Under the conduit theory of taxation which of the following statements are TRUE

  What gets changed   Existing value – Sample   Revised value - Sample   Where all this will reflect   Scheme name ABC Mutual Fund - Regular - Dividend (Payout / Reinvestment)

ABC Mutual Fund - Regular - Daily Dividend (Payout / Reinvestment)

ABC Mutual Fund - Regular - Weekly Dividend (Payout / Reinvestment)

ABC Mutual Fund - Regular - Daily IDCW (Payout / Reinvestment)

ABC Mutual Fund - Regular - Weekly IDCW (Payout / Reinvestment)

79. Which of the following statements describe the conduit theory of taxation?I.A fund is not taxed on earnings it distributes provided distributions equal 90% ormore of net investment income.II.Earnings distributed by a regulated investment company are taxed three times.III.Dividends and interest are passed through to the investor without the fund beingtaxed.IV.Dividends and interest accumulate tax free to the shareholder.A) II and III.B) I and IV.C) I and III.D) II and IV.Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on theincome retained, provided it distributes at least 90% of its net investment income. Theinvestor benefits because the income is only taxed twice (at the corporate level and at theindividual level), and avoids taxation at the fund level. There is no tax-free accumulationfor the shareholder.

Reference:10.8.1.2in your License Exam Manual.Question ID:19619780. An investor who owns XYZ stock is optimistic about the long-term growth potentialof the company. However, the stock, currently priced at $58, has made a sharp advance inthe last week and the investor wants to lock in a minimum price in case the share pricedrops. Which of the following option transactions will help meet the investor's objective?

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Mathematics: A Practical Odyssey

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Reference:4.3.1in your License Exam Manual.Question ID:2683281. A member firm wants to give a gift to a registered representative of another memberfirm. Which of the following would be applicable to the gift?

Reference:15.1.3.2in your License Exam Manual.Question ID:25049

What Is Conduit Theory?

Conduit theory is a theory stating that an investment company that passes all capital gains, interest, and dividends on to its shareholders shouldn't be taxed at the corporate level like most regular companies.

Most mutual funds qualify as a regulated investment company, which gives them conduit status and requires them to be exempt from taxes at the corporate level.

Understanding Conduit Theory

Conduit theory can also be known as pipeline theory. The theory is based on the idea that companies passing all capital gains, interest, and dividends to their shareholders are considered conduits, or pipelines.

Rather than actually producing goods and services in the way that regular corporations do, these companies serve as investment conduits, passing through distributions to the shareholders and holding their investments in a managed fund.

When distributions to shareholders are made, the firm passes untaxed income directly to the investors. Taxes are only paid by the investors who incur income tax on the distributions. Conduit theory suggests that investors in these types of firms should only be taxed once on the same income, unlike in regular companies.

Regular companies see double taxation on both the income of the company and then income on any distributions paid to shareholders, which is an issue of considerable debate. 

Key Takeaways

• Conduit theory states that an investment company that passes all capital gains, interest, and dividends to its shareholders shouldn't be taxed at the corporate level.
• Conduit theory can also be known as pipeline theory, that these companies are considered conduits, or pipelines.
• Regular companies see double taxation on both the income of the company and income on any distributions paid to shareholders. 
• Most mutual funds are conduits that qualify for tax exemption as regulated investment companies. 
• Some types of companies that may be considered conduits include limited partnerships, limited liability companies, and S-corporations.

Conduit Companies

Most mutual funds are conduits that qualify for tax exemption as regulated investment companies.

Other types of companies that may also be considered conduits include limited partnerships, limited liability companies, and S-corporations. These companies are exempt from income taxes. Fidelity is one of the largest, most well known S-corporations, filing for the status in 2007. As an S-corporation it is exempt from taxes.

Real estate investment trusts (REITs) also have special provisions that allow them to be taxed as partial conduits. In most cases, real estate investment trusts will be allowed to deduct the dividends they pay to shareholders, reducing their taxes paid through the deduction.

Conduit Mutual Funds

Mutual funds register as regulated investment companies in order to allow for the benefits of tax exemptions. This is an important aspect of consideration for all managed funds that pass through income and dividends to their shareholders. Fund accountants serve as the primary managers of fund tax expenses.

Regulated investment companies that are exempt from taxes have the benefit of lower annual operating expenses for their investors. Funds will include details on their tax exempt status in their mutual fund reporting documents.

What is the conduit theory?

Which of the following statements describes the pipeline theory of taxation?

What is pipeline theory?

Which of the following is true regarding a summary section and a statement of additional information for management investment companies?