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 petitioners then appealed the Board's decision to the United States Court of Appeals for the First Circuit, which certified the following question to be decided by the U.S. Supreme Court: "Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?"
Majority opinion
Justiciability.Chief Justice Taft, writing for the majority, first held that the appeal of Wood's executors was a justiciablecase or controversy for the court to decide. Furthermore, the fact that the Revenue Act of 1926 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 to pay 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. Further, the payment of taxes of Wood's behalf did not constitute a gift in the legal sense, because it was made in consideration of his services to the company, thus making the payment part of his compensation package..
