- 33 -
v. Commissioner, supra at 490. We recognize that the treatment
of an item for financial accounting and Federal income tax
purposes does not always mesh, and that an accounting method that
is acceptable under GAAP may be unacceptable for Federal income
tax purposes because it does not clearly reflect income. Thor
Power Tool Co. v. Commissioner, supra at 538-544; see also
Hamilton Indus., Inc. v. Commissioner, 97 T.C. 120, 128 (1991);
UFE, Inc. v. Commissioner, 92 T.C. 1314, 1321 (1989); Sandor v.
Commissioner, 62 T.C. 469, 477 (1974), affd. 536 F.2d 874 (9th
Cir. 1976); Peninsula Steel Prods. & Equip. Co. v. Commissioner,
supra. All the same, the regulations under section 446(b)
contemplate that a method of accounting "ordinarily" will clearly
reflect income when it "reflects the consistent application of
generally accepted accounting principles in a particular trade or
business in accordance with accepted conditions or practices in
that trade or business". Sec. 1.446-1(a)(2), Income Tax Regs.
In this regard, we believe that the instant case falls
within the contemplation of section 1.446-1(a)(2), Income Tax
Regs. Petitioners consistently calculated their shrinkage
estimates under a methodology that comported with GAAP. Under
this methodology, they generally estimated shrinkage every month
based on a 3-year rolling average, which was revised after every
actual count. They adjusted any prior under- or over-estimate of
shrinkage each time they counted their inventory so that their
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