The tax-free swap died on September 28, when the Internal Revenue Service (IRS) ruled that moving low-basis stock into a new fund and passing it to a broker is a taxable sale [1]. The same paperwork named the pooled version as the next idea under review, with comments due October 28 [2]. It only ever worked below a 25% single-stock ceiling, so it reaches fewer holders than the trade press implied when it called the move the end of exchange funds [2][9].

The big picture:

The ruling walks through three steps. A holder puts stock with a large built-in gain into a brand new fund. The fund sells shares to a broker, then buys that broker out with the holder’s original stock [1]. Each step leaned on a separate rule, and together they let the holder end up with a spread-out basket while owing nothing.

The IRS said the mix fails. It called the fund a pipe and treated the holder as having sold the stock to the broker at market price [1]. That is old reasoning aimed at a structure built in the past few years, not a new law [1][8].

What strikes me is how few books this wrapper ever fit. The first step only worked if the stock was already spread out: no single company above 25% of the pile, and five or fewer names holding no more than half [2].

Anyone with 40% of their money in one employer’s stock failed that test before this ruling existed.

By the numbers

  • 25% — Single-stock ceiling: The limit a portfolio had to clear, with a second test capping five or fewer names at half its value [2]. A book that is one big name fails both tests by its own math.
  • 7 years — Lock on the stock: Stock given to a pool and handed to another partner inside seven years forces the giver to book the gain, and a payout back to the giver runs on the same clock [3][4]. That is the timer behind the pooled fund.
  • 20% — Top long-term rate: A long-held gain faces a top rate of 20%, plus the 3.8% net investment income tax [5][6]. A short-term position instead meets ordinary rates, up to 37% above $640,600 for a single filer and $768,700 for a couple [5].
  • $72,000 — Retirement cap: The 2026 limit on what can go into a workplace plan from both sides combined [7]. It is the other sheltered place a sale can land, and it is small beside a seven-figure holding.

What I’d watch:

The notice asks for arguments; it does not write the rule. The Treasury Department asked which similar trades have different facts and deserve different treatment, and set October 28 for comments [2]. I have been reading the law-firm notes all week, and the sharp ones argue about scope rather than about whether the ruling was right [8].

  • The comment file: What pooled funds file by October 28 shapes whether the partnership version gets carved out or folded into the next round of guidance [2].
  • The label risk: Future guidance could name a trade as a listed transaction, which adds reporting duties for anyone who used one [2].
  • The look-back risk: The notice says guidance could apply to trades that already took place, so a fund joined in 2024 is not safe just because it predates the paper [2].
  • The 20% slice: The version Treasury describes needs at least 20% of the pool’s assets in property that is not stock or securities [2]. If that slice stops working, the pooling math fails with it.
  • The exam route: An examiner can challenge one of these trades under current law, without waiting for new guidance [2].

The catch

My read is that the obituary named the wrong patient. The notice says plainly that it does not address other trades involving exchange funds, and that it takes no view on them [2]. It also steps back from a transfer that seeds a fund with stock matching that fund’s own theme [2].

A plain pool, run to hold for years, is not the trade this paper describes.

The real limits sit elsewhere. The seven-year clock is written into the law, not into a fund contract, so the tax break unwinds if the stock comes back inside it [3][4]. The swap also keeps the old cost basis, so the bill is pushed forward rather than erased.

I could be wrong about the timing. Treasury may decide the pool version is different enough to leave alone, and then this is a story about a wrapper almost nobody could use.

At a glance

  • The Big Shift: On September 28 the IRS ruled that putting low-basis stock into a new fund and passing it to a broker is a taxable sale, not a free transfer [1]. The same notice named the pooled version of the trade as a strategy under study [2].
  • Why It Matters: The wrapper was sold as a free way to spread a big position, and it only ever worked below a 25% single-stock ceiling [2]. The ruling lands on the holder who was already spread out, while the holder with one big name still faces the pooled fund and its seven-year lock [3].
  • What I’d Watch:
  • The comment deadline: Written comments close October 28, and what funds argue about scope shapes whatever comes next [2].
  • A listed-transaction label: The notice holds open the option of naming one of these trades, which would add reporting duties after the fact [2].
  • Reach-back: Guidance could cover trades already done, which is the gap between an old plan and an open bill [2].
  • The Catch: The notice does not address plain exchange funds and says so outright, so the “exchange funds are dead” read goes too far [2]. The break is also not free: it carries a seven-year clock and keeps the old cost basis [3][4].

Related reading

Sources

[1] Internal Revenue Service, Rev. Rul. 2026-20 (2026-09-28) — https://www.irs.gov/pub/irs-drop/rr-26-20.pdf [2] Internal Revenue Service, Notice 2026-62 (2026-09-28) — https://www.irs.gov/pub/irs-drop/n-26-62.pdf [3] 26 U.S.C. § 704(c)(1)(B) — https://www.law.cornell.edu/uscode/text/26/704 [4] 26 U.S.C. § 737 — https://www.law.cornell.edu/uscode/text/26/737 [5] Internal Revenue Service, Rev. Proc. 2025-32, 2026 rate tables — https://www.irs.gov/pub/irs-drop/rp-25-32.pdf [6] 26 U.S.C. § 1411 — https://www.law.cornell.edu/uscode/text/26/1411 [7] Internal Revenue Service, Notice 2025-67, 2026 cost-of-living amounts — https://www.irs.gov/pub/irs-drop/n-25-67.pdf [8] Willkie Farr & Gallagher, “IRS Guidance Limits Section 351/ETF Conversions and Puts Private Funds Pursuing Certain Tax-Aware Strategies on Notice” (2026-10-01) — https://www.willkie.com/publications/2026/10/irs-guidance-limits-section-351-etf-conversions-and-puts-private-funds [9] CNBC, “Treasury, IRS crack down on ETF ploy wealthy use to avoid income tax” (2026-10-02) — https://www.cnbc.com/2026/10/02/treasury-irs-capital-gains-income-tax-section-351-warning.html