- 40 -
hindsight in estimating shrinkage. It also did not have the
results of the subsequent inventories that are used in this
comparison when it made its estimates. All the same, we believe
that our comparison of Wal-Mart's estimates with those made with
the benefit of hindsight helps demonstrate that Wal-Mart's method
is reasonable. Wal-Mart's estimation procedure resulted in
Parent's stores underestimating shrinkage in 2 years (1984 and
1986) and overestimating shrinkage in 2 years (1983 and 1985).
Similarly, Kuhn's and Edwards underestimated shrinkage in some
years and overestimated shrinkage in other years.
We conclude that Wal-Mart's shrinkage estimates clearly
reflect income, and that Wal-Mart has met the second prong of our
two-prong test. We so hold.10 Because respondent has determined
to the contrary, we reverse her determination.
IV. Sam's
The correlation of shrinkage to sales supports Sam's use
of estimates. The reasonableness of Sam's shrinkage estimates
for the 1985 and 1986 taxable years is evident from the data.
During those years, petitioners verified shrinkage through the
physical inventories of Sam's in the amount of $5.236 million.
Over the same period, Sam's recorded sales of $1.912 billion.
Thus, Sam's shrinkage for the 2-year period was approximately
.27 percent of sales, or slightly higher than the .2-percent rate
10 We note that Dr. LaRue has not persuaded us that we
should hold otherwise.
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