Research Tax Problem 11-65
Facts
Texas Corporations disassembles old automobiles for the purpose of reselling
their components.
At yearend inventory is done only by estimate of employees and old quote
journals.
Issues
When Texas has to pay for disposal, they give the inventory a value of zero; they
do not use any standard inventory method, should this be acceptable?
Reasonings and Authorities
Reg. Secs. 1.471-2(a) and 1.471-3(d)
Section 1.471 provides two tests to which each inventory must conform. It must
conform as nearly as may be to the best accounting practice in the trade or
business, and must clearly reflect income.
Morrie Chaitlen, 1978 PH T.C. Memo 78,006, 37 TCM 17
Under this case the scrap metal company used a method peculiar to the industry,
which is having a corporate officer would visit the yard, scrap estimate quantities
and determine a price for the inventory.
Justus & Parker Co., 13 BTA 127 (1928)
It states the same issue of reducing the value of ending inventory in order to
reduce income and taxes, giving a discount price of less than the amount it cost
to acquire the merchandise or even giving an obsolete value. Using consistency
of inventory methods is a proper thing to do.
Conclusions
An inventory method must be used constantly, one that is acceptable by the trade of
business in which the company is involved. An estimate should be evaluated by a
professional and not by an employee
Summary
Texas Corporation does not use an inventory method and their way of giving the
estimate of the value of their merchandise varies depending on if the higher the
value will end up costing them more.