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We have recently addressed the question of what constitutes
a “sound accounting system” under section 1.471-(2)(d), Income
Tax Regs. In Kroger Co. & Subs. v. Commissioner, T.C. Memo.
1997-2, we noted that section 1.471-(2)(a), Income Tax Regs.,
provides two specific requirements with which acceptable
inventory practices must conform. We then stated:
First, such practices must conform as nearly as may be
to the best accounting practice in the industry.
Second, the practices must clearly reflect the
taxpayer’s income. Section 1.471-2(b), Income Tax
Regs., adds consistency of application from year to
year as an important and explicit element of inventory
practices that clearly reflect income. The use of the
adjective “sound” in section 1.471-2(d), Income Tax
Regs., does not introduce an additional standard, but
only incorporates the previously articulated standards,
with the emphasis on the “system” or methodology
employed to maintain book inventories. * * * [Id.]
Therefore, our inquiry is, principally, whether the Divisions'
systems of maintaining book inventories (including the making of
shrinkage accruals) conform to the best accounting practice and
clearly reflect income.
V. Best Accounting Practice
The parties have stipulated that, for financial accounting
purposes, petitioner’s financial statements for the taxable year
in issue were consistent with generally accepted accounting
principles (GAAP). In Thor Power Tool Co. v. Commissioner, 439
U.S. 522, 532 (1979), the Supreme Court stated that the phrase
“best accounting practice”, as it appears in section 471(a) (and
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