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which operated a chain of drug and general merchandise stores
throughout the United States, was a wholly owned subsidiary
corporation of Kroger. Superx generated over $800 million in
annual sales during each of the years in issue. Florida Choice,
which operated a chain of supermarkets in Florida, was a division
of Superx. Florida Choice generated over $100 million in annual
sales during each of the years in issue. (Hereafter, for
convenience, we will refer to Kroger (but only with respect to
its retail operations), Superx, and Florida Choice, collectively,
as the retailers.)
B. Accounting Practices
Petitioner’s annual accounting period and taxable year was a
52/53-week year ending on the Saturday closest to December 31.
The retailers used the accrual method of accounting for both
Federal income tax and financial reporting purposes. Gross
income was calculated using inventories to account for the
purchase and sale of merchandise. Book inventories were
maintained to determine closing inventories for taxable years for
which no physical inventories were taken at year's end.
Gross income, in a merchandising business, means gross
receipts for the period in question less cost of goods sold, plus
any income from investments and from incidental or outside
sources. Cost of goods sold, slightly simplified, equals opening
inventory plus inventory purchased during the period minus
closing inventory.
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