Question

Discuss the implications of the tax case Thor Power Tool Co. v. Commissioner: who/what affected & how relevant today/any cases that used this case in their decision?

Answer 1

Thor Power Tool Company v. Commissioner was a United States Supreme Court case in which the Court upheld IRS regulations limiting how taxpayers could write down inventory.

IMPLICATIONS:

Thor manufactured equipment using multiple parts that it produced. It capitalised the cost of these parts when produced. When it inventories of parts in excess of production needs, the companies accounting practise was to write down those inventories , taking a loss based on management judgement.

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.

In court , the company argued that it's deduction for loss should be allowed for tax purposes because it was permitted for accounting purposes. But the court upheld the IRS regulation, saying , "there is no presumption that an inventory practise conformable to 'generally accepted accounting principle' is valid for tax purposes. Such a presumption is insupportable in light of the statute, this court's passed decisions , and the differing objectives of tax and financial accounting.

EFFECTS:

The Thor decision caused publishers and booksellers to be much quicker to destroy stocks of poorly - selling books inorder to realise 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.