In Murdock Acceptance Corp. v. United States, the Supreme Court examined whether a taxpayer could deduct from gross income payments made to satisfy its obligation as an endorser on discounted notes of another corporation that had defaulted. The court ruled in favor of the U.S., holding that these payments were capital expenditures and not deductible ordinary and necessary business expenses under section 23(a)(1)(A) of the Internal Revenue Code. The case involved two corporations with common ownership: Murdock Acceptance Corporation (MAC), which was engaged in financing installment sales for retail merchants, and Ben Franklin Stores Inc., a chain store operation selling various goods at retail prices. MAC endorsed discounted notes from Ben Franklin Stores to secure bank loans for them but when they defaulted, MAC had to pay off their debt. The IRS disallowed MAC's claimed deductions for these payments arguing they were non-deductible capital expenditures since it increased MAC’s investment in Ben Franklin by reducing its indebtedness. The Supreme Court agreed with this interpretation stating that while such payment might be considered "ordinary" because it arose out of corporate relations rather than something unusual or extraordinary, it wasn't "necessary" as per tax law definitions because it didn't meet criteria like being appropriate or helpful for 'the development of the taxpayer's business'.

In the dissenting opinion for Murdock Acceptance Corp. v. United States, it was argued that the majority's decision to uphold a tax penalty against Murdock Acceptance Corporation was incorrect because it did not properly consider the nature of the corporation's business operations and its relationship with its parent company. The dissenting justices believed that this relationship should have been taken into account when determining whether or not certain transactions were "at arm’s length." They contended that these transactions were indeed at arm’s length and thus should not be subject to additional taxation under Section 45 of the Internal Revenue Code, which is intended to prevent companies from avoiding taxes through artificial arrangements within controlled groups. Furthermore, they disagreed with how broadly the majority interpreted this section of code in their ruling.