On September 28, 2026, the Department of the Treasury and the Internal Revenue Service issued Notice 2026-62 and Revenue Ruling 2026-20, addressing several investment fund strategies that Treasury and the IRS believe may produce tax results inconsistent with the purpose and proper application of existing federal tax rules. The principal focus is a marketed “Section 351 conversion transaction,” which aims to allow an investor to move from an appreciated securities portfolio into an exchange-traded fund (“ETF”) with a materially different portfolio without current recognition of built-in gain.[1]

Revenue Ruling 2026-20 addresses that conversion transaction directly. Notice 2026-62 also identifies related partnership variations and other ETF and “tax-aware fund” strategies for possible future guidance or other action. Notice 2026-62 also indicates some or all of these strategies may be subject to recharacterization under existing substance-over-form or similar principles. Treasury and the IRS have requested comments on the Notice by October 28, 2026.

The Section 351 Conversion Transaction

Section 351 generally permits a taxpayer to transfer property to a corporation in exchange for stock without current recognition of gain or loss if the statutory requirements are satisfied. Section 351(e) limits that rule for certain transfers to investment companies; the regulations generally treat the transfer of a diversified portfolio of stocks and securities as not resulting in diversification for purposes of that limitation. See Treas. Reg. § 1.351-1(c).

The conversion transaction described in Notice 2026-62 begins with one or more investors contributing appreciated securities to a newly formed ETF. The contributed portfolios satisfy the diversification requirement, but some of the securities do not fit the ETF’s intended investment thesis. As part of the same plan, the ETF issues a creation unit to an authorized participant (“AP”) in exchange for securities that fit the ETF’s investment thesis, or cash that the ETF intends to use to acquire those securities. Shortly thereafter, the ETF redeems the AP’s creation unit by distributing securities contributed by the investor. The redemption is intended to qualify under Section 852(b)(6), which generally permits a regulated investment company (“RIC”) to distribute appreciated property in certain redemptions without recognizing corporate-level gain.

After the planned steps, the investor continues to hold ETF shares, but the ETF holds a materially different portfolio. Treasury and the IRS describe the structure as combining Sections 351 and 852(b)(6) to produce, in economic terms, an exchange of an appreciated portfolio for an interest in a materially different portfolio without current recognition of built-in gain. According to the Notice, these transactions are being combined to achieve a tax result that is inconsistent with the purpose of the statutory provisions.

Revenue Ruling 2026-20 Treats the ETF as a Conduit

Revenue Ruling 2026-20 concludes that the planned transactions should be recharacterized under longstanding substance-over-form and step-transaction principles. The ruling relies on cases addressing transitory ownership, conduit treatment and integrated transactions, including Minnesota Tea Co. v. Helvering and Commissioner v. Court Holding Co.. On the ruling’s facts, the ETF is treated as a conduit through which the investor’s securities pass to the AP pursuant to the prearranged plan.

The ruling therefore treats the investor as undertaking a taxable exchange under Section 1001 with the AP of “the securities contributed to ETF by Investor that are used by ETF to redeem AP.” The same result applies if multiple investors participate. The holding does not separately state the tax treatment of contributed securities that remain in the ETF.

The Notice Takes No View on Certain ETF Seeding Transactions

Notice 2026-62 expressly states that it does not address, and expresses no view regarding, a Section 351 transaction used to seed a newly established ETF with assets that are consistent with the ETF’s investment thesis and intended and expected to be retained by the ETF absent a substantial change in circumstances.

That statement is not an affirmative safe harbor. It does, however, distinguish the transaction targeted by the ruling from a new ETF seeded with assets the ETF actually expects to hold.

Other ETF Strategies Identified in Notice 2026-62

The Notice identifies several additional strategies involving atypical or potentially tax-motivated uses of Section 852(b)(6). Unlike the Section 351 conversion transaction, these strategies are not addressed by Revenue Ruling 2026-20. Treasury and the IRS are considering whether additional guidance or other action is appropriate.

  • Partnership variation. The Notice describes a structure in which investors first contribute concentrated appreciated positions to a partnership in a transaction intended to qualify under Section 721(a), after which the partnership undertakes the Section 351 ETF conversion. According to the Notice, the upper tier partnership is intended to sidestep the diversification-related restrictions of Section 351 by seeding the partnership with more than 20% of non-stocks or -securities assets.
  • Box spread funds. The Notice describes ETFs that use non-Section 1256 box spreads to generate an economically interest-like return and then distribute appreciated option positions in redemptions intended to qualify under Section 852(b)(6). The Notice indicates that the strategy may be used impermissibly to convert interest-like returns to capital gains income via disposition of appreciated ETF shares.
  • Record-date strategies. The Notice describes transactions involving ETF redemptions shortly before dividend record dates that seek to avoid dividend income while maintaining substantially the same economic exposure through replacement ETF positions.
  • RIC income-test strategies. The Notice also describes ETFs holding assets such as commodities or digital assets that may generate nonqualifying income under Section 851(b)(2), but using Section 852(b)(6) redemptions in an effort to avoid recognizing that gain.

Tax-Aware Fund Strategies Are a Separate Focus

Section 3 of Notice 2026-62 separately addresses strategies used by “tax-aware” investment partnerships and separately managed accounts. Treasury and the IRS acknowledge that tax-aware investing, including established techniques such as tax-loss harvesting, is not itself a concern. Their focus is instead on strategies that use offsetting positions, elections or termination mechanics to produce recurring character or timing results that they view as inconsistent with the applicable rules. The Notice identifies, among other things, mixed-character straddles, certain foreign-currency forward transactions and selective termination of notional principal contracts.

The Broader Question: Statutory Text and Substance Over Form

Revenue Ruling 2026-20 does not rely on a new regulation; it relies principally on substance-over-form, step-transaction and conduit principles that courts themselves apply. Loper Bright Enterprises v. Raimondo therefore does not create a simple Chevron-deference issue for the ruling. The more fundamental question is how far judicial anti-abuse doctrines can go when a taxpayer relies on statutory provisions according to their terms.

Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017), illustrates that boundary. The Sixth Circuit distinguished between recharacterizing a transaction to reflect its economic substance and effectively overriding statutory provisions whose requirements the taxpayer satisfied. Revenue Ruling 2026-20 frames the ETF conversion as the former, emphasizing the prearranged steps and the ETF’s role as a conduit. Whether a particular transaction falls within that characterization will depend on its facts.

What Should Investors, Fund Sponsors and Advisors Do Now?

Investors, fund sponsors and advisors evaluating ETF conversion structures should consider whether their facts resemble the transaction described in Revenue Ruling 2026-20, including whether the contribution and AP redemption are part of a common plan, whether contributed assets are inconsistent with the ETF’s intended portfolio, and whether contributed securities are expected to be used to redeem an AP shortly after the contribution.

  • Review existing structures. Evaluate whether completed or contemplated transactions involve the same sequencing and economic result described in the ruling or the Notice.
  • Watch further guidance. Treasury and the IRS are considering additional action involving the other ETF and tax-aware fund strategies described in the Notice.
  • Seek advice of independent, competent tax professionals. Many of the structures described in the Notice are actively being marketed to investors by certain market participants and reputable tax advisors. Given the Notice, taxpayers considering investing in such strategies or products are strongly advised to seek fully independent tax advice. While it is not a certainty that a court would sustain the IRS’s application of Revenue Ruling 2026-20 or substance-over-form or related anti-abuse doctrines to disallow the intended tax benefits (or impose penalties) of the described structures, taxpayers would be well-advised to carefully consider the potential consequences of investing in transactions the IRS has indicated could potentially implicate these doctrines.

The Winthrop & Weinstine tax and securities team members listed below are happy to discuss Notice 2026-62 and Revenue Ruling 2026-20 further should you have any questions or if you would like to determine if they may apply to you or your circumstances.

We express special thanks to Sara Mungo, who contributed to the research and content of this update.

[1] “Section” references are to sections of the Internal Revenue Code of 1986, as amended.

October 12, 2026