The U.S. Treasury and Internal Revenue Service are drawing a sharper distinction between legitimate ETF seeding and tax-driven portfolio conversions that use Section 351 to defer capital-gain recognition. Notice 2026-62 and Rev. Rul. 2026-20 say certain transactions combining Section 351 contributions with ETF creation and redemption mechanics may be treated as taxable exchanges under Section 1001. Section 351 generally allows investors, subject to limitations, to contribute appreciated securities to a newly formed ETF without immediately recognizing the embedded gain. The guidance focuses on whether contributed assets fit the ETF's investment thesis, whether the fund intends to retain them and whether later redemptions were planned from the outset. Shang Chou, co-founder and managing partner at Dishmi Capital, said investors should evaluate the economic substance of the transaction rather than focus solely on its tax benefits. More than 100 ETFs reportedly use Section 351 seeding, including Eagle Capital Select Equity ETF (NYSE:EAGL), Kovitz Core Equity ETF (NYSE:EQTY) and Tema S&P 500 Historical Weight ETF Strategy (NYSE:DSPY).