James A. And Audrey J. Warner v. Commissioner of Internal Revenue, Jerrie D. And Leta J. Schooley v. Commissioner of Internal Revenue

This is an appeal from a decision of the Tax Court of the United States. The Tax Court’s opinion is reported at 48 T.C. 49 . The Tax Court found that the petitioners had certain deficiencies in income tax for the taxable year of 1963 in that they reported certain losses as ordinary losses when they should have been reported as capital losses. The Tax Court had jurisdiction under 26 U.S.C. §§ 6212 , 6213, 6214. We have jurisdiction over the appeal under 26 U.S.C. §§ 7482 , 7483. The following facts give rise to this dispute:

Sewmor Sewing Center, Inc., was an Idaho corporation wholly owned by James Warner, engaged in the sewing machine and vacuum cleaner sales business in Boise, Idaho. Sewmor had an excellent group of steady employees, averaging about ten in number. While there was a substantial turnover of employees in the industry generally, Sewmor had not advertised for employees for a period of over six years. James Warner was himself an employee of Sewmor, as was the other petitioner, Jerrie Schooley.

Anxious to maintain the loyalty and continued services of its employees, Sew-mor established an incentive plan. To implement this plan a new corporation was formed, called…