## Facts

- Du Pont was a substantial stockholder in E. I. du Pont de Nemours & Co. and affiliated entities.
- The corporation sought to place company stock with executive employees but could not sell its own shares directly to them.
- Du Pont borrowed 9,000 shares from Christiana Securities Co. and made short sales of those shares to corporate executives; the corporation lent the executives the purchase funds.
- When the initial borrowing period expired, du Pont obtained replacement shares from Delaware Realty & Investment Co. under a contract to return equivalent shares.
- Under the contract, du Pont agreed to pay Delaware amounts equal to (1) dividends Delaware received on the borrowed shares and (2) Delaware’s income tax attributable to those payments.
- Du Pont paid $647,711.56 and claimed deductions under the Revenue Act of 1928 as either (a) ordinary and necessary business expenses (§ 23(a)) or (b) interest on indebtedness (§ 23(b)).
- The District Court disallowed the deductions; the Third Circuit allowed them; the Supreme Court reversed.

## Issues

1. Whether payments equal to dividend equivalents and the lender’s related income tax, made in connection with borrowed shares used to complete short sales, were deductible as “ordinary and necessary” expenses of the taxpayer’s “trade or business” under § 23(a) of the Revenue Act of 1928.
2. Whether those payments were deductible as “interest paid or accrued . . . on indebtedness” under § 23(b) of the Revenue Act of 1928.

## Decision

- The Supreme Court reversed the court of appeals and held the deductions were not allowable.
- The payments were not “ordinary and necessary” business expenses under § 23(a) because they did not proximately result from the taxpayer’s business and were not shown to be ordinary in any business the taxpayer conducted.
- The payments were not “interest” on “indebtedness” under § 23(b) because they were not compensation for the use of borrowed money.

## Legal Principles

- A deduction from gross income is permitted only when clearly authorized by statute.
- For § 23(a), “ordinary” takes its common meaning: normal, usual, or customary; the underlying transaction must be of common or regular occurrence in the taxpayer’s type of business.
- An expense that is ordinary in one business is not necessarily ordinary when incurred in a different business context.
- Expenses incurred to advance a corporation’s business plan, even if intended to protect or increase a shareholder’s investment, may be treated as originating from the corporation’s business rather than the shareholder’s.
- “Interest” under § 23(b) means the amount contracted to be paid for the use of borrowed money; not every contractual obligation is “indebtedness” for that provision.
- Dividend-equivalent and tax-reimbursement payments arising from borrowing stock do not qualify as interest on indebtedness.

## Conclusion

The Court denied deductions for payments tied to borrowing shares to support a corporate employee stock plan, holding they were neither ordinary business expenses of the taxpayer nor interest on indebtedness within the Revenue Act of 1928.


Deputy v. du Pont, 308 U.S. 488 (1940)