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Blair v. Commissioner | 300 U.S. 5 (1937)
Generally, only income that’s been realized is taxable. In addition, income that’s assigned to another is taxable to the person who earns the income or who owns the property producing it. In the 1937 case Blair versus Commissioner of Internal Revenue, the United States Supreme Court considered whether the net income of trust property that’s assigned to another is taxable to the person who assigns it.
In 1899, William Blair died testate, or with a will, in Illinois. In his will, William created a testamentary trust, leaving half of the trust’s net income to his widow during her life, and the other half to his son, Edward Blair, during his life. Also, in the event that the widow or son died, the survivor was to receive the remainder of the trust’s net income during his or her life.
In 1923, William’s widow died. Following her death, Edward assigned the trust’s net income to his four children. The trustees accepted the assignments and distributed the income.
On his 1923 tax returns, Edward didn’t include the net income transferred to his children as part of his taxable income. In response, the Internal Revenue Service, or IRS, ruled that the income was taxable to Edward and assessed a deficiency. Edward appealed the deficiency to the Board of Tax Appeals, which reversed. The IRS then appealed to the Seventh Circuit Court of Appeals, which reversed the board’s decision, holding that, under Illinois law, the trust was a spendthrift trust and the assignments were therefore invalid. The United States Supreme Court denied cert.
Subsequently, the trustees sued Edward and the children in Illinois superior court to obtain guidance on the validity of the assignments. The question was certified to the Illinois appellate court, which upheld the assignments, and the court record was submitted to actions pending before the Board of Tax Appeals for later tax returns filed by Edward. The board found that the income wasn’t taxable to Edward, and the Seventh Circuit once again reversed, concluding that the trust’s net income was taxable because it was realized when Edward assigned the income to his children and exercised control over the funds. The United States Supreme Court granted cert.
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