In the case of Commissioner of Internal Revenue v. Gordon et ux., 1967, the Supreme Court ruled on a tax dispute involving stock dividends and capital gains. The Gordons had received additional shares as a dividend from their investment in American Telephone & Telegraph (AT&T). They sold these new shares and claimed the proceeds as capital gains on their income taxes, which are taxed at a lower rate than ordinary income. However, the IRS argued that this should be considered dividend income because it originated from dividends, thus subject to higher taxation rates. The Supreme Court sided with the Gordons stating that under Section 306 of Internal Revenue Code of 1954, when shareholders sell stock acquired through dividends they can treat profits as capital gain rather than dividend income for tax purposes if they did not have an option to receive cash instead.

In the dissenting opinion for Commissioner of Internal Revenue v. Gordon et ux., Justice Harlan disagreed with the majority's interpretation of Section 355(a)(1)D and its application to this case. He argued that the statute was intended to exclude from gross income any amount received by a shareholder in a distribution if certain conditions were met, including that it was not essentially equivalent to a dividend. The majority interpreted "essentially equivalent" as meaning economically equivalent, but Harlan believed this ignored other factors such as control over corporate affairs or potential future profits which could also be considered essential equivalences. Furthermore, he felt that Congress had intentionally left room for judicial discretion in interpreting what constituted an "essential equivalence". Therefore, he would have affirmed the decision of the Court of Appeals which found that there was no taxable event when shareholders exchanged their common stock for preferred stock because they retained significant control over corporate affairs and had potential future profit interests.