Tax Legal Services · Primary-source case analysis

Deputy v. du Pont: Paying Another Party’s Stock-Borrowing Costs Was Not an Ordinary Business Expense

By Aneeta Mishra and Timothy Chan

Published May 15, 2026 · Updated October 18, 2026

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

Deputy v. du Pont examined deductions claimed by a major shareholder who paid carrying costs so a corporation could use borrowed stock in an employee compensation arrangement.

The expense must belong to the taxpayer’s trade or business

The Court assumed, without deciding, that managing du Pont’s investments was a trade or business. Even on that favorable assumption, the payments arose from the corporation’s executive stock-purchase plan, not the shareholder’s own alleged business. The result did not depend on a finding of tax avoidance: The Court acknowledged a good-faith business purpose. Deputy, 308 U.S. at 493–494.

Ordinary describes a business norm

An expense can be ordinary even if it occurs once in a taxpayer’s lifetime. The question is whether the underlying transaction is common or customary in the particular type of business—not how often this taxpayer paid it. The record did not show stockholders managing investments ordinarily funded executive stock plans this way. Deputy, 308 U.S. at 495–496.

Necessary does not eliminate the separate-taxpayer rule

The 1929 replacement stock loan did not change the origin of the obligation created by the 1919 executive plan. A later refinancing or new counterparty did not make the expense one arising from a different business. Trace that origin before asking whether a payment helped preserve an investment. Deputy, 308 U.S. at 494.

The claimed deductions were denied

The Court reversed the appellate judgment and reinstated the judgment against the refund claim. It did not decide what other tax treatment the costs might receive. A denied business-expense deduction is not, by itself, a holding that capitalization or another deduction applies. Deputy, 308 U.S. at 497–499.

Key takeaways

• Identify whose legal obligation is being paid.
• Define the taxpayer’s own trade or business.
• Separate direct business expenses from shareholder investment benefits.
• Consider capitalization, contribution, and related-party rules before claiming a deduction.