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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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