Dayton Hudson Corporation and Subsidiaries - Page 50

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            assumption that sales and shrinkage are sufficiently correlated                              
            so that the sum of aggregate monthly shrinkage accrued as a                                  
            percentage of sales for the taxable year, adjusted for an                                    
            allocation of any accrual error based on a ratio of relative                                 
            sales between the relevant taxable years, yields a figure for                                
            taxable year shrinkage that would clearly reflect income.10                                  
            Although we believe that sales have some value as a predictor of                             
            shrinkage at the Target-wide level, we simply cannot accept the                              
            critical assumption that underlies Dr. Seago's shrinkage accrual                             
            accuracy analysis.                                                                           
                  Dr. Seago did not conduct an analysis of the correlation                               
            between sales and shrinkage or a shrinkage accrual accuracy                                  
            analysis for data derived from the operations of Dayton’s.  We                               
            assume that petitioner wishes that we infer both a strong                                    
            correlation between sales and shrinkage and a favorable shrinkage                            


            10    In addition, this Court has difficulty with Dr. Seago's                                
            shrinkage accrual accuracy analysis for other reasons.  Target's                             
            shrinkage method results in the accrual of shrinkage based on a                              
            rate set at the beginning of the taxable year for each department                            
            within each store.  Thus, conceivably, a department within a                                 
            store could accrue shrinkage at two different rates during the                               
            cross-year inventory period, e.g., 2 percent of sales during the                             
            taxable year's physical-to-yearend period and 2.5 percent of                                 
            sales during the period prior to the physical inventory in the                               
            next taxable year.  An allocation of any accrual error only, as                              
            opposed to an allocation of total verified shrinkage, is                                     
            inconsistent with the underlying assumption that sales and                                   
            shrinkage are perfectly correlated.  In the same vein, Dr. Seago                             
            allocates accrual error based on a 75/25 ratio that is an                                    
            approximation of the relative sales between the relevant taxable                             
            years and not the actual cross-year sales percentages.                                       





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