The Kroger Company and Subsidiaries - Page 16

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            As the regulations point out, section 471(a) establishes two                              
            distinct tests to which an inventory must conform:                                        
                        (1) It must conform as nearly as may be to the                                
                  best accounting practice in the trade or business, and                              
                        (2) It must clearly reflect the income.                                       
            Sec. 1.471-2(a), Income Tax Regs.                                                         
                  In accordance with the authority provided by section 471(a),                        
            the Secretary has promulgated rules for taxpayers maintaining a                           
            perpetual (book entry) system of keeping inventories.  In                                 
            pertinent part, section 1.471-2(d), Income Tax Regs., reads as                            
                  Where the taxpayer maintains book inventories in                                    
                  accordance with a sound accounting system in which the                              
                  respective inventory accounts are charged with the                                  
                  actual cost of the goods purchased or produced and                                  
                  credited with the value of goods used, transferred, or                              
                  sold, calculated upon the basis of the actual cost of                               
                  the goods acquired during the taxable year * * * the                                
                  net value as shown by such inventory accounts will be                               
                  deemed to be the cost of the goods on hand.  The                                    
                  balances shown by such book inventories should be                                   
                  verified by physical inventories at reasonable                                      
                  intervals and adjusted to conform therewith.                                        

            III.  Dayton Hudson Corp. & Subs. v. Commissioner                                         
                  In Dayton Hudson Corp. & Subs. v. Commissioner, 101 T.C. 462                        
            (1993), respondent determined a deficiency in the taxpayer’s                              
            Federal income tax because, in computing its yearend book                                 

            100 Stat. 2356, designated the quoted language as sec. 471(a).                            
            Before amendment, the quoted language was the entirety of sec.                            

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