Lucas v. Kansas City Structural Steel Co.

Background

A Missouri steel fabrication company that builds parts for buildings, bridges, and tanks kept a supply of steel on hand and, for tax returns, valued up to 5,554 tons at a constant price of $1.70 per hundredweight (the amount and price from December 31, 1916). For years after 1916, the company inventoried that 'normal' quantity at the constant price and valued any excess at cost or market, whichever was lower. During 1918 and 1920 market prices rose, so the tax commissioner revalued the company’s entire year-end inventories at current market prices, increasing the company’s reported inventories and resulting taxes for those years. The Board of Tax Appeals agreed with the commissioner; a federal appeals court reversed; the Supreme Court reviewed these tax years.

Reasoning

The main question was whether the company could keep a fixed 'base stock' valued at a nominal price for annual tax accounting. The Court said inventories are necessary to measure annual profit and must reflect gains and losses realized in each year. The base stock method hides real gains in rising price years and overstates income in falling price years, so it conflicts with required annual accounting and with Treasury rules that favor cost or cost-or-market valuation. The Court found the company’s materials were commingled, used in production, and plainly influenced profits. Because the company did not show the commissioner’s revaluation was plainly arbitrary, the Court sided with the tax agency.

Real world impact

This ruling means businesses that keep interchangeable supplies cannot lock a fixed normal quantity at an old nominal price for tax purposes. Companies that used the 'base stock' cushion method may have to value inventories at cost or market, which can raise taxable income in periods of rising prices. The decision enforces Treasury inventory rules and affects contractors, manufacturers, and others who maintain rolling stock of materials.