- 29 -
accepted standard for a trade or industry may be established by
reference to a common practice followed by members of that trade
or industry. See sec. 1.471-2(a)(1), Income Tax Regs.
(inventories must conform to the best accounting practice in the
trade or business). Petitioners' methodology for estimating stub
period shrinkage is consistent with and comparable to the best
practice used in the retail industry. Like most major retailers,
petitioners use cycle counting, which is widely accepted in the
retail industry. Petitioners' physical inventory process is
strictly and carefully conducted and reviewed by independent
counting services, petitioners' internal auditors and loss
prevention department, and independent auditors. Petitioners'
competitors also estimate shrinkage as a percentage of sales.
Estimating shrinkage for the stub period as a percentage of sales
is the best practice available in the industry. It is also
relevant that petitioners used the same shrinkage estimates for
reports issued to the Securities Exchange Commission.
We conclude that petitioners' method of accounting for
their inventories, including their estimates of shrinkage at
yearend, conforms as nearly as may be to the best accounting
practice in the trade or business. We so hold, and we turn to
the second prong.
III. Clear Reflection of Income
Inventory accounting is governed by sections 446 and 471.
Section 471 prescribes the general rule for inventories. The
Page: Previous 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 NextLast modified: May 25, 2011