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and the Federal income tax return, petitioners reported shrinkage
on an aggregate basis. Other large retail businesses, in
addition to Wal-Mart, estimate shrinkage for the stub period.
The practice of estimating shrinkage as a percentage of sales is
prevalent in the retail industry.
OPINION
I. Overview
We must decide whether petitioners' estimates of inventory
shrinkage at yearend are permissible. In Dayton Hudson Corp. &
Subs. v. Commissioner, 101 T.C. 462 (1993), we held that a
taxpayer was entitled to use an estimate of yearend shrinkage if
the taxpayer's method of accounting for its inventory was
"sound". In the instant case, respondent asks us to reconsider
our holding in Dayton Hudson. We will not do so. We adhere to
our opinion in Dayton Hudson Corp. & Subs. v. Commissioner,
supra, for the reasons stated therein. We will not disturb
petitioners' method of accounting for their inventories,
including their estimates of shrinkage at yearend, if the method
is "sound". Stated differently, petitioners will prevail if they
prove that their inventory method meets the following two-prong
test: (1) It conforms as nearly as may be to the best accounting
practice in the trade or business and (2) it clearly reflects
income. Sec. 471(a);8 see also Thor Power Tool Co. v.
8 Sec. 471(a) provides:
(continued...)
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