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Respondent does not seriously claim that losses from
shrinkage factors in a cross-year inventory cycle occur only in
the latter year. Nor does respondent claim that losses from
shrinkage factors do not occur generally throughout an inventory
cycle. On the record before us, we have no doubt that, on a
regular basis, the Divisions experienced losses from theft,
billing errors, and other shrinkage factors. We also have no
doubt that some of those losses were experienced during the
physical-to-yearend period and gave rise to yearend shrinkage.
Therefore, the principal difference between the Divisions’
shrinkage methods and respondent’s method is that respondent,
without admitting it, accepts an estimate of yearend shrinkage
while the Divisions, by making shrinkage accruals, consciously
attempt to estimate that shrinkage.3
3 Petitioner attempts to distort our understanding of
respondent's method by stating that, for Target, “[r]espondent
allows shrinkage at retail of $6,152,381 or 0.202 percent of
sales.” Petitioner also states that “[r]espondent has not even
allowed the shrinkage verified by physical inventories during the
year of $51,323,565.” That characterization of respondent's
method is misleading because it fails to recognize that
respondent's adjustments for the year in issue are not isolated
determinations, but, rather, reflect a method change. Indeed, in
the petition, petitioner alleges, alternatively, that a sec. 481
adjustment would be required in the event that respondent's
adjustments are sustained. At trial, however, petitioner's
counsel acknowledged that no evidence was submitted on that issue
and that petitioner intended to rely on defeating respondent's
determination of deficiency. On brief, petitioner's counsel
cites respondent's failure to make an adjustment to opening
inventory as evidence of the arbitrariness of respondent's
method. Adjustments to opening inventory are the province of
sec. 481; petitioner having abandoned its sec. 481 argument, we
(continued...)
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