In the case of William E. Herring v. Commissioner of Internal Revenue, 1934, the Supreme Court was tasked with determining whether or not a taxpayer could deduct losses from his income tax return that were incurred due to loans made in good faith which later became worthless. The petitioner, William E. Herring, had loaned money to several corporations he controlled and claimed these as business bad debts when they failed to repay him. However, the IRS denied these claims on grounds that there was no debtor-creditor relationship established between Mr.Herring and his corporations because he did not expect repayment at time of making those advances but rather intended them as contributions to capital. The court ruled against Mr.Herring stating that for a debt claim to be valid under Section 23(k) (now section 166) of the Revenue Act it must be shown that there existed an authentic debtor-creditor relationship at time when funds were advanced; meaning expectation for repayment should have been present then rather than being an afterthought once realization dawned upon lender about improbability of getting repaid by borrower.

In the dissenting opinion for William E. Herring v. Commissioner of Internal Revenue, it was argued that the majority's decision to tax a stock dividend as income was incorrect and inconsistent with previous rulings by the Supreme Court. The dissenters believed that such dividends should not be considered taxable income because they do not increase a shareholder's wealth or purchasing power; instead, they merely represent a redistribution of corporate assets among shareholders without any change in total value. They also pointed out that taxing these dividends would discourage corporations from retaining earnings for future growth and investment, which could have negative implications for economic development and job creation.