Old Colony Trust Co. v. Commissioner
Encyclopedia
Old Colony Trust Co. v. Commissioner, , was an income tax case before the Supreme Court of the United States
.
HELD:
adopted a resolution
which provided that the company would pay all taxes due on the salaries of the company's officers. It calculated the employees' tax liabilities based on a gross income that omitted, or excluded, the amount of the income taxes themselves.
In 1925, the Bureau of Internal Revenue
assessed a deficiency for the amount of taxes paid on behalf of the company's president, William Madison Wood
, arguing that his $681,169.88 tax payment had wrongly been excluded from his gross income in 1919, and that his $351,179.27 tax payment had wrongly been excluded from his gross income in 1920. Old Colony Trust Co., as the executor
s of Wood's estate, filed suit in the District Court for a refund, then appealed to the Board of Tax Appeals (the predecessor to the United States Tax Court
). The petitioners then appealed the Board's decision to the United States Court of Appeals for the First Circuit
.
Taft
, writing for the majority, first held that the appeal
of Wood's executors was a justiciable
case or controversy
for the court to decide. Furthermore, the fact that the Revenue Act of 1926
(which altered the appeals process for tax deficiencies) was passed while the case was under review by the Board of Tax Appeals did not cut off the judicial process sought by the petitioners. Taft held that the principle of res judicata
resolved the jurisdiction
al issue, because regardless of whether the District Court action or the Board's action were decided first, the judgment which was first in time would then be properly appealable.
Merits. Taft held that payment of Mr. Wood's taxes by his employer constituted additional taxable income to him for the years in question. The fact that a person induced or permitted a third party from paying income taxes on his behalf does not excuse him from filing a tax return
. Furthermore, Taft added, "The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." 279 U.S. 716 at 729.
Thus, the company's payment of Wood's tax bill was the same as giving him extra income, regardless of the mode of payment. Nor could the payment of taxes of Wood's behalf constitute a gift
in the legal sense, because it was made in consideration of his services to the company, thus making it part of his compensation package
. (This case did not change the general rule that gifts are not includable in gross income
for the purposes of U.S. Federal income taxation, while some gifts but not all gifts from an employer to an employee are taxable to the employee.).
wrote a brief dissent. He felt that the Court of Appeals was without jurisdiction because the Revenue Act of 1926 interfered with the executive power of the Board of Tax Appeals.
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
.
HELD:
- When a third party purports to pay a person's income taxIncome tax in the United StatesIn the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
on his behalf, it must include the amount of the tax payment in the gross income on which it calculates his tax liability, because Federal income tax payments are not tax deductible.
Facts and procedural history
In 1916, the American Woolen CompanyAmerican Woolen Company
The American Woolen Company was established in 1899 under the leadership of William M. Wood and his father-in-law Frederick Ayer through the consolidation of eight financially troubled New England woolen mills. At the company's height in the 1920s, it owned and operated 60 woolen mills across New...
adopted a resolution
Resolution (law)
A resolution is a written motion adopted by a deliberative body. The substance of the resolution can be anything that can normally be proposed as a motion. For long or important motions, though, it is often better to have them written out so that discussion is easier or so that it can be...
which provided that the company would pay all taxes due on the salaries of the company's officers. It calculated the employees' tax liabilities based on a gross income that omitted, or excluded, the amount of the income taxes themselves.
In 1925, the Bureau of Internal Revenue
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
assessed a deficiency for the amount of taxes paid on behalf of the company's president, William Madison Wood
William Madison Wood
William M. Wood was a textile mill owner of Lawrence, Massachusetts who was considered to be an expert in efficiency. He made a good deal of his fortune through being hired by mill owners to turn around failing mills and was disliked by organized labor.- Early life :William Wood was born in 1858...
, arguing that his $681,169.88 tax payment had wrongly been excluded from his gross income in 1919, and that his $351,179.27 tax payment had wrongly been excluded from his gross income in 1920. Old Colony Trust Co., as the executor
Executor
An executor, in the broadest sense, is one who carries something out .-Overview:...
s of Wood's estate, filed suit in the District Court for a refund, then appealed to the Board of Tax Appeals (the predecessor to the United States Tax Court
United States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
). The petitioners then appealed the Board's decision to the United States Court of Appeals for the First Circuit
United States Court of Appeals for the First Circuit
The United States Court of Appeals for the First Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* District of Maine* District of Massachusetts...
.
Majority opinion
Justiciability. Chief JusticeChief Justice of the United States
The Chief Justice of the United States is the head of the United States federal court system and the chief judge of the Supreme Court of the United States. The Chief Justice is one of nine Supreme Court justices; the other eight are the Associate Justices of the Supreme Court of the United States...
Taft
William Howard Taft
William Howard Taft was the 27th President of the United States and later the tenth Chief Justice of the United States...
, writing for the majority, first held that the appeal
Appeal
An appeal is a petition for review of a case that has been decided by a court of law. The petition is made to a higher court for the purpose of overturning the lower court's decision....
of Wood's executors was a justiciable
Justiciability
Justiciability concerns the limits upon legal issues over which a court can exercise its judicial authority. It includes, but is not limited to, the legal concept of standing, which is used to determine if the party bringing the suit is a party appropriate to establishing whether an actual...
case or controversy
Case or controversy
The Case or Controversy Clause of Article III of the United States Constitution has been deemed to impose a requirement that United States federal courts are not permitted to hear cases that do not pose an actual controversy — that is, an actual dispute between adverse parties which is capable of...
for the court to decide. Furthermore, the fact that the Revenue Act of 1926
Revenue Act of 1926
The United States Revenue Act of 1926, , reduced inheritance and personal income taxes, cancelled many excise imposts, and ended public access to federal income tax returns.Passed by the 69th Congress, it was signed into law by President Calvin Coolidge....
(which altered the appeals process for tax deficiencies) was passed while the case was under review by the Board of Tax Appeals did not cut off the judicial process sought by the petitioners. Taft held that the principle of res judicata
Res judicata
Res judicata or res iudicata , also known as claim preclusion, is the Latin term for "a matter [already] judged", and may refer to two concepts: in both civil law and common law legal systems, a case in which there has been a final judgment and is no longer subject to appeal; and the legal doctrine...
resolved the jurisdiction
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
al issue, because regardless of whether the District Court action or the Board's action were decided first, the judgment which was first in time would then be properly appealable.
Merits. Taft held that payment of Mr. Wood's taxes by his employer constituted additional taxable income to him for the years in question. The fact that a person induced or permitted a third party from paying income taxes on his behalf does not excuse him from filing a tax return
Tax return (United States)
Tax returns in the United States are reports filed with the Internal Revenue Service or with the state or local tax collection agency containing information used to calculate income tax or other taxes...
. Furthermore, Taft added, "The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." 279 U.S. 716 at 729.
Thus, the company's payment of Wood's tax bill was the same as giving him extra income, regardless of the mode of payment. Nor could the payment of taxes of Wood's behalf constitute a gift
Gift
A gift or a present is the transfer of something without the expectation of receiving something in return. Although gift-giving might involve an expectation of reciprocity, a gift is meant to be free. In many human societies, the act of mutually exchanging money, goods, etc. may contribute to...
in the legal sense, because it was made in consideration of his services to the company, thus making it part of his compensation package
Executive compensation
Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc. Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker's wage...
. (This case did not change the general rule that gifts are not includable in gross income
Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
for the purposes of U.S. Federal income taxation, while some gifts but not all gifts from an employer to an employee are taxable to the employee.).
Dissent
Justice McReynoldsJames Clark McReynolds
James Clark McReynolds was an American lawyer and judge who served as United States Attorney General under President Woodrow Wilson and as an Associate Justice of the United States Supreme Court...
wrote a brief dissent. He felt that the Court of Appeals was without jurisdiction because the Revenue Act of 1926 interfered with the executive power of the Board of Tax Appeals.