FREE NEWSLETTER
This past month the IRS issued guidance which disallows a much marketed technique many advisors are pitching to investors. The technique involves transferring appreciated securities to a newly formed ETF without recognizing capital gains. The idea is that forming a “new corporation” (the ETF) and transferring assets to it should be a nontaxable event under IRS Code Section 351. For the past couple of years many advisors have been pitching this. I even heard a Vanguard advisor recommending it. Sound too good to be true?
Well, this month the IRS brought down the hammer and told the world these shenanigans don’t work. There may be exceptions but generally the transfer to the ETF is a taxable event. Does anyone here have experience with this? It seems we may see many lawsuits as some investors may be on the hook for untold amounts of capital gains taxes.
On July 21, 2026 The Wall Street Tax Association with others had an educational seminar where it has been reported that some IRS officials made comments expressing concerns about certain ETF investment strategies the government argues are not “consistent with the intent of Congress regarding IRC 351.
In late September 2026 the IRS issued Notice 2026-62 and Revenue Ruling 2026-20.
The stated purpose of the Revenue Ruling is –
Should a transfer of securities to a newly formed exchange traded fund that is intended to qualify as an exchange to which § 351 of the Internal Revenue Code applies fail to qualify as such if, as part of the same plan, some or all of the transferred securities are distributed pursuant to § 852(b)(6) in redemption of shares held by an “authorized participant”?
On 10/28/26 Jeff Levine at Kitces.com published a long article and a 35 minute podcast titled-
New IRS Guidance On Sec. 351 Exchanges And ETFs: Managing Tax Risk Of Tax-Aware Investing
which is worth a read if you are interested in the topic.
I recall a conversation about this. I believe one or more readers have done this. This could be catastrophic for some peeps if those transfers are disallowed.
Free Newsletter
Arrives weekly.