308 U.S. 488 (1940), 151, Deputy v. Du Pont
|Docket Nº:||No. 151|
|Citation:||308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416|
|Party Name:||Deputy v. Du Pont|
|Case Date:||January 08, 1940|
|Court:||United States Supreme Court|
Argued December 12, 1939
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE THIRD CIRCUIT
1. In calculating net income for taxation a deduction from gross income is allowable only if there is clear statutory provision therefor. P. 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. 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. 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. 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. 493 et 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:
(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. 494 et seq.
(2) Such expenditures were not deductible as "interest paid or accrued . . . on indebtedness" under subsection 23(b) of the Act. P. 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. 497.
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.
DOUGLAS, J., lead opinion
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
This case presents the question of whether respondent, in computing his taxable net income for the year 1931, may deduct payments of $647,711.56 made by him in that year to the Delaware Realty and Investment Co. (hereinafter called the Delaware Company). The deduction is sought either under § 23(a) of the Revenue Act of 1928, 45 Stat. 791, as "ordinary and necessary expenses paid
or incurred during the taxable year in carrying on" the "trade or business" of respondent, or under § 23(b) as "interest paid or accrued within the taxable year on indebtedness." The Commissioner disallowed the deduction and determined a deficiency, which respondent paid and now seeks to recover. It is agreed that, if the deduction is allowed, respondent is entitled to judgment for $172,351.64. The judgment of the District Court against respondent, 22 F.Supp. 589, was reversed by the Circuit Court of Appeals. 103 F.2d 257. We granted certiorari because of the asserted inconsistency of that ruling with Welch v. Helvering, 290 U.S. 111, which construed the meaning of the words "ordinary [60 S.Ct. 365] and necessary expenses;" and with Burnet v. Clark, 287 U.S. 410, which limited such deductions to losses directly connected with the taxpayer's business.
Respondent's claim to the deduction arose out of the following transactions, briefly summarized. Respondent was beneficial owner of about 16% of the stock of E. I. du Pont de Nemours and Company (hereinafter called the du Pont Company). In 1919, the du Pont Company constituted a new executive committee composed of nine young men. For business reasons, it thought it desirable that these men have a financial interest in the company. Alleged legal difficulties stood in the way of the du Pont Company's selling them the 9,000 shares desired.1 Accordingly, respondent undertook to sell them 1,000 shares each.
But, since he did not have readily available that amount from his own holdings,2 he borrowed 9,000 shares of the du Pont Company from Christiana Securities Company,3 under an agreement whereby he agreed to return the stock loaned in kind within ten years and, in the interim, to pay to the lender all dividends declared and paid on the shares so loaned.4 Respondent thereupon sold the shares to the nine executives, the purchase price being furnished by the du Pont Company.5 In October, 1929, when the ten-year
period was about to expire, respondent did not have available the number of shares which he was obligated to return to Christiana Securities Company.6 Therefore, he arranged for a loan from the Delaware Company of the [60 S.Ct. 366] number of shares necessary to discharge that obligation.7 Under a contract with that company, respondent agreed to return in kind the number of shares loaned (plus any increase by stock dividend or otherwise) within ten years; to pay to the Delaware Company an amount equivalent to all dividends declared and paid on the borrowed shares until returned, and to reimburse the Delaware Company for all taxes accruing against it by reason of the agreement.
Pursuant to that agreement respondent paid the Delaware Company, in 1931, the sum of $567,648, being an amount equivalent to the dividends received by him during that period from the du Pont Company on the borrowed shares, and the sum of $80,063.56, being the amount of the federal income tax imposed upon the lender by reason of the foregoing payments which it had received from respondent. These are the expenditures claimed as a deduction in the present suit.
The District Court concluded, on the basis of respondent's large and diversified investment holdings and his
wide financial and business interests, that his business was primarily that of conserving and enhancing his estate. The petitioners challenge that conclusion, asserting that respondent's activities in connection with conserving and enhancing his estate did not constitute a "trade or business" within the meaning of § 23(a) of the Act.
But, as we view the case, it is unnecessary for us to pass on that...
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