Section 351 ETF Conversion: Rev. Rul. 2026-20 Taxable Exchange (September 28, 2026), 23 Notice Comments

What a “351 conversion” was, and what the ruling does to it

Section 351 says no gain or loss is recognized when property goes to a corporation solely for its stock and the transferors control the corporation afterwards. An ETF that is a regulated investment company (RIC) is a corporation for federal tax purposes, so advisers promoted a way to move a stock portfolio into a brand-new ETF without selling. The notice describes it as a strategy “to diversify investors' portfolios without the investors recognizing built-in gains in their securities”. The catch the notice points to is what happens next: the ETF swaps the securities it just received for the ones it wants, through a creation and redemption with an authorized participant.

Section 852(b)(6) is the rule that lets a RIC hand out appreciated securities in redemption of its shares “upon the demand of the shareholder” without the ETF recognizing gain on them. Rev. Rul. 2026-20 does not say that rule is invalid. It says the pieces cannot be read separately when they are one plan.

The legal reasoning is the old one: substance over form and the step-transaction doctrine. The ruling cites Kuper v. Commissioner, 533 F.2d 152 (5th Cir. 1976), Commissioner v. Court Holding Co., 324 U.S. 331 (1945) and Minnesota Tea Co. v. Helvering, 302 U.S. 609 (1938), amplifies Rev. Rul. 71-336 and distinguishes Rev. Rul. 75-447 and Rev. Rul. 88-32. The holding adds that “the result would be the same if there were multiple investors engaging in the transaction.”

Where the ruling stops. The ruling treats the investor as having made a taxable exchange only for the securities that the ETF used to redeem the authorized participant. A reader should not stretch that to “every ETF that took in stock is taxable”. What the text turns on is the plan: contribution plus an AP creation and a section 852(b)(6) redemption funded with the contributed securities, resulting in a portfolio materially different from what was contributed.

One ruling, eight strategies: what Notice 2026-62 covers

The notice opens by saying Treasury and the IRS “have identified novel investment fund strategies that purport to produce tax results that may be inconsistent with the purpose and proper application of the relevant federal tax rules”. Sections 2 and 3 describe them.

On what happens next, the notice says guidance “may include regulations, notices, revenue rulings, and other guidance published in the Internal Revenue Bulletin, including the potential identification of a transaction as a transaction of interest or a listed transaction”, that it “could apply prospectively only or retroactively to transactions that already have taken place”, and that “the IRS may challenge an abusive investment fund strategy upon examination”. It also states that labelling a strategy “tax-aware” or “tax-advantaged” “does not in and of itself represent cause for concern”. We do not know whether or when a designation will come; nothing in either document sets a date.

What the documents do not cover

The carve-outs are as important as the holding, and the notice states them directly.

One point the search queries get wrong: the ruling's Investor contributes a portfolio that is “diversified within the meaning of § 1.351-1(c)”. The notice explains the test: a portfolio is generally diversified if no more than 25 percent of its value is in one issuer and no more than 50 percent is in five or fewer issuers. For an investor with one concentrated stock, section 1.351-1(c)(5) says a single transferor to a newly organized corporation “generally will not be treated as resulting in diversification” unless the transfer is part of a plan to achieve diversification without recognition of gain, in which case it is. That is why the notice's section 2.03 describes the partnership variation for investors whose portfolio “is not diversified for purposes of § 351(e)”: the concentrated-stock holder was never the profile of the ruling's fact pattern. Our page on exchange funds for concentrated stock covers that product; it does not discuss the notice's section 2.03, which is where the two documents meet.

The timeline, from the documents themselves

Who commented: 23 submissions in docket IRS-2026-1255

We read the docket through the regulations.gov programming interface on November 2, 2026. It lists 23 posted comments: 13 from organizations and 10 from individuals or posted as anonymous (our count of the titles; we are not naming individuals). We could not download the attached letters, so this page does not describe what any commenter argued. The organizations are:

The notice asked four questions: whether its descriptions are accurate, whether similar transactions with different economics deserve different treatment, what future guidance should look like, and what other strategies exist. Whether any of the 23 answers moves Treasury is not knowable from the docket.

What ETF prospectuses now tell investors

A fund that took a section 351 contribution has to tell its own shareholders about the risk. EDGAR's full-text search for the phrase “Revenue Ruling 2026-20” between September 28 and November 2, 2026 returns three filings from two registrants; that is a floor, because a filer can describe the ruling without using that phrase.

The pattern is a before and after: the May 11, 2026 LTEQ prospectus, filed before the ruling, has no Treasury sentence in the text we saved, and the October 7, 2026 revision has a long one. These are the funds' own statements about their own contributions. They are not findings by the IRS and say nothing about whether any particular contribution is taxable.

Worked example: what “taxable” can mean in dollars (our arithmetic)

The ruling gives no formula, so this applies the general rule the notice recites: gain is the amount realized less adjusted basis (section 1001(a)). Assume an investor contributes a portfolio worth $1,000,000 with an adjusted basis of $250,000, and (our assumption) that the gain on the securities used to redeem the AP is proportional to basis. Rates: the IRS says a 20% rate applies to net capital gain to the extent taxable income exceeds the 15% threshold (Tax Topic 409, reviewed September 24, 2026), and section 1411 adds 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over $250,000 (joint) or $200,000 (other filers). State tax is not included.

At lower brackets the same gain costs less, and an investor whose portfolio had a loss would be in a different position. See our net investment income tax page for how the 3.8 percent is applied. Whether the securities that the ETF did not use to redeem the AP keep their tax deferral is a question the ruling does not answer in terms (our reading).

What a reader can do with this

This is analysis of public documents, not investment, legal or tax advice. The reader who matters here is one of four people, and the next step is different for each.

• You already contributed a portfolio to an ETF (2024 to 2026). Ask for three documents: the opinion letter or tax memo given to contributors, the sequence of creations and redemptions in the weeks after launch (the ETF's own holdings reports show what it held), and the basis the sponsor reported to you. Ask directly whether any of your contributed securities were delivered to an authorized participant in a redemption. The ruling turns on that fact and on the plan.
• You are in the process of contributing. The prospectus language above is the sponsor's view that its structure is distinguishable; none of the funds we read says the IRS agreed, and the LTEQ prospectus says no ruling was or will be sought. Ask what happens to your tax position if your securities are used to redeem an AP, and who bears the tax.
• You hold a concentrated position and were pitched an ETF swap. Read the notice's section 2.03 first: it describes the partnership route and says further guidance is under consideration. The alternatives that do not rely on a recharacterization are the ordinary ones: sell and pay the tax (see the arithmetic above), give appreciated shares to charity (our pages on donating appreciated assets to a donor-advised fund and charitable remainder trusts), an exchange fund with its seven-year rule (exchange funds), or holding for a basis step-up at death (step-up in basis).
• You only buy ETF shares on an exchange. Nothing in the ruling's facts applies to you (our reading), but the notice's other sections, such as box spread ETFs, describe fund-level strategies, and a fund's prospectus is where its use is disclosed.

If real money is involved, a tax adviser who has read the actual fund documents and your lot-level basis is the right next step. The questions above are what to bring.

Limits of this page

We read the full text of Rev. Rul. 2026-20 and Notice 2026-62 as posted on irs.gov, the table of contents and summaries of Internal Revenue Bulletin 2026-43, the regulations.gov docket listing, and the four fund filings named above. We did not download the 23 comment letters (the attachments were not retrievable), the July 21, 2026 remarks, or any sponsor's opinion letter. The EDGAR search is phrase-based, so a fund that describes the ruling in other words would not appear. The worked example uses an assumed portfolio and rates, not any person's return. Nothing here says whether any specific transaction is taxable: the ruling's result depends on the plan and on facts we cannot see.

FAQ

Sources

Read November 2, 2026. Rev. Rul. 2026-20 and Notice 2026-62 (IRS), as printed in Internal Revenue Bulletin 2026-43 (October 19, 2026). Docket IRS-2026-1255 on regulations.gov. SEC EDGAR: RBB Fund Trust (CIK 1618627), Form 497 accession 0001999371-26-022328 (October 7, 2026), Form 485BPOS 0001999371-26-010491 (May 11, 2026) and 0001999371-26-022742 (October 14, 2026); Financial Investors Trust (CIK 915802), Form 485BPOS 0001398344-26-017624 (September 30, 2026) and Form 497 0001398344-26-017893 (October 5, 2026); EDGAR full-text search. 26 U.S.C. 1411 and IRS Tax Topic 409.