In the United States v. Ludey case of 1926, the Supreme Court ruled on a dispute over income tax law. The defendant, Ludey, had sold oil properties and claimed that the profits from these sales should be treated as capital gains rather than regular income for taxation purposes. The government disagreed with this interpretation and argued that these profits were taxable as ordinary income under existing laws. In its decision, the Supreme Court sided with the government's position and held that proceeds from such sales are indeed subject to normal income tax rates instead of being classified as capital gains which would have been taxed at lower rates. This ruling clarified an important aspect of U.S federal taxation policy regarding natural resource extraction industries.

In the dissenting opinion for United States v. Ludey, Justice Holmes argued that the majority's interpretation of income tax law was flawed and inconsistent with previous rulings. He contended that oil extracted from land should not be considered part of a taxpayer's gross income because it is essentially a sale of real estate, which is non-taxable under existing laws. According to him, treating oil extraction as taxable income would lead to double taxation since both the value of the land (from which oil is extracted) and proceeds from selling this oil are taxed separately. This contradicts earlier court decisions where timber cut from land wasn't treated as taxable income but rather as capital gain or loss depending on whether its sale price exceeded or fell short of its cost basis respectively.