Which of the following statements is incorrect regarding common and collective funds?

Which of the following statements is incorrect regarding common and collective funds?

• A. Both common and collective funds are designed to be exempt from income tax.
• B. Only common funds are designed to be exempt from income tax, since collective fund participants are already tax-exempt.
• C. Collective funds are typically aimed at institutional investors.
• D. Common funds can include a variety of asset types.

Answer: (B)

The statement indicating that only common funds are designed to be exempt from income tax is incorrect because both common and collective funds can be structured to provide tax benefits. Collective funds are predominantly utilized by institutional investors, such as pension plans and charitable organizations, which are usually already tax-exempt entities. Therefore, the design of collective funds does not prioritize income tax exemption as it does for common funds, which typically cater to a broader range of investors, including taxable entities. Both types of funds are generally structured to achieve favorable tax treatment, but their tax-exempt nature can differ based on the participants and fund structures involved. Recognizing the objective of collective funds as facilitating investment for tax-exempt organizations clarifies that the statement in question misrepresents the tax attributes of both fund types.

The statement indicating that only common funds are designed to be exempt from income tax is incorrect because both common and collective funds can be structured to provide tax benefits. Collective funds are predominantly utilized by institutional investors, such as pension plans and charitable organizations, which are usually already tax-exempt entities. Therefore, the design of collective funds does not prioritize income tax exemption as it does for common funds, which typically cater to a broader range of investors, including taxable entities.

Both types of funds are generally structured to achieve favorable tax treatment, but their tax-exempt nature can differ based on the participants and fund structures involved. Recognizing the objective of collective funds as facilitating investment for tax-exempt organizations clarifies that the statement in question misrepresents the tax attributes of both fund types.