## Facts

- David Sunnen, an inventor and president of Sunnen Products Company, held about 89% of the company’s stock; his wife held 10%; both served on a five-member board requiring three votes for binding action.
- Sunnen licensed certain patents to the corporation for a 10% royalty on sales under nonexclusive agreements that required no minimum production or royalty payments and were cancellable on notice.
- Sunnen assigned to his wife, as gifts, his royalty interests under these license contracts; the corporation was notified and paid royalties directly to her, and she reported the royalties as her income.
- For tax years 1929–1931, the Board of Tax Appeals had previously held that royalties paid to Sunnen’s wife under a 1928 license agreement were not taxable to Sunnen.
- For tax years 1937–1941, the Tax Court held the royalties taxable to Sunnen, except for a portion of 1937 royalties under the 1928 agreement, which it treated as precluded by the earlier decision.
- The court of appeals affirmed preclusion as to the 1937 royalties under the 1928 agreement and extended collateral estoppel to bar the Commissioner from taxing Sunnen on the remaining royalties for 1937–1941.

## Issues

1. Whether a prior final decision on the taxability of royalties for earlier tax years collaterally estopped the Commissioner from taxing similar royalty income in later years.
2. Whether royalties paid to Sunnen’s wife under assigned patent license royalty interests were taxable to Sunnen because he retained sufficient control and interest over the income-producing arrangement.

## Decision

- The Supreme Court reversed the court of appeals.
- The Court held that claim preclusion applies in tax cases only to the same claim and the same tax year; different tax years are different claims.
- The Court held collateral estoppel in tax cases for different years applies only when the issue is identical in all respects and both controlling facts and applicable legal rules remain unchanged.
- Because intervening legal developments in assignment-of-income doctrine altered the applicable legal rules, and because later-year circumstances were not necessarily identical, the earlier decision did not bar the Commissioner from litigating liability for 1937–1941.
- On the merits, the Court upheld the Tax Court’s finding that Sunnen retained sufficient interest in and control over the royalty contracts and the amount of income derived from them to justify taxing the royalties to him.

## Legal Principles

- Res judicata (claim preclusion) in federal income tax litigation generally binds the parties only as to the same tax year and all matters that were or could have been litigated for that year.
- Collateral estoppel (issue preclusion) across different tax years is limited to issues that are identical in all respects, with controlling facts and governing law unchanged.
- Intervening changes in controlling legal rules defeat issue preclusion, preventing outdated rulings from fixing tax treatment for later years.
- For assignment-of-income questions, retained control and continuing economic interest in the income-producing arrangement can support taxing the income to the assignor despite formal assignment to a spouse.

## Conclusion

The Court held that a prior tax decision for earlier years did not preclude the Commissioner from taxing later-year royalties where the governing legal rules had changed and later-year issues were not identical, and it sustained taxing the royalties to Sunnen because he retained sufficient control and interest in the royalty arrangement.


Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591 (1948)