US Treasury Targets Section 351 ETF Conversions

The US Treasury and IRS have challenged a specific use of Section 351, which can allow investors to contribute securities to a new ETF without immediately recognizing gains. Revenue Ruling 2026-20 says the exchange is taxable when, under a prearranged plan, the ETF quickly transfers the contributed securities to an authorized participant and replaces them with a materially different portfolio. The ruling targets that transaction, rather than every Section 351 conversion. A companion notice says the agencies are examining other strategies involving ETF in-kind redemptions, partnership exchange funds, box spreads and tax-aware funds. They are considering further guidance that could apply retroactively.