- 24 -
Commissioner determines that a taxpayer's method of accounting
does not clearly reflect income, the taxpayer must demonstrate
either that his method of accounting clearly reflects income or
that the Commissioner's method does not clearly reflect income.
See Asphalt Prods. Co. v. Commissioner, supra at 847; Kroger Co.
& Subs. v. Commissioner, T.C. Memo. 1997-2.
C. The Divisions' Shrinkage Methods
The Divisions maintained book inventory records from which
yearend inventories could be determined. Losses for the taxable
year occasioned by shrinkage factors (taxable year shrinkage)
were reflected in the Divisions' book inventory records under
methods (individually, Target's shrinkage method and Dayton's
shrinkage method; together, when no distinction is intended, the
Divisions' shrinkage methods) that essentially involved three
variables: (1) an estimate of losses from shrinkage factors for
the portion of the taxable year preceding the date of the
physical inventory (preinventory accrual), (2) the accrual error
(a measure of error in both the prior year's shrinkage accrual
and the preinventory accrual), and (3) the shrinkage accrual for
the taxable year.
Target accounted for shrinkage as a percentage of sales
using rates (accrual rates) that were set for each department in
each store for each taxable year. Those rates were derived from
a companywide accrual rate that was based on a combination of
factors including historical shrinkage experience, demographics,
Page: Previous 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 NextLast modified: May 25, 2011