In the case of Commissioner of Internal Revenue v. Tufts et al., 1982, the U.S. Supreme Court ruled that when a taxpayer disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, he must include in his amount realized from disposition both any cash received and also discharge from liability for repayment. The court held that such an individual is liable to pay tax on this "phantom income" - income derived not from actual earnings but rather from debt relief. This decision overturned previous rulings which had allowed taxpayers to avoid paying taxes on money they borrowed but did not repay if their investment depreciated in value.

In the dissenting opinion for Commissioner of Internal Revenue v. Tufts et al., Justice Stevens argued that the majority's decision was inconsistent with previous case law and could lead to unfair tax consequences. He contended that a taxpayer should only recognize gain from a sale or disposition of property when he actually realizes an economic profit, not merely because he received relief from liability. In this case, Tufts did not realize any actual economic benefit beyond his initial investment; therefore, according to Justice Stevens' interpretation of Section 1001(b) of the Tax Code, no taxable income occurred. The majority’s ruling would result in taxpayers being taxed on phantom income they never received which is contrary to fundamental principles underlying our federal income tax system.