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adversely affecting employee morale. Petitioners aimed to reduce
shrinkage, and they devoted extensive resources to the mitigation
and monitoring of it. Petitioners' management discussed
shrinkage weekly among themselves, and they regularly discussed
the subject with the audit committee of the board of directors,
as well as the regional managers, district managers, and store
managers.
C. Petitioners' Monthly Shrinkage Estimates
Wal-Mart estimated shrinkage for each store for the period
between the physical inventory and the end of the taxable year by
multiplying a retail shrinkage rate (stated as a percentage of
sales) by the store's sales for the period between the physical
inventory and the end of the taxable year. For new stores,
Wal-Mart estimated shrinkage based on a fixed rate established by
its senior management. In the 1983 and 1984 taxable years, the
retail shrinkage rate for new stores was 3 percent of sales. In
the 1985 and 1986 taxable years, the rate was 2 percent of sales.
Wal-Mart used the fixed rate from the date the store opened until
the date that the first inventory was taken at the store.
After Wal-Mart took the first inventory at a store, it
computed a shrinkage rate for that store by dividing the store's
shrinkage at retail, as verified by the first inventory, by the
store's sales for the period starting with the date the store
opened and ending on the inventory date. The shrinkage rate, as
computed, was subjected to the imposition and application of
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