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Dr. Bates compared his estimates of taxable year shrinkage
with the losses claimed by the retailers for Federal income tax
purposes. He performed the same calculations to determine the
accuracy of respondent's method of reflecting shrinkage factors,
which would allow no shrinkage accrual, but would take account of
shrinkage only in the year when demonstrated by physical count.
Dr. Bates made these comparisons using estimates of taxable year
shrinkage based on both sales and time. The results of Dr.
Bates' calculations and analyses are set forth in an appendix to
this opinion.
Dr. Bates determined that the accounting system utilized by
the KFS division for Federal income tax purposes produced, in the
aggregate, a net underestimate for the years 1984 through 1991 of
1.8 percent of sales-based taxable year shrinkage and 1.7 percent
of time-based taxable year shrinkage. He determined that
respondent's method produced a net underestimate of 4.4 percent
of sales-based taxable year shrinkage and 4.3 percent of time-
based taxable year shrinkage. In addition, Dr. Bates determined
that the maximum error under respondent’s method was 15.6 percent
of sales-based taxable year shrinkage and 15.7 percent of time-
based taxable year shrinkage (compared to 11.4 percent and 11.2
percent, respectively, under the system utilized by the KFS
division). He concludes that respondent’s method is less
accurate than that used by the KFS division.
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