Appeal from the Circuit Court of Cook County; the Hon. Earl
Arkiss, Judge, presiding.
PRESIDING JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:
Plaintiffs, Robert M. and Eleanor Lee Wolters, husband and wife, filed a complaint in the circuit court of Cook County pursuant to the provisions of the Administrative Review Act (Ill. Rev. Stat. 1979, ch. 110, par. 264 et seq.) to obtain judicial review of a decision rendered by the Illinois Department of Revenue (Department), affirming the denial of refunds to plaintiffs as joint taxpayers for State income tax paid on money disbursed as alimony in tax years commencing after December 31, 1973, through December 31, 1976. The circuit court affirmed the Department's decision. Plaintiffs' timely appeal followed. On appeal, plaintiffs contend that: (1) the money disbursed as alimony was received by them as a nontaxable trust; (2) inclusion of alimony in both payor's (ex-husband) and payee's (ex-wife) taxable incomes constitutes double taxation; and (3) payment of State income tax on those earnings used to meet alimony obligations is inequitable. For the reasons that follow, we affirm the circuit court's decision.
Pursuant to the divorce settlement agreement entered into by and between plaintiff-husband and his former wife, Alice G. Wolters, dated May 15, 1973, plaintiff-husband agreed to make bimonthly payments of alimony and child support to his former wife. In tax years commencing after December 31, 1973, through December 31, 1976, plaintiffs deducted alimony paid to Alice Wolters from their joint State income tax returns. Each year, the Department refused to process the returns as filed and treated plaintiffs' alimony deduction as a mathematical error. As a result, plaintiffs filed claims for refund contending that, pursuant to section 2-203(a)(2)(I) *fn1 of the Illinois Income Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 1-101 et seq.) (the Income Tax Act), and article IX, section 3(a) of the Illinois Constitution, they had a right to deduct the husband's alimony payments from Illinois base income. The Department denied the claims for refund and plaintiffs' timely protests followed.
The first issue before this court is whether the money disbursed as alimony was received by plaintiffs as trustees of a nontaxable trust or whether it was received by them as taxable income.
In support of their position that the money paid as alimony was actually the res of a nontaxable trust, plaintiffs cite Hanley v. Kusper (1975), 61 Ill.2d 452, 337 N.E.2d 1, for the proposition that the creation of a trust to avoid income taxes is sanctioned by the Illinois Supreme Court. By relying on Hanley, plaintiffs have overlooked the fact that the existence of the trust itself must be established before the purpose of the trust becomes relevant. It is our opinion that plaintiffs have failed to establish this prerequisite.
• 1 It is unclear from the record whether plaintiffs were pleading the existence of an express trust *fn2 or an implied trust. Thus, we will address the requirements of each to the extent necessary. An express oral trust of personal property is valid if the acts or words relied on to create the trust are so unequivocal as to lead but to one conclusion. If the evidence is doubtful or capable of reasonable explanation upon any other theory, it is not sufficient to establish an express oral trust. (Price v. State (1979), 79 Ill. App.3d 143, 148-49, 398 N.E.2d 365.) In the pending case, plaintiffs present the following argument for the existence of an express oral trust:
"The decree of divorce between taxpayer, Robert M. Wolters, and his ex-wife required taxpayer to pay stated sums to his ex-wife from money that taxpayer was to receive in the future. Such money was earmarked for the ex-wife by the court, and taxpayer had no beneficial interest whatsoever in it. It was therefore a trust fund, and not properly taxed as income by the Department of Revenue."
It is our opinion that the aforementioned argument consists of nothing more than a series of unsubstantiated conclusory statements and that the terms of the settlement agreement are readily capable of an alternative explanation. Although plaintiff-husband has a legal obligation to pay stated sums to his former wife as alimony and support, the agreement does not mandate that this obligation be met by future income. In fact, plaintiffs admit that the obligation to pay exists whether or not plaintiff-husband is receiving any income at all. Thus, the obligation can reasonably be met by drawing on accumulated savings, selling stock or other valuable property, procuring loans, or even by drawing on the income or savings of plaintiff-husband's current wife. Moreover, neither the divorce court nor plaintiffs established separate bank accounts or took any other action to "earmark" particular funds for payment as alimony. Thus, we find that the acts and words relied on by plaintiffs to create a trust do not unequivocally demonstrate the requisite intent.
• 2 Similarly, plaintiffs have also failed to establish the existence of an implied trust, either as a resulting trust or a constructive trust. By definition, a resulting trust is imposed by operation of law to effectuate the intent of the parties. (In re Estate of Wilkening (1982), 109 Ill. App.3d 934, 943, 441 N.E.2d 158.) As discussed, plaintiffs have not demonstrated that the requisite intent existed. Finally, a constructive trust arises when there is a breach of a fiduciary relationship or when fraud is proved. (Williams v. Teachers Insurance & Annuity Association (1973), 15 Ill. App.3d 542, 546, 304 N.E.2d 656.) Clearly, neither element is at issue in the pending case. *fn3
• 3 Furthermore, even if all elements necessary to create a trust had been established by plaintiffs, the corpus of the trust would not have escaped taxation as income to plaintiffs. The rule that income is not taxable until realized has never meant that a taxpayer who has fully enjoyed the benefit of the economic gain represented by his right to receive income, can escape taxation because he did not actually receive the money himself. (United States v. Kirby Lumber Co. (1931), 284 U.S. 1, 76 L.Ed. 131, 52 S.Ct. 4 (taxpayer liable for income tax on earnings paid directly to his creditors); Corliss v. Bowers (1930), 281 U.S. 376, 74 L.Ed. 916, 50 S.Ct. 336 (taxpayer-settlor liable for income earned by a revocable trust even though income was paid directly to the beneficiaries).) In the landmark decision, Helvering v. Horst (1940), 311 U.S. 112, 85 L.Ed. 75, 61 S.Ct. 144, the United States Supreme Court expressed the underlying rationale behind Kirby and Corliss:
"The taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them.
The power to dispose of income is the equivalent of ownership of it." 311 U.S. 112, 117-18, 85 L.Ed. 75, 78-79, 61 S.Ct. 144, 147.
• 4 Thus, the key factors in the determination of income tax liability on earnings are control over the money and readily realizable economic benefit derived from that control. (Rutkin v. United States (1952), 343 U.S. 130, 137, 96 L.Ed. 833, 838, 72 S.Ct. 571, 575.) In the case at bar, plaintiffs clearly had control over the distribution of their earnings. Under their direction, a portion of their earnings was paid to Alice Wolters. Although plaintiff-husband was legally obligated to make those payments, the choice was still his. He alone exercised control over his earnings and derived the immediate benefit of not being penalized for failure to meet that obligation. In that respect, the alimony obligation is no different than any other contractual obligation. For example, when a mortgage payment is automatically paid to the mortgagor every month out of funds in the mortgagee's bank account, those earnings used to pay the mortgage do not escape income tax liability to the mortgagee. The mortgagee may not have actually seen the funds, he may not even have written the mortgage check, ...