- 44 -
errors in the shrinkage accruals for those physical-to-yearend
periods. Those errors, however, were subject to correction
within the next taxable year and would, on average, involve no
more than 3 or 4 months of possible overestimates. The limited
potential for deferral is significant to us in deciding whether
income was clearly reflected.2
Respondent abused her discretion in determining that the
retailers’ shrinkage method does not clearly reflect income and
that her method does clearly reflect income. Taxable income must
be reflected with as much accuracy as standard methods of
accounting practice permit. Caldwell v. Commissioner, 202 F.2d
at 115. Because the retailers did not generally take physical
inventories at year’s end, no accounting method can state with
certainty either yearend shrinkage or the year’s taxable income.
In order to determine the accuracy of the retailers’ shrinkage
2 Shrinkage accruals are no more than estimates, and because
there are tax incentives for maximizing shrinkage accruals, the
potential for tax avoidance exists. That is so notwithstanding
that minimization of shrinkage factors was a management goal for
each of the retailers. Essentially, the determination of
shrinkage accrual rates by the management of each KMA (the
analysis is the same for Florida Choice and Superx) is not
dependent entirely on shrinkage factors, which individual store
and department managers have an incentive to minimize. The
potential for tax avoidance is one of respondent’s objections to
shrinkage accruals. On the record before us, however, we are
unconvinced that there was a significant potential for tax
avoidance or that, indeed, there was any tax avoidance. Any
potential overestimates were subject to correction within the
following taxable year and would, on average, involve no more
than 3 or 4 months of excess shrinkage accruals. We see no
pattern of overaccruals for tax avoidance purposes.
Page: Previous 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 NextLast modified: May 25, 2011