In the case of Iselin et al. v. United States, 1925, the U.S Supreme Court ruled in favor of the appellants (Iselin and others) who were contesting an income tax assessment by the federal government. The dispute arose over how to calculate losses from sales of stock for income tax purposes under a provision of Revenue Act 1918 which allowed taxpayers to deduct losses incurred during taxable year from gross income. The Commissioner had determined that each sale constituted a separate transaction and calculated loss on each one individually while appellants argued that all transactions should be considered as one unit for calculating net loss or gain. The court held that when interpreting taxing statutes where ambiguity exists, such interpretation must be in favor of taxpayer unless it is clearly expressed otherwise by Congress. It found ambiguity in wording used by Congress regarding calculation method and hence decided against Government’s interpretation which was unfavorable to taxpayers. This decision established an important principle known as "taxpayer favorable construction rule" according to which any doubt arising from ambiguous language used in taxation laws will be resolved in favor of taxpayer.

In the dissenting opinion for Iselin et al. v. United States, Justice Oliver Wendell Holmes Jr., joined by Justices Louis Brandeis and Harlan Fiske Stone, argued that the majority's interpretation of tax law was too rigid and literal. They contended that a more flexible approach should be adopted to ensure fairness in taxation. The dissenters believed that when interpreting ambiguous provisions in tax laws, courts should consider not only the letter of the law but also its spirit or purpose - which is to distribute tax burdens equitably among taxpayers based on their ability to pay. In this case, they disagreed with the majority's decision denying deductions claimed by taxpayers who had sold securities at a loss because it failed to take into account economic realities affecting these transactions such as market fluctuations and transaction costs.