NEW YORK –- Shareholders in mutual funds saw big returns on their investments thanks to Wall Street's strong performance in 2006, but they also wound up paying a hefty tax bill to Uncle Sam from their distributions.

A report by Lipper, a fund research company, found that shareholders in taxable fund accounts paid at least $23.8 billion in taxes.

That figure, said Lipper, reflects the impact on investors who simply held their funds and reinvested their distributions.

The company added that those shareholders who sold fund shares during the year would have paid even higher taxes.

One news source reported that overall mutual funds distributed a record $418.5 billion in 2006. That included short-term and long-term capital gains, as well as dividend and interest income.

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That distribution exceeds the fund distribution record previously set in 2000 of $376.6 billion.

The high payout, said the news source, reflects the strong performance of the stock market last year, which allowed shareholders to rack up big gains. Among the top-performing equity fund categories in 2006 were foreign and emerging markets, real estate and utilities.

Mutual funds also reportedly paid out more taxable distributions because they can no long carry forward the steep losses incurred during the bear market which had been used to offset gains in recent years.

Lipper found that over the past 20 years, the average investor in a taxable stock fund gave up the equivalent of 17 percent to 44 percent of their returns to taxes.

To minimize future tax hits, the company recommends that investors hold tax-efficient funds in their taxable accounts, such as index-funds or tax-managed funds.

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