Under the 'conduit' theory, taxes payable on dividends and interest distributed by a regulated investment company are paid:

Under the 'conduit' theory, taxes payable on dividends and interest distributed by a regulated investment company are paid:

• A. By the investment company only.
• B. Only by the shareholder.
• C. By both the investment company and the shareholder.
• D. Only if distributions are made in cash.

Answer: (B)

Under the conduit theory, a regulated investment company acts like a tax pass-through. The income it earns from dividends and interest isn’t taxed at the fund level as long as the fund meets its requirements (such as distributing a substantial portion of income to shareholders). When distributions are paid to shareholders, the tax is owed by the shareholders on their own tax returns, at their individual rates, rather than by the fund. The fund itself doesn’t pay the tax on that distributed income. That’s why taxes in this setup are borne solely by the shareholder.

Under the conduit theory, a regulated investment company acts like a tax pass-through. The income it earns from dividends and interest isn’t taxed at the fund level as long as the fund meets its requirements (such as distributing a substantial portion of income to shareholders). When distributions are paid to shareholders, the tax is owed by the shareholders on their own tax returns, at their individual rates, rather than by the fund. The fund itself doesn’t pay the tax on that distributed income. That’s why taxes in this setup are borne solely by the shareholder.