IRS Notice 2026-62 treats one 351 ETF conversion sequence as taxable

IRS Notice 2026-62 and its companion Rev. Rul. 2026-20, issued Sept. 28, treat one seeding-and-redemption sequence in a 351 ETF conversion as a taxable exchange.

351 ETF conversions are a route concentrated-stock holders use to move a single position into an ETF while deferring capital gains. The guidance expresses no view on funds that keep their assets matching their strategy, leaving open whether a proposed conversion sits inside or outside the line.

Baird's Steffen says sound 351 ETF conversions remain viable, consistent with the guidance's silence on strategy-aligned funds rather than any blanket prohibition. That is a practitioner's view, not a safe harbor: the guidance does not bless conversions generally or describe a compliant conversion in detail.

For a client weighing a conversion, the diligence is concrete: does the fund's asset base stay aligned with its stated strategy, or does the structure depend on seeding and then redeeming the contributed shares? The first maps to the space the guidance declined to address; the second maps to the sequence it called taxable.