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Toraya's beginning inventory reported on its 1989 return
included the Berkeley inventory plus the Post Street inventory.
At the end of 1989 only the Post Street restaurant was open. On
its 1989 tax return Toraya wrote off the $19,917 Berkeley
restaurant beginning inventory as a purchases expense.
Toraya's inventory was not commingled with the Fillmore
Street restaurant's inventory or transferred to the Fillmore
Street restaurant. The Fillmore Street restaurant was a straight
Sushi bar and served mostly fish dishes. The Post Street and
Berkeley restaurants served more meat dishes. Frozen meat could
be transferred, but frozen fish was not appropriate for sushi.
Toraya's tax returns reflect the following gross receipts,
cost of goods sold (COGS), taxable income before net operating
loss (NOL), and unappropriated retained earnings per Toraya's
books and records for the years 1988 through 1991:
1988 1989 1990 1991
Gross receipts $922,439 $648,927 $449,608 $421,608
COGS 340,311 232,303 152,934 132,107
Taxable income
before NOL (4,983) (1,361) 5,315 (13,929)
Retained earnings
per books 162,390 160,153 $164,492 132,322
Nakamura advised the Takaos that every cash transaction
should be rung up. He also advised the Takaos to check the
waitress tags against the cash register tapes at the end of the
day to make sure that every transaction was recorded. Nakamura
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