Tax Indemnity Payments

General Matters:

Are payments or reimbursements by third parties for tax payments included in gross income for federal tax purposes?  The basic principle of tax law is that a payment by a third party of a taxpayer’s income tax constitutes additional taxable income for the taxpayer.  Old Colony Trust v. Commissioner, 279 U.S. 716 (1929); Treas. Reg. § 1.61-14(a).  There are exceptions to this rule.  In some cases, courts will follow the “relation-back” approach and look to the nature of the transaction for the tax treatment of any tax indemnity payments.  See Arrowsmith v. Commissioner, 344 U.S. 6 (1952).

References:

James F. Hayden, The Taxation of Tax Indemnity Payments from Clark to Consentino, White & Case LLP, November 19, 2014.

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