Kaps Warehouse, Inc. - Page 30

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            exchange for different inventory.  Petitioner's ending inventory                          
            was not written down because of obsolescence.                                             
                  By writing down its ending inventory at the end of fiscal                           
            years 1991 and 1992 by $160,000 and $115,000, respectively,                               
            petitioner reduced taxable income by these amounts.  Petitioner has                       
            failed to provide a valid reason for the writedowns.  Mr. Dunn                            
            provided no reason to believe that the inventory balances on record                       
            as a result of the perpetual inventory system were inaccurate.                            
                  Moreover, Mr. Lamprecht testified that one factor he relied                         
            upon to determine the ending inventory writedown was petitioner's                         
            high gross profit percentage compared to prior years. However,                            
            petitioner  provided  no  evidence  of  how  the  writedown  was                          
            established or the computations petitioner used.  Petitioner was                          
            simply unable to demonstrate to us that ending inventory was                              
            understated on its books.                                                                 
                  In sum, there was no reasonable basis or substantial authority                      
            for petitioner's positions with regard to the rebates or the                              
            inventory writedown.  There was also no disclosure on the returns                         
            of the relevant facts affecting the tax treatment of these items.                         
            Accordingly, we hold that petitioner is liable for the section                            
            6662(b) penalties for substantial understatements of taxable income                       
            in connection with the rebates to its related entities and the                            
            writedown of ending inventory for fiscal years 1991 and 1992.                             

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