## Facts

- A testamentary trust created under Illinois law paid net income to the settlor’s widow for life and to his son, Edward Tyler Blair; after the widow’s death, Blair was entitled to all net income for his life.
- After the widow died, Blair executed written instruments assigning to his children specified annual dollar amounts from the trust’s net income for the duration of his life interest.
- The trustees accepted the assignments and distributed the designated portions of income directly to the assignees.
- The Commissioner treated the arrangements as anticipatory assignments of future income and asserted the assigned income remained taxable to Blair.
- In earlier litigation over a prior tax year, the court of appeals treated the trust as spendthrift under Illinois law and held the assignments invalid, resulting in tax liability to Blair.
- The trustees then sought state-court instructions on whether the trust permitted assignment; the Illinois intermediate appellate court held the trust was not spendthrift and upheld the assignments as valid.
- For later tax years, the Board of Tax Appeals relied on the state-court construction and ruled that the assigned income was not taxable to Blair; the court of appeals reversed, invoking res judicata from its earlier federal decision.

## Issues

1. Whether a prior federal judgment about tax liability for an earlier year barred relitigation for later years when a subsequent state-court construction altered the controlling characterization of the beneficiary’s rights.
2. Whether a life beneficiary’s state-law-valid assignment of a portion of his trust interest transfers ownership such that the assigned trust income is taxable to the assignees rather than to the assignor.

## Decision

- The Supreme Court reversed the court of appeals and reinstated the Board of Tax Appeals’ decision for Blair.
- The earlier federal judgment did not operate as res judicata for later tax years because the controlling legal situation changed when the state court construed the trust and upheld the assignments.
- Under Illinois law (as conclusively determined by the state appellate decision), Blair’s life income interest was an alienable equitable interest, and the assignments validly transferred portions of that interest.
- Because the assignees became owners of the beneficial interests assigned to them, the income attributable to those interests was taxable to the assignees, not to Blair.

## Legal Principles

- Federal income tax liability generally follows ownership of the income-producing property interest.
- For trust taxation, statutory references to income “distributable” to a beneficiary apply to the owner of the beneficial interest, including one who becomes an owner through a valid assignment under governing state law.
- A life beneficiary’s right to trust income is an equitable interest in the trust corpus; absent a valid restraint on alienation (such as a spendthrift restriction), that interest may be assigned in whole or in part.
- A state-court construction of a trust’s terms and the beneficiary’s power to assign, rendered in appropriate proceedings, is conclusive in determining the nature and validity of the beneficial interests for federal tax purposes.
- Res judicata does not control tax liability across different taxable years when later controlling state-law determinations change the legal characterization of the underlying property rights.

## Conclusion

The Court held that, once state law established the assignments as valid transfers of portions of a trust beneficiary’s equitable life interest, the assignees—not the assignor—owned those interests and were taxable on the corresponding trust income, and an earlier-year judgment did not bar that result for later years.


Blair v. Commissioner, 300 U.S. 5 (1937)