The Kroger Company and Subsidiaries - Page 1

                                        T.C. Memo. 1997-2                                             

                                     UNITED STATES TAX COURT                                          

                     THE KROGER COMPANY AND SUBSIDIARIES, Petitioner v.                               
                        COMMISSIONER OF INTERNAL REVENUE, Respondent                                  

                 Docket No. 3358-94.                   Filed January 2, 1997.                         

                       P operated supermarkets and convenience stores.                                
                 P used “cycle counting” to conduct physical inventories                              
                 of merchandise throughout the year.  P maintained book                               
                 inventory records from which inventory closing balances                              
                 could be determined at year’s end.  P estimated losses                               
                 from shrinkage factors (e.g., theft and errors in                                    
                 billing) occurring from the time of the last physical                                
                 count of inventory to year’s end and made an accrual of                              
                 the estimate.  P calculated shrinkage accruals as a                                  
                 percentage of gross sales.                                                           
                       Held:  P’s systems of maintaining book inventories                             
                 (including the making of shrinkage accruals) conform to                              
                 the best accounting practice and clearly reflect                                     
                 income.  They are, thus, sound within the meaning of                                 
                 sec. 1.471-2(d), Income Tax Regs.                                                    

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