SERIES 6 ASKS ABOUT PIPELINE THEORY ON MUTUAL FUND TAXATION

The Series 6 exam asks about the "pipeline" or conduit theory regarding distributions paid by a mutual fund to its shareholders.  This theory explains how shareholders of a mutual fund are not subject to triple taxation on those dollars paid to them by a mutual fund representing dividends.  As an example, suppose ABC Fund owns 100 different stocks, each one of them paying dividends to ABC Fund.  If ABC Fund pays out at least 90 percent of the dividends it receives from companies in its portfolio, then it itself is not subject to pay any tax on these dividends.  It is considered a "regulated investment company."  Imagine that there is a pipeline or conduit connecting the companies in the mutual fund's portfolio with the shareholders of the mutual fund.  The pipeline bypasses the mutual fund, thus eliminating any need for the mutual fund to pay taxes.