In Bazley v. Commissioner of Internal Revenue, the Supreme Court addressed whether or not a taxpayer could deduct losses from the sale of stock as ordinary business losses rather than capital losses. The petitioner, Mr. Bazley, was an investor who had purchased stocks in several corporations with the intent to resell them for profit. However, due to market conditions he sold these shares at a loss and claimed this loss on his tax return as an ordinary business expense rather than a capital loss. The IRS disagreed with this classification and argued that since Bazley was not engaged in the trade or business of selling securities but merely invested for personal gain, his losses should be classified as capital losses which are subject to different tax rules. The Supreme Court sided with the IRS ruling that because Mr. Bazley's primary purpose was investment rather than conducting a trade or business activity related to buying and selling securities; therefore his claim did not qualify under section 23(e)(2) of Revenue Act (1938). As such it held that these were indeed capital losses - thus limiting their deductibility against other income types.

In the dissenting opinion for Bazley v. Commissioner of Internal Revenue, it was argued that the majority's interpretation of "income" in Section 22(a) of the Revenue Act was too broad and inconsistent with previous rulings. The dissenting justices believed that a taxpayer should not be taxed on unrealized appreciation because it is not truly income until realized through sale or exchange. They also disagreed with taxing stock dividends as income, arguing this would result in double taxation since corporations are already taxed on their earnings before distributing them to shareholders as dividends. Furthermore, they contended that such an interpretation could lead to absurd results where taxpayers might be required to pay tax on theoretical gains which may never materialize due to market fluctuations or other factors beyond their control.