281 U.S. 264 (2014), Lucas v. Commissioner

Citation:281 U.S. 264, 50 S.Ct. 263, 74 L.Ed. 848
Party Name:Lucas v. Commissioner
Case Date:April 14, 1930
Court:United States Supreme Court

Page 264

281 U.S. 264 (2014)

50 S.Ct. 263, 74 L.Ed. 848




United States Supreme Court

April 14, 1930




1. Whether, in a particular business, inventories are necessary for the determination of income is a practical question left by the Revenue Act of 1918, § 203, to the judgment of the Commissioner of Internal Revenue. P. 268.

2. The "base stock" method of inventory, using a constant price for a so-called normal quantity of goods or materials in stock, is inconsistent with the annual accounting required by Congress for income tax purposes. Id.

3. A company engaged in the business of fabricating and erecting steel plates for buildings, bridges, etc., under contracts therefor, ordered the materials for each particular job from the mills, but aimed to keep an emergency stock on hand for use when mill shipments were delayed, etc., and to keep it replenished from such shipments. Although no part of the material was earmarked and set aside as a "standby" stock, but all was commingled and indiscriminately used in production, so much of it as fell within the amount on hand at the close of 1916 was inventoried each year,

Page 265

until 1921 at the 1916 cost, and the excess at cost or market price, whichever was lower. The quantities in stock fluctuated from much below to much above that of 1916. In 1918 and 1920, the tax year in question, the stock inventoried at the 1916 cost was revalued by the Commissioner at the current market price in the absence of a showing of actual cost, with consequent increase of income taxes. Held that inventories were properly required, and the Commissioner's action was properly sustained. P. 269.

4. A taxpayer appealing from an order of the Board of Tax Appeals sustaining an increased income tax resulting from changes made by the Commissioner in the taxpayer's inventory has the burden of proving that the Commissioner's action was plainly arbitrary. P. 271.

33 F.2d 53 reversed.

Certiorari, 280 U.S. 543, to review a judgment of the circuit court of appeals which reversed a decision of the Board of Tax Appeals, 11 B.T.A. 877, sustaining increases of income taxes, based on revised inventory valuations.

BRANDEIS, J., lead opinion

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

The Kansas City Structural Steel Company, a Missouri concern, appealed to the United States Board of Tax Appeals from determinations by the Commissioner of Internal Revenue which made an increase of $7,656.74 in

Page 266

the company's 1918 income tax and of $15,953.36 in its 1920 income tax.1 These additions were due wholly to changes made by the Commissioner in the inventory valuation of material carried in stock. The company valued at a constant price all the material which did not exceed in quantity what was said to be the normal stock on hand.2 The Commissioner revalued this at current market prices. The changes resulted in increasing the December, 1918, inventory by $165,849.46 and the December 31, 1920, inventory by $117,113.61. The Board of Tax Appeals sustained the Commissioner's action. 11 B.T.A. 877. Its decision was reversed by the United States Circuit Court of Appeals for the Eighth Circuit. 33 F.2d 53. This Court granted writs of certiorari, 280 U.S. 543.

Section 203 of the Revenue Act of 1918, Feb. 24, 1919, c. 18, 40 Stat. 1057, 1060, provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.3

Regulations 45 (1920 edition, as amended by Treasury

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Decision 3296) provides, in Article 1581, that

inventories at the beginning and end of each year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor.

Article 1582 declares that the basis of valuation

most commonly used by business concerns and which meets the requirements of the revenue act is (a) cost or (b) cost or market, whichever is lower;


goods taken in the inventory which have been so intermingled that they cannot be identified with specific invoices will be deemed to be . . . the goods most recently purchased;

that the "taxpayer must satisfy the commissioner of the correctness of the prices adopted;" and that "(d) using a constant price or nominal value for a so-called normal quantity of materials or goods in stock" is not in accord with the regulations.4

The company is engaged in the fabrication and erection of steel plates for buildings, bridges, tanks, etc. It does not carry finished products in stock, but fabricates the plates for specific structures or contracts. It orders material from the mills for each structure or contract, but it also keeps a supply on hand in order

to insure the prompt and orderly execution of contracts in view of delay, etc., incident to shipments from the mills and other exigencies affecting the availability for use when needed of material ordered for a particular job.

Material is taken from this supply as and when needed, and the stock is subsequently replenished.5 On December 31,

Page 268

1916, the quantity in stock was 5,554 tons. The company then inventoried it at cost -- $1.70 per hundredweight f.o.b. Pittsburgh. At the close of each year thereafter, until 1921, the company inventoried its stock on hand up to 5,554 tons at that price, regardless of its actual cost or the market, and the excess, if [50 S.Ct. 265] any, at cost or market price, whichever was lower. In the tax years in question, the market was much higher. It is not shown what the actual cost of the stock then on hand was, or that any of it had cost, as little as $1.70.6 The Commissioner therefore revalued the entire stock at market price, with the consequent increase in the taxes complained of.

First. Whether, in a particular business, inventories are necessary for the determination of income is a practical question left by the statute to the judgment of the Commissioner. On that question, he and the company did not differ. In every year, it, without any question or protest, used inventories in making its return. The dispute was merely on the method of valuation to be adopted for that part of the stock which...

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