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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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