Deputy v. Du Pont
308 U.S. 488 (1940)

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U.S. Supreme Court

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

Deputy v. Du Pont

No. 151

Argued December 12, 1939

Decided January 8, 1940

308 U.S. 488

Syllabus

1. In calculating net income for taxation a deduction from gross income is allowable only if there is clear statutory provision therefor. P. 308 U. S. 493.

2. In determining what are "ordinary and necessary" expenses of a taxpayer's "trade or business," within the meaning of § 23(a) under the Revenue Act of 1928, resort is had to the popular or received import of those words. P. 308 U. S. 493.

3. An ordinary expense is one that is normal, usual or customary; a transaction that gives rise to it must be of common or regular occurrence in the type of business involved. P. 308 U. S. 495.

4. The fact that an expense would be an ordinary and common one in the course of one business does not necessarily make it such in connection with another business. P. 308 U. S. 495.

5. Carrying charges on short sales of stock made by a stockholder to assist his corporation and preserve his investment in it cannot be deducted as ordinary and necessary expenses of his business where it does not appear that he was in the business of trading in securities, or that stockholders, engaged in conserving and enhancing their estates, ordinarily assist their corporations in similar fashion. Pp. 308 U. S. 493et seq.

6. In order to aid a plan of his corporation to increase the efficiency of its management by selling some of its stock to executive employees -- the corporation not being able legally to sell directly -- and to the end that, by the plan, his beneficial interest in the corporation might be conserved and enhanced, a stockholder made short sales to the executives (the corporation lending them the price) and borrowed the shares requisite to fulfill his contracts; when the borrowing period was up, he restored equivalent shares to the lender by borrowing them elsewhere under a contract which in time obliged him to pay to the second lender (a) a sum equal to dividends received by him on the borrowed shares, and (b) a sum equal to the lender's income tax on such payments. Assuming that the activities of the stockholder in conserving and enhancing his estate constitute a "trade" or "business" within the meaning of § 23(a) of the Revenue Act of 1928, held:

Page 308 U. S. 489

(1) That these expenditures were not deducible in computing the stockholder's income, because they proximately resulted not from the taxpayer's business, but from the business of the corporation, and because they were neither "ordinary" nor "necessary" expenses of his business within the meaning of § 23(a). Pp. 308 U. S. 494et seq.

(2) Such expenditures were not deductible as "interest paid or accrued . . . on indebtedness" under subsection 23(b) of the Act. P. 308 U. S. 497.

7. Although an indebtedness is an obligation, an obligation is not necessarily an "indebtedness" within the meaning of § 23(b). Interest in its usual import is the amount which one has contracted to pay for the use of borrowed money. In the business world, interest on indebtedness means compensation for the use or forbearance of money. It is assumed that Congress has used the word in that sense. P. 308 U. S. 497.

103 F.2d 257 reversed; 22 F.Supp. 589 affirmed.

Certiorari, post, p. 533, to review the reversal of a judgment of the District Court rendered against the present respondent in his action to recover money collected as income taxes.

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