In the United States v. Cowden Manufacturing Co., 1940, the Supreme Court examined whether a corporation could deduct from its gross income payments made to an employee trust fund that were not guaranteed to be used for employees' benefits. The company had created a trust fund for its employees and deducted contributions as business expenses on their tax returns. However, if the company went bankrupt or dissolved before all funds were distributed, remaining money would revert back to Cowden Manufacturing Company's owners rather than being paid out to employees. The Internal Revenue Service (IRS) disallowed these deductions and assessed deficiencies against the company which led them to file suit in response. The court ruled in favor of IRS stating that such payments cannot be considered ordinary and necessary business expenses under Section 23(a) of Revenue Act because they are contingent upon events beyond normal business operations i.e., bankruptcy or dissolution of corporation; hence they do not qualify as deductible expenses under existing tax laws.

The dissenting opinion in the United States v. Cowden Manufacturing Co. case argued that the majority's decision was inconsistent with previous rulings and misinterpreted the law concerning tax deductions for losses incurred due to theft. The dissent believed that a loss should be deductible when it is discovered, not necessarily when it occurred, as per Section 23(e)(3) of the Revenue Act of 1928 which allows for deduction in "the taxable year sustained." They contended that 'sustained' means 'discovered', since a taxpayer cannot claim a loss until they are aware of it. Furthermore, they pointed out inconsistencies between this ruling and other cases where deductions were allowed based on discovery rather than occurrence date (e.g., Boehm v Commissioner). Thus, according to them, Cowden should have been able to deduct its embezzlement losses from its taxes during the year those losses were discovered.