Influence of tax legislation on financial accounting: A study of the timber industry, 1905-1925

              The Accounting Historians Journal Vol. 14, No. 2 Fall 1987
Robert C. Elmore UNIVERSITY OF ALABAMA — HUNTSVILLE
THE INFLUENCE OF TAX LEGISLATION ON FINANCIAL ACCOUNTING: A STUDY OF THE TIMBER INDUSTRY, 1905-1925
Abstract: The purpose of this paper is to examine the financial accounting records of a Mississippi timber company and its sub-sidiaries in light of the dynamic tax environment of the period 1905 to 1925. The financial accounting records and correspon-dence with the Commissioner of Internal Revenue indicate de-ficiencies in the following areas: asset valuation, a lack of a cost accounting system to adequately value inventories, and the deple-tion and depreciation deduction. The demands of the new tax laws were often in conflict with the accounting practices of this period of time forcing changes in accounting practice.
Introduction
The accounting practices of individual corporations are shaped by their dynamic relationships with regulatory and environmental conditions. The conflict between accounting practices and regulations should be studied" ... in terms of changes-rather than its static order"[Saito, Spring 1983, p. 2]. An example of a conflict between practices and regulations existed between accounting practices and the newly enacted tax laws at the beginning of the twentieth century. No other period of time has experienced the sweeping changes in the tax environment as did the years of 1905 to 1925, with the enact-ment of the Corporation Excise Tax of 1909, and the Revenue Acts of 1913, 1918, 1921, and 1924. The requirements of these new tax laws often conflicted with the existing accounting practices in the areas of inventory valuation, depletion, asset valuation, and depreciation. Prior to the enactment of these tax laws, corporations faced few constraints from any type of governmental regulation. The purpose of this paper is to examine the financial records of a Mississippi timber company, the L. N. Dantzler Company, and its subsidiaries, and the influence of this dynamic tax environment on their financial accounting principles and cost accounting systems.
Methodology
The practice of accounting has often been influenced by tax