Cleo Perfume, Inc. - Page 11

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          prior to the current year, (2) the deduction resulted in a tax              
          benefit, (3) an event occurs in the current year that is                    
          fundamentally inconsistent with the premises on which the deduction         
          was originally based, and (4) a nonrecognition provision of the             
          Internal Revenue Code does not prevent the inclusion in gross               
          income.  Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370, 383-           
          384 (1983); see Gold Kist, Inc. v. Commissioner, 110 F.3d 769, 772          
          (11th Cir. 1997), revg. per curiam 104 T.C. 696 (1995); Frederick           
          v. Commissioner, 101 T.C. 35, 41 (1993).  A current event is                
          fundamentally inconsistent with the premises on which the deduction         
          was originally based when that event would have prevented the               
          deduction if the event had occurred in the year of the deduction.           
          Hillsboro Natl.  Bank  v.  Commissioner, supra; Frederick v.                
          Commissioner, supra.                                                        
               Respondent asserts that petitioner improperly derived a                
          $2,031,778 tax benefit because that amount was treated (on                  
          petitioner's books) as a purchase and consequently petitioner's             
          cost of goods sold for the year ended June 30, 1990, was                    
          overstated.  Petitioner disagrees, claiming that even though its            
          purchases were overstated, the ASA merchandise was included in              
          petitioner's  ending  inventory  and  thus  there  was  a  wash.5           

               5    Cost of goods sold is generally determined as follows:            
                         Beginning inventory                                          
                    +    Purchases                                                    
                                                             (continued...)           




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