conduit theory

Conduit Theory

A theory stating that an investment firm passing all capital gains, interest, and dividends onto their customers/shareholders shouldn't be levied at the corporate level like most regular companies are.

Notes:

Basically the firm passes income (without taxing themselves) directly to the investors who are then taxed as individuals. This theory means investors are taxed once on the same income, whereas in regular companies investors are taxed twice. Both when the company reports income and when dividends are received. An example is a REIT or mutual fund company.

See also: Capital Gain, Dividend, Income Tax, Mutual Fund, REIT

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Conduit theory

A theory that because investment companies are merely conduits for capital gains, dividends, and interest, which are in fact passed through to shareholders, the investment company should not be taxed at the corporate level.

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conduit theory

The theory that states that because regulated investment companies merely act as conduits for the passage of dividends, interest, and capital gains to stockholders, these income items should not be taxed once to a company and again to the company's stockholders. If an investment company complies with certain federal regulations, the income is taxed only to the stockholders receiving the distributions. Also called pipeline theory. See also Subchapter M.