300 U.S. 5 (1937)
In 1899, William Blair, a resident of Illinois, died leaving a will that created a testamentary trust of property located in that state.1 One-half of the net income was to be paid to his widow during her life, and the other half to his son Edward Tyler Blair, who was to receive the entire net income after the widow's death for the remainder of his life.2
In 1923, following the widow's death, Edward Tyler Blair executed assignments transferring specified portions of his interest in the net income of the trust to his children.3 He assigned to his daughter Lucy Blair Linn an interest of $6,000 for the remainder of 1923 and $9,000 in each subsequent calendar year, and made similar assignments of $9,000 annually to his daughter Edith Blair and his son Edward Seymour Blair.4 In later years he executed additional assignments to these children and to his son William McCormick Blair.5 The trustees accepted the assignments and distributed the income directly to the assignees.6
The question of tax liability first arose for the year 1923. The Commissioner of Internal Revenue determined that the income was taxable to Edward Tyler Blair.7 The Board of Tax Appeals held otherwise, but the Circuit Court of Appeals reversed that decision.8 Certiorari was denied by the Supreme Court.9
The trustees then brought suit in the Superior Court of Cook County, Illinois, seeking a construction of the will regarding the beneficiary's power to assign and the validity of the assignments made.10 The petitioner and the assignees were joined as defendants.11 The Appellate Court of Illinois, First District, held that the trust was not a spendthrift trust and upheld the assignments.12 Pursuant to that decision, the Superior Court entered a decree adjudging the assignments valid.13
Proceedings involving the trust income for the years 1924, 1925, 1926, and 1929 were pending before the Board of Tax Appeals.14 The Board received the state court record in evidence and, applying the state court's decision, overruled the Commissioner's determination.15 The Circuit Court of Appeals reversed the Board once more.16 The Supreme Court granted certiorari on October 12, 1936, because of an asserted conflict with the decision of the state court and with decisions of other circuit courts of appeals.17
Whether the judgment relating to the income for 1923 is conclusive in this proceeding as res judicata?18
Res judicata applies where in the subsequent proceeding, although relating to a different tax year, the questions presented upon the facts and the law are essentially the same.19 A supervening decision of a state court interpreting local law in direct relation to the trust creates a new situation that cannot justly be ignored when the local law is determinative of any material point in controversy.20
No. The determination of petitioner’s liability for the year 1923 had been rested entirely upon the local law. The supervening decision of the state court interpreting that law in direct relation to this trust cannot justly be ignored in the present proceeding so far as it is found that the local law is determinative of any material point in controversy.21 The facts of the case unfold chronologically through the following narrative.22 William Blair died in 1899 creating the testamentary trust under Illinois law with income interests specified for his widow and son Edward Tyler Blair.23
After the widow’s death, Edward Tyler Blair executed the assignments in 1923 and later years, which the trustees accepted by distributing income directly to the assignees.24 The initial tax dispute for 1923 proceeded through the Commissioner’s determination, the Board of Tax Appeals holding for the taxpayer, the Circuit Court of Appeals reversal on spendthrift trust grounds, and denial of certiorari.25 Subsequently the trustees brought suit in Illinois state court resulting in the Appellate Court decision that the trust was not a spendthrift trust and that the assignments were valid, followed by the Superior Court decree adjudging them valid.26 Proceedings for 1924 through 1929 were then resolved by the Board applying the state decision, only for the Circuit Court of Appeals to reverse again.27
The Supreme Court granted certiorari because of the asserted conflict with the state court decision.28 Applying the res judicata rule to these facts shows that the new state court decree created a different legal situation precluding application of the prior federal judgment.29
The judgment relating to the income for 1923 is not conclusive in this proceeding as res judicata.30
Whether the validity of the assignments is a question of local law determined by the decision of the state court?31
The question of the validity of the assignments is a question of local law because the donor was a resident of Illinois and his disposition of the property in that State was subject to its law.32 By that law the character of the trust, the nature and extent of the interest of the beneficiary, and the power of the beneficiary to assign that interest in whole or in part are to be determined.33 The decision of the state court upon these questions is final.34
Yes. The ESTABLISHED FACTS show that the donor was a resident of Illinois and the trust property was located in that state.35 The Appellate Court of Illinois reviewed Illinois decisions and held that the trust was not a spendthrift trust, upholding the assignments as valid.36 The Superior Court of Cook County then entered its decree finding the assignments to be voluntary assignments of a part of the interest of Edward Tyler Blair in the trust estate and adjudging them valid.37
The decision of the state court upon these questions is final and it is not open to the Government to argue that the trust was under Illinois law a spendthrift trust.38 Applying the rule to the ESTABLISHED FACTS confirms that the state court suit was between the trustees and the beneficiary and his assignees.39 The decree determined as between these parties the validity of the particular assignments without any basis for a charge that the suit was collusive.40 The trustees were entitled to seek the instructions of the court having supervision of the trust and the appellate court reached a deliberate conclusion after reviewing the decisions of the Supreme Court of the State.41
The validity of the assignments is a question of local law determined by the decision of the state court.42
Whether, treating the assignments as valid, the assignor was still taxable upon the income under the federal income tax act?43
The tax is upon income as to which in the general application of the revenue acts the tax liability attaches to ownership.44 The beneficiary of a trust is the one entitled to the beneficial interest and valid assignments of that interest make the assignee the beneficiary entitled to receive the income.45 Nothing in the revenue acts denies the assignee that status or precludes valid assignments of the beneficial interest.46
No. The ESTABLISHED FACTS establish that Edward Tyler Blair assigned specified portions of his interest in the net income to his children and that the trustees accepted the assignments and distributed the income directly to the assignees.47 The will entitled the petitioner during his life to the net income of the property held in trust so that he became the owner of an equitable interest in the corpus of the property.48 The interest was present property alienable like any other, in the absence of a valid restraint upon alienation.49 The beneficiary may thus transfer a part of his interest as well as the whole.50
Applying the rule to the ESTABLISHED FACTS demonstrates that the assignments were valid transfers of the specified interests of the petitioner as the life beneficiary of the trust.51 The assignees thereby became the owners of the specified beneficial interests in the income.52 The tax here is not upon earnings taxed to the one who earns them nor is it income attributable to the taxpayer by reason of the application of the income to the discharge of his obligation.53 There is no question of evasion or of the taxpayer’s retention of control.54
The Circuit Court of Appeals erred in holding that the petitioner had no interest in the corpus and could not dispose of the income until he received it.55
Treating the assignments as valid, the assignor was not still taxable upon the income under the federal income tax act.56