Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

How can Regulated Investment Companies relieve their tax burden on income?

1. By distributing 90% of their net investment income

2. By increasing their share price

3. By limiting shareholder withdrawals

4. By investing only in tax-exempt securities

The correct answer is: By distributing 90% of their net investment income

Regulated Investment Companies, also known as RICs, can relieve their tax burden on income by distributing at least 90% of their net investment income to shareholders. This is a fundamental requirement under the Internal Revenue Code that allows them to avoid taxation at the corporate level. When RICs meet this distribution requirement, they can pass their taxable income directly to shareholders, who are then responsible for paying taxes on that income at their individual tax rates. This mechanism allows RICs to avoid double taxation — once at the corporate level and again at the individual level. While increasing share price can provide gains for shareholders, it does not directly impact the taxation of the company itself. Limiting shareholder withdrawals does not change the income distribution or alleviate any tax burden. Investing in tax-exempt securities may reduce income tax liabilities on those specific investments, but it does not apply broadly to all types of income a RIC generates. Thus, the most effective method for RICs to relieve their tax burden is through the distribution of the required percentage of their net investment income.