In the case of Petroleum Exploration v. Burnet, Commissioner of Internal Revenue in 1932, the U.S Supreme Court was tasked with deciding whether or not a taxpayer could deduct from gross income amounts paid for drilling and development costs as expenses incurred during that taxable year. The court ruled against Petroleum Exploration Inc., stating that these were capital expenditures rather than deductible business expenses under section 214(a)(10) of the Revenue Act of 1921. This decision established precedent regarding tax deductions related to oil exploration and extraction activities, clarifying that such costs must be capitalized over time rather than immediately deducted as current-year business expenses.

In the dissenting opinion for Petroleum Exploration v. Burnet, Justice Stone argued that the majority's decision was inconsistent with previous rulings of the court and misinterpreted tax law. He contended that a taxpayer should be allowed to deduct losses from their gross income when they are incurred, not when they are discovered or realized. In this case, he believed that Petroleum Exploration should have been able to claim deductions for its unsuccessful oil drilling operations in 1917 and 1918 even though it did not discover these losses until later years. According to Justice Stone, allowing such deductions would more accurately reflect a taxpayer's net income for a given year and align better with principles of annual accounting periods established by Congress in tax legislation.