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comparing the shrinkage claimed by Target and by Dayton's for the
taxable year to actual taxable year shrinkage figures.
Petitioner must rely on an indirect method of proof. That is why
petitioner relies on the expert testimony of Dr. Seago.
Dr. Seago developed a model for determining taxable year
shrinkage. First, Dr. Seago assumed that sales and shrinkage are
“perfectly correlated”, based on his findings in the 10-year
correlation analysis, supra section VI.E.2. As we have stated,
Dr. Seago allocated 75 percent of any 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. That allocation of the accrual
error in conjunction with the aggregate of monthly accruals for
shrinkage for the relevant taxable years yielded, in Dr. Seago's
opinion, the best estimate of taxable year shrinkage (i.e.,
sales-allocated taxable year shrinkage).
Dr. LaRue criticizes Dr. Seago for aggregating sales and
shrinkage figures at the Target-wide level. Dr. LaRue believes
that variances in LIFO pool attributes and discontinuities in the
timing of the physical inventories throughout the taxable year
render the aggregate data virtually meaningless. Although we
appreciate Dr. LaRue's criticism, we believe that an analysis of
divisionwide or companywide data is not necessarily without
merit, especially when an analysis of such data exposes relative
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