In the 1932 case Reinecke v. Smith, the U.S. Supreme Court ruled on a matter concerning federal estate tax law and its application to property transferred by a decedent prior to death. The decedent had sold his real estate holdings in exchange for bonds and cash, which he then gifted to his children before passing away within two years of making these transactions. The former Collector of Internal Revenue argued that this transfer was subject to federal estate taxes under Section 302(d) of the Revenue Act of 1926 because it was made "in contemplation of death." However, the executors contended that since there were bona fide sales involved rather than mere transfers or gifts, they should not be considered as such. The Supreme Court sided with the executors' interpretation, ruling that when property is sold for full consideration in money or money's worth received by a person contemplating death but who retains no interest therein at time of their demise - even if they die within two years after sale - it does not fall under Section 302(d). Therefore, these transactions are not taxable as part of gross estate.

In the dissenting opinion for Reinecke v. Smith, Justice Stone argued that the majority misinterpreted tax law by allowing a deduction of estate taxes from gross income before calculating net taxable income. He contended that this interpretation was inconsistent with the language and intent of Congress when drafting these laws. According to him, estate taxes should not be considered as part of cost basis in determining capital gains or losses because they are not costs incurred during acquisition or improvement of property but rather an obligation imposed upon transfer at death. Therefore, he believed that such deductions distort actual gain realized on sale and undermine fairness in taxation by providing undue benefits to certain taxpayers over others based on their ability to pay estate taxes.