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Income Tax Regs., which specifies when a liability is incurred
for purposes of the accrual method of accounting, requires only
reasonable accuracy in determining the amount of an established
liability. As noted previously, the term “liability”
specifically includes a cost taken into account in computing cost
of goods sold. Sec. 1.446-1(c)(1)(ii)(B), Income Tax Regs.
The accuracy of the retailers’ shrinkage method presents a
question of fact. Petitioner bears the burden of proving that
fact. Rule 142(a). Since, under the cycle method of counting
used by the retailers, yearend inventories are not ordinarily
taken, the accuracy of the retailers’ shrinkage method is not a
fact that petitioner can prove simply by comparing the retailers'
estimates (shrinkage accruals) to actual yearend shrinkage
figures. Petitioner must rely on an indirect method of proof.
That is why petitioner relies on the expert testimony of Dr.
Bates, whose expertise is in statistics, econometric modeling,
and economic analysis.
Dr. Bates was given the retailers' estimates of yearend
shrinkage based on sales. He hypothesized that he could prove
the accuracy of those estimates by showing that they did not
differ, or differed by only a small percentage, from amounts
determined on the basis of a sales-based allocation of the actual
shrinkage for the relevant inventory cycles. Dr. Bates’
conclusion is that, for each of the retailers, annual losses, in
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