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method, we must, therefore, hypothesize the taxable income for
each of the years in question. Although we accept Dr. Bates’
opinion as to the correlation between sales and shrinkage at the
business level, and we are impressed by Dr. Bates’ sales-based
accuracy analysis, we are hesitant to rest our conclusion as to
the accuracy of the retailers’ shrinkage method on a correlation
whose significance we may not fully appreciate. The assumption
underlying Dr. Bates’ time-based accuracy analysis, on the other
hand, is independent of any correlation between sales and
shrinkage. Indeed, it is independent of the correlation between
shrinkage and any particular factor. Moreover, respondent has
not argued that shrinkage is a function of any particular factor.
Thus, the hypothesis that taxable income reflects a ratable
allocation within cross-year inventory cycles of shrinkage
determined for those cycles provides a neutral guideline to judge
not only the accuracy of the retailers’ shrinkage method but also
the relative accuracy of that method compared to respondent’s
method. Based on Dr. Bates’ time-based comparison of the
retailers’ shrinkage method with respondent’s method, utilizing
KFS division, Florida Choice, and Superx data for various years
between 1983 and 1991, see sec. VI.D.4., supra, we are convinced
that respondent's method of estimating losses from shrinkage
factors is less accurate than the retailers' shrinkage method and
is subject to a greater range of error.
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