Supreme Court Decision Old Colony Trust Company vs Commissioner
Legal Article GuideBy: Kum Martin
In 1929, the U.S Supreme court issued a decision in which case a company was paying taxes on behalf of an employee of that company as a matter of convenience.
Old Trust company argued that the sum paid as income tax on behalf of the employee did not constitute income for that employee, and therefore was not itself subject to tax. They argued that to tax that sum as income would constitute double taxation.
Commissioner argued that this does constitute a form of income for the employee and tax must therefore be paid on it. Specifically they said "Because the payment of his income taxes was in consideration for his continued employment, the payments constituted income to the employee."
They also pointed out that by accepting Old Colony Trust Company's argument, it would make it too easy for people to avoid taxation by restructuring payment to third parties. They could organize a system where people paid taxes for each other in order to achieve far lower tax rates.
The precedent set in this case also established that benefits provided to an employee are taxable as well, such as trust funds, gifts, and vacations. These benefits must be primarily work related not to be taxed.
Early such court decisions, during a time when income tax had just been introduced, help shape the modern system of taxation. They were the proving ground for the new laws, and these precedents are often consulted by modern judges when determining how to apply tax law.
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