Dissenting Opinion by
Me. Justice Roberts:I am unable to agree that the Principal and Income Act, of 19471 mandates that capital gains2 distributions of regulated investment companies or mutual funds be allocated to principal. My consideration of the problem leads me to conclude that a more reasonable construction of that Act would dictate an allocation to income.
Section 5(1) of the Principal and Income Act of 1947 provides that “where the trustee shall have the option of receiving a dividend, either in cash or in the shares of the distributing corporation, it shall be considered as a cash dividend and deemed income, irrespective of the choice made by the trustee.” Act of July 3,1947, P. L. 1283, as amended, 20 P.S. §3470.5. In the present case, not only did the trustee have such an option, but he elected to receive the distribution in cash. The majority, while recognizing that the literal language of §5(1) would mandate the allocation of the disputed distribution to income, nevertheless concludes *476that the distribution is removed from the ambit of that section by reason of §5(3).3 I disagree. In my view, the application of §5(1) to require the allocation of capital gains distributions of mutual funds to income would be more consonant with the language of the Act and the intent of the Legislature.
In concluding that the allocation of capital gains distributions of mutual funds is controlled by §5(3), the majority adopts and relies upon the so-called “conduit theory”. Thus, the majority disregards the intervention of the mutual fund as a separate entity and treats the gains realized on the sale of securities held directly by a mutual fund as being equivalent to the gain realized on the sale of securities held directly by á trust.
I am not persuaded that the “conduit theory” is an accurate characterization of the relationship between mutual funds and those holding shares in the mutual fund. Were the fund merely a conduit, any single *477transaction would result in the'same economic consequences to the fund and to those holding shares therein. This, however, can be demonstrated not to be the case. ; -
When an investor purchases shares in an Open-end mutual fund, the most common type, he pays an amount which is directly proportionate to the' current market value of the securities 'held by the fund.4 However; since the current market value of securities held -by the mutual fund may be higher, or lower than the-amount paid by the fund for such securities, their sale by the fund may, and most often does, result in different economic consequences to the owners of mutual fund shares than it does to the mutual fund itself. "
'Thus, while the conduit theory views the owner- of shares in a mutual fund as merely owning a fractional interest in the fund’s portfolio of securities, nevertheless such- a mutual fund shareholder may realize a gain by disposing of his shares in the mutual fund itself, while the fund continues to hold the securities whose appreciated value represents the basis for the mutual fund shareholder’s gain. Conversely, the fund may realize a gain by the sale of securities at a price which is no higher than the cost of the mutual fund shareholder’s fractional investment in the- fund.
Given this disparity in economic consequences which may arise from the sale of securities by the fund, it appears unreasonable to-ignore the existence of the mutual fund as an economic entity separate and apart from its investors. The recognition of the fund’s separate existence as a matter-of‘economic- reality-requires the rejection of the conduit theory. /*' '
I believe a more accurate characterization of the relationship between mutual, funds, and. their share*478holders is the one suggested by Professor Bogert.5 As he views that relationship, shares in a mutual fund represent an interest in an investment business, the income and gains of which constitute profits of the operation of such business. Under this analysis, securities held by a mutual fund are treated as “stock in trade”, not capital assets, and the gain realized on their sale as an operating profit. Accordingly, distributions arising from this source should be allocable to income, in the same manner as any cash dividend that results from the operation of a business for profit.
Although this approach, strongly urged by Professor Bogert, has been adopted by most courts which have considered the problem,6 the majority today has rejected it on the basis of considerations which are not relevant to the purposes of the Principal and Income Act of 1947, and which I find unpersuasive.
While ignoring the fact that the very regularity and volume with which mutual funds trade securities supports Professor Bogert’s analysis aixd undermines the theory that such securities should be viewed as capital assets rather than “stock in trade”, the majority appears to rely heavily on tax considerations in determinixig the appropriate allocation. However, the treatment accorded capital gains distributions by mixtual funds for purposes of federal taxation is not determixxative on the issue of the allocation of such distributions under the Principal and Ixxcome Act of 1947. It should be clear that policy considerations which may *479prompt a particular tax treatment by Congress are not necessarily the same considerations which are relevant to an accommodation of the respective claims of life tenants and remaindermen.7 Thus, I would not permit life tenants to be deprived of distributions which properly should be accorded to them merely because an allocation of such distributions to principal may bring about a particular federal tax result.
Moreover, the fact that other state legislatures have seen fit to enact specific provisions which require the allocation of such capital gains distributions as are here involved to principal is not dispositive of the construction of our Act. We deal with the intent and purposes of that Act as now written- — -without such a specific provision. In the event that the Legislature determines to amend the Principal and Income Act of 1947 to deal explicitly with this problem, it may well decide not to follow those jurisdictions which have resolved the dispute in favor of principal. It may seek an accommodation similar to that embodied in the 6% stock dividend rule.8 In any event, this Court should not decide the issue raised on this appeal by attempting to anticipate a legislative determination, nor should it decide the issue by reliance on factors only appropriate to legislative consideration.
*480I am convinced that §5(1) of the Principal and Income Act of 1947 should govern the distribution- here in dispute. I reach this conclusion not only on the-basis of Professor Bogert’s economic analysis .but -also - because the application of §5(3) to require-the alio-, cation of capital gains distributions to principal will; result in. a yield to life tenants' of generally less than 3%, in my view a completely inadequate return. Absent a clear and explicit expression of such-intent, I am unable to attribute a design to the legislature which would produce this result.
In a recent nationwide study of 330 open-end investment companies,9 it was revealed that 295 yielded only 3% or less in distributions derived solely from dividend income. Of the 35 remaining funds studied, 9 yielded less than 3.5% and only 14 yielded 4% or higher, from such source. None yielded over 5.2%. As can readily-be seen, over 89% of the funds studied yielded 3% or less in income distributions in the year studied. Thus, under , the result reached by the majority, income beneficiaries,, traditionally the primary' object. of the settlor’s bounty,10 Avill be unfairly deprived of a reasonable return on the trust corpus. Moreover, another recent study demonstrates that capital gains distributions have averaged approximately 2.3%.11 Even if capital gains distributions were to be allocated to the life tenant along with income distribu*481tions, the resulting allocation would not be disproportionate.
Under these circumstances, the result reached by the majority unnecessarily deprives the income beneficiary of that which the settlor intended him to re-. ceive. In addition, yet another undesirable consequence of the majority’s holding is that because of the: low income yield of mutual funds, and the resulting deprivation to the life tenant, trustees may no longer be able to avail themselves of mutual funds for fiduciary investment purposes.12 As indicated previously, the return to income beneficiaries derived solely from mutual fund dividend income tends to be below 3%. Thus, the allocation of capital gains distributions of such funds to principal, as compelled by the majority, may preclude trust participation in most mutual funds. I see no justification for reaching a result which may have the equally undesirable and unnecessary effect of either depriving income beneficiaries of a reasonable, return or forcing trustees to withdraw from their investment in mutual funds.
Accordingly, I am led to conclude that the application of §5(1) to require capital gains distributions to income would produce a more equitable result and one more consonant with the intent of settlors and the Legislature, as embodied in the Principal and Income Act of 1947.
Act of July 3, 1947, P. D. 1283; §5, as amended, 20 P.S. §3470.5.
“Capital gains” is a specialized term designed to indicate the federal tax consequences of certain" specified, transactions. Since it is indicative "of a tax result rathér than responsive to economic reaUty- or state law governing the allocation of distributions between the various interests in a trust, it is-somewhat misleading in the present context. However, since the term is employed by the majority, I will use it in the interest of uniformity.
The majority concludes that the pertinent language of §5(3) to be applied to the present distribution is: “All disbursements of corporate assets to the stockholders, whenever made, which are designated by the corporation as a return of capital or division of corporate property, shall be deemed principal. Any profit or loss resulting from the sale or liquidation of corporate shares shall enure to or fall upon principal.”
It should be noted that the disputed distribution was not denominated by the mutual fund as “á return of capital or division of corporate property” but as a distribution “payable from realized capital gains.” Nor could it properly be designated as “a return of capital or division- of corporate property” since it is clearly and simply a distribution of profits realized on the sale of shares held by the fund for more than 6 months. Under such circumstances, the majority’s reliance on §5(3) to, require an allocation to principal may be justified only if the, capital gains distribution here involved is the result of “a profit . . . from the sale of . . . corporate shares” referred to in §5(3) was obviously intended to mean shares held directly by the trust, the applicability of §5(3) in this case is dependent on the validity of the “conduit theory.”
For present purposes,- we may disregard commissions or other such fees. '
Bogert, Trusts and Trustees, §858, p. 553 et seq. (2d ed. 1962).
See, e.g., Rosenburg v. Lombardi, 222 Md. 346, 160 A. 2d 601 (1960); Gardner’s Trust, 266 Minn. 127, 123 N.W. 2d 69 (1963); Coates v. Coates, 304 S.W. 2d 874 (1957 Mo.); Briel v. Moody, 77 N.J. Super. 306, 186 A. 2d 314 (1962); Matter of Byrne, 192 Misc. 451, 81 N.Y.S. 2d 23 (1948); contra, Tait v. Peck, 346 Mass. 521, 194 N,E. 2d 707 (1963).
It should, of course, be equally clear that a Revenue Ruling (Rev. Ruling 60-385, C.B. 1960-2, p. 77) which pertains only to charitable remaindermen and which depends on the applicable state law should not be a factor in determining what that state law is to be with regard to all remaindermen and income beneficiaries.
“Corporate distributions made to a trustee in the shares of the distributing corporation, however described or designed by the distributing corporation, shall be deemed principal but if the number of shares of any class distributed to shareholders of such class is six percent (6%) or less of the number of shares of that class outstanding on the record date for such distribution, the shares so distributed shall be deemed income.” Act of July 3, 1947, P. L. 1283, §5, as amended, 20 P.S. §3470.5(1).
Wiesenberger, Investment Companies 112-17 (25th ed. 1965). The 330 mutual funds studied included all the open-end investment companies offered for sale in the United States for which, current information could be obtained. The study was for the year ending December 31, 1964.
See Pew Trust, 411 Pa. 96, 109, 191 A. 2d 399, 406 (1963).
See Bogert, Trusts and Trustees, §858, p. 555, n.45.5 (2d ed. 1962). Although these figures are for 1960, there is no indication that the distributions in question fluctuate greatly from year to year.
See Bogert, Trusts and Trustees, §858 (2d ed. 1962).