In the 1934 case Gregory v. Helvering, the U.S. Supreme Court ruled that taxpayers must have a legitimate business purpose for their transactions beyond merely avoiding taxes. The court held that while tax avoidance is not illegal, it becomes unlawful when there are no real purposes to transactions other than to dodge taxes. In this case, Mrs. Gregory had restructured her company in a way that allowed her to sell stock without paying income tax on the profits from those sales - an action she claimed was legal under existing tax laws at the time because they did not explicitly prohibit such restructuring solely for tax benefits. However, Justice Sutherland wrote in his opinion for a unanimous court: "The question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended." This ruling established what has come to be known as "the economic substance doctrine," which continues to guide interpretations of federal taxation law today.

In the dissenting opinion for Gregory v. Helvering, Justice Stone argued that there was no legal basis to deny tax benefits to transactions solely because they lacked a business purpose. He contended that if Congress intended for such a requirement, it would have been explicitly stated in the law. Furthermore, he pointed out that many legitimate transactions could be viewed as lacking a business purpose but are still allowed under tax laws. Therefore, he believed it was not within the Court's jurisdiction to impose additional requirements on taxpayers beyond what is specified by legislation and regulations. In his view, this decision represented an overreach of judicial power into legislative territory.