At a glance
- Revenue Ruling 2026-20 applies to swaps of securities that do not fit an ETF's investment thesis, made through an authorized participant as part of the same plan, for securities that do.
- Notice 2026-62 identifies transactions that concern the IRS and says guidance or enforcement, possibly retroactive, could follow a comment period.
- For advisors, the test is whether a client would still have a legitimate investment reason to own a tax-aware strategy if its projected tax benefit were materially smaller than expected.
The IRS ruled that a variant of the Section 351 ETF conversion produces a taxable exchange, Kitces.com reported.
Revenue Ruling 2026-20 applies to swaps of securities that do not fit an ETF's investment thesis, made through an authorized participant as part of the same plan, for securities that do. The IRS said the ETF should not be treated as an independent intermediary, but it did not restrict Section 351 ETF conversions more broadly.
Notice 2026-62 identifies transactions that concern the IRS and says guidance or enforcement, possibly retroactive, could follow a comment period. The list includes a partnership/exchange-fund variant of the 351 trade, box-spread ETFs that turn interest-like income into deferred capital gain, ETFs that defer income by rotating among underlying funds with different dividend record dates, ETFs that seek to work around registered investment company qualifying-income rules, and strategies exploiting character differences between economically offsetting gains and losses.
For advisors, the test is whether a client would still have a legitimate investment reason to own a tax-aware strategy if its projected tax benefit were materially smaller than expected.
Reported by the Products & portfolios desk from Kitces — Nerd's Eye View. Published . Corrections