Old Colony Trust Co. v. Commissioner

Background

William M. Wood was president of a manufacturing company that adopted a board resolution promising to pay officers’ income taxes. The company paid large federal income taxes for Mr. Wood for the years around 1918–1920. The Board of Tax Appeals found those payments were additional income to him. The executors and the courts then asked whether an employer’s payment of an employee’s income tax must be treated as taxable income to the employee.

Reasoning

The Court framed the question simply: when a third party discharges an employee’s tax obligation, is that payment the same as the employee receiving income? The Court answered yes. It said the tax payments were made in consideration of the employee’s services and thus were a gain derived from labor and part of compensation. The Court relied on the governing tax statute’s rule that form does not change substance, so a third-party payment that benefits the employee is equivalent to the employee’s receipt of income. The Court also rejected the idea that such payments were mere gifts.

Real world impact

People whose employers agree to pay their taxes must treat those payments as income and report them on returns. Employers who make such payments should treat them as part of wages or compensation for tax reporting and withholding. The Court noted—but did not resolve—complicated follow-up questions such as whether taxing that added income could create further taxable amounts.

Dissents or concurrances

Justice McReynolds filed a separate opinion arguing the Board of Tax Appeals is an administrative body and that courts were being asked to exercise executive power, so he questioned the courts’ jurisdiction to decide here.