Series 6: 5.1.7.1. Fund Distributions

5.1.7.1. Fund Distributions

The Internal Revenue Service holds the view that most investment companies are different from other corporations because most of their income is passed on to shareholders. If investment companies were taxed like other corporations, their income would be taxed twice: first at the investment company level and then again at the shareholder level. This is called the conduit or pipeline theory of income distribution. For this reason, the IRS allows a regulated investment company to deduct all income that it distributes to shareholders from its corporate taxes. To be considered a regulated investment company by the IRS, a mutual fund must distribute at least 90% of its net income to its shareholders. Any income that is not distributed to shareholders is taxed at the fund’s ordinary corporate rate.

As a result of this rule, most mutual funds distribute almost all income