The Kroger Company and Subsidiaries - Page 18

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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                            
            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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