In the 1940 case of McClain v. Commissioner of Internal Revenue, the U.S Supreme Court ruled on whether or not a taxpayer could deduct losses from their income tax due to embezzlement. The petitioner, McClain, was an officer and stockholder in several corporations who had misappropriated funds from those companies for his personal use. When he repaid these amounts under threat of legal action, he sought to deduct them as losses incurred during his trade or business activities. However, the court held that such deductions were not permissible because they did not result from any transaction entered into for profit-making purposes but rather arose out of thefts committed by him against his own corporation which constituted gross income when received and remained so until repaid.

The dissenting opinion in the case of McClain v. Commissioner of Internal Revenue argued that the majority's decision was inconsistent with previous rulings and interpretations of tax law. The dissent emphasized that a taxpayer should not be taxed on income derived from property until it is realized, i.e., when there is an actual sale or exchange. In this case, they believed that Mr. McClain had not yet realized any gain from his stock transactions because he had merely received options to buy stocks at a future date rather than actually acquiring them outright or selling them for profit. Therefore, according to the dissenters' interpretation of tax law principles, no taxable event occurred during the year in question and thus Mr. McClain should not have been liable for any additional taxes based on these transactions.