Episode summary
The Value Of Assessing Clients' "Tax Risk Tolerance" Amidst IRS Scrutiny Of Tax-Aware Investment ...
Financial Advisor Success (Kitces)
· · 35 min · Hosts: Michael Kitces · Guests: Jeff Levine
Summary
Jeff Levine argues that the IRS is drawing sharper lines around tax-aware investment strategies, especially Section 351 ETF conversions that can look like a way to strip out gains without paying tax. He explains that the IRS’s recent revenue ruling goes after the most aggressive versions of these structures, where appreciated securities are contributed, quickly swapped through an ETF, and then redeemed in a way that leaves the client with diversified assets and little or no current tax bill.
He also says the IRS notice broadens the focus beyond Section 351 conversions to other tactics that use in-kind ETF mechanics or attempt to convert ordinary income into capital gain or losses. Levine points to partnership-based exchange fund variants, box spread ETFs, selective termination of notional principal contracts, and foreign currency strategies as examples of areas the IRS now appears to be scrutinizing more closely.
The bigger planning message, Levine says, is that advisors need to assess a client’s “tax risk tolerance” the same way they assess investment risk tolerance: by weighing both willingness and capacity to take risk, plus the possible downside if the IRS challenges a strategy. He argues that advisors should build due diligence processes, coordinate with CPAs and tax attorneys, and match the complexity of the strategy to the client’s appetite for scrutiny, cost, and hassle.
Key takeaways
- Jeff Levine says the IRS revenue ruling clearly targets the most egregious Section 351 ETF conversion structures, not all tax-aware investing.
- The IRS notice flags additional ETF and derivatives strategies, including partnership-based exchange fund variants, box spread ETFs, and selective termination of notional principal contracts.
- Levine argues that advisors should evaluate a client’s tax risk tolerance by considering both willingness and capacity to absorb IRS scrutiny, penalties, and professional fees.
- He says the real downside analysis should include not just back taxes, but also interest, penalties, and the personal hassle of an audit or tax dispute.
- Levine expects more of these strategies to reach mass affluent clients, which means advisors need a repeatable due-diligence process now.
Notable quotes
“If things go wrong in this, you know, how bad is the downside? What are we looking at just likely back taxes”
“we don't really know what's good. and that's that's the big challenge for for clients and advisors coming out of this revenue ruling”
“the IRS issued a notice. This was notice 2026-62”
“we are going to see more and more and more of this”
How the episode opens
If things go wrong in this, you know, how bad is the downside? What are we looking at just likely back taxes? Is it more likely that if the IRS looks at something, it's going to be prospective only? If they do something retroactively, could it also trigger interest? Could it trigger penalties? And what would that do to the client's situation and their overall plan?
Hello and welcome back to the Financial Advisor Technician podcast. I'm your host, Adam Van Deusen. On today's episode, we're going to discuss a recent IRS revenue ruling and a separate IRS notice that scrutinize certain tax-aware investment strategies and how these documents fit within the broader category of tax risk for clients.
Cuz in today's environment, technology and other advances have made many tax-aware investment strategies that might once have been the domain of ultra-high net worth individuals feasible for clients with a wider range of wealth. However, while certain strategies have been officially blessed by the IRS, others exist in a much more gray area, which suggests that a client's interest in pursuing them could be determined by what might be called their tax risk tolerance or their capacity and tolerance for using tax strategies that could save them significant money, but also could put them in hot water with the IRS. So, to help us dig deeper into this topic, I'm joined today by Jeff Levine, the lead financial planning nerd here at Kitces.com and the chief planning officer for Focus Financial Partners, to discuss the ins and outs of the recent IRS revenue ruling and notice, what they mean for particular tax-aware investment strategies, and how advisors can help clients determine their personal tax risk tolerance and put it into action when considering tax planning strategies.
So, welcome Jeff to the Financial Advisor Technician podcast.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- irs scrutiny
- tax-aware investment strategies
- tax risk tolerance
- section 351 etf conversions
- advisor due diligence
Companies and tickers mentioned
- Kitces.com
- Focus Financial Partners
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Financial Advisor Success (Kitces), this episode and its artwork belong to Michael Kitces. Octagon is not affiliated with the show; this page is an independent summary.
