Tax Legal Services · Primary-source case analysis

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

By Aneeta Mishra and Timothy Chan

Published September 13, 2026

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 the argument that the payment was a gift or that taxing it created an impermissible tax-on-tax objection.

The deficiency was sustained

The amounts paid by the employer were included in the executive’s gross income for the relevant years.

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.