In the case of John Kelley Co. v. Commissioner of Internal Revenue, 1945, the U.S Supreme Court ruled on a tax dispute involving John Kelley Company's claim for deductions under Section 23(k) and (l) of the Revenue Act of 1936. The company had made payments to its president and vice-president as compensation for services rendered in prior years when it was financially unable to pay them their full salaries due to economic hardship during the Great Depression era. The IRS disallowed these claims arguing that they were not ordinary or necessary business expenses but rather distributions of profits. The court held that such back-payments could be deducted as business expenses if they were intended at the time they accrued as compensation for services rendered, even though paid in later profitable years; however, this intention must be proven by clear evidence which was lacking in this case. Therefore, while acknowledging that companies may deduct reasonable amounts paid out as compensation for personal services actually rendered from gross income under certain conditions established by law and precedent cases like Lucas v Earl & Helvering v Independent Life Insurance Co., it upheld lower courts' decisions denying John Kelley Company’s claimed deductions because there wasn't sufficient proof showing those payments were indeed compensations.

In the dissenting opinion for John Kelley Co. v. Commissioner of Internal Revenue, it was argued that the majority's interpretation of Section 22(b)(9) of the Revenue Act was incorrect and too narrow. The dissent contended that this section should be understood to exclude from gross income any amount received through insurance as compensation for loss or damage due to fires, storms, shipwreck, or other casualty - regardless if those amounts were used in a manner consistent with their purpose (i.e., repairing or replacing damaged property). They believed that there is no requirement in law stating these funds must be spent on repairs within a certain timeframe to qualify for exclusion from taxable income. Therefore, they disagreed with taxing John Kelley Co.'s insurance proceeds simply because they had not yet been used towards rebuilding at the time taxes were assessed.