In the case of Old Colony Railroad Co. v. Commissioner of Internal Revenue, 1931, the U.S Supreme Court ruled that when an employer pays income tax on behalf of its employee as part of their compensation package, it is considered additional taxable income for the employee under federal law. The court held that such payments are essentially a benefit to the employee and therefore should be included in gross income calculations for taxation purposes. This decision established a precedent known as "the Old Colony rule," which has significant implications for employment contracts and compensation packages where employers agree to pay employees' taxes.

In the dissenting opinion for Old Colony Railroad Co. v. Commissioner of Internal Revenue, Justice McReynolds disagreed with the majority's view that payment by an employer of an employee's income tax should be considered additional taxable income to the employee. He argued that such a ruling would lead to absurd results and endless complications because it could potentially create a never-ending cycle where each payment made on behalf of the employee is considered additional income, thus increasing their tax liability further which in turn needs another payment from the employer leading to more taxable income and so forth. Furthermore, he pointed out that there was no legal obligation for employers to pay these taxes on behalf of employees; they were doing so voluntarily as part of their compensation packages - this did not make them liable under existing laws or regulations at that time.