The U.S. Supreme Court case Smallwood et al. v. Gallardo, Treasurer of Porto Rico in 1927 revolved around the issue of taxation on foreign corporations operating in Puerto Rico. The plaintiffs, Smallwood and others, were shareholders in a Delaware corporation that conducted business exclusively in Puerto Rico and had its principal office there as well. They argued that the taxes imposed by the Insular Government of Puerto Rico were unconstitutional because they violated their rights to equal protection under law as guaranteed by the Fourteenth Amendment. However, the court ruled against them stating that since Puerto Rico was not incorporated into United States territory but merely an unincorporated possession or territory; therefore it did not have to abide by all provisions of U.S constitution including those related to taxation policies for foreign corporations operating within its boundaries. In essence, this ruling reinforced previous decisions which held that constitutional protections do not automatically extend to territories acquired by United States unless specifically legislated so by Congress.

In the dissenting opinion for Smallwood et al. v. Gallardo, Treasurer of Porto Rico, Justice Stone argued that Puerto Rico should not be considered a foreign country under U.S law and thus its citizens should not be subject to import taxes when sending goods to mainland United States. He believed that the Foraker Act did not intend to impose duties on goods moving between Puerto Rico and other parts of the United States as it would contradict constitutional principles regarding interstate commerce. Furthermore, he pointed out inconsistencies in treating Puerto Rico as both domestic and foreign depending on context which could lead to confusion and unfair treatment. Therefore, he disagreed with majority's decision upholding such taxation.