The U.S. Supreme Court case Lucas v. North Texas Lumber Company in 1929 revolved around the issue of tax deductions for business expenses under the Revenue Act of 1918. The North Texas Lumber Company had claimed a deduction for payments made to its shareholders, arguing that these were ordinary and necessary business expenses as they were used to repay loans from said shareholders which kept the company operational during difficult financial times. However, Commissioner Guy Tresillian Lucas of Internal Revenue argued that these payments constituted dividends rather than deductible expenses since they were proportionate to each shareholder's ownership interest in the corporation and thus should be taxed accordingly. In their decision, the Supreme Court sided with Lucas stating that even though such expenditures might have been essential for keeping a struggling business afloat, it did not change their character as capital distributions or dividends among stockholders rather than ordinary and necessary expense incurred in carrying on any trade or business under Section 234(a)(1) of Revenue Act of 1918. Therefore, those amounts could not be deducted from gross income when calculating federal income taxes.

In the dissenting opinion for Lucas v. North Texas Lumber Company, Justice Holmes argued that the majority's interpretation of tax law was incorrect and overly rigid. He contended that a more flexible approach should be taken when interpreting tax laws to allow for reasonable business practices. In this case, he believed that the lumber company had acted in good faith by paying its taxes based on an estimate of inventory at year-end rather than conducting a physical count, which would have been impractical due to their large stockpile spread across multiple locations. He also disagreed with the majority's view that all discounts must be accounted for in calculating gross income; instead, he suggested they could reasonably be considered as part of cost-of-goods-sold or operating expenses under certain circumstances. Overall, his dissent emphasized pragmatism over strict adherence to statutory language.