In the 1942 case of Detroit Bank v. United States, the U.S Supreme Court was tasked with determining whether or not a bank could deduct from its gross income certain amounts set aside for possible loan losses in future years. The court ruled that these reserves were not deductible as they did not represent actual "losses sustained" during the taxable year and therefore did not meet criteria outlined by relevant tax laws at that time. Instead, they represented potential future losses which may or may never materialize. This decision clarified how financial institutions should handle their reserve funds for taxation purposes and established precedent regarding what constitutes an allowable deduction under federal income tax law.

In the dissenting opinion for Detroit Bank v. United States, Justice Frank Murphy argued that the majority's interpretation of Section 113(a)(5) of the Revenue Act was incorrect and overly restrictive. He contended that this section should be interpreted to allow a deduction for losses incurred in any transaction entered into for profit, regardless of whether it is connected with a trade or business. In his view, Congress intended to provide relief from taxation in cases where taxpayers suffer economic loss due to their investment activities. By limiting deductions only to those transactions directly tied to one’s trade or business, he believed the court was denying many deserving taxpayers such relief and thus contradicting congressional intent.