Skelly Oil Company v. United States

128 806), ran risk that Phila the con- he 77 S.Ct. delphia context and and its ‘historical ” enactment,’ might accept trust, existing prior to its ditions might it, be unable administer 373, Cf. at U.S. at 387 might subsequently Parking Wilmington unable to act be Author- Burton v. chang 856, 722, 6 cause federal constitution was ity, U.S. (as ed occurred when the Fourteenth (1961). record L.Ed.2d passed). College Amendment was is in this after at discrimination Girard unique situation of Supreme deliberate Court testator’s United States major provision for role further state it clear that decision makes scheme, Pennsylvania in his charitable the ac “state actions” tion of state rises to courts the level courts ality, not “cure” the unconstitution- affirmatively of unconstitutional state action. perpetuated charitable encouraging scheme chosen Girard discrimination. continued easily hindsight have become invalid due is clear no rea- With change against perpetui in the rule son exists the deviation imposed by ties or some other limitation appointing private trus- Girard’s towill society rights pri tees, except allowing compliance unlimited for its property vate orphans” provision. death. See Common with the “white Pennsylvania Brown, wealth inescapable And v. F. likewise Supp. (E.D.Pa.1966). clusion that substitution of trustees encouraged compliance in 1957 with the

“white” has lasted years.

over 10 The state action today Orphans’

continues Court- “encourage- relationship

trustee is the

ment” of discrimination first original appointment of the individ- ual trustees. COMPANY, SKELLY OIL Appellant, Even clearer state action “encour- agement” passed is found in the statute America, UNITED STATES Pennsylvania Legislature Appellee. Supreme Pennsylvania ap- the proved Court No. 8822. private the substitution of trus- 19, 1959, tees. The Act November Appeals States Court of post P.L. authorized ex Tenth Circuit. facto Orphans’ actions, Courts’ and further im- April plemented change-over fully em- 3,1968. Rehearing April powering private the new trustees to place City serve Board of Trusts guardians boys attending College up Girard and to set a common property.

trust fund for their The same repealed Act also several laws

passed College. to aid Girard Such af- legislative action, firmative tempt as an at-

to render a state neutral with

respect to otherwise unconstitutional dis-

crimination, Mulkey makes Reitman v. apposite.

still more Stephen deliberately

When Girard

pointedly chose involve the State “private” charitable conduct of his (as

school was decided at 353 Casey, (Don- City Robert J. New York Moyers, Tulsa, Okl., counsel,

ald P. Clark, Ellis, City, Carr & York New Martin, Logan, Moyers, Martin & Con- total these two amounts was brief), way, Tulsa, Okl., him claimed and return as entered appellant. paid. deduction in pursuant This was done to Section Atty., Dept, Myron Baum, C. Jus- of the Code 1954 in that Rogo- (Mitchell tice, Washington, D. C. the close Jackson, Atty. Gen., vin, A. Lee Asst. taxable Attys., Loring Post, Graney, M. Melva W. right” such have “unrestricted Washington, C., Dept, Justice, of D. “an its item” which was included in Atty., counsel, Imel, and John M. U. S. gross appeared had because it it income Atty., McSoud, A. Asst. U. Lawrence S. years, right prior such for several taxable Okl., brief), Tulsa, him on the with through appellee. above, appellant As indicated claimed MURRAH, Judge, and Chief Before it was entire entitled to deduct Judges. SETH, and HILL Circuit amount of the refunds. The trial amount, instead not allow this per it reduced cent which SETH, Judge. 27% Circuit percentage appellant deducted appellant brought this The action years 1952-57 returns ground refund of income taxes gas depletion. from its sales as was entitled in full to a deduction (Section In- statute 1341 of the under Inter- Section 1954) provides ternal Code of Revenue nal Revenue for refunds Code part that: gas corporations purchased from “(a) rule —If— General following price it made reduction. “(1) gross an item was trial de- court reduced claimed prior year (or income for a taxable percentage duction the amount years) appeared because deduction, has taxpayer had an unrestricted appeal. taken this item; to such “(2) a deduction is for the appellant the business has been year taxable estab- because it was gas producing selling natural and prior lished after of such the close many years, so en- Oklahoma year (or years) taxable during gaged period when state taxpayer did not an unrestrict- have gas price for natural minimum order ed to such item or ato put into at the effect. sales wellhead was item; such gas price of This order raised the preexisting selling appellant under “(3) such deduction contracts, until in effect continued $3,000, exceeds Michigan Wis- it was declared invalid imposed by chapter “then tax Corporation Pipe Com- Co. v. consin Line year for the taxable shall lesser be the Oklahoma, 355 U.S. mission State following: 412. After 2 L.Ed.2d 78 S.C. “(4) year tax for taxable terminated, purchaser order was deduction; computed during period gas from brought a suit order was in effect “(5) equal an amount to— Skelly difference be- from recover “(A) year the tax for the taxable price the contract rate tween deduction, computed without by the rate. This suit was settled order minus purchaser by appellant repayment to the * * * “(B) Appellant $500,000.00. the decrease in of the sum * * * purchaser posi- paid in a similar taxable another solely $5,536.54. the sum ** * accruing some benefit because of such exclusion specific depletion al income such as a gross for such * * O’Meara, supra lowance. National taxable Insurance & Accident [National Life stipulated parties trial court Company States, D.C., 244 F. taxes for the 135; Supp. O’Meara v. Commissioner computed sub- above under the to be are 8 C.C. 622].” (4). When facts in the case bar ground rules, ap it is As to the against wording set bare appel parent was on the burden appears requirements to estab circumstances lant under these permit are satisfied to Refin Products Corn lish deduction. full amount. The “item” here Reve of Internal Co. v. Commissioner “gross was included in the income” nue, L.Ed. during several general proposition a Further as a 1958, appeared it that it placed statu narrow is construction the Further unrestricted thereto. tory provisions for deductions. United “a deduction is tax- allowable the Television, Olympic & v. Radio States year able show facts [1958]” because the Inc., 733, 232, 99 L.Ed. 349 U.S. 75 S.Ct. taxpayer that 1957 gener the 1024. The rules to construction have the unrestricted to “a ally are contained United States v. item,” of such amount of the the (10th Cir.), Allen, F.2d 293 916 greater $3,000.00. Trucking deduction than American United States v. Thus for 1958 be com- 1059, the tax would Ass’ns, Inc., 534, 310 60 U.S. S.Ct. ap- puted with “such deduction.” 84 L.Ed. 1345. “gross income,” parent that the term argues taxpayer appeal on this “exclusion,” and “deduction” used wording express that meanings. The well have defined applied, involved should be and there are parties stipulated $505,536.54 separate at and distinct tax least two taxpayer’s had all been included fitting nicely into stat- events each “gross years income” for 1952-57. utory language. urges It also wording applied if Thus without deduction dollars without were more, en- is entitled to the paid out, and cannot or not be be should tire deduction. origin year. traced their enacted, a 1341 Before Section was hand the other the Government per- taxpayer argues could not have of the item mitted deduct that such to the intended a benefit accrue so returned. restored it was taxpayer, the several events are right” firm- The “claim of doctrine was lated, and one should be used define ly by Oil North American the other. 417, Burnet, 286 U.S. Consolidated v. 613, 1197. There 76 L.Ed. trial court concluded that sec- remedy alternative, clear, no if be tion was not and resort should sought legislative history. as was held in both had to its Also it Lewis, 590, legislation policy 71 S.Ct. 340 U.S. cluded that States Healy by 522, 560, permit sought v. Com- 95 L.Ed. and in would Revenue, being taxpayer, unreasonable missioner 278, 671, There 97 L.Ed. 1007. “Con- 73 S.Ct. one. The court concluded that: gress possibility the tax- thus existed the intended that a should get payer equal the deduc- would at but cannot be benefitted least tax benefit other- tion over treatment should he have intended that received, get be or on wise have that he would prejudiced. previously paid deter- result was then which had not a tax he appears tax Thus Sec- of factors a number mined computation existing rule as more enacted the for the two change year deductions, and added including to current one—a most obvious whereby taxpayer in the new another taxpayer in tax Thus the rates. always qualifies period mer- who can pre-Section at the cy choice a tax equal ceive benefit of the circumstances es- least to the tax on item when cases to him. The above cited income, refining tablishing added receive a tax “claim “and greater right” ac- 2 Mer- annual benefit amount.” also rule reiterated tens, counting must Taxation Law Federal Income doctrine and asserted Stanley (Zimet applied despite inequities ch. 12.106a & be Rev.). Thus it must concluded that from it. arise Congress sought change in to make no present it is suf- consideration For the remedy, the current that before Section ficient note recomputation provision. added permitted de- virtue statutory enactment have been than more benefit duction could receive precipitated by application of strict upon originally paid him the tax accounting annual cases rule Thus had to restored. “item” Healy v. Commissioner of Internal recog- current a benefit 345 U.S. possibility, limited nized but not Quarterly L.Ed. 14 Oil & Gas Tax paid on related previous year. then treated in It was the pur- any The trial court found that for these the sec- other deduction ambiguous, poses year was unclear or and in of restoration. the legislative history sorted to the change in “law” the stat The do not enactment Section 1341. We utory 1341, consid of Section enactment decide whether or not history resort to the the ering wording alone, the proper, the was was word- whether the ambiguity. leg- is without such addition of in subsection The history islative leads to the same con- (a) (5) taxpayers who directed those clusion as does the examination disadvantage by use would suffer a preexisting state the law year preju of a This current deduction. statutory language described above. by permitting dice was the re- removed permit computation The cases the examination taxes for the current taking place transactions in year re without deduction and then a identify or to transac characterize computed duction tax so year. in tions current Arrowsmith amount of tax attributable to the use f Revenue, v. Commissioner o Internal year restored in the earlier (a 344 U.S. L.Ed. 6 if such a route would result in a lesser pre-Section case), example. is an year tax than would a current deduction. violating This be without done recomputation provision The alternative accounting principle, annual forma appears (a) (5), in subsection appears (a) (5); of it in subsection how recognized in current deduction is ever, we no reason in Act to re see (a) (4), non- as it existed before in a prior years’ in examine the transactions statutory form. assumed must be statute in sub the case before us. The purpose in a real en (a) (4), section we here with which acting remedy (a) (5), the new concerned, require not or indicate does that it relief afford some needed any way that this be done. giving an alternative. nothing great places There is itself the enactment reliance The Government change attempt indicate on O’Meara v. Commissioner remedy. current T.C. 1947. There roy reported sub certain Much could written ject general policy production. He from oil about the result alties received application to have not without found judicial had to re addition of conditions. This or land and title to the lease statutory pro specific, pay narrow factor however the amounts received. particular at vision for a the case set circumstanc from an obvious distinction es, general policy of Con and no broad became whether bar. There the gress any The used deduc is indicated. words entitled to recognized clearly year. also have a all See tion at in the current Cir.). meaning field, (5th Scofield, the tax the whole 185 F.2d 535 Parr v. applied section is held the tax consistent when Tax Court payer in the words direct. refund entitled recognized repaid time less was well of the amount current statutory point enactment. allowance. is not here which we are concerned The benefit which accrue developed opinion as the court large, dif and thus it is indicate how does previous instances ferent where applied. should event although recog benefit was small well subsequent enactment Section ; nized we no reason to make see stating any adjust without conditions distinction based on the amount cited of doubtful ments makes the statutory money involved to override authority. provisions. trial court no such made distinction, apply sought by To but instead indicated that the rule Gov- general imposition principles require and the O’Meara ernment requirements led to an addition of limitation of Section use expressed amount of determined the statute. cannot We agree either, with this as the mandate paid by appellant taxes is clear. years. or ad- limitation There justment required Reversed. in ex- doctrine enactment, pressed (a) (4) in before Rehearing Petition On for in statute.

and none is indicated relationship appears to be no es- There petition appellee a The filed (4) tablished between granted. hearing which was Additional prior year’s computation argument other oral briefs were submitted and Act, expressed none was heard. than those pertinent. The Sec- of which are here worse, agreed parties, or The better only requires for the cur- tion the tax litigation during that 26 U.S.C. § figured “with such de- to provision. rent 1341(a) (4) applicable was the so basis and duction.” The on this case was tried presented to this court. authority permit a is no There orig rehearing, as on as well readjustment of the allowance urges presentation, inal the Government hap prior nor of the v. Commission case Hugoton penings Production it. alter er, (1947), is determinative 8 T.C. 622 States, F.2d Co. v. urges of the also issue. Government Ct.Cl. con a construction section indication Further there trary to their is not in accord repay- dollars used source “spirit” legislation. ance of the before Sec- to be considered ment was thereafter, prepared (4) 1341(a) We are not rest this nor “spirit” used decision of the dollars source more than the statutory the statute. The rules other deductions. established, vote, Thereafter, are and we a construction well unanimous clearly petition rehearing granted faced are with a worded was reargued. very point. I which refers to a narrow case was then became referring original This is not a that our decision was convinced scope. Under these cir- not that the matter of broad correct and trial court should Therefore, face I cumstances we must take it at value. affirmed. now must spectfully dissent. reliance The continued Govern- Commissioner, ment on 8 T.C. O’Meara v. judge I believe the trial correct assistance, (1947), is of little but reasoning not did § obviously part is understandable. It is create deduction and that thus new pre-statute (1954) law applied O’Meara decision1 in the de- develop any point, new this condition, but if termination of deduction allowable. such a condition wa3 car- majority present any reason fails present ried over into section of the divorcing determination of law. matter refunds this char- initiating deduction from its basis. when the acter well known statute argu- cornerstone enacted, must assume that we position apparently ment and the ac- if intended to create a condi- cepted by majority is that “the stat- applicability tion as to of the sec- interchangeably phrase ute utilizes tion, it so. would have done gross ‘item purport The O’Meara case does ” year’ with the term It is ‘deduction.’ anything define “deductions” else. my phrases contention these two concerned, term, here and the others interchangeably not used more and that a by myriad defined were cases where interpretation reasonable of the statute involved, the issue both before is that the “deduction” to be allowed after O’Meara. O’Meara was Thus obvi- signifi- appropriate situations differ ously law, part nothing cantly gross in- included in incorporated decided majority come. At no de- time does the estab- nor influenced construction of fine as it “deduction” is used terminology. lished tax is, It asserted “deduction” original opinion, under As stated meaning. has a well defined This can these cannot add a con- circumstances we meaning developed refer expressly dition to the statute pre-1341 dealing eases with the although terms, redefinition we right” in- refund of “claim of wish do so results. in view recognizes majority come. Indeed apparent steps is that some remedial recog- that “the current deduction is taken, should be do but cannot so. we (4), nized in existed before non-statutory However, form.” original opinion and We adhere to our majority’s further statement that disposition of the case. to the enactment of “a § Reversed. appellant’s position permitted to de- duct the amount of the item restored Judge HILL, (dissenting). Circuit any it was so returned” without is and difficult case a close reference to the O’Meara leading mis- decision is say of the one that has caused each member to the least and is undoubted- midnight ly panel majority’s After to oil. error in burn some crucial reasoning. by my bypassed the case agreed us I was first submitted is O’Meara distinguished my by that a strict brothers brothers with the state- interpretation point of 26 ment U.S.C. that “The with which we § prevail developed entitled here in the concerned is opinion opinion the court was so written. court does not indicate as the O’Meara, (1947). P. Maurice 8 T.C. 622 reporting by peti- in effect depletion should deduction for how subsequent only the net amount any tioner of applied. In event 72V2% royalties rather than of the received stat- 1341 without enactment Section recognize 100%, that adjustments makes or whether we ing any conditions permitted authority.” deduction is case doubtful the cited the owner to one reasonable it much more me is To depletable place or in- of a oil in say that the existence O’Meara therein, it de- and that when terest pre-dating the enactment law case petitioner veloped that it means must be erroneous, owner deduction became “deduction” part of the definition of petitioner required include is Certainly law. case that arises income in deducted amount as shows an examination O’Meara appears; see that situation when problem of the the court considered Douglas v. Commissioner [of taking deduc- effect of Revenue], 322 U.S. S.Ct. [64 which was income tion on claim 1271]; the ad- L.Ed. or whether returned. The O’Meara by justment required viewed which a suit for refund taxes cerned statutory definition of basis. Section previously paid on O’Meara had been Virginian 113(b) (1) (B), I.R.C. See royalties prop- received from certain oil Helvering, Corp. Hotel acquired erties which had been L.Ed. [63 1561]. During by warranty deed. O’Meara any event, net of the loss amount when such income was petitioner take entitled to deple- had taken the allowable O’Meara royalties is the total of royalties. tion allowance Subse- reported the amount deducted less litigation quently as a result of O’Meara depletion.” O’Meara, supra, at 634- possession held to have had unlawful properties mineral and was royalties quired pay received over all Appellant the second asserts that property. return his later grounds of the above mentioned for the repaid deducted O’Meara the amount so valid; reduction is instant since by the and this deduction was disallowed there Commissioner. The Tax Court reversed Skelly legal owner was at all times rule and allowed the Commissioner’s of the land O’Meara case is distin- deduction,2 reducing limiting it and guishable applicable and not the in- previ- Apparently stant case. the court ously taken as a allowance. O’Meara, felt grounds above three mentioned would be Concerning of reduction government’s uphold sufficient allowable deduction the court argument deduction should O’Meara stated: deplétion reduced amount pe- loss for “[T]he previously taken. titioner entitled to must be limited suggest the amount of the I that O’Meara stands for the royalty reported pur- for principle that basic established a basis poses deducting depletion. gain for for or loss the inclusion of income It makes little right, difference whether the claim under a income has depletion deduction depletion viewed as a percentage for been the basis a income, thereby deduction, diminution of result- must be limited interesting 2. It is to in note that the establishment of a for basis later gross gains “an term item or losses. As discussed later there requirement is, however, significant income” is as used a for a difference be- application establishing allowing of the same re- statute. This tween a basis quirement O’Meara, established the full amount as deduction. a supra, requirement to be the sole establishing directly process related deduc- a basis “the amount tion,3 * * * reasoning ap- an income consists and that gross just reporting taxpayer’s plicability it in the in- decision is O’Meara ”* * * today T.C. as valid as was before come Id. 8 entirely agree quired I that no further consideration enactment of § Judge Daugherty given depletion taken any he states to deduction when “Any computation of procedure income in the other would do violence from said legislation spirit in- to the the deduction allowable equitable repayment. The in mak- tent of the to afford the ing Tax Court thought statement, however, taxpayer not relief to a he who considering keep a certain of his income and merely paid taxes thereon turns out of deduction allowable but but government receive that he had such did not have to and was any quired repay from the inclusion of restore or same. tax benefit taxpayer prior year. intended that a income the return should gross get equal reporting but of the item as at least tax benefit cannot mere court, get have intended a income however, a should established basis. go say that the income did not on to gross previously paid which he a tax entire income had not item included accruing basis. because of would establish some benefit specific depletion income such a allow- This until the later above, opinion quoted In ance.” fact other appear totally where the deduction to be found that unreasonable. resulting equatable effect with the to- would be that two meas- allowable was gross ures income intended relieve and benefit the tal amount included in depletion was limited deduction taxpayers can combine a to result previously inconsistency re- taken. No greatly windfall exceed- saying from sults that the inclusion ing the benefit from gross an item in income establishes a ba- separate application of these meas- notwithstanding for later sis deductions ures. That such an overall result was government lack of tax benefit unlikely. intended seems allowing but not a include gross argued by appellant in- entire amount included in It come basis deduction. statement of the court depletion analysis depletion Both these had a allowances A short deduc- specific upon limit total amount tion its direct relation to the shows depletion taken; gross produced that could be from income a w.ell depletion proved recognizing why some- these limitations further illustrates unsatisfactory they compu- what made deduction return such depletion percentage cognizance There- tation of the difficult. must be fore, percentage depletion depletion deduction was deduction. whereby depletion deduc- tax- is allowed a A produc- payer made a direct function of whose income results amount of income from the nat- In receiv- received tion from a natural resource. Mertens, ural resource. 24.04. There natural income the resource is deple- taxpayer’s depleted, depleting is no limitation on the amount of thus computing capital over other tion deductions which be taken investment. period income, e., manu- as with the cost i. such as a forms of depreciation capital income, like investment facturer’s equipment used allowance allowed for the is considered and the manufacturer in fact a de- a manufacturer. is clear Thus in a similar sense deducted. pletion deduction taken the total from income received exceed from a natural resource far allowed as could natural resource is from a capital. taxpayer’s natural resource. Mer- the total cost 4 return of the depletion v. tens, Internal Revenue Commissioner allowance Such § 24.02. 308, Exploration Co., grounds, originally 350 Southwest U.S. two considered on 395, discovery depletion. 100 L.Ed. 76 S.Ct. and a a cost establishing deple- poses prices percentage for wellhead Consideration determining computation In the the deduc- allowances. tion deduction prices, not vio- of such the court 1341 does stated under tion allowable § by accounting concept as es- could consider refunds made such late annual producers Brooks other under similar by & situations v. Burnet Sanford tablished gave 150, to that of the instant case and Co., 359, 75 L.Ed. as 51 S.Ct. 282 U.S. considering prior reasons for not such refunds 383, consideration as the accounting concept. purpose of annual years’ for is returns note, however, court on to determining went that such any respect year’s return. refunds would be reflected present in the they refiguring subsequent reopening as were considered in the There is no years repayments computation merely when the years’ were made. prior taxes, Hugoton year’s It should suffice for present taxes. That case say question by years’ prior returns sideration there not the by clearly cases be made is considering we are in the instant case. Commissioner such as Arrowsmith v. go however, question, could One on to 71, Revenue, 6, S.Ct. Internal application whether of the annual ac- 6; Douglas Commissioner 97 L.Ed. v. counting concept situation found 275, 64 S.Ct. Internal 322 U.S. Hugoton required in the the result 1271; 988, Dobson v. Com- 88 L.Ed. respect reached that eourt. In Revenue, 320 U.S. missioner say it is reasonable to that consideration 239, 489, L.Ed. 248. Cases prior depletion deductions allowed Healy by appellant v. Com- such as cited computing “deduction” allowable under Revenue, 345 U.S. missioner of Internal for current tax is § concern 97 L.Ed. accounting not a violation of annual taxpayer’s proposition that concept. recomputed prior taxes from the made refunds be summary, deduction for years. paid in the situation original- funded claim clearly before us is not the one ly established and continued law above, Here, mentioned instant case. provide relief for a determining merely we are application pres- of the allowable “deduction” strict un- claim doctrine. majority year. taxpaying cites ent reasonable relief into a to transfer Hugoton Production Co. the case of windfall unless States, F.2d 172 Ct.Cl. clearly unavoidably authority proposition quired. A double deduction should not be given not be that consideration virtually unless there is no alterna- Hugoton years. tive. Here I the more believe reasonable authority case, direct decision to to limit allow- proposition. case involved That percent- able deduction the amount of price received age determination previously púr- producers similarly situated claimed.

Case Details

Case Name: Skelly Oil Company v. United States

Court Name: Court of Appeals for the Tenth Circuit

Date Published: Apr 3, 1968

Citation: 392 F.2d 128

Docket Number: 8822

Court Abbreviation: 10th Cir.