Deputy v. du Pont

Dupont Corporation (the corporation) decided to sell stock to some of its executives to increase the executives’ efficiency to the corporation’s benefit. After the corporation learned that it could not legally furnish the stock to the executives, Pierre du Pont (plaintiff) borrowed shares of the corporation’s stock and sold the shares to the executives at a discount. Du Pont was not otherwise involved in the business of trading securities or assisting other corporations in furnishing stock for their executives. Du Pont promised to return a certain number of shares to the corporation within 10 years but was unable to do so. Instead, du Pont paid the corporation the cash value of the shares, an amount equal to the dividends that the executives’ shares had earned over the loan period, and the federal tax that the corporation was required to pay on du Pont’s payment. Du Pont then deducted the total amount of his payment to the corporation on his income taxes, claiming that the payment was an ordinary and necessary business expense. The Commissioner of Internal Revenue (the commissioner) disallowed the deduction and determined a deficiency in du Pont’s income taxes. Du Pont paid the taxes as recalculated by the commissioner and then sued the United States (defendant) in federal district court to recover the amount paid. The district court ruled against du Pont, reasoning that although du Pont was engaged in the business of conserving and enhancing his estate, the payment to the corporation was an extraordinary, highly uncommon expense, rather than an ordinary expense. A federal appellate court reversed the district court’s decision, and the United States Supreme Court granted certiorari to determine whether the appellate court’s decision was consistent with prior Supreme Court precedent regarding appropriate deductions for ordinary and necessary business expenses.