Thor Power Tool Co. v. Commissioner

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Thor Power Tool Company v. Commissioner
Seal of the United States Supreme Court.svg
Argued November 1, 1978
Decided January 16, 1979
Full case nameThor Power Tool Company v. Commissioner of Internal Revenue
Citations 439 U.S. 522 ( more )
99 S.Ct. 773; 58 L. Ed. 2d 785
The Commissioner did not abuse his discretion in determining that the write-down of "excess" inventory failed to reflect petitioner's 1964 income clearly, since the write-down was plainly inconsistent with the governing Regulations.
Court membership
Chief Justice
Warren E. Burger
Associate Justices
William J. Brennan Jr.  · Potter Stewart
Byron White  · Thurgood Marshall
Harry Blackmun  · Lewis F. Powell Jr.
William Rehnquist  · John P. Stevens
Case opinions
Majority Blackmun, joined by unanimous
Laws applied
Internal Revenue Code

Thor Power Tool Company v. Commissioner, 439 U.S. 522 (1979), was a United States Supreme Court case in which the Court upheld IRS regulations limiting how taxpayers could write down inventory.

The Thor Power Tool Company was a manufacturer of tools, washing machines, motorcycles, vacuum cleaners, rotary irons, electric ranges, kitchen sinks, speed snips, electric shoe shine machines, and the Juvenator.

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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, the company's accounting practice was to write down those inventories, taking a loss based on management judgment.

However, IRS regulations accepted this "lower of cost or market" method for tax purposes only if the taxpayer could demonstrate a reduced market price, or the goods were defective or "subnormal". It did not permit companies to write down goods simply because they were not selling them. [1]

Lower of cost or market is a conservative approach to valuing and reporting inventory. Normally, ending inventory is stated at historical cost. However, there are times when the original cost of the ending inventory is greater than the net realizable value, and thus the inventory has lost value. If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the current market value. Any loss resulting from the decline in the value of inventory is charged to "Cost of goods sold" (COGS) if non-material, or "Loss on the reduction of inventory to LCM" if material.

In court, the company argued that its deduction for loss should be allowed for tax purposes because it was permitted for accounting purposes. But the Court upheld the IRS regulations, saying, "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 Thor decision caused publishers and booksellers to be much quicker to destroy stocks of poorly-selling books in order to realize a taxable loss. These books would previously have been kept in stock but written down to reflect the fact that not all of them were expected to sell. [2]

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