In Bowers v. Kerbaugh-Empire Co., the U.S. Supreme Court ruled on a case involving taxation of income derived from foreign sources. The Kerbaugh-Empire Company, an American corporation, had borrowed money in Germany and used it to purchase German bonds during World War I. After the war ended, they sold these bonds at a profit but argued that this profit should not be subject to U.S federal income tax because it was earned abroad. The court disagreed with their argument and held that all income earned by an American citizen or corporation is taxable under U.S law regardless of where it is earned unless specifically exempted by statute. This principle has come to be known as "worldwide taxation." The court's decision reinforced the power of Congress under Article 1 Section 8 Clause 1 of the Constitution which grants them authority "To lay and collect Taxes...on incomes from whatever source derived".

In the dissenting opinion for Bowers v. Kerbaugh-Empire Company, Justice Oliver Wendell Holmes Jr. argued that the majority's decision was based on a misinterpretation of tax law and an incorrect understanding of how foreign exchange operates. He contended that when a U.S company repays a loan in depreciated German marks, it should not be taxed as if it had made a profit from currency speculation because such transactions are part of regular business operations rather than speculative activities aimed at making profits from changes in currency values. According to him, taxing these transactions would discourage American companies from doing business abroad and harm international trade relations by creating unnecessary financial burdens for them.