In the Old Colony Trust Co. v. Commissioner of Internal Revenue case in 1936, the U.S Supreme Court ruled that when an employer pays an employee's income tax, it is considered additional taxable income for the employee. The case involved William M. Wood who was president of American Woolen Company and had his taxes paid by his company as part of a compensation agreement from 1919 to 1921. The IRS argued this constituted extra income and should be taxed accordingly; Wood disagreed claiming it was not personal gain but rather a business expense for his employer. The court sided with the IRS stating that payment of an individual’s tax liability by another party constitutes gross income on which further tax is due under Section 61(a) (1) of the Internal Revenue Code because such payments are economic benefits to those individuals upon whom they are bestowed, thereby increasing their wealth.

In the dissenting opinion for Old Colony Trust Co. v. Commissioner of Internal Revenue, Justice Stone argued that the majority's interpretation of tax law was incorrect and overly broad. He contended that when an employer pays an employee's income taxes, it should not be considered additional taxable income for the employee because it is a payment made to satisfy a personal obligation on behalf of another party (the employee). This does not increase or enrich the economic benefit received by employees from their labor services; hence, it shouldn't be treated as part of their gross income under federal tax laws. Furthermore, he warned against potential negative implications this ruling could have on other forms of indirect compensation in employment relationships if they were also deemed taxable under similar logic used by the majority.