Deputy v. Du Pont

Decision Date08 January 1940
Docket NumberNo. 151,151
PartiesDEPUTY et al. v. DU PONT
CourtU.S. Supreme Court

Mr. Robert K. McConnaughey, of Dayton, Ohio, for petitioners.

Mr. George Wharton Pepper, of Philadelphia, Pa., for respondent.

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, 26 U.S.C.A. Int.Rev.Code, § 23(a)(1), 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. 3 Cir., 103 F.2d 257. We granted certiorari 308 U.S. 533, 60 S.Ct. 89, 84 L.Ed. —-, because of the asserted inconsistency of that ruling with Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212, which construed the meaning of the words 'ordinary and necessary expenses'; and with Burnet v. Clark, 287 U.S. 410, 53 S.Ct. 207, 77 L.Ed. 397, 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 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 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 contention and to make the delicate dissection of administrative practice which that would entail. For we are of the opinion that the deductions are not permitted either within the rule of Burnet v. Clark or Welch v. Helvering, supra, even though we were to assume that the activities of respondent constituted a business, as found by the District Court.

There is no intimation in the record that the transactions whereby the stock was borrowed were not in good faith or were entered into for any reason except a bona fide business purpose. Nor is there any suggestion that the transactions were cast in that form for purposes of tax avoidance. And it is true that as respects the dividends received by respondent and paid over to the Delaware Company, he was little more than a conduit. But allowance of deductions from gross income does not turn on general equitable considerations. It 'depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.' New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348. And when it comes to construction of the statutory provision under which the deduction is sought, the general rule that 'popular or received import of words furnishes the general rule for the interpretation of public laws,' Maillard v. Lawrence, 16 How. 251, 261, 14 L.Ed. 925, is applicable.

By those standards the claimed deduction falls for two reasons. In the first place, the payments in question do not meet the test enunciated in Kornhauser v. United States, 276 U.S. 145, 48 S.Ct. 219, 72 L.Ed. 505, since they proximately result not from the taxpayer's business but from the business of the du Pont Company. The original transactions had their origin in an effort by that company to increase the efficiency of its management by selling its stock to certain of its key executives. The respondent undertook to furnish the necessary stock only after the company had been advised that it could not legally do so. In that posture of the case these payments are no more deductible than were the payments made by the stockholder in Burnet v. Clark, supra, as a result of his endorsements of the obligations of his corporation. Those payments were disallowed as deductions from his gross income though they arose out of transactions which were intended to preserve his investment in the corporation. Similar payments were disallowed in Dalton v. Bowers, 287 U.S. 404, 53 S.Ct. 205, 77 L.Ed. 389. Hence, the fact that the transaction out of which the carrying charges here in question arose might benefit respondent does not bring it within the ambit of his alleged business of conserving and enhancing his estate. The well established decisions of this Court do not permit any such blending of the corporation's business with the business of its stockholders. Accordingly, the payments made under the 1919 agreement would certainly not be deductible. And the fact that a new and different arrangement was made in 1929 with the Delaware Company does not alter the conclusion, for it is the origin of the liability out of which the expense accrues which is material. Otherwise carrying charges on any short sale whether or not related to the business of the taxpayer would be allowable as deductible expenses. That cannot be if the notion of proximate result implicit in the statutory words 'expenses paid or incurred * * * in carrying on any trade or business' is to have any vitality.

In the second place, these payments were not 'ordinary' ones for the conduct of the kind of business in which, we assume arguendo, respondent was engaged. The District Court held that they were 'beyond the norm of general and accepted business practice' and were in fact 'so extraordinary as to occur in the lives of ordinary business men not at all' and in the life of the respondent 'but once.'8 Certainly there are no norms of conduct to which we have been referred or of which we are cognizant which would bring these payments within the meaning of ordinary expenses for conserving and enhancing an estate. We do not doubt the correctness of the District Court's finding that respondent embarked on this program to the end that his beneficial stock ownership in the du Pont Company might be conserved and enhanced. But that does not make the cost to him an 'ordinary' expense within the meaning of the Act. Ordinary has the connotation of normal, usual, or customary. To be sure, an expense may be ordinary though it happen but once in the taxpayer's lifetime. Cf. Kornhauser v. United States, supra. Yet the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved. Welch v. Helvering, supra, 290 U.S. at page 114, 54 S.Ct. at page 9, 78 L.Ed. 212. Hence, the fact that a particular expense would be an ordinary or common one in the course of one business and so deductible under § 23(a) does not necessarily make it such in connection with another business. Thus, it has been held that one who was an active trader in securities might take as deductions carrying charges on short sales since selling short was common in that business.9 But the carrying charges on respondent's short sale in this case cannot be accorded the same privilege under § 23(a). The record does not show that respondent was in the business of trading in securities. Nor does it show that a stockholder engaged in conserving and enhancing his estate ordinarily makes short sales or similarly assists his corporation in financing stock...

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