In the case of McCaughn, Collector of Internal Revenue v. Ludington in 1924, the United States Supreme Court ruled on a dispute regarding estate taxes. The plaintiff, Ludington's estate executor, argued that certain deductions should have been allowed from the gross estate before calculating federal tax liability under the Revenue Act of 1918. Specifically at issue were state inheritance taxes and administration expenses which had not yet been paid or determined by the time federal tax was assessed. The court held that such prospective payments could not be deducted because they were uncertain and indeterminable at the time when net taxable value must be ascertained for federal purposes; therefore these amounts cannot reduce gross assets to determine net taxable value under this act. This decision clarified how estates are taxed federally and set precedent for future cases involving similar issues.

In the dissenting opinion for McCaughn v. Ludington, Justice Holmes argued that the tax in question should not be considered a direct tax but rather an excise or duty. He contended that while it was true that Congress had imposed a tax on gifts and inheritances, this did not mean they were taxing property directly. Instead, he believed they were imposing a fee on the privilege of transferring wealth from one person to another - something within their power under Article I Section 8 of the Constitution which allows them to impose duties and excises as long as they are uniform across all states. Therefore, according to his interpretation, such taxes would not need apportionment among states based on population (as required by Article I Section 2 for direct taxes). His view was ultimately rejected by majority decision which held gift taxes unconstitutional until later amendment clarified Congress's authority over such taxation.