Skelly Oil Co. (Skelly) (plaintiff) is a natural gas producer. In the six taxable years prior to 1958, Skelly charged its customers in accordance with a minimum price order. The Supreme Court invalidated the minimum price order and, in 1958, Skelly was required to refund a total of $505,536 to two of its customers for overcharges from the previous six years. Skelly had included the $505,536 in its gross income upon receipt. But because Skelly was a producer of natural gas, Skelly was entitled to a 27.5 percent depletion deduction each year. Skelly essentially only paid taxes on 72.5 percent of its income. Thus, only $366,513 of the $505,536 was taxable to Skelly. After refunding the $505,536 in 1958, Skelly sought to deduct the entire amount from its gross income for that year. The Commissioner (defendant) did not allow Skelly to deduct the entire refunded amount, since Skelly had not been taxed on all of it. The Commissioner instead reduced the claimed deduction to account for the 27.5 percent on which Skelly had not been taxed. Skelly paid the tax as assessed but brought suit in the District Court for a refund. The District Court sustained the Commissioner’s ruling. The Court of Appeals reversed. The United States Supreme Court granted certiorari.