At last week's Wall Street Tax Association seminar on current developments in tax-aware products, one of the first areas of focus that Treasury officials mentioned was the use of section 351 conversions to seed new ETFs.
Read the transcript of the seminar here.
Section 351 is a century-old law meant to make startup funding easier. Suppose you and I want to start a farm. You have a tractor, and I have a barn. We shouldn't need to sell the tractor and the barn and pay tax to start the new farm.
Over the past several years, section 351 has been adopted by the ETF industry.
As of this writing, 351.tax lists 87 ETFs seeded in kind with about $18 billion in launch assets. This could move up or down depending on current information and what is included in the tabulation.
Ellie and I wrote about Section 351, its origins, Congress's intent, and potential abuse scenarios in our paper (forthcoming Journal of Wealth Management).
Some are suggesting that section 351 ETF seeding is doomed, while others are shouting that Treasury won't do anything.
"...there may be real commercial reasons to seed a new ETF with securities rather than cash," Kevin Salinger, Deputy Assistant Secretary for Tax Policy, U.S. Department of the Treasury, and Principal Deputy Chief Counsel, Internal Revenue Service, said during the seminar.
This whole thing seems to hinge on what "real" means. So, let's get into it.