In the case of REO Motors, Inc. v. Commissioner of Internal Revenue (1949), the U.S Supreme Court was tasked with determining whether or not a corporation could deduct from its gross income any losses incurred due to debts that were deemed worthless within that tax year. The petitioner, REO Motors Inc., had sold trucks and parts on credit to another company which later went bankrupt and couldn't pay back its debt. As such, REO wrote off this debt as a loss in their 1938 tax return but it was disallowed by the Commissioner of Internal Revenue who argued that there wasn't enough evidence proving these debts became worthless in 1938. The court ruled in favor of the respondent - Commissioner of Internal Revenue - stating that for a taxpayer to claim deductions for bad debts under section 23(k)(1) they must prove beyond reasonable doubt when exactly those specific debts became worthless; something which REO failed to do convincingly according to both lower courts' findings.

In the dissenting opinion for REO Motors, Inc. v. Commissioner of Internal Revenue, Justice Jackson disagreed with the majority's interpretation of Section 122(b)(2) of the Internal Revenue Code and its application to this case. He argued that Congress intended this provision to provide relief for businesses experiencing a loss due to extraordinary circumstances beyond their control, not as a tax benefit for corporations undergoing reorganization or liquidation. According to him, REO Motors' losses were part of an intentional business strategy rather than unforeseen events causing economic hardship; thus they should not be eligible for carry-back and carry-forward deductions under Section 122(b)(2). Furthermore, he contended that allowing such deductions would create an unfair advantage in favor of failing companies over successful ones by reducing their tax liabilities significantly more than profitable firms'. This could potentially distort market competition and undermine the integrity of corporate taxation system.