In the 1940 case of Cary v. Commissioner of Internal Revenue, the United States Supreme Court ruled on a dispute regarding income tax liability for funds received from an insurance policy. The petitioner, Mrs. Cary, was named as beneficiary in her husband's life insurance policy and upon his death she chose to receive the proceeds in installments rather than a lump sum payment. She did not include these payments as gross income on her federal tax returns which led to conflict with the IRS who argued that they should be taxed under section 22(b) of the Revenue Act of 1934. The court sided with Mrs. Cary stating that while some portions could be considered taxable interest, most were part of non-taxable principal amount paid by virtue of contract obligation at death (which is exempted from taxation). Therefore, only those amounts exceeding this original value would be subject to taxation - not all installment payments received over time.

In the dissenting opinion for Cary v. Commissioner of Internal Revenue, Justice Frankfurter disagreed with the majority's interpretation of Section 22(a) and (b)(2) of the Revenue Act. He argued that these sections should not be interpreted to mean that a taxpayer who receives dividends from a corporation in which he has no proprietary interest can exclude such dividends from his gross income. According to him, this interpretation is contrary to both the letter and spirit of tax laws as it allows taxpayers to avoid taxation by simply transferring their shares into trusts or other legal entities while still retaining control over them. He further contended that such an arrangement would undermine public confidence in tax fairness and encourage tax evasion through complex financial arrangements designed solely for avoiding taxes.