Investors in closed-end funds who hope for a cash distribution this year may be disappointed, and wind up with more shares of their funds instead.

Closed-end funds can generally avoid tax at the fund level by distributing at least 90% of their annual income and capital gains to shareholders in the year it is earned.

But many funds are reluctant to sell portfolio holdings in a weak market to make these distributions. The Internal Revenue Service has granted them leeway to avoid doing that.

In January, the IRS extended guidance that had earlier been granted to real-estate investment trusts and which allowed them to distribute as little as 10% in cash, with the remainder paid in stock. The extension covers publicly traded, regulated investment companies, which include closed-end funds.

The guidance applies to tax years ending on or before Dec. 31, 2009. The IRS will treat the stock distributions as a taxable distribution of property.

As a result, if shareholders are given a choice of stock or cash, but as a group request cash in an amount that exceeds the limit set by the fund, they will receive a proportionate share in cash and the rest in stock.

The IRS made the change in response to the market downturn, said Cecilia Gondor, executive vice president at Thomas J. Herzfeld Advisors Inc., a Miami investment advisory firm. Payment in stock minimizes the need to sell underlying portfolio holdings to raise cash in depressed and illiquid markets.

Though the guidance was issued to REITs in time for them to use when paying year-end 2008 distributions, the January announcement extending it to closed-end funds came too late for year-end payouts. However, the guidance may be used in 2009 by closed-end funds invested in markets that continue to suffer from illiquidity, those invested in REITs that are themselves receiving distributions in stock, those with capitalizations that have fallen to levels that jeopardize their exchange listings or those with low asset-coverage levels on leverage, Ms. Gondor said.

At least six closed-end funds did limit the cash portion of capital-gains distributions made in 2008, according to Ms. Gondor. Some did so because the distributions represented such a large portion of assets.

Joy Macintyre, a partner in the tax department at the law firm Morrison & Foerster LLP in San Francisco, said some funds were able to limit the cash portion of distributions before the IRS guidance because they received private-letter rulings from the IRS. Others may have relied on letters received by other funds or on advice from legal counsels, she said.

In December, J.P. Morgan Asset Management's JF China Region Fund Inc. made a distribution -- actually a payment of the fund's 2007 gains -- of $21.5 million, limiting the cash to be paid to 30% of the total distribution. At the time, the fund had $66 million in assets. The fund's board was concerned that a reduction in the fund's size would lead to an increase in its total expense ratio and a reduction in liquidity. Stockholders who requested cash received 47.8% in cash and the balance in newly issued stock in the fund.

U.S. Bancorp's Mexico Equity and Income Fund declared a stock dividend payable on Jan. 27, and limited the cash portion of the payout to 30% of the aggregate distribution. Stockholders who requested cash received 47.98% in cash, with the remainder reinvested in common stock of the fund.

On Jan. 30, RCM Capital Management LLC's Korea Fund announced the results of its capital-gains distribution of $220.3 million, or $90.30 a share. The fund's board limited the cash distribution to stockholders to 20% of the aggregate dollar amount of the distribution. As cash requested exceeded the limit, stockholders who requested cash received 31.6% of the distribution in cash and 68.4% in common stock.

Other funds that limited cash distributions in 2008 include the New Ireland Fund , Martin Currie Inc.'s China Fund and Baring Asset Management's Greater China Fund.