In the case of J.E. Riley Investment Co. v. Commissioner of Internal Revenue, 1940, the U.S Supreme Court was tasked with determining whether a corporation could deduct losses from sales of securities in computing its income tax if it had previously reported profits from similar transactions as capital gains rather than ordinary income. The court ruled that since the company had chosen to report previous profits as capital gains (which are taxed at a lower rate), it must also report losses in the same manner - meaning they could not be deducted against ordinary income for tax purposes. This decision upheld an earlier ruling by the Board of Tax Appeals and reinforced that corporations cannot selectively classify financial transactions to minimize their taxes.

The dissenting opinion in the case of J.E. Riley Investment Co. v. Commissioner of Internal Revenue argued that the majority's decision was inconsistent with previous court rulings and misinterpreted tax law provisions related to corporate reorganizations. The dissent emphasized that a literal interpretation of Section 112(g)(1) would lead to an absurd result, as it would allow any sale or exchange involving securities to be considered a reorganization, which is not what Congress intended when drafting this provision. Instead, they believed that for a transaction to qualify as a reorganization under this section, there must be continuity of business enterprise and continuity of interest by shareholders before and after the transaction - conditions which were not met in this case according to them.