OPINION.
James:
The sole question presented in this appeal is whether under section 561 of the statutes of Kentucky, the taxpayer was in receipt of income on account of the dissolution dividend received by him in 1919, or was in receipt of that income only when the affairs of the corporation were finally wound up in 1923 by final payment of the corporation's liability on account of income and profits taxes.
The material provision of section 561 reads as follows:
all debts and demands against the corporation shall be paid in full before the officers receive anything.
It is contended on behalf of the taxpayer that the distribution to the taxpayer, under the circumstances, was an illegal distribution and that the sum he received in 1919 was received by him in trust, and did not become his own property until all the liabilities of the corporation were satisfied.
The taxpayer has submitted a brief upon the subject, but is not able to submit any authority construing the above provision of the Kentucky statutes or similar provisions in other States, if any exist, in a manner suporting his position.
It is, of course, elementary that the funds of a corporation in the hands of dissolution trustees are trust funds, first, for the benefit of creditors, and thereafter for the benefit of stockholders. It is likewise elementary that a distribution to stockholders in preference of creditors creates a trust relationship which will enable the defrauded creditors to recover pro rata from among the stockholders, but our attention has been called to no case, and we know of none, which holds that a distribution to the stockholders of a corporation in proportion to their stock holdings does not then and there fix title in them of the proceeds of such distribution.
It is also elementary that directors making an improper distribution among stockholders in preference of creditors are themselves liable to the creditors in such a case, but this liability attaches to them in their official position and not to the proceeds which they may receive themselves as stockholders. The liability is measured by the debt to the creditor, and not by the sums they themselves received on account of the stock distribution. Tapley Company v. Keller, 117 N. Y. Supp. 817.
It should be borne in mind that Le Bus received the distribution here, not as an officer, but as a stockholder. Section 561, in prohibiting payments to officers, is at least open to the construction that the prohibition applies to receiving funds as officers and not as stockholders. This would be entirely consistent with the general provisions of law governing the so-called " trust-fund doctrine " as related specifically to stockholders. As so construed, the section would be particularly significant, since it would place around the dissolution of a corporation peculiar safeguards against the misappropriation of funds belonging both to creditors and stockholders in the guise of salaries and other special and preferential distributions. As an officer, Le Bus, together with the other trustees, reserved a substantial fund to meet the contingent liabilities of the corporation. It is true that it was not large enough to meet the maximum claim made by the Commissioner on account of taxes. It was, however, approximately two and one-half times the sum required to meet the liability as finally determined. The record does not disclose that there were any other substantial liabilities outstanding at the time the reserve of $120,000 was set aside. It is. apparent that Le Bus and his associates in making distribution to the stockholders distributed only that which in their best judgment and in the ultimate outcome was a safe distribution after making full and adequate provision for the payment of debts and costs of liquidation.
Notwithstanding the so-called "trust-fund doctrine," a dissolution dividend may be declared and payment may be enforced by a stockholder, even though the affairs of the corporation have not been finally wound up. Janeway v. Burn, 86 N. Y. Supp. 628, affirmed 180 N. Y. 560.
We are of the opinion tbat Le Bus received income in the year 1919 on account of the dissolution dividend here in question, and that the determination of the Commissioner with reference to that transaction is correct and must be affirmed.