Enter the Nixon-era tax law. In 1969, Congress decreed that mutual funds can hand over appreciated stocks to withdrawing investors without triggering a tax bill. Lawmakers never explained why they blessed the industry with this unique break, but back then, it didn’t seem like much of a giveaway. Mutual funds rarely took advantage of it, because their investors preferred cash payouts.
I am going to assume that they didnt want to double dip on taxes, taxing the increase then taxing the income of the withdrawn investor. Nixon era was just to throw a time period and after a long time unintended consequences come into play.
"Science is the belief in the ignorance of the experts" – Richard Feynman