In the United States v. Memphis Cotton Oil Co., 1932, the Supreme Court ruled on a case involving tax deductions for losses incurred by a corporation. The Memphis Cotton Oil Company had purchased cottonseed from farmers and processed it into oil, meal, and linters. However, due to market fluctuations in price during processing time, they often sold these products at lower prices than what they paid for raw materials. They claimed this difference as a loss on their income tax returns but were denied by the Commissioner of Internal Revenue who argued that these were not actual losses since no sale or disposal of assets occurred at diminished values. The Supreme Court sided with the company stating that under Section 214(a) of the Revenue Act of 1921 which allows deduction for "losses sustained during taxable year," such losses are deductible even if there is no closed transaction in form of sale or disposition of property resulting in loss within taxable year itself. This decision set an important precedent regarding how corporations could claim financial losses on their taxes.

In the dissenting opinion for United States v. Memphis Cotton Oil Co., Justice McReynolds argued that the majority's interpretation of the Revenue Act was incorrect and unjustly penalized businesses. He contended that Congress intended to tax only actual profits, not potential or theoretical ones. According to him, a company should be taxed on its net income after accounting for all legitimate business expenses, including depreciation of assets over time due to wear and tear or obsolescence. The majority's decision failed to consider this reality by taxing companies based on their gross income without allowing them deductions for depreciation losses unless they were physically manifested in some way during the taxable year. This approach ignored economic realities and imposed an unfair burden on businesses which could lead to financial hardship or even bankruptcy if applied consistently over time.