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year, respondent’s method would produce only an estimate of the
loss from shrinkage factors for the taxable year. The facts
underlying that conclusion can be illustrated by the following
diagram, in which it is assumed that a physical inventory is
taken semiannually, on March 31 and September 30, and that the
taxpayer is a calendar year taxpayer.
1995 Taxable Year1996 Taxable Year1997 Taxable Year
Dec. 31 Dec. 31 Dec. 31
1995 Inventory Year1996 Inventory Year1997 Inventory Year
Sept.30Mar. 31 Sept. 30Mar. 31 Sept. 30 Mar. 31 Sept. 30
Under respondent’s method, the taxpayer’s cost of goods sold for
a taxable year would be computed by including shrinkage for the
taxpayer’s inventory year ending September 30. Shrinkage for the
inventory year might equal taxable year shrinkage, but the
occurrence of that remote possibility is impossible to verify.
What is likely (almost a certainty) is that the taxpayer,
computing his cost of goods sold under respondent's method, would
be making that computation using some figure for taxable year
shrinkage that was not the actual taxable year shrinkage. In
other words, the taxpayer would be forced to use what is almost
certainly no more than an estimate of taxable year shrinkage in
computing cost of goods sold.
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