- 46 -
Respondent abused her discretion because petitioner has
convinced us that the retailers’ shrinkage method was more
accurate in reflecting taxable income than was respondent’s
method. If, indeed, shrinkage is a function of sales, our
conclusion would not change, because, on that basis also, the
retailers’ shrinkage method is more accurate than respondent’s
method.
In sum, we conclude that respondent abused her discretion in
determining that the retailers' shrinkage method does not clearly
reflect income because the retailers' shrinkage method more
clearly reflects income when compared to respondent's method
based on an allocation of cross-year inventory shrinkage losses
as a function of time. In addition, the frequency of the
retailers' physical inventories and the uniform and consistent
application of the retailers' shrinkage method insured correction
of overestimates on a regular basis and promoted the clear
reflection of income.
VII. Conclusion
The retailers’ systems of maintaining book inventories
(including the making of shrinkage accruals) conform to the best
accounting practice and clearly reflect income. They are, thus,
sound within the meaning of section 1.471-2(d), Income Tax Regs.
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