## Facts

- William M. Wood was president of the American Woolen Company and received substantial salary and commissions during 1918–1920, which he reported as income.
- The employer adopted a corporate resolution under which it would pay federal income taxes assessed on its officers’ compensation, including Wood’s.
- Pursuant to that resolution, the employer paid Wood’s federal income taxes directly to the United States for prior-year liabilities.
- Wood did not include the employer-paid tax amounts in his gross income for the years in which the payments were made.
- The Commissioner determined deficiencies on the theory that the employer’s tax payments were additional compensation taxable to Wood; the Board of Tax Appeals sustained the deficiencies.
- The court of appeals certified to the Supreme Court the legal question whether the employer’s payment of the employee’s income tax constitutes additional taxable income to the employee.

## Issues

1. Whether judicial review of a Board of Tax Appeals determination presents a justiciable “case or controversy” within Article III and the governing revenue statutes.
2. Whether an employer’s payment of an employee’s federal income tax, made in consideration of services, constitutes taxable income to the employee under the Revenue Act of 1918 and the Sixteenth Amendment.

## Decision

- The Court held the proceeding was a justiciable case or controversy and within the jurisdictional scheme authorizing judicial review of Board decisions.
- The Court answered the certified question yes: the employer’s payment of the employee’s income taxes, made as part of the employment arrangement, was additional taxable income to the employee.
- The Court rejected characterization of the payments as gifts because they were tied to services and made pursuant to an employment-related corporate resolution.
- The Court declined to treat potential “tax-on-tax” complications as a basis to deny that the initial payment was income, noting no attempt had been made to collect further layers of tax on that theory.
- The Court upheld the tax deficiencies predicated on inclusion of the employer-paid taxes in the employee’s gross income.

## Legal Principles

- A third party’s discharge of a taxpayer’s legal obligation is treated as income to the taxpayer because it is the economic equivalent of the taxpayer’s receipt of funds and payment of the obligation.
- Payments made by an employer in consideration of an employee’s services, even if paid to someone other than the employee (including the government), are compensation and part of the employee’s gross income.
- An administrative-origin proceeding may become a justiciable case or controversy when it reaches a court and requires the exercise of judicial power; the absence of traditional execution against a private party does not defeat Article III jurisdiction where the statutory scheme provides for judicial review and effectuation through the responsible executive department.
- Parallel remedial paths do not negate jurisdiction; a final judgment in one proceeding can preclude relitigation in another under res judicata principles.

## Conclusion

The Court held that an employer’s payment of an employee’s federal income tax, when made as compensation for services, is taxable income to the employee because satisfaction of the employee’s obligation by a third party is the equivalent of receipt by the employee.


Old Colony Tr. Co. v. United States, 279 U.S. 716 (1929)