Definition of conduit theory

theory regulating investment companies such as Real Estate Investment Trusts and mutual funds holding that since such companies are pure conduits for all capital gains, dividends, and interest to be passed through to shareholders, the investment company should not be taxed at the corporate level. As long as the investment company adheres to certain regulations, shareholders are therefore taxed only once-at the individual level-on income and capital gains. In contrast, shareholders of corporations are taxed twice: once at the corporate level in the form of corporate income taxes and once at the individual level in the form of individual income taxes on all dividends paid by the corporation. The same concept defines a conduit IRA, where funds in a qualified retirement plan with one employer can be held without tax consequences pending their rollover into a new employer's qualified plan or trust.