In the case of National Carbide Corp. v. Commissioner of Internal Revenue, the Supreme Court ruled on whether a parent corporation could avoid income tax by channeling its profits to subsidiary corporations that it owned and controlled. The court held that such arrangements were not legitimate if they lacked economic substance apart from their tax effects; in other words, if there was no real business purpose for the arrangement beyond avoiding taxes, then it would be disregarded for tax purposes and the parent company would still owe income tax on those profits. The National Carbide Corporation had created wholly-owned subsidiaries which sold products manufactured by National Carbide at cost plus a commission. The profit made through these transactions was taxed at lower rates than what would have been applied to direct sales by National Carbide itself. However, since these subsidiaries were essentially agents without any substantial independence or separate business function from their parent company, this structure was deemed as an artificial construct designed solely for evading higher taxation. Therefore, despite legal recognition of corporate entities involved in such transactions under state law principles (as argued by National), federal taxation rules required consideration of substantive economic realities rather than mere formalities.

In the dissenting opinion for National Carbide Corp. v. Commissioner of Internal Revenue, Justice Jackson argued that the majority's decision effectively allowed corporations to avoid taxation by creating subsidiary entities and transferring income to them. He contended that this was a violation of tax law principles which dictate that income should be taxed where it is earned, not where it is transferred or assigned. Furthermore, he expressed concern about the potential implications of this ruling on future cases involving corporate structures and tax evasion strategies. According to him, allowing such practices would undermine the integrity of our tax system by enabling large corporations to manipulate their taxable income through complex organizational structures and transactions with controlled subsidiaries.