UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Item 1:  Report to Shareholders

SOURCE CAPITAL, INC.

2016

ANNUAL REPORT

for the year ended December 31

SOURCE CAPITAL, INC.
LETTER TO SHAREHOLDERS

DEAR SHAREHOLDERS:

Performance

Equity markets continued to move higher in the fourth quarter after overcoming the initial misgivings surrounding the results of the U.S. presidential election. In the fourth quarter of 2016, the net asset value (NAV) per share of Source Capital (or the "Fund") increased 3.29%, including the reinvestment of the distributions paid during the period. These changes compare with a 3.82% return for the S&P 500 Index, a -2.98% return for the Barclays U.S. Aggregate Bond Index and a 1.10% return for the 60/40 blended S&P 500/ Barclays U.S. Aggregate benchmark.

For the full 2016 year, the Fund increased 9.05% on an NAV basis including the reinvestment of the distributions paid during the period. These changes compare to an 11.96% return for the S&P 500 index, a 2.65% return for the Barclays U.S. Aggregate Bond Index, and an 8.31% increase for the 60/40 blended S&P 500/ Barclays U.S. Aggregate benchmark during the same period.

Open Market Repurchases

Investors in open-end mutual funds are able to transact at NAV. An open-end fund issues shares for every purchase and redeems shares for each sale at the market value of net assets. In this way, a buyer's or seller's order on any day is executed at the price determined by the fund's underlying NAV.

A closed-end fund, on the other hand, has a fixed number of shares, which are transacted on a stock exchange. Buyers and sellers meet in the marketplace to determine a price that usually results in the transaction occurring above or below NAV. A closed-end fund, therefore, can trade at varying discounts or premiums based on factors other than the market value of its net assets, such as future return expectations or emotion.

If a discount or premium remains constant over a shareholder's ownership period, then fund return will equal investor return. For example, if a closed-end fund trades at $9, a 10% discount to a $10 NAV and trades in perpetuity at a 10% discount, then a buyer today will simply receive the fund's compounded annual return. However, if the discount were to widen just prior to the disposition of shares, then that holder would receive a lower rate of return. On the other hand, if the fund trades at a premium to NAV upon sale, then the holder would receive a rate of return in excess of what the underlying assets returned.

Source Capital is a closed-end fund that has traded at both a premium and a discount. As value investors who prefer managers that practice good corporate governance, we demand the same of ourselves. Therefore, if the shares of Source Capital trade at a discount to NAV that is in excess of 10%, Source Capital may make open market repurchases on its Common Stock.¹ We view less than 10% as not much more than trading noise. We believe those shares purchased at a discount will accrete to the benefit of all remaining shareholders and, assuming a constant discount, could allow for a return in excess of what might otherwise have been achieved had there not been any share repurchases.

We provide the following simple analysis to help demonstrate the impact share repurchases can have on performance over a long period of time. For this example we assume that a fund, Fund XYZ, is trading at a 12.5% discount to its NAV and hypothetically returned 5% annually over the next 10 years. We demonstrate in the following table what Fund XYZ's returns might be if no shares were repurchased versus repurchasing 2% of the outstanding shares annually or 4% of the outstanding shares annually.²

The example above is included for the sole purpose of illustrating the concept of share repurchases and is not intended, nor should it be construed, as a representation, projection, or prediction of the Fund's performance results.

For Source Capital, we repurchased 14,849 shares in the fourth quarter of 2016 at an average discount of 12.7%. While the number of shares purchased was modest, it was accretive to shareholders by adding $0.01 per share to the Fund's NAV and 0.02% to the Fund's

¹  Any such repurchases would be subject to various factors, including limitations imposed by the federal securities laws governing the repurchase of an issuer's stock by the issuer and FPA's ability to raise cash to repurchase shares of the Fund's common stock in a tax-efficient manner. There is no assurance that the Fund will purchase shares at any specific discount level or in any specific amounts.

²  Since the CAGR is in excess of the amount of shares repurchased in both Scenarios B and C, there would be not be the dilutive impact of a higher expense ratio, all else equal.

SOURCE CAPITAL, INC.

NAV return for the year. While such action increases net asset value per share, it does reduce the size of the Fund. We accept that reduction in assets managed in the spirit of thoughtfully creating value for shareholders—a position that often feels contrary to typical industry practice. Our longer-term shareholders would be the beneficiaries. Hopefully, such value-inducing actions will cause the Fund to trade at a narrower discount than it might otherwise.

Lower fund assets do cause fixed and variable costs to deleverage.³ However, as it stands today and assuming the example above, share repurchases would still be accretive to shareholders.

We believe Source Capital should deliver good risk-adjusted returns over time and if our shareholder friendly actions are well-received, then perhaps the Fund will trade at a lower average discount than it otherwise would. On the other hand, all else being equal, a larger discount allows us to repurchase at a more attractive valuation and would therefore provide greater accretion.

Portfolio

Our exposure to financial firms benefited 2016's performance as exhibited in the tables below.⁴ All but one of the winners were financials in Q4 and full-year periods, the opposite of what we saw in Q1. The losers lacked any particular theme.

As shown in the tables above, the Fund's performance for the year was mostly driven by the equity portion of the portfolio and our equity book was led by our overweight to financials. The tale of our fluctuating financial exposure is emblematic of our approach to investing: buy good businesses when others don't want to own them and avoid them when they're popular. Owning the unloved can be trying at times as these companies may be suffering from general economic weakness, industry malaise or internal missteps. Since we lack any ability to discern the bottom in a company's earnings or stock price, our initial purchases are generally early. That can be uncomfortable for the holder—or worse, the holder of the holder, like shareholders of a fund, for example. The more removed one is from primary research, the less comfort understandably exists in observing a manager maintain a position while it's declining in price. Worse, if in that instance the manager were to increase its stake, a fund investor's discomfort may compound. We don't let our judgment become unduly influenced by stock price, preferring to focus instead on fundamentals.

We generally lack the foresight to build an entire position once a bottom has been reached in a sector or asset class for that matter. As a result, we regularly endure periods of underperformance while waiting for our thesis to play out but our buying program generally continues as long as our opinion remains constant.

We established our positions in financials when we assumed management of the Fund in December 2015. As prices declined in early 2016, we bought more. Our investment in financials contributed to Source Capital's performance lagging its exposure for a period of time. We had plenty of phone calls from shareholders questioning the wisdom of the investment. Those calls reached a crescendo in Q1 2016 when 4 of the 5 losers in the period were the same financials that round out the winners list in Q4. No surprise that Q1 was a bottom for the sector (and the market). Since we are closer to the investments than our shareholders, we can appreciate their discomfort. And yet discomfort is a kind of petri dish that cultures opportunity. Anxiety creates selling pressure and lower prices, which allows us to invest with a margin of safety.⁵ The comfort of going it alone is, for us, preferable to that of running with the crowd.

³  E.g., management fee and fund operating expenses.

⁴  Reflects the top contributors and top detractors to the Fund's performance based on contribution to return for the quarter and year. Contribution is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented.

⁵  Buying with a "margin of safety," a phrase popularized by Benjamin Graham and Warren Buffett, is when a security is purchased for less than its estimated value. This helps protect against permanent capital loss in the case of an unexpected event or analytical mistake. A purchase made with a margin of safety does not guarantee the security will not decline in price.

SOURCE CAPITAL, INC.

In periods of such solitude, we hope we succeed in providing you a modicum of reassurance as we tried to do when we articulated our rationale for financials in our Q2 2016 commentary.

Buying at a discount to a business's intrinsic value (as we did with the banks) offers downside protection but that doesn't mean we'll always make money. We can justify an investment if the upside case is much higher than the downside. Sometimes, though, the downside case materializes and we take a loss. We wouldn't characterize that as a mistake (though we can point to our share of blunders). Our long-formed habit of leaning into the wind will continue and Source Capital's performance will disconnect from its benchmarks at times as a result.

What happens over short time frames should be entirely irrelevant. We instead maintain our focus on the longer-term goal of achieving equity rates of return with less risk than the market and avoiding permanent impairment of capital. We appreciate that investment risk, like beauty, is in the eye of the beholder. We define it as losing money. For others, volatility, the institutionally accepted definition of risk, may be more appropriate. If we have $1,000 today and it drops to $750 next year, but then is worth $2,000 five years from now, we've compounded our capital at almost 15%. If, on the other hand, the 25% drop to $750 causes someone to sell, then they've unfortunately let price rather than value be their guide.

If volatility is your definition of risk, then we'd recommend not investing in stocks as there will invariably be a point in time that the markets will conspire against you and, in a meaningful correction, take prices down 20% or 30%...or more. We endeavor to create a portfolio that shouldn't bear the worst of such a downdraft. Market moves of smaller magnitudes, say 5%-10% up or down, are nothing more than noise. Source Capital will do better or worse in these smaller moves over shorter time frames, consistent with its non-index hugging history.

Although there really isn't much wind to lean into at the moment, healthcare has underperformed, with the S&P Healthcare Index being one of the few sectors to decline last year.

As you should have come to expect, we've spent a fair amount of time recently looking at various companies across the different subsectors (e.g., pharma, distributors, hospitals, medical equipment, insurance, etc.). Though the portfolio had negligible exposure to the healthcare industry at large over the past year, we are familiar with many of the participants. Thus far we have made a few purchases but they've been small and we'd prefer not to discuss them further at this time. However, the activity is yet another illustration of how the Fund opportunistically allocates capital across industries.

We're always on the hunt for those businesses that other investors have placed in the penalty box. We are finding that today, though, there are numerous companies that we'd expect to be unloved or underappreciated but aren't. We'd love to be more invested. The reason that we aren't more so invested is that stocks aren't generally cheap—as we've regularly discussed these past few years. The reason half the book wasn't in financials is that Source Capital doesn't seek to take such risks that are disproportionate to being able to achieve our risk-adjusted return objective. The reason that we haven't found more to do is a function of price, not diligence.

Take Deere, for example. A superior company long known for its wide range of high-quality agricultural equipment and leading U.S. market share, Deere has nevertheless not been immune to weaker farm economics. The U.S. has been challenged. Brazil has been

SOURCE CAPITAL, INC.

horrible. What Deere hoped to accomplish in Eastern Europe changed when Putin's troops marched into Crimea. Success in the low horsepower Indian market has been slow coming. Deere's sales worldwide have declined almost 30% from their 2013 peak while earnings per share have plunged almost 50%. A chart of its stock price and earnings per share suggests something entirely different however. Its stock has hit a new, all-time high while earnings are back at 2010 levels. Where's the margin of safety in the purchase of shares now trading at 21.8x trailing twelve month earnings?⁵ Deere's mid-cycle earnings should be higher, which would make the normalized valuation not quite as dear but we miss when such companies would trade as if the bad times would last forever. We aren't picking on Deere. There's lots of stuff that crosses our desks that hasn't made much sense.

For a spell, the stock prices of some companies will defy logic but that won't last forever. Eventually, fundamentals prevail. In the interim, stock prices can trade anywhere. We hope to populate the Fund with those quality companies whose current earnings fail to appropriately reflect longer-term prospects. Sadly, we're finding a lot of Deeres out there.

Just because the market isn't rife with opportunity doesn't mean that stocks can't go higher. Some investors feel the need to "keep up", which can lead to certain sacrifices like rationalizing a lower business quality, accepting a weaker balance sheet, tolerating weak management with poor corporate governance or justifying a more expensive valuation. We won't, at least not intentionally. Despite the natural tension between doing something versus doing nothing at all, we will remain the same principled investors that we have been throughout our multi-decade careers. We won't likely capture all of the upside in rising markets but we do hope to avoid all of the downside in declining ones.

Economy/Markets

The general consensus appears to be that President-elect Trump will revive the animal spirits that will lift our economy and our stock market. His proposed lower corporate tax rates would make a pricey market less so. U.S. companies might also be able to repatriate foreign-domiciled cash at a low tax rate. There is an expectation that the additional cash from tax savings will be recycled back through the U.S. economy through higher or special dividends, share repurchases, capital investment and/or acquisitions.⁶

Moreover, there's talk of as much as a $1 trillion infrastructure spending program for the necessary rebuilding of U.S. roads, bridges, ports and other projects. All of these measures should be a stimulus but we don't know what the long-term effect will be on the already near $20 trillion in national debt.

⁵  Bloomberg. Price as of January 5, 2017.

⁶  World Bank and Goldman Sachs. Market capitalization of U.S. listed companies ~$25 trillion (World Bank). $1 trillion of cash held overseas. If $300 billion repatriated at 10% tax rate, then $270 billion would be available for share buybacks, dividends, acquisitions, and capital investment. $270 billion / $25 trillion = 1.1%.

SOURCE CAPITAL, INC.

On the other side of the ledger as a risk to the U.S. economy, Trump has spoken aggressively about protecting U.S. jobs. Subsequent action could start a trade war. We don't want to see the decades-long path to globalization reversed. Higher trade tariffs and barriers will lessen global trade and increase import prices and potentially increase domestic production costs due to diminishing economies of scale.

As former U.S. Treasury Secretary Lawrence Summers points out, "This is probably the largest transition ideologically and in terms of substantive policy that we've seen in the U.S. in the last three quarters of a century."⁷

We have no idea what comes next but we do know that the largest engine of our economy—the consumer—isn't firing on all cylinders and some broader trends are concerning: The mortgage refinance boom has ended thanks to rising interest rates, housing affordability has declined to an eight-year low, the growth rate of per-capita discretionary income has been slashed by more than half in two years, and gasoline prices have risen 27% since their February lows and appear headed higher.⁸ Although the case today, this could always be temporary.

We build a potentially treacherous environment into our models in the downside scenarios for our individual investments. Most things have a price at which we'd be buyers. Today, however, asset prices have had tremendous support globally from the indiscriminate buyer, the likes of which we have never seen, thanks to both quasi-government action and the trend towards passive investing. We lump central banks into the government category because we find it hard to find the distinction that divides the world's central bankers from the elected officials who appoint them.

The general attitude seems to be to flood economies with so much money that they have to get moving again. So far, the only things really moving are asset prices and generally in one direction: up. Price distortions can't help but develop as a result.

The Bank of Japan (BOJ) was the biggest buyer of Japanese ETFs in 2016 for the second consecutive year, more than offsetting shares sold by foreign investors.⁹

The European Central Bank (ECB) has been aggressively buying corporate bonds since mid-year 2016. As of December 31, 2016, the ECB held about €51 billion of corporates, which equates to 7%-8% of an estimated €600-€700 billion eligible market. JP Morgan estimates that this could rise to more than 20% by year-end 2017.¹⁰

Our own U.S. Federal Reserve's balance sheet has almost quintupled since 2009, using its expanded capacity to now own $2.5 trillion worth of U.S. Treasury securities and $1.7 trillion of mortgage-backed securities.¹¹

Low interest rates, the printing of money and artificial buying support have created pricing distortions. Deere might be one of example but not anywhere near the most egregious. Consider that Henkel and Sanofi became the first public companies to sell new Euro bonds to investors for more than buyers will receive in return. Henkel found lenders willing to pay them 0.05% for a bond with a 2-year maturity. Sanofi did Henkel one better, also borrowing at -0.05% but for 3.5 years. When compared to the 2-year German Bund that had bondholders paying the German government 0.67%, both of these corporate issues seemed favorable at the time.¹²

As the U.S. stock market continues to perform well, more dollars continue to flow into passive funds such as ETFs and index funds. Buy programs are initiated to put these incremental dollars to work, ultimately influencing thousands of stock prices without regard to relative value of the underlying businesses.

A good example of this was the reaction of bank stocks immediately following the presidential election. Bank stocks deserved to rise, all else equal, given the likelihood of less restrictive governmental regulation and the benefits of rising interest rates for those institutions with asset-sensitive balance sheets. However, little distinction seemed to be made between those banks that would be helped by rising rates and those that would be hurt. The latter includes banks whose liabilities reprice faster than their assets and those with larger mortgage origination businesses that saw their stock prices rise in line with their more advantaged brethren.

We don't suggest that passive management is bad and that active management is good. They can both be effective tools, if used wisely. It's hard to argue with passive investing's lower fees, tax efficiency and market-matching performance. Passive investing however, is only as good as an investor's ability to buy and hold those funds in periods of volatility. Excessive shareholder turnover could cause a typical investor to underperform the benchmark. To the detriment of long-term returns, most investors have shown a greater propensity to sell into a bear market and then not return until the market has rebounded to levels above where they initially sold. In our view, these investors exchange the higher fees of actively-managed funds for an illusory peace of mind associated with passive investing.

⁷  Bloomberg television: "Bloomberg Surveillance," Tom Keene. January 3, 2017.

⁸  Housing affordability data from ATTOM Data Solutions. The affordability index is based on the percentage of average wages needed to make monthly house payments on a median-priced home with a 30-year fixed rate and a 3 percent down payment.

⁹  Nikkei Asian Review. December 25, 2016.

¹⁰  JP Morgan. European Credit Outlook & Strategy 2017: Frankfurt Syndrome. November 17, 2016. Doctor, et al.

¹¹  St. Louis Fed (https://fred.stlouisfed.org/series/WALCL).

¹²  The first euro corporate bond was state-owned German rail company Deutsche Bahn, priced to yield -0.006%.

SOURCE CAPITAL, INC.

Many active managers offer little by way of differentiation, structuring portfolios that all too often mimic an index but at a higher fee. Such "closet" index funds are silly. Others, however, offer real differentiation both in terms of portfolio composition and downside protection. Source Capital, for example, benefits from its unusual breadth, investing in different regions and asset classes and exhibiting a willingness to sit on the sidelines while waiting for better opportunities (hopefully to the benefit of our investors even if it might prove to the detriment of our business). We can act quickly when we find something attractive, which is particularly important when there's only a narrow window of time in which to take advantage of the opportunity. Our team's flexibility to invest in stocks and/or bonds, whether they be domestic or international, can translate into something differentiated—attractive risk-adjusted returns over full market cycles. As managers, we are definitely out of the proverbial closet. That makes it challenging to use just one index as a benchmark, which is why we offer two: a domestic stock index and a balanced benchmark.

Passive U.S. equity assets now total $5 trillion (up from $4 trillion at the end of 2015) and represent approximately 20% of U.S. market capitalization. Their market share will likely continue to increase as long as the stock market rise continues unabated. There is some natural limit to passive investing's penetration as without any research and indiscriminate buying there is no price discovery, fewer dollars available for IPOs and secondary offerings, and less of an ability to hold managements accountable. That, therefore, puts some theoretical upper threshold on passive share yet it could still be far larger than it is today.

Similarly, the influence of central banks is not infinite. Their balance sheets are already larger than they've ever been and there are only so many assets that can be purchased. For that, all they've been able to exhibit thus far is some control over the pricing of risk assets (and derivatively the financial system).

Closing

We like to ski when there's soft snow covering the slopes. When ski conditions are poor, you're more likely to get hurt. Investing is no different. Money can be made when the market is rising just like one can conceivably get down a mountain of icy slopes without breaking a bone but taking that risk is open to question. Give us some powder in the form of good valuations and you'll see us put some capital to work.

Low and negative interest rates amongst the aforementioned artificial forces have pulled forward spending, benefiting today's economy at the expense of tomorrow's. We suspect that will cause some market disruption...one day. That fallout could be toxic but should create the kinds of opportunities we seek but we need to be careful what we wish for too.

Investing other people's money is a great responsibility and is based on trust. We're not going to deliver market rates of return with less risk over time by investing the same as the market, which means that our returns when compared to the market will differ wildly at times—for better or worse. Here's to being different.

Respectfully submitted,

Source Capital Portfolio Management Team

January 25, 2017

SOURCE CAPITAL, INC.

Important Disclosures

On December 1, 2015, a new portfolio management team assumed management of the Fund and the Fund transitioned to a balanced strategy. Performance prior to December 1, 2015 reflects the performance of the prior portfolio manager and investment strategy and is not indicative of performance for any subsequent periods.

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may vary from the performance quoted. The Fund is managed according to its investment strategy which may differ significantly in terms of security holdings, industry weightings, and asset allocation from those of the benchmark(s). Overall Fund performance, characteristics and volatility may differ from the benchmark(s) shown.

The views expressed herein and any forward-looking statements are as of the date of this publication and are those of the portfolio management team. Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments. This information and data has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data.

Portfolio composition will change due to ongoing management of the Fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Fund or the portfolio managers. It should not be assumed that future investments will be profitable or will equal the performance of the security examples discussed. Please visit our website, www.sourcecapitalinc.com, for a complete list of portfolio holdings.

Investing in closed-end funds involves risk, including loss of principal. Closed-end fund shares may frequently trade at a discount or premium to their net asset value. In addition, there is no guarantee the Fund's investment objectives will be achieved. You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest.

Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. It is important to remember that there are risks inherent in any investment and there is no assurance that any investment or asset class will provide positive performance over time.

Non-U.S. investing presents additional risks, such as the potential for adverse political, currency, economic, social or regulatory developments in a country, including lack of liquidity, excessive taxation, and differing legal and accounting standards. Non-U.S. securities, including American Depository Receipts (ADRs) and other depository receipts, are also subject to interest rate and currency exchange rate risks.

The return of principal in a fund that invests in fixed income securities is not guaranteed. The Fund's investments in fixed income securities have the same issuer, interest rate, inflation and credit risks that are associated with underlying bonds owned by the Fund. Lower rated bonds, convertible securities and other types of debt obligations involve greater risks than higher rated bonds.

When interest rates go up, the value of fixed income securities, such as bonds, typically go down and investors may lose principal value. Credit risk is the risk of loss of principle due to the issuer's failure to repay a loan. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults, the security may lose some or all its value.

Mortgage securities and collateralized mortgage obligations (CMOs) are subject to prepayment risk and the risk of default on the underlying mortgages or other assets; such derivatives may increase volatility. Convertible securities are generally not investment grade and are subject to greater credit risk than higher-rated investments. High yield securities can be volatile and subject to much higher instances of default. The Fund may experience increased costs, losses and delays in liquidating underlying securities should the seller of a repurchase agreement declare bankruptcy or default.

Value style investing presents the risk that the holdings or securities may never reach their full market value because the market fails to recognize what the portfolio management team considers the true business value or because the portfolio management team has misjudged those values. In addition, value style investing may fall out of favor and underperform growth or other styles of investing during given periods.

Index Definitions

S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The index focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, but is also considered a proxy for the total market.

Barclays Aggregate Index provides a measure of the performance of the U.S. investment grade bonds market, which includes investment grade U.S. Government bonds, investment grade corporate bonds, mortgage pass-through securities and asset-backed securities that are publicly offered for sale in the United States. The securities in the Index must have at least 1-year remaining in maturity. In addition, the securities must be denominated in U.S. dollars and must be fixed rate, nonconvertible, and taxable.

60% S&P 500/40% Barclays Aggregate Index is a hypothetical combination of unmanaged indices comprised of 60% S&P 500 Index and 40% Barclays Aggregate Index, representing the Fund's neutral mix of 60% stocks and 40% bonds.

Indices are unmanaged, do not reflect any commissions or fees which would be incurred by an investor purchasing the underlying securities. Investors cannot invest directly in an index.

You can obtain additional information by visiting the website at www.sourcecapitalinc.com, by email at crm@fpafunds.com, toll free by calling 1-800-279-1241 (option 1), or by contacting the Fund in writing.

SOURCE CAPITAL, INC.

The discussion of Fund investments represents the views of the Fund's managers at the time of this report and are subject to change without notice. References to individual securities are for informational purposes only and should not be construed as recommendations to purchase or sell individual securities. While the Fund's managers believe that the Fund's holdings are value stocks, there can be no assurance that others will consider them as such. Further, investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.

The Russell 2500 Index is an unmanaged index comprised of the 2,500 smallest companies in the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The S&P 500 Index is an index of 500 companies with large market capitalization.

FORWARD LOOKING STATEMENT DISCLOSURE

As managers, one of our responsibilities is to communicate with shareholders in an open and direct manner. Insofar as some of our opinions and comments in our letters to shareholders are based on our current expectations, they are considered "forward-looking statements," which may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as "believe," "expect," "may," "anticipate," and other similar expressions when discussing prospects for particular portfolio holdings and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in this report should not be construed as a recommendation to purchase or sell any particular security.

SOURCE CAPITAL, INC.
PORTFOLIO SUMMARY

December 31, 2016

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FEDERAL INCOME TAX INFORMATION

Calendar 2016

Cash Dividends and Distributions:

*  On February 8, 2016, the Board of Directors declared a special long-term capital gain distribution in the amount of $33.65 per share. This amount was payable on March 15, 2016 to shareholders of record on February 19, 2016. The transition of the portfolio that commenced on December 1, 2015 resulted in the realization of significant capital gains. The amounts paid on March 15, 2016 substantially complete distributions related to the transition of the portfolio.

The amounts in column (1) are to be included as dividend income on your tax return and 100% of these amounts are Qualified Dividend Income.

In accordance with the provisions of the Internal Revenue Code, the amounts in column (2) are long-term capital gain distributions.

A Form 1099 has been mailed to all shareholders of record on dividend record dates setting forth the specific amounts to be included in their 2016 tax returns. For corporate shareholders, 42.76% of the amount in column (1) qualifies for the 70% corporate dividends received deduction. Source Capital did not elect to retain any undistributed long-term capital gains for the year ended December 31, 2016. Therefore, Common shareholders will not receive a Form 2439 for 2016.

Notice to Dividend Reinvestment Plan Participants:

When additional shares are issued by Source Capital under the Automatic Reinvestment Plan at a discount from the market price, a participant in the Plan is treated for federal income tax purposes as having received a taxable distribution equal to the market value of the shares purchased. In effect, the discount from market price at which shares are purchased is added to the amount of the cash distribution to determine the total value of the taxable distribution. Such value also becomes the participant's tax basis for the shares purchased under the Plan.

For the year ended December 31, 2016 none of the distributions paid were reinvested at a discount from the market price.

State Tax Information:

1.96% of the amounts reported in column (1) were derived from U.S. Treasury Securities.

SOURCE CAPITAL, INC.
PORTFOLIO OF INVESTMENTS

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

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PORTFOLIO OF INVESTMENTS (Continued)

December 31, 2016

*  Non-income producing security.

@  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2016.

**  Restricted securities. These restricted securities constituted 20.41% of total net assets at December 31, 2016, most of which are considered liquid by the Adviser. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under policies adopted by authority of the Fund's Board of Directors.

††  These securities have been valued in good faith under policies adopted by authority of the Board of Director in accordance with the Fund's fair value procedures. These securities constituted 3.54% of total net assets at December 31, 2016.

@@  Step Coupon — Coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 2016.

As permitted by U.S. Securities and Exchange Commission regulations, "Other" Common Stocks include holdings in their first year of acquisition that have not previously been publicly disclosed.

SOURCE CAPITAL, INC.
PORTFOLIO OF INVESTMENTS —
RESTRICTED SECURITIES

December 31, 2016