In the case of Commissioner of Internal Revenue v. South Texas Lumber Co., 1947, the Supreme Court was tasked with determining whether or not a corporation could deduct from its gross income certain sums paid to its stockholders as dividends on common stock. The company argued that these payments were deductible as "reasonable allowances for salaries or other compensation for personal services actually rendered." However, the court ruled against this argument stating that such payments are not deductible because they represent distribution of profits rather than payment for services rendered. The court emphasized that it is crucial to distinguish between distributions made on account of ownership interests and those made in return for services provided by shareholders who also work as employees in order to maintain fairness in taxation policies.

In the dissenting opinion for Commissioner of Internal Revenue v. South Texas Lumber Co., Justice Rutledge argued that the majority's decision to allow a deduction for payments made by a corporation to its stockholders, under the guise of rental payments, was inconsistent with established tax principles and precedent. He contended that these were not true rental payments but rather disguised dividends meant to evade taxation. The justice believed this ruling could open up avenues for tax evasion as corporations might use similar tactics in future transactions. Furthermore, he emphasized that it is crucial to look beyond formalities and consider substance over form when interpreting tax laws so as not to undermine their purpose or fairness.