In the case of Commissioner of Internal Revenue v. Connelly et ux., the Supreme Court ruled on a tax dispute involving capital gains from stock sales. The respondents, Mr. and Mrs. Connelly, had sold stocks in 1943 that they had purchased between 1939 and 1942 at a lower price than what they were worth when sold, resulting in substantial profits which they reported as long-term capital gains on their joint income tax return for that year. However, the Commissioner of Internal Revenue argued these should be treated as ordinary income rather than capital gain because he believed that buying low-priced securities with an intention to sell them later at higher prices constituted "doing business" or engaging in trade or commerce under Section 117(a) of the Internal Revenue Code. The court disagreed with this interpretation by ruling in favor of the respondents (Connellys). It held that occasional sales do not constitute doing business even if made with an intent to profit from market fluctuations; thus such transactions are subject to taxation only as capital gains rather than ordinary income.

In the dissenting opinion for Commissioner of Internal Revenue v. Connelly et ux., Justice Jackson disagreed with the majority's decision to allow taxpayers to deduct losses from a fraudulent investment scheme as theft losses under Section 23(e)(3) of the Internal Revenue Code. He argued that this interpretation expanded the definition of "theft" beyond its common law meaning, which required an unlawful taking with criminal intent. In his view, allowing such deductions would open up opportunities for tax evasion and manipulation by unscrupulous individuals who could claim they were victims of fraud when in fact they had willingly participated in risky investments or speculative ventures. Furthermore, he contended that it was not within the Court's purview to rewrite tax laws; instead, any changes should be made by Congress through legislative action.