Blair v. Commissioner and the Assignment of Income
Explore the tax law distinction between assigning income and transferring the underlying property, clarifying how tax liability can be effectively shifted.
The U.S. Supreme Court case Blair v. Commissioner is a significant decision in federal income tax law. It addressed the question of who is liable for taxes on income from a trust when a beneficiary gives away their right to receive that income. The case explored the assignment of income doctrine, a concept that determines whether a taxpayer can shift their tax burden to another individual. The ruling provided a precedent that continues to influence tax planning involving trusts and gifts.
Factual Background of the Case
The case originated with a testamentary trust established by the will of William Blair. This trust designated his son, Edward T. Blair, as a life beneficiary, meaning he was entitled to receive the net income from the trust’s assets for his life. In 1923, Blair assigned portions of his future trust income to his children. He executed formal assignment documents transferring specified annual amounts from his interest, which the trustees acknowledged. The trustees then began to distribute the assigned income directly to Blair’s children, prompting a disagreement with the government over who should pay taxes on the funds.
The Central Legal Dispute
The central legal dispute involved two conflicting views of tax law. The Commissioner of Internal Revenue argued that the trust income was taxable to Edward Blair, regardless of the assignments. The Commissioner’s position was based on the principle that income is taxed to the individual who earns it or owns the underlying asset that produces it. The government viewed Blair’s assignments as an anticipatory arrangement to deflect his tax liability.
Blair countered that he had transferred more than just the right to receive future payments, contending he had assigned a portion of his actual property right in the trust. He argued his life interest was an equitable interest—a form of property—and the income from the transferred portions should be taxed to the new owners, his children.
The Supreme Court’s Ruling and Rationale
The Supreme Court ruled in favor of Edward Blair, reversing a lower court’s decision. The Court’s rationale hinged on the distinction between an assignment of earned income and an assignment of income-producing property. The Court determined that Blair’s life beneficiary status was not just a right to receive money; it was an equitable interest in the trust’s corpus, which qualified as a property right under state law.
Because Blair’s interest was considered property, his assignment of parts of that interest was a valid transfer of the property itself. The Court used the “fruit of the tree” doctrine, concluding that Blair had not simply given away the “fruit” (the income), but had transferred a part of the “tree” (his property interest in the trust). Once the property transfer was deemed valid, the tax liability for the income it produced shifted to the new owners, his children.
The Enduring Tax Principle
The Blair decision established a key principle: a taxpayer can legally shift the tax liability for future income to another person, provided they transfer ownership of the underlying income-producing asset. This is distinct from merely redirecting the payment of income from an asset the taxpayer continues to own.
This principle was later refined by the Supreme Court in Harrison v. Schaffner. In that case, a life beneficiary assigned a specific dollar amount of trust income to her children for just one year. The Court held this was an anticipatory assignment of future income, not a transfer of the underlying property interest, because the assignment was for a short duration.
The distinction is that to shift the tax burden, the assignment must transfer a substantial portion of the property interest. This contrasts with Lucas v. Earl, where an individual attempted to assign future salary to his spouse. The Supreme Court ruled the income was taxable to the person who earned it because one cannot assign income that has not yet been earned from personal services. The Blair case shows that when income flows from property, a transfer of that property effectively moves the tax obligation to the new owner.