Tax Legal Services · Primary-source case analysis

Old Colony Trust: Employer-Paid Income Tax Was Additional Compensation

By Aneeta Mishra and Timothy Chan

Published May 11, 2026 · Updated October 18, 2026

Decision: Old Colony Trust Co. v. Comm’r, 279 U.S. 716 (1929).

Old Colony Trust Co. v. Commissioner explains why third-party payment of a taxpayer’s liability can be income.

The employer promised tax-free compensation

American Woolen paid its president’s federal income taxes in addition to salary under a board resolution.

Discharge of an obligation produced an economic benefit

Paying the executive’s personal tax liability was equivalent to providing additional compensation that he used to satisfy the debt.

The tax payment was itself taxable

The Court rejected gift treatment because the payment compensated services under the employment arrangement. It answered the certified income question yes, but expressly declined to decide the further tax-on-tax computation: No such further assessment was before it. Do not turn that reservation into a holding approving a particular gross-up formula. Old Colony Trust, 279 U.S. at 729–731.

The deficiency was sustained

The employer paid $681,169.88 of Wood’s 1918 tax in 1919 and $351,179.27 of his 1919 tax in 1920. Those payments were additional income in the years the employer paid them, not simply amounts added back to the earlier salary year. Old Colony Trust, 279 U.S. at 719–720.

Key takeaways

• Identify whose legal obligation was paid.
• Treat third-party payment as a potential accession to wealth.
• Distinguish compensation from a genuine detached gift.
• Gross up arrangements must account for tax on the tax payment.