Law Commons^™

The Great Etf Tax Swindle: The Taxation Of In-Kind Redemptions, Jeffrey M. Colon

Faculty Scholarship

Since the repeal of the General Utilities doctrine over 30 years ago, corporations must recognize gain when distributing appreciated property to their shareholders. Regulated investment companies (RICs), which generally must be organized as domestic corporations, are exempt from this rule when distributing property in kind to a redeeming shareholder.

In-kind redemptions, while rare for mutual funds, are a fundamental feature of exchange-traded funds (ETFs). Because fund managers decide which securities to distribute, they distribute assets with unrealized gains and thereby significantly reduce the future tax burdens of their current and future shareholders. Many ETFs have morphed into investment vehicles that …