Deductions for estimated inventory shrinkage.The recent passage of the Taxpayer Relief Act of 1997 (TRA TRA Training TRA Transfer TRA Transition TRA Tennessee Regulatory Authority TRA Telecommunications Regulatory Authority (Oman) TRA Tax Reform Act (1976, 1984, or 1986) TRA Teachers Retirement Association '97) should end years of litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. between retailers and the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. over estimated inventory shrinkage Shrinkage The amount by which inventory on hand is shorter than the amount of inventory recorded. Notes: The missing inventory could be due to theft, damage, or book keeping errors. . Many retailers cycle count their inventory; the inventory at various locations may be physically counted at least once each year, but all stores are not counted at the end of the year. If a physical count is not taken at yearend, shrinkage occurring since the last count will have to be estimated for financial reporting purposes and subsequently verified at the next inventory count. Three recent Tax Court decisions demonstrate the Service's resistance to allowing a deduction for estimated inventory shrinkage. Dayton Hudson Corp., 101 TC 462 (1993), answered the threshold question of whether an estimate for inventory shrinkage could be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. at all. The Tax Court held that a taxpayer's method of accounting may include the use of an estimate of shrinkage occurring through year-end, provided the estimation method is sound and clearly reflects income. Ultimately, the Tax Court decided that Dayton Hudson's particular method of determining estimated inventory shrinkage did not clearly reflect income; see TC Memo 1997-260. However, two other cases (Wal-Mart Stores, Inc., TC Memo 1997-1, and The Kroger Co., TC Memo 1997-2) held that the taxpayers' methods of determining estimated shrinkage clearly reflected income and were deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). . Congress has stepped in and effectively resolved the issue for future years by including a deduction for inventory shrinkage in the TRA '97. TRA '97 Section 961 codifies the decision in Dayton Hudson that taxpayers can take into account and estimate inventory shrinkage occurring through year-end, provided the method used clearly reflects income. The TRA '97 Conference Agreement describes a safe-harbor method for retailers to estimate shrinkage. Under the safe-harbor method, inventory shrinkage is determined for tax purposes using a historic ratio of shrinkage to sales for the three most recent tax years; this ratio is separately determined for each store or department in a taxpayer's store. Further, estimated shrinkage determined in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with this safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. is not required to be recalculated through a look-back adjustment or to other-wise reflect the results of physical inventories taken after year-end. The Treasury is also given the authority to develop other safe-harbor methods of determining inventory shrinkage. From Barbara J. Young, J.D., Washington, D.C. |
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