Compare the tax consequences of owning stocks with funds. With the realization of gains and losses under your control, tax planning is easy. That's not the case with funds. Fund managers know distributions rankle shareholders, but they have no choice. Since most fund managers are compensated based on pretax, not aftertax, returns, taxes don't get much attention.
Most shareholders direct the fund company to reinvest the distributions by buying more shares.
But to the Internal Revenue Service, it doesn't matter that the investor left the money in the fund. The distribution is a taxable event. Of course, this is not the only tax paid on mutual funds. Remember, investors also face capital gains taxes when they sell appreciated shares. The annual distributions effectively force fund owners to prepay some of those taxes.