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following the year of opening. In most cases, Target set accrual
rates for new stores by considering the average shrinkage rate
for the district in which the new store was being opened. Target
also considered the demographics of that district, as well as the
marketing plan of “sister stores”--stores that are located in
areas with similar demographics and have merchandise mixes
similar to that anticipated for the new store--in setting accrual
rates for new stores.
3. Warehouses
During 1979 through 1984, physical inventories were
performed at Target's distribution centers and metro warehouses
(hereafter, collectively referred to as “warehouses”) once each
year prior to the close of the taxable year, during the months of
December or January. The results of the physical inventories at
the warehouses were taken into account in April of the subsequent
taxable year on a departmental basis by the Target stores
serviced by each particular warehouse. The amount of shrinkage
was allocated to the Target stores based upon the store's use of
a particular warehouse. That practice reflected the
determination that the warehouses' shrinkage generally reflected
billing errors to stores.
C. Proposed Deficiencies With Respect to Target
In the notice of deficiency, respondent disallowed shrinkage
accruals for 1984. The LIFO cost adjustment was $36,339,217,
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