In the Southern Pacific Company v. United States case of 1925, the Supreme Court ruled that a railroad company could not deduct losses from federal income taxes for property destroyed during World War I in Mexico by revolutionary forces. The Southern Pacific Company claimed these deductions under an Act of Congress which allowed companies to claim losses due to destruction or seizure of property by "enemy action". However, the court held that this provision only applied if such actions were carried out by enemies recognized as such by the U.S government at war time. Since there was no formal declaration of war between US and Mexico during this period, Mexican revolutionaries did not qualify as "enemies" within meaning of law allowing deduction for loss resulting from destruction or seizure of property through enemy action. Therefore, it concluded that Southern Pacific's claims were invalid.

In the dissenting opinion for Southern Pacific Company v. United States, Justice McReynolds argued that the Interstate Commerce Commission (ICC) did not have the authority to regulate intrastate rates of railroads even if they indirectly affected interstate commerce. He believed that this power should be left to individual states unless it was explicitly given to Congress by the Constitution. According to him, allowing federal control over such matters would lead to an excessive centralization of power and undermine state sovereignty. Furthermore, he contended that there were no clear standards or limits on how far-reaching these regulations could be which could potentially result in arbitrary and unpredictable decisions from the ICC. Therefore, he disagreed with majority's decision upholding ICC's order requiring Southern Pacific Company to reduce its intrastate freight rates in California.