Income averaging for all taxpayers was a way to effectively lower the tax rate on this year’s income by spreading it over a number of prior (lower-income) years to find an average tax rate for it. The general 4-year income averaging rule expired in 1986. Currently, income averaging can only be used by farmers and fishermen for their business income and, in some cases, for lump-sum retirement plan distributions.
A mutual-fund distribution allocated to gains realized on the sale of fund portfolio assets. You report the distribution as long-term capital gain even if you held the fund shares short term.