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The only think I can think of is that the funds sold holdings for a gain and then distribute those gains to the funds shareholders proportionally based on the number of shares you hold. Then they automatically reinvest those funds into you account as additional shares. Am I on the right track?

You got it. I think the key here is to call this transaction a distribution, rather than use the blanket term, dividend. Because dividend is a specific type of distribution. Semantics...

Part of the distribution is ordinary income, short-term C.G., and long-term C.G. While these may have different tax ramifications to you, if you are reinvesting your distributions, then they will all be reinvested. It's all really one transaction.

Hope that helps.
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