- 10 -
Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), affg.
T.C. Memo. 1992-673. The income is recognized in the year
cancellation occurs. Montgomery v. Commissioner, 65 T.C. 511, 520
(1975).
Respondent asserts that petitioner had a debtor relationship
with ASA, beginning on the date the goods were delivered in 1990
until some point in 1991, when the debt was discharged.
Continuing, respondent contends that there was a discharge of
$2,031,778 of indebtedness which, from a tax viewpoint, resulted in
discharge of indebtedness income to petitioner. Petitioner, on the
other hand, maintains that it never purchased the ASA perfume but
only held the merchandise on consignment. Consequently, petitioner
asserts there was no debt to be forgiven.
We agree with petitioner's position that it held the
merchandise from ASA on consignment. Consequently, we find that
there was no debt owed to ASA by petitioner;4 thus, no debt
forgiveness occurred. Accordingly, we dismiss respondent's first
argument that petitioner had discharge of indebtedness income.
B. Tax Benefit Rule
The tax benefit rule includes an amount in current income to
the extent that: (1) The amount was properly deducted in a year
4 We recognize that pursuant to the auditor's request,
petitioner's shareholders signed a letter acknowledging their
assumption of a liability due ASA. Nonetheless, we accept Mr.
Campos, Sr.'s testimony that the letter was signed knowing that
there was no actual debt owing by petitioner to ASA.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011