In the Old Colony Trust Company v. Commissioner of Internal Revenue case in 1928, the U.S. Supreme Court ruled that when an employer pays income tax on behalf of an employee, it is considered additional taxable income for that 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 contractual agreement between them from 1919 to 1921. When he died in 1926, the IRS claimed back taxes owed due to this arrangement being deemed as extra compensation which should have been taxed accordingly at the time it was received by Mr.Wood's estate (Old Colony Trust). The court upheld this claim stating that payment made directly or indirectly constitutes gross income regardless if derived from salary or other forms of payment related to employment services rendered.

In the dissenting opinion for Old Colony Trust Company v. Commissioner of Internal Revenue, Justice Holmes argued that the payment by an employer of an employee's income tax should not be considered additional taxable income to the employee. He reasoned that such a payment is merely discharging an obligation on behalf of another and does not constitute profit or gain to the recipient, thus it shouldn't be treated as gross income under federal tax law. Furthermore, he contended that this interpretation was more in line with common understanding and usage of what constitutes "income". Therefore, according to his view, Mr. William M. Wood did not receive any additional benefit when American Woolen Company paid his taxes; instead it was simply fulfilling its contractual agreement with him.