In the case of Pacific National Co. v. Welch, 1937, the U.S Supreme Court ruled in favor of the respondent, Welch (Former Collector of Internal Revenue). The petitioner, Pacific National Company had claimed a deduction for losses incurred due to embezzlement by its president and treasurer during tax years 1921 and 1922. However, these losses were not discovered until after an audit in 1924. The court held that under Section 214(a) of the Revenue Act of 1921 and similar provisions in earlier acts which allow deductions for losses sustained during taxable year but not compensated by insurance or otherwise; such loss must be evidenced by closed and completed transactions within taxable year itself. Therefore since no claim was made against any person who might be liable as insurer or otherwise until after close of each respective year (i.e., when it was discovered), there could have been no ascertainable loss deductible from gross income within those years.

In the dissenting opinion for Pacific National Co. v. Welch, Justice Cardozo argued that the majority's decision to allow a corporation to deduct losses from its income tax due to stock depreciation was incorrect and inconsistent with previous rulings of the court. He believed that such deductions should only be allowed when there is an actual loss or outlay of money, not merely a decrease in value on paper. Furthermore, he contended that allowing this deduction would open up opportunities for abuse by corporations seeking to manipulate their taxes through artificial transactions designed solely to create deductible losses without any real economic impact. In his view, it was essential for courts and tax authorities alike to scrutinize these kinds of transactions closely in order ensure fairness and prevent evasion.