Tax Legal Services · Primary-source case analysis

Old Colony Trust: An Employer’s Payment of an Employee’s Tax Was Income

By Aneeta Mishra and Timothy Chan

Published May 24, 2026

Old Colony Trust Co. v. Commissioner addressed a corporate resolution promising senior executives that the company would pay the federal income taxes arising from their salaries.

The employer discharged the employee’s obligation

Payment to the Treasury satisfied a personal liability the executive otherwise owed. Economic benefit did not depend on the employee first receiving cash.

The payment was compensation for services

The company acted because of the employment relationship and salary arrangement, making the tax payment additional remuneration rather than a gift.

The payment did not create an endless tax loop

The Court rejected the argument that taxing the benefit required infinite recomputation; the tax consequences could be calculated under the governing rules.

The Board’s income determination was affirmed

The employer-paid taxes were included in the executives’ gross income for the years at issue.

Key takeaways

• Identify whose legal obligation was discharged.
• Determine why the third party made the payment.
• Include employer-paid personal liabilities in compensation reporting when required.
• Calculate gross-up terms explicitly rather than assuming a tax-free benefit.