The Effects of the Supreme Court's Thor Power Tool Decision on the Balance of Tax Accounting Power.

Abstract This article focuses on the effects of the U.S. Supreme Court's Thor Power Tool decision on the balance of tax accounting power. Under the Revenue Acts of 1909 and 1913, neither GAAP nor a clear reflection of income standard was considered in determining taxable income. All taxpayers were required to file their returns by the cash receipts and disbursements methodof accounting. The law at that time did not provide for income averaging nor were there any net operating loss carry back and carry forward provisions. Thus, the cash method produced some inequities for taxpayers whose income fluctuated from year to year. Also, businesses that prepared their financial statements on the accrual basis experienced bookkeeping problems in converting to the cash basis. In 1916, the laws were amended to allow the taxpayer to file his/her tax return on the same basis used to keep his books and records, "unless such basis does not clearly reflect income and subject to regulation by the Commissioner." Thus, the clear reflection of income standard originated in 1916. Congress opted out of being involved with developing details of tax accounting.