In the case of Commissioner of Internal Revenue v. Phipps (1948), the U.S Supreme Court was tasked with determining whether a taxpayer could deduct losses from sales of securities to a trust, where he served as trustee and his children were beneficiaries. The court ruled in favor of the Commissioner, stating that such transactions are not recognized for tax purposes due to their intra-family nature. This decision was based on Section 24(b)1 of the Revenue Act which disallows recognition for loss from any sale or exchange made directly or indirectly between members of a family. The court reasoned that this provision aimed at preventing taxpayers from creating artificial losses through collusive transfers within families and thus should apply even if there is no collusion involved in reality.

In the dissenting opinion for Commissioner of Internal Revenue v. Phipps, Justice Jackson disagreed with the majority's interpretation of Section 22(k) of the Revenue Act. He argued that this section was intended to prevent tax evasion by spouses who transfer property between themselves in order to reduce their overall tax liability. However, he did not believe it should apply when a husband transfers property to his ex-wife as part of a divorce settlement because such transactions are typically made under duress and do not involve any intent to evade taxes. Furthermore, he pointed out that applying Section 22(k) in these circumstances could lead to unfair results since an ex-spouse receiving alimony would be taxed on both the alimony payments and any income generated by transferred assets while still being liable for capital gains if they sell those assets later at a profit.