The Kroger Company and Subsidiaries - Page 17

                                               - 17 -                                                 
            inventories, the taxpayer made a shrinkage accrual.  In the                               
            Dayton Hudson case, which was before us on the Commissioner’s                             
            motion for summary judgment, we held that section 1.471-2(d),                             
            Income Tax Regs., as a matter of law, does not prohibit making a                          
            shrinkage accrual in computing book inventories.  We                                      
            acknowledged, however, that the Commissioner might yet argue that                         
            the taxpayer’s accounting system, including the making of                                 
            shrinkage accruals, is not “sound” within the meaning of the                              
            regulations, or fails to clearly reflect income.  Id. at 468.                             
                  Here, respondent acknowledges our holding in the Dayton                             
            Hudson case, but she does not agree that it is correct.  We                               
            adhere to that holding.                                                                   
            IV. Are the Retailers’ Systems of Accounting for Inventories,                             
                  Including the Use of Shrinkage Accruals, Sound?                                     
                  Because the retailers used cycle counting to conduct                                
            physical inventories of merchandise, and no count was taken at                            
            year’s end, the retailers necessarily had to maintain book                                
            inventory records to determine yearend inventories for purposes                           
            of computing cost of goods sold.  Those book inventories included                         
            an entry for shrinkage accrual.  We must determine whether those                          
            book inventories were maintained in accordance with a “sound                              
            accounting system”.  Sec. 1.471-2(d), Income Tax Regs.                                    
                  The question of what constitutes a “sound accounting system”                        
            under section 1.471-2(d), Income Tax Regs., has not been answered                         
            by the courts.  Section 1.471-2(a), Income Tax Regs., however,                            

Page:  Previous  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  Next

Last modified: May 25, 2011