Tax Equalization in Mutual Funds

Posted: 7 Jan 2011

See all articles by Steven L. Gill

Steven L. Gill

San Diego State University

Christopher Schwarz

University of California at Irvine

Date Written: December 16, 2010


By making an annual tax election, open-ended mutual funds can treat redeeming shareholders as if they have been allocated a pro-rata share of taxable gains, when in fact they have not (known as “equalization”). Equalization provides significant benefits to shareholders and funds; however it also leads to additional fund level costs. In this study, we use equalization elections to examine how managers weigh the costs and benefits of tax minimization. Overall, our results suggest both are important in the decision making process. Even though funds and investors both benefit, only ten percent of funds use equalization. Funds in larger fund families and with higher expense ratios, both proxies for the additional infrastructure necessary to calculate equalization dividends, are more likely to use equalization. Equalization is also used when its benefits are highest, such as by funds with greater redemptions and larger unrealized gains.

Keywords: tax equalization, mutual funds, tax efficiency

JEL Classification: G23, G28, M41

Suggested Citation

Gill, Steven L. and Schwarz, Christopher, Tax Equalization in Mutual Funds (December 16, 2010). Journal of American Taxation Association, Forthcoming. Available at SSRN:

Steven L. Gill (Contact Author)

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Christopher Schwarz

University of California at Irvine ( email )

Irvine, CA 92697-3125
United States

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