Login | October 22, 2026
Pay attention when the IRS talks to investors
JULIE JASON
Published: October 22, 2026
If you are a client of a financial institution known for innovative tax planning, you may have come across a tax-savings vehicle that could turn out to be "too good to be true."
Here is the problem: The Treasury Department and 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," according to IRS Notice 2026-62, released on Sept. 28 (tinyurl.com/3x7fb3nf).
Example: Consider two tax codes that were not intended to be used together. Notice 2026-62 cited "transactions purporting to be governed by [Tax Code] Sections 351 and 852(b)(6) are being combined as part of a plan to achieve a result that neither provision was designed to produce." Section 351 involves "Transfer to corporation controlled by transferor"; Section 852 deals with "Taxation of regulated investment companies and their shareholders."
More: IRS Revenue Ruling 2026-20, also released Sept. 28 (tinyurl.com/5e2anfun), examined the transfer of securities to exchange traded funds (ETFs) in which "in-kind" swaps involving an "authorized participant" (AP) are involved, resulting in a tax-free transaction for the ETF.
The ruling described the following scenario:
-- An investor transfers a portfolio of appreciated securities to a newly formed ETF. The ETF is, for federal income tax purposes, a corporation that intends to qualify as a regulated investment company (RIC) and meet the requirements to be taxed under the Internal Revenue Code.
-- The ETF in turn distributes some or all of the shares to another investor serving as an AP in exchange for cash or securities that fit with the ETF's investment thesis.
-- The ETF then redeems those AP shares (tax free) in exchange for securities transferred to the ETF by the investor.
-- The ETF now "holds a portfolio of securities that is consistent with its investment thesis and materially different from the portfolio transferred by the investor."
More examples: Notice 2026-62 lists others, including:
-- Box spread funds (an ETF "purportedly avoids recognition of any income or gain from the box spread, and investors purportedly recognize no current income although they economically benefit from a return consistent with a short-term interest rate").
-- Record date strategies (the "recognition of dividend income can be avoided by making a redemption distribution of the stock of the acquired ETF prior to the record date").
What to expect: The Treasury and the IRS may issue regulations, notices, revenue rulings or other guidance in the Internal Revenue Bulletin -- and the guidance can be retroactive. Investors need to watch for upcoming guidance.
The issues at hand are not to be ignored. In July, Treasury Secretary Scott Bessent posted on X that the Treasury Department "welcomes innovation in our financial markets, but we will not turn a blind eye to abusive Wall Street tax dodges or tolerate products designed to exploit our federal tax code" (tinyurl.com/mwhws24t).
Some sage advice: What should you do if you are an investor who might be affected by transactions mentioned in the IRS releases?
Joel N. Crouch, a partner in the Texas law firm Meadows Collier, which specializes in complex tax law, offers the following suggestions in his blog (tinyurl.com/4ykydxyc):
-- Review the transaction with your tax adviser.
-- Determine whether the transaction falls within one of the strategies identified by the IRS.
-- Review the tax opinion or analysis supporting the transaction.
-- Consider whether additional documentation or a change in reporting position is appropriate.
"For most investors who simply buy and sell publicly traded ETFs as part of a conventional investment portfolio, Notice 2026-62 does not change the basic tax treatment of those investments," Crouch adds.
If you want to take a stand or voice an opinion, the IRS is accepting comments on "transactions described in [Notice 2026-62] giving rise to unintended tax benefits ... as well as similar transactions."
You can submit comments at www.regulations.gov (type "IRS-2026-1255" in the search field) or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2026-62), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. All comments will be available for public viewing and are due by Oct. 28, 2026.
Seasoned investment counsel (tinyurl.com/52nus8hz) and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, "The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)" (tinyurl.com/4u7h9pjs), published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.
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