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II. Target
A. Accounting Methods and Procedures
1. In General
Target comprised 205 stores that were organized into
91 separate departments. Target maintained its inventory records
by department and by store.
2. LIFO Retail Method
Beginning in 1963 and continuing through 1984, petitioner
elected to value Target's inventories using the LIFO Retail
Method of inventory valuation pursuant to section 1.471-8, Income
Tax Regs. Pursuant to sections 1.472-1(k) and 1.472-8(c), Income
Tax Regs., petitioner elected to use department store indexes
prepared by the U.S. Bureau of Labor Statistics (BLS).
Petitioner aggregated Target's departments into 17 LIFO pools
that corresponded to merchandise groups as established by BLS.
3. Accrual Rate for Shrinkage
Target accounted for its inventory shrinkage on the accrual
method, by department and by store. Target accrued shrinkage as
a percentage of sales using rates (accrual rates) that were set
for each department in each store. The accruals were posted
directly to the perpetual inventory system on a monthly basis,
and adjustments were made to account for accrual errors.
Target developed a companywide accrual rate for each taxable
year by reviewing the inventory results for prior physical
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