In the United States v. Welch case of 1909, the Supreme Court ruled on a matter concerning tax law and its application to corporate dividends. The defendant, Welch, was a shareholder in a corporation that had issued dividends from profits earned prior to the enactment of an income tax law in 1909. When he did not pay taxes on these dividends, arguing they were exempt as they came from pre-tax-law profits, he was taken to court by the U.S government who argued otherwise. The Supreme Court sided with Welch's argument and held that shareholders could not be taxed for dividends paid out of earnings accumulated before Congress enacted an income tax law because those earnings were not "income" within the meaning of such laws at their time of accumulation. This decision clarified how new taxation laws should apply retrospectively or prospectively regarding corporate dividend distributions.

In the dissenting opinion for United States v. Welch, Justice Harlan argued that the majority's decision to uphold a tax on legacies and distributive shares of personal property was unconstitutional. He contended that such a tax is not an excise or duty but rather a direct tax, which according to Article I, Section 9 of the Constitution must be apportioned among states based on population. Harlan believed this interpretation was supported by previous court decisions and historical context surrounding the drafting of the Constitution. Furthermore, he expressed concern that upholding such taxes could lead to federal encroachment upon state taxation powers and potentially disrupt delicate balances between different levels of government power established in American federalism.