In the case of Hays v. Gauley Mountain Coal Company in 1917, the U.S Supreme Court ruled on a dispute involving tax deductions for coal companies. The Gauley Mountain Coal Company had claimed a deduction from its gross income for royalties paid to landowners from whom it leased mining rights. However, this was denied by Hays, who served as Collector of Internal Revenue for West Virginia at that time. He argued that these payments were capital investments rather than deductible business expenses under federal tax law. The court sided with the Gauley Mountain Coal Company and held that royalty payments made by coal companies to lessors could be deducted as ordinary and necessary business expenses under section 12(a) of the Revenue Act of 1916 because they were essentially rent payments which are typically considered regular operating costs.

In the dissenting opinion for Hays v. Gauley Mountain Coal Company, Justice Holmes disagreed with the majority's interpretation of tax law and its application to coal companies. He argued that a company should not be taxed on the value of its coal while it is still in the ground because this would amount to double taxation when combined with taxes levied after extraction. According to him, taxing unmined coal was akin to taxing potential income rather than actual profit, which he believed contradicted established principles of taxation. Furthermore, he contended that such an approach could lead to unfair outcomes if market conditions changed between assessment and sale periods. Therefore, Justice Holmes concluded that only extracted coal should be subject to tax under existing laws.