United States: ETFs, 351, and other Good Stuff: A Ruling and a Notice

By: Joel D. Almquist, Edward B. Baer, and Kevin R. Gustafson

Official guidance from the IRS on Monday 28 September 2026, followed through on comments made by IRS and Treasury officials at a meeting of the Wall Street Tax Association (WSTA) back in July.

Revenue Ruling 2026-20 provides a narrow path to follow for funding new ETFs by means of in-kind contributions of securities. It does this by telling us what does not work: contributions that are part of a plan designed to enable the investors to exchange the investors’ appreciated portfolios for shares of an ETF with a materially different investment thesis, which indicates that the ETF is merely being used a conduit through which securities are transferred from the investors to the ETF’s Authorized Participant pursuant to the plan.

The simple path for a good 351 contribution to an ETF: only accept contributed assets consistent with the ETF’s investment thesis. Although this formula leaves a lot of gray area, this is the path already taken by most ETF 351 transactions, and the IRS confirmed that 351 remains available for such transactions. Ordinary course in-kind redemptions would be respected under section 852(b)(6) following a “good” 351 transaction.

Notice 2026-62 discusses the same novel transactions previously discussed at the July WTSA meeting, such as in-kind distributions by ETFs to avoid receipt of income, including nonqualifying income. In addition to ETF-related issues, the Notice addresses transactions engaged in by “tax aware” funds, such as transactions involving mixed straddles, foreign currency forward contracts, and selective swap terminations. The Notice says that these novel transactions could yet become “transactions of interest” or listed transactions, and it asks for more information on these transactions from the marketplace. Although specific transactions are discussed in the Notice, later regulatory guidance could sweep in similar transactions not mentioned in the Notice.

Anyone with an interest in engaging in these or similar transactions might consider whether this is the time to make a case to the IRS. Comments are due by 28 October.