|Thor Power Tool Company v. Commissioner|
|Argued November 1, 1978|
Decided January 16, 1979
|Full case name||Thor 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.|
|Majority||Blackmun, joined by unanimous|
|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.
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."
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