“I Declare Nonrecognition!” Why the IRS Says Certain Section 351/ETF Conversions Don’t Work That Way

On September 28, 2026, Treasury and the IRS issued Revenue Ruling 2026-20 and Notice 2026-62 . Together they address Section 351/ETF conversions, ETFs’ use of in-kind redemptions to avoid income and non-qualifying income recognition, and investment funds’ strained reading of technical rules to generate taxpayer-favorable capital gains and ordinary losses. Michael Scott once shouted “ I declare bankruptcy!