Thanks for taking time to explain your side. When I have people whom
I believe have more experience than I do, I check things out. I had
3-5 people disagree with me, you being the highest level of education
and credentials in the accounting field that disagreed.
So I went further. I know with I’m guess 30 years of experience
you’ll have a hard time saying “Now I get it, jewelry is different.”
The lady I quoted from the article is in fact an attorney in
California. Here is a small blurb on her on her website:
"Robin Gilden focuses her practice in corporate, partnership and
individual taxation, transactional business matters and international
taxation. She also has experience in mergers and acquisitions,
executive compensation and the application of the deferred
compensation rules of section 409A.
Prior to entering private practice, Ms. Gilden worked in the tax
departments of two Fortune 100 companies. Ms. Gilden has lectured on
partnership tax matters before the USC Tax Institute and the
California Society of CPAs. She also teaches a partnership tax class
at Loyola Law School."
This is info about her at the company website:
And the page describing her, it’s a large law firm in LA
Posted on the main page:
“With nearly 600 attorneys in offices across the country practicing
in all areas of corporate and business law, complex litigation,
intellectual property and regulatory and government affairs, Venable
is one of America’s top 100 law firms.”
Looks like this stuff is in fact her/their specialty.
I wrote her and asked her (based upon your email) “Where can I see
the Supreme court ruling that you quoted?” She emailed me the link
and here it is:
Here’s the title:
U.S. Supreme Court
Thor Power Tool v. Commissioner, 439 U.S. 522 (1979)
Thor Power Tool v. Commissioner of Internal Revenue
Argued November 1, 1978
Decided January 16, 1979
439 U.S. 522
The Supreme court indeed does hear tax cases after all. It’s a long
read but I did read it. To bring it down to size this company makes
power tools, had a lot of excess inventory that wasn’t moving. Just
like jewelry, they had too much for too long. The company president
did what jewelers do “Its not being sold, I’m going to reduce the
cost to a lower number. In 'general accepted accounting principals’
I’m going to say, from my experience, it’s worth X.”
The accountant agreed with the boss. They took some write offs
immediately and later when it didn’t sell again, did some more.
The nuts and bolts of the Supreme court decision is the idea was
fine overall (as you mentioned) but they didn’t have any proof how
much the items would sell for in scrap nor sell for later to their
customers and what the lower price/cost would be. They didn’t prove
that if they REPLACED their inventory that NEW inventory being bought
that would cost them a lower number. It was a guess and the court
said you had to have provable numbers. This is where the court said
you can’t KEEP IT in stock is you have no proof. They disallowed the
A little below is two short paragraphs I copied from the Supreme
Courts decision for you.
But Anne, more importantly I was contacted by a jeweler who’s
accountant told him to do exactly what I wrote about, lowering cost
of items because its old and not selling and to send the difference
to an expense or cog’s account. His email is the 3rd paragraph down.
This applies to you.
COURT SHORT COPIES:
From this language, the regulatory scheme is clear. The taxpayer
must value inventory for tax purposes at cost unless the “market” is
lower. “Market” is defined as “replacement cost,” and the taxpayer is
permitted to depart from replacement cost only in specified
The Tax Court found, however, that Thor made no sales and kept no
records. 64 T.C. at 171. Thor’s management simply wrote down its
closing inventory on the basis of a well educated guess that some of
it would never be sold. (David Geller note heRe: this IS WHAT
JEWELERS DO) The formulae governing this write down were derived from
management’s collective “business experience”; the percentages
contained in those formulae seemingly were chosen for no reason other
than that they were multiples of five and embodied some kind of
anagogical symmetry. The Regulations do not permit this kind of
evidence. If a taxpayer could write down its inventories on the basis
of management’s subjective estimates of the goods’ ultimate
salability, the taxpayer would be able, as the Tax Court observed,
id. at 170, “to determine how much tax it wanted to pay for a given
year.” [Footnote 13]
Anne I then got this email from a respected jeweler I’ve known from
1989 and he’s still in business:
“I had an accountant that did that “favor” for me years ago. Of
course, I got audited. When the IRS guy came he looked over the books
and asked to use the phone. He called his boss and said in essence
"They have it on their books just like we have it on ours. What
should I do?” The agent then asked me how my taxes were prepared. I
told him I took the years ledger sheets down to the copymat, made
Xerox copies of them, and gave The accountant those.
He asked for a letter that said that. I cut him the letter. He said
that I was going to get a bill for the taxes due, but no penalties
or interest. That was exactly what I got.
However, the accountant got a “Client List Audit”. It darn near put
him out of business because he lost something like 80% of his
clients, including me.
The accountant lowered the inventory number to show how smart he was
and make me (supposedly) happy.
I told him it was wrong, he said that it was right.
I said OK, you’re the pro, and signed the return.
When the IRS came they agreed with me. That is why I didn’t get
dinged for interest and penalties.
Because they disagreed with him, they did a “client list audit”.
That darn near killed him.
Mark Twain said that when the legend becomes bigger than the fact,
legend. OK for the idiots that believe the media. But like you keep
pointing out, what they hear and “have been told” is in conflict
with the law. And the IRS is going to gaff you on the law and what
you have heard doesn’t count."
The ONLY way you could lower value on jewelry inventory and send it
to cogs or expense and actually win with the IRS is like what
happened in the very late 1980’s. If you were in jewelry back then
you’ll know gold went up to $850 an ounce and predictions were $2000.
It hit about $859 and then dropped like a rock, settling around $350
for many years.
My brothers, a jeweler also, told me in that year he bought $10,000
of assorted chain, he thus paid the highest price for chain. So when
he still had this over priced chain and he could order MORE chain,
now at $500 an ounce, he could with an order and a paid invoice from
1992 show that the chain can be replaced for half of its original
cost. Then he could do, legally, what you mentioned.
But for the past many years gold, platinum and diamonds have done
nothing but GO up. It would be hard pressed to prove our inventory is
now worth less.
Anne, if you indeed do this in your practice for any JEWELERS (only
area I consider myself to have expertise) all I can say is
“you were damn lucky.”