Preferential Dividends in the Regulated Investment Company Context

Posted: 1 Apr 2006


Regulated investment companies, more commonly known as mutual funds, can generally eliminate their corporate-level tax by availing themselves of the dividends paid deduction, a corporate-level deduction for dividends paid by the RIC. However, there is a significant potential pitfall. The dividends paid deduction is disallowed in the case of a preferential dividend, as provided in section 562(c) of the code.

This report considers the applicability of the preferential dividends disallowance to RICs. The report (1) reviews the legislative history of the prohibition on preferential dividends, with particular focus on its applicability to RICs; (2) discusses the structure of section 562(c) and selected issues in its application; and (3) discusses in considerable detail the application of preferential dividends prohibition to a RIC with multiple classes of stock. Finally, the author concludes that, as a tax policy matter, the preferential dividends prohibition should not apply to RICs.

Suggested Citation

Baneman, Roger J., Preferential Dividends in the Regulated Investment Company Context. Tax Notes, Vol. 111, No. 1, April 3, 2006, Available at SSRN:

Roger J. Baneman (Contact Author)

Shearman & Sterling LLP ( email )

599 Lexington Avenue
New York, NY 10022-6069
United States

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