The Kroger Company and Subsidiaries - Page 4

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            which operated a chain of drug and general merchandise stores                             
            throughout the United States, was a wholly owned subsidiary                               
            corporation of Kroger.  Superx generated over $800 million in                             
            annual sales during each of the years in issue.  Florida Choice,                          
            which operated a chain of supermarkets in Florida, was a division                         
            of Superx.  Florida Choice generated over $100 million in annual                          
            sales during each of the years in issue.  (Hereafter, for                                 
            convenience, we will refer to Kroger (but only with respect to                            
            its retail operations), Superx, and Florida Choice, collectively,                         
            as the retailers.)                                                                        
                  B.  Accounting Practices                                                            
                  Petitioner’s annual accounting period and taxable year was a                        
            52/53-week year ending on the Saturday closest to December 31.                            
                  The retailers used the accrual method of accounting for both                        
            Federal income tax and financial reporting purposes.  Gross                               
            income was calculated using inventories to account for the                                
            purchase and sale of merchandise.  Book inventories were                                  
            maintained to determine closing inventories for taxable years for                         
            which no physical inventories were taken at year's end.                                   
                  Gross income, in a merchandising business, means gross                              
            receipts for the period in question less cost of goods sold, plus                         
            any income from investments and from incidental or outside                                
            sources.  Cost of goods sold, slightly simplified, equals opening                         
            inventory plus inventory purchased during the period minus                                
            closing inventory.                                                                        

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Last modified: May 25, 2011