In the case of Royal Indemnity Co. v. United States, 1940, the U.S Supreme Court ruled in favor of the United States government regarding a dispute over tax deductions claimed by Royal Indemnity Company. The insurance company had deducted from its gross income certain amounts paid as dividends to policyholders on participating policies for years prior to their declaration and payment. The Commissioner of Internal Revenue disallowed these deductions which led to an increased deficiency in taxes that was challenged by Royal Indemnity Company leading up to this court case. The central issue was whether or not such "dividends" were deductible under Section 203(a)(2) of the Revenue Act of 1928 before they were declared and paid out. This section allows deduction for “Dividends or similar distributions paid within the taxable year on policy and annuity contracts.” The Supreme Court held that these payments could not be considered 'dividends' until they are declared because only then do they become obligations enforceable against the company; hence cannot be deducted from gross income prior to their declaration and payment.

In the dissenting opinion for Royal Indemnity Co. v. United States, Justice McReynolds disagreed with the majority's interpretation of a federal statute regarding tax deductions for losses incurred by insurance companies. He argued that the law was intended to allow insurers to deduct from their income taxes all amounts set aside as reserves for future liabilities, not just those specifically enumerated in the statute. According to him, this broader interpretation better aligned with Congress' intent and would prevent unfair taxation of insurance companies who were required by state laws or business practices to maintain additional types of reserves beyond those listed in the federal law.