Robert F. Dwyer and Aileen K. Dwyer v. United States

The federal government brings this appeal from the district court’s judgment finding the appellees, Robert Dwyer and his wife Aileen Dwyer, entitled to a refund of federal income tax collected for the 1968 tax year. The appeal involves the federal personal income tax consequences arising out of the liquidation of a corporation owned by Robert Dwyer and his son, and particularly the impact of Dwyer’s purported forgiveness of interest owed to him by the corporation. We reverse the decision of the district court, 439 F.Supp. 99 (D.Or. 1977), and hold that the taxpayers realized ordinary income in payment of that interest which the taxpayer attempted to forgive simultaneously with the liquidation of the corporation.

In March, 1966, Dwyer and his son each invested $50,000 and formed a corporation, the Dwyer Steamship Co., Inc. As the corporation required more operating capital the elder Dwyer contributed additional funds on an open account and in exchange for five percent, five-year debentures. The corporation, an accrual method taxpayer, recorded the interest on Dwyer’s loans as follows:

In late 1968 the corporation entered into an agreement with a purchaser calling for sale of the…