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years, and an accrual error is detected, some portion of that
error is attributable to each of the taxable years. With support
from the results of the 10-year correlation analysis, Dr. Seago
assumed that sales and shrinkage were perfectly correlated
throughout the year and, thus, determined that any accrual error
should be allocated according to the relative sales between the
two relevant taxable years to arrive at a figure for taxable year
shrinkage. Dr. Seago examined Target's sales figures for the
taxable years ending in 1984, 1985, and 1986, and determined that
approximately 75 percent of sales between physical inventory
dates are allocable to the taxable year prior to the taxable year
in which the physical inventory is taken. As a result, Dr. Seago
allocated 75 percent of the applicable accrual error to the
taxable year prior to the taxable year in which the physical
inventory was taken and 25 percent to the taxable year in which
the physical inventory was taken. Dr. Seago compared his
resulting figures for taxable year shrinkage (sales-allocated
taxable year shrinkage) with the shrinkage claimed by Target for
tax purposes and the shrinkage that would be allowed under
respondent's method. Dr. Seago's analysis produced the following
results:5
5 These tables contain a few minor computational errors, and
we have taken the liberty of calculating the aggregate percentage
difference using Dr. Seago's numbers.
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