Finding the Outer Limits of IRS Accounting Discretion : The Kollman Case

The statutory language of the Internal Revenue Code gives cognizance to the methods of accounting used by taxpayers for their financial reporting. The 1979 U.S. Supreme Court opinion of Thor Power acceded to the Internal Revenue Service a significant amount of discretion in its attempt to require taxpayers to change and adapt their accounting methods to its satisfaction. In particular, the Commissioner of Internal Revenue's seemingly absolute authority to prohibit lower of cost or market inventory valuation was upheld. Until the recent Tax Court decision in the case of United States v. Kollman, in fact, there were few guidelines that helped to delineate the outer limits of the IRS's discretion in demanding taxpayer adherence to its preferred tax accounting methods. This paper considers how the parameters for a taxpayers' ability to challenge this discretion have been significantly clarified, if not changed, by the Kollman case. We discuss the clear reflection of income doctrine as it has evolved over time and examine the impact of recent judicial decisions – especially Kollman – on this standard and consider whether or not there is need for revision on the law in this area. We conclude that the Commissioner's authority to arbitrarily require specific methods of accounting is in fact limited, and that the Kollman case serves as a helpful marker of the outer limits of such authority