- 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
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