Old Colony Trust Co. v. Commissioner

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Old Colony Trust Co. v. Commissioner
Seal of the United States Supreme Court.svg
Argued January 10–11, 1929
Reargued April 15, 1929
Decided June 3, 1929
Full case name Old Colony Trust Company, et al. v. Commissioner of Internal Revenue
Citations 279 U.S. 716 (more)
49 S. Ct. 499; 73 L. Ed. 918; 1929 U.S. LEXIS 66; 1 U.S. Tax Cas. (CCH) P408; 7 A.F.T.R. (P-H) 8875; 1929-2 C.B. 222; 1929 P.H. P1023
Prior history On certiorari from the United States Court of Appeals for the First Circuit
Holding
  • When a third party purports to pay a person's income tax on his behalf, it must include the amount of the tax payment in the gross income on which it calculates his tax liability.
Court membership
Case opinions
Majority Taft, joined by Holmes, Stone, Sanford, Brandeis, Sutherland, Van Devanter, Butler
Dissent McReynolds
Laws applied
Revenue Act of 1926

Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929),[1] was an income tax case before the Supreme Court of the United States.

HELD:

  • When a third party purports to pay a person's income tax 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[edit]

In 1916, the American Woolen Company 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 executors 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.

Majority opinion[edit]

Justiciability. Chief Justice 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 jurisdictional 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.[2]).

Dissent[edit]

Justice McReynolds 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.

Academic Commentary[edit]

Petitioner was essentially arguing that Federal income taxes should be tax deductible. The holding of this case is today embodied in §275, which specifically disallows deduction for federal income taxes.[3]

See also[edit]

References[edit]

  1. ^ 279 U.S. 716 Full text of the opinion courtesy of Findlaw.com
  2. ^ See 26 U.S.C. § 102, 26 U.S.C. § 74(c) and 26 U.S.C. § 132(e).
  3. ^ Chirelstein, Marvin (2005). Federal Income Taxation: A Law Student's Guide to the Leading Cases and Concepts (Tenth Edition ed.). New York, NY: Foundation Press. p. 50. ISBN 1-58778-894-2.