Thor Power Tool Company v. Commissioner
Encyclopedia
In Thor Power Tool Company v. Commissioner, 439 U.S. 522
(1979) the United States Supreme Court
upheld IRS regulations limiting how taxpayers could write down inventory. The opinion limited the application of the lower of Cost or Market
method to the two circumstances in the regulations.
The taxpayer had reduced the value of its inventory to an amount management asserted was the fair market value, without selling the inventory. In court, the taxpayer argued that its deduction for loss should be allowed for tax purposes because it was permitted for accounting purposes. The Court stated, "There is no presumption that an inventory practice conformable to "generally accepted accounting principles" is valid for tax purposes. Such a presumption is insupportable in light of the statute, this Court's past decisions, and the differing objectives of tax and financial accounting." The Court's opinion cited, in particular, a lack of evidence presented by the taxpayer to support its loss.
Thor manufactured equipment using multiple parts that it produced. It capitalized the costs of these parts when produced. When it had inventories of parts in excess of production needs, it wrote down those inventories, taking a loss based on management judgment. This write-down was in accordance with the company's accounting practice.
IRS regulations provided that goods could be written down only if one of two conditions existed: either the taxpayer could demonstrate a market price, or the goods were defective or "subnormal". The Court denied the write-down because Thor did not present evidence to demonstrate a market price of less than its cost and did not show that the parts were subnormal goods.
The decision prevents companies from writing down goods simply because they are not selling them.
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(1979) the United States Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
upheld IRS regulations limiting how taxpayers could write down inventory. The opinion limited the application of the lower of Cost or Market
Lower of Cost or Market
Lower of cost or market is an approach to valuing and reporting inventory. Normally ending inventory is stated at historical cost but there are times when the original cost of the ending inventory is greater than the cost of replacement thus the inventory has lost value...
method to the two circumstances in the regulations.
The taxpayer had reduced the value of its inventory to an amount management asserted was the fair market value, without selling the inventory. In court, the taxpayer argued that its deduction for loss should be allowed for tax purposes because it was permitted for accounting purposes. The Court stated, "There is no presumption that an inventory practice conformable to "generally accepted accounting principles" is valid for tax purposes. Such a presumption is insupportable in light of the statute, this Court's past decisions, and the differing objectives of tax and financial accounting." The Court's opinion cited, in particular, a lack of evidence presented by the taxpayer to support its loss.
Thor manufactured equipment using multiple parts that it produced. It capitalized the costs of these parts when produced. When it had inventories of parts in excess of production needs, it wrote down those inventories, taking a loss based on management judgment. This write-down was in accordance with the company's accounting practice.
IRS regulations provided that goods could be written down only if one of two conditions existed: either the taxpayer could demonstrate a market price, or the goods were defective or "subnormal". The Court denied the write-down because Thor did not present evidence to demonstrate a market price of less than its cost and did not show that the parts were subnormal goods.
The decision prevents companies from writing down goods simply because they are not selling them.