In the 1942 case Smith v. Shaughnessy, Collector of Internal Revenue, the United States Supreme Court ruled on a tax dispute involving stock dividends. The petitioner, Smith, was a shareholder in two corporations and received additional shares as stock dividends from both companies. He did not report these dividends as income on his federal tax return for that year. However, the Commissioner of Internal Revenue determined that these stock dividends constituted taxable income under Section 115(f) of the Revenue Act of 1936 and assessed a deficiency against him accordingly. Smith contested this decision arguing that he had not realized any gain from receiving these stocks because their value had decreased since they were issued to him; thus there was no "income" within the meaning of Sixteenth Amendment to be taxed. The Supreme Court disagreed with Smith's argument stating that Congress has broad power to define what constitutes taxable income under its authority granted by Sixteenth Amendment which allows it to levy taxes on incomes without apportionment among states or regard to census enumeration. Therefore, even though Smith may have experienced an economic loss due to decrease in value after receipt doesn't change fact at time when dividend is paid out it represents an increase in wealth hence can be considered as taxable income.

In the dissenting opinion for Smith v. Shaughnessy, Justice Robert H. Jackson argued that the majority's decision was an overreach of judicial power and a misinterpretation of tax law. He contended that the court had no authority to impose its own views on what constitutes fair taxation, as this is a matter reserved for Congress under the Constitution. Furthermore, he disagreed with their interpretation of "income" in relation to stock dividends; while they saw it as new wealth subject to taxation, he viewed it merely as a rearrangement of existing assets which should not be taxed again. In his view, this ruling could lead to double taxation and discourage investment by unfairly penalizing shareholders who choose not to sell their shares immediately after receiving them.