Tax Legal Services · Primary-source case analysis

Deputy v. du Pont: A Stock-Loan Carrying Charge Was Not Interest on Borrowed Money

By Aneeta Mishra and Timothy Chan

Published September 5, 2026 · Updated October 24, 2026

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

A real contractual obligation is not necessarily indebtedness for purposes of an interest deduction. In Deputy v. du Pont, 308 U.S. 488 (1940), the Supreme Court rejected interest treatment for dividend-equivalent payments and tax reimbursements under a stock-loan agreement. The agreement required the return of shares and related payments; the claimed carrying charges were not compensation for the use or forbearance of money. The decision, issued January 8, 1940, also rejected a separate business-expense theory. Deputy, 308 U.S. at 497–99.

Start with what the stock-loan contract required

Du Pont was a major shareholder who helped a corporation’s executives acquire company stock under a plan begun in 1919. He borrowed shares to supply the plan. Stock dividends and splits later increased the number he owed the original lender. As the ten-year loan period approached its end in 1929, he lacked the shares needed for repayment and arranged a replacement stock loan with the Delaware Company. That history explained the obligation; calling the later arrangement a loan did not identify what property had been lent. Deputy, 308 U.S. at 490–92.

Under the replacement agreement, he had to return equivalent shares in kind within ten years, including relevant increases, pay amounts equal to dividends on the borrowed shares and reimburse the lender for taxes arising from the agreement. In 1931 he paid $567,648 in dividend equivalents and $80,063.56 in tax reimbursement—a total of $647,711.56. These were the expenditures he sought to deduct, not a stated percentage charge on cash principal advanced by the lender. Deputy, 308 U.S. at 492.

He sought a refund of income tax paid for 1931. The district court ruled against the refund claim, and the Third Circuit reversed. The Supreme Court’s decision restored the district court’s judgment. Deputy, 308 U.S. at 489–90, 499.

An obligation is not necessarily indebtedness

The historical provision, section 23(b) of the Revenue Act of 1928, allowed interest paid or accrued on indebtedness. The Court did not treat every expense associated with a loan, or every enforceable duty to pay money, as satisfying those words. An obligation to return shares and make the lender whole for dividends and tax could be binding without turning those payments into interest on borrowed money. Deputy, 308 U.S. at 497–98.

The controlling distinction concerned the payment’s function. Interest on indebtedness, as the Court used that phrase, compensated for the use or forbearance of money. The stock-loan payments arose from the specific duties attached to borrowed shares. Their amount and contractual necessity did not supply the missing money-use relationship. A carrying-charge label answered neither what the lender advanced nor what the particular payment compensated. Deputy, 308 U.S. at 497–98.

Accounting terminology did not decide tax classification

Du Pont urged a broader understanding of interest and indebtedness, including their historical usage. The majority instead read the revenue statute in its ordinary business context. It relied on Old Colony Railroad Co. v. Commissioner in rejecting an accounting or theoretical concept of effective interest that would displace the statutory words. The analysis did not deny that carrying borrowed property has an economic cost; it denied that the cost necessarily fit the particular deduction Congress provided. Deputy, 308 U.S. at 497–98.

Good faith did not bridge that statutory gap either. The Court acknowledged a genuine business purpose and no suggestion of tax avoidance. Those facts could explain why du Pont entered the arrangement, but they did not establish eligibility for an interest deduction. This is why a present record should separate the commercial reason for a payment from the legal category claimed for it. Deputy, 308 U.S. at 493, 497–98.

The payments were not interest

The Court reversed the Third Circuit and affirmed the district court’s judgment against the refund claim. Its separate rejection of ordinary-business-expense treatment concerned whose business generated the obligation and whether the expense was ordinary in that business. Our companion analysis of du Pont’s shareholder expenses addresses those distinct grounds. They should not be substituted for the interest analysis. Deputy, 308 U.S. at 493–99.

The government had described the costs as capital in nature, but the Court expressly declined to decide their appropriate treatment under other provisions because that issue was not before it. Thus the judgment denied the deductions claimed; it did not award capitalization or identify a different deduction. Justice Roberts’ separate opinion, joined by Justice McReynolds, disagreed with the treatment of the business-expense question and with taking the case for review, while acknowledging that the payments were not technically interest. His disagreement concerned the business-expense deduction and the Court’s review of the case, not allowance of the interest claim. Deputy, 308 U.S. at 498–502.

For a present stock-lending or financing review, obtain the complete agreement and amendments, identify the property actually advanced, and separate each payment stream. A schedule distinguishing principal, share-return duties, dividend substitutes, tax reimbursement and any separate cash-borrowing charge permits the relevant provision to be tested against the actual obligation. Preserve the dates, counterparty statements and payment calculations; an accounting entry marked interest cannot do that work by itself.

This opinion construed the Revenue Act of 1928. Modern securities-lending payments require the statutes and regulations applicable to the particular year and transaction. Start with the historical distinction between an obligation and the claimed statutory category, then separately determine present deductibility, capitalization and any limitations. Neither the transaction’s business purpose nor this historical denial supplies that current calculation.

Key takeaways

• Identify whether the lender advanced money, shares or something else.
• Separate each payment’s contractual function before labeling it interest.
• Keep the interest claim distinct from the shareholder’s ordinary-business-expense theory.
• Read the exact judgment and applicable current provisions before assuming denied interest becomes a different allowed deduction.