What is the "exchange fund variant"?
At the Wall Street Tax Association seminar in July 2026 (read the transcript), Treasury officials spoke at length about exchange traded funds seeded with appreciated assets (and no gain recognition) using a Section 351 transfer.
Many advisers recoiled at Treasury's mere mention of Section 351 transfers, but things have moderated since Notice 2026-62 and Rev. Rul. 2026-20 landed in late Sept. 2026 and the more nuanced distinction between routine and aggressive planning has emerged.
The "exchange fund variant" mentioned by Kevin Salinger (Deputy Assistant Secretary for Tax Policy, Department of the Treasury) during the Wall Street Tax Association (WSTA) seminar is when an exchange fund seeds an exchange traded fund with appreciated assets using a Section 351 transfer.
These three episodes of The Albatross podcast are relevant:
1) Exchange funds from scratch with Cache founder Srikanth Narayan
An exchange fund seeding an exchange traded fund is obviously deeper down the rabbit hole and without taking a close look many advisers simply tossed it in the "too risky" bucket and moved on.
But just as things have moderated around Section 351 transfers to ETFs, my guess is that things will moderate with the exchange fund variant, too.
The devil is in the details. Or, more specifically, the use of one particular section of the tax code.