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Upon closer analysis, we conclude that respondent's method
essentially estimates yearend shrinkage for the taxable year
based on yearend shrinkage for the prior taxable year.
Respondent's method would adjust the retailers' book inventories
by disallowing any shrinkage accrual. If we were to sustain
respondent's disallowance, the retailers would compute book
inventories much as they do now, except that they would neither
add to shrinkage as determined by physical count during the year
any shrinkage accrual for the physical-to-yearend period of that
year nor subtract from such shrinkage the shrinkage accrual for
the prior year's physical-to-yearend period. See sec. I.C.
(Findings of Fact), supra. The retailers’ cost of goods sold, as
determined by book inventories, would, therefore, include
shrinkage for all inventory cycles beginning and ending in the
taxable year, plus shrinkage for inventory cycles beginning in
the prior taxable year and ending in the taxable year, but not
any portion of the shrinkage determined for the inventory cycle
beginning within the taxable year and ending in the next taxable
year (i.e., yearend shrinkage). In sum, the retailers’ cost of
goods sold for a taxable year that included cross-year inventory
cycles would include shrinkage accurately measured (i.e.,
verifiable) for some period other than that taxable year (i.e.,
an inventory year).
If it is assumed that there is yearend shrinkage, then,
unless the amount of yearend shrinkage for the taxable year is
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