In the 1941 case of Puerto Rico v. Rubert Hermanos, Inc., et al., the U.S. Supreme Court ruled in favor of Puerto Rico's right to tax foreign corporations operating within its territory. The defendants, a group of foreign sugar companies, argued that they were exempt from local taxation due to their status as federal instrumentalities under an act passed by Congress in 1917 known as the Jones Act. However, this argument was rejected by Justice Felix Frankfurter who delivered the opinion for a unanimous court stating that there is no constitutional principle which bars a state or territory from imposing taxes on federally chartered corporations unless explicitly stated by Congress. Therefore, since there was no explicit exemption provided in either the Jones Act or any other legislation pertaining to Puerto Rico at that time; it was concluded that these corporations were subject to local taxation.

In the dissenting opinion for Puerto Rico v. Rubert Hermanos, Inc., Justice Frank Murphy argued that the majority's decision was an overreach of federal power and a violation of states' rights. He contended that Puerto Rico should have been allowed to regulate its own internal affairs without interference from the federal government, including setting tax rates on foreign corporations operating within its borders. Justice Murphy believed that by denying Puerto Rico this right, the Supreme Court was undermining its autonomy and treating it as a mere territory rather than recognizing it as a self-governing entity with inherent powers of taxation. He also expressed concern about potential negative economic impacts resulting from allowing foreign corporations to avoid paying local taxes in places where they conduct business.