Cleo Perfume, Inc. - Page 10

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          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          
               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.                        

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