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provides two specific requirements with which acceptable
inventory practices must conform. First, such practices must
conform as nearly as may be to the best accounting practice in
the industry. Second, the practices must clearly reflect the
taxpayer’s income. Section 1.471-2(b), Income Tax Regs., adds
consistency of application from year to year as an important and
explicit element of inventory practices that clearly reflect
income. The use of the adjective “sound” in section 1.471-2(d),
Income Tax Regs., does not introduce an additional standard, but
only incorporates the previously articulated standards, with the
emphasis on the “system” or methodology employed to maintain book
inventories. Our inquiry, then, is, principally, whether the
retailers' systems of maintaining book inventories (including the
making of shrinkage accruals) conform to the best accounting
practice and clearly reflect income. Indeed, the principal point
relied on by respondent on brief is that “Petitioner’s methods of
estimating inventory shrinkage * * * failed to clearly reflect
income.”
V. Best Accounting Practice
The parties have stipulated that, for financial accounting
purposes, petitioner’s financial statements for the years in
issue were consistent with generally accepted accounting
principles (GAAP). In Thor Power Tool Co. v. Commissioner, 439
U.S. 522, 532 (1979), the Supreme Court stated that the phrase
“best accounting practice”, as it appears in section 471(a) (and
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