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variations of petitioners' method, rather than strictly following
it. According to respondent, Wal-Mart's competitors in the
retail industry use different historic periods to ascertain their
shrinkage rates, and they adjust these rates differently than the
ceiling and floor levels used by Wal-Mart. Respondent also
argues that petitioners' shrinkage estimates do not conform to
GAAP for the reasons stated by Dr. Wheeler. Respondent adds that
petitioners' financial statements as a whole may have satisfied
GAAP, but that their estimates of shrinkage do not. Respondent
contends that E&Y was able to certify the subject statements
without qualification because petitioners' shrinkage estimates
were immaterial from a financial point of view. Respondent
alleges that materiality is a financial accounting concept that
does not apply to tax accounting.
The Supreme Court has indicated that the phrase "best
accounting practice in the trade or business" is synonymous with
GAAP. Thor Power Tool Co. v. Commissioner, 439 U.S. at 531; see
also Hachette USA, Inc. v. Commissioner, 105 T.C. 234, 247
(1995), affd. 87 F.3d 43 (2d Cir. 1996). Thus, petitioners'
method of accounting for their inventories will satisfy the first
prong of our two-prong test if it conforms to GAAP. We believe
it does. Petitioners' estimate of stub period shrinkage as a
percentage of sales is a widely accepted industry practice.
Petitioners consistently followed this practice, and they
utilized the estimates resulting therefrom in their financial
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