On September 28, 2026, the IRS issued Revenue Ruling 2026-20, while Treasury and the IRS issued Notice 2026-62 addressing investment-fund tax strategies. The ruling concerns an investor’s contribution of appreciated securities to a newly formed ETF, followed under the same plan by distribution of some or all of those securities to an authorized participant redeeming ETF shares.
Although designed to obtain nonrecognition treatment under Sections 351 and 852(b)(6), the specified arrangement is treated as a taxable exchange under Section 1001 through substance-over-form and step-transaction principles. This conclusion concerns the particular prearranged transaction described, not every ETF contribution or in-kind redemption.
The notice requests information on related partnership structures, ETF record-date strategies, box-spread ETFs, use of redemption rules to circumvent the regulated investment company qualifying-income test, and certain arrangements generating capital gains alongside ordinary losses. According to KPMG’s analysis, further guidance could apply retroactively, and the IRS may challenge these strategies under existing law. For family offices, investment managers, and advisers handling concentrated appreciated portfolios, the development underscores the importance of reviewing the substance and sequencing of transactions rather than relying only on their formal steps.
Source: KPMG TaxNewsFlash