In the Pearce v. Commissioner of Internal Revenue case in 1941, the U.S Supreme Court was tasked with determining whether a taxpayer could deduct losses from sales of securities as ordinary losses or capital losses. The petitioner, Mr. Pearce, had purchased and sold several shares of stock within a short period during 1936 and claimed these transactions were made for profit-making purposes rather than investment intentions. Therefore, he argued that his incurred loss should be considered an ordinary business loss instead of a capital loss under Section 117(a) and (b) of the Revenue Act which would limit deductions to $2,000 only. The court ruled against Mr.Pearce stating that despite his claims about trading stocks for profit-making purposes being true; it did not change their nature as capital assets under section 117(d). Hence any resulting gains or losses are subject to treatment as such by law regardless if they are held by professional traders or casual investors alike.

In the dissenting opinion for Pearce v. Commissioner of Internal Revenue, it was argued that the majority's decision to tax a widow on her late husband's estate was incorrect. The dissenting justices believed that under Section 811(c) of the Internal Revenue Code, property transferred by a decedent at death should not be included in his gross estate if he did not retain any interest or power over it at his death. In this case, they contended that Mr. Pearce had irrevocably transferred all interests and powers over his life insurance policies to Mrs. Pearce before he died; therefore, these assets should have been excluded from his gross estate and not subjected to taxation upon transfer to Mrs. Pearce after her husband’s death.