On 21 July 2026, officials from the Internal Revenue Service and the Department of Treasury met with income tax professionals at a Wall Street Tax Association meeting.
The discussions centred on transactions involving exchange-traded funds and other investment strategies where the government believes the tax treatment appears “too good to be true.”
Officials declined to formally approve any particular transactions as being outside the scope of government scrutiny, but they described in considerable detail the arrangements that have caught their attention.
At the heart of the ETF-related concerns is the use of section 852(b)(6) of the Internal Revenue Code, which allows regulated investment companies to distribute assets in-kind without recognising a taxable gain.
Officials made clear they are not opposed to section 852(b)(6) being available to ETFs broadly, but certain applications of the provision have drawn specific concern from regulators.
One area of scrutiny involves in-kind contributions of assets by shareholders seeding new ETFs in transactions intended to be nontaxable under section 351, where those assets are later distributed in redemptions also intended to avoid tax under section 852(b)(6).
Tiered ETF structures, where one ETF holds shares in other ETFs and distributes those shares in-kind to sidestep income and gain distributions, were also among the arrangements discussed at the meeting.
The government has additionally flagged ETFs that invest in assets such as cryptocurrencies and use section 852(b)(6) to distribute those assets and avoid recognising income that would otherwise fail to qualify under regulated investment company rules.
Beyond ETFs, officials raised concerns about swap transactions generating patterns of capital gains and ordinary losses, selective late elections under section 988, and the use of identified straddle elections to produce ordinary rather than capital losses.
Congress enacted section 852(b)(6) in 1986 as relief for mutual funds facing large redemption requests, allowing them to distribute appreciated securities in-kind without triggering capital gain distributions for remaining shareholders.
The provision took on a broader role when ETFs emerged in the United States seven years after the rule was enacted, with in-kind creation unit redemptions proving central to how ETFs maintain market values close to net asset value.
ETFs have since evolved from simple index funds to actively managed and increasingly sophisticated vehicles, and the value of assets held by ETFs has grown substantially over that period.
Some of that growth has come from mutual fund conversions using nontaxable corporate reorganisation provisions, while mutual funds have also begun using section 852(b)(6) more actively through liquidity arrangements provided by investment banks.
Critics have focused particularly on combinations of nonrecognition provisions, such as individuals contributing appreciated securities portfolios to a new ETF under section 351, followed by the ETF distributing those same securities in a nontaxable creation unit redemption.
At the 21 July meeting, government officials solicited input from the investment management community, including more detailed information directly from transaction participants, to help distinguish acceptable uses from problematic ones.
Officials stated clearly that they are considering all regulatory tools available to them in addressing transactions they view as producing results that are “too good to be true.”
Despite their refusals to endorse specific strategies, officials did acknowledge the continuing importance of section 852(b)(6) to the ordinary operation of ETFs and the ongoing viability of section 351 contributions where contributed assets fit an ETF’s investment profile.
The government also signalled an absence of concern about many traditional tax-planning strategies, drawing a distinction between standard practice and the more aggressive arrangements under review.
The K&L Gates attorneys Joel D. Almquist, Edward B. Baer, and Kevin R. Gustafson reported on the proceedings of the meeting in analysis published following the event.