279 U.S. 716 (1929), Supreme Court of the United States
Old Colony Trust Co. v.
Whether an employer's payment of an employee's federal income tax liability constitutes taxable income to the employee under the federal income tax laws.
Gross income includes compensation for services, of whatever kind and in whatever form paid, as well as undeniable accessions to wealth clearly realized. When a third party discharges a taxpayer's personal obligation, the taxpayer realizes income equal to the amount of the obligation satisfied, unless a specific statutory exclusion applies. An employer's payment of an employee's federal income tax is additional taxable compensation to the employee.
Yes. The employer's payment of the employee's federal income tax is additional taxable income to the employee in the year the tax is paid.
Old Colony is a cornerstone of the expansive approach to gross income under modern § 61. It teaches that economic benefit—not the form of payment—controls tax consequences. The rule that third-party payments of a taxpayer's personal obligations constitute income underlies doctrines involving cash equivalents, constructive receipt, and discharge-of-indebtedness-like benefits. For law students, the case is an essential reference point for analyzing compensation structures, fringe benefits, and gross-ups. It also illustrates how courts navigate statutory text with economic substance and how a simple compensation design choice (the employer paying the employee's taxes) can have clear tax implications. The decision remains frequently cited in cases and rulings addressing whether a benefit counts as taxable income and how to characterize employer-provided perks.