Old Colony Trust Co. v. Commissioner

Holding

An employer's payment of an employee's income tax is itself additional compensation and is taxable to the employee as gross income.

Facts

American Woolen Company adopted a resolution to pay all federal income taxes of its president and other senior officers as additional compensation. The taxes were paid directly to the government on the officers' behalf. The Commissioner included the tax payments in the officers' income.

Reasoning

Chief Justice Taft wrote that discharge by a third party of an obligation owed by the taxpayer is equivalent to receipt of the funds. The tax payment was made in consideration of services rendered and was therefore compensation; the form of payment cannot alter its taxable substance.