The Meb Faber Show - Better Investing The Tax Alpha Arms Race (w/ Wes Gray & Brent Sullivan) | #622
13 snips
Mar 13, 2026 
Wes Gray, Co-CIO of Alpha Architect known for ETF and portfolio design, and Brent Sullivan, tax analyst and editor of Tax Alpha Insider, tackle concentrated stock playbooks. They break down 351 ETF seeding, IRS diversification tests, regulatory risks, and practical steps for tax-aware rebalancing. They also explore the rise of tax-managed long-short strategies and how AI could reshape tax planning.
AI Snips
Chapters
Transcript
Episode notes
351 Was For Startups Not Tax-Free Diversification
- Section 351 originated to let founders contribute assets to start businesses tax-free, but Congress later limited it to prevent tax-free diversification.
- The code now allows tax-free contribution only when assets are already diversified, else partnership rules (721) with penalties apply.
How To Meet 351 Diversification Tests
- To qualify as diversified under 351 you must meet the 25% rule (no contributed security >25%) and the 50% rule (top five contributed securities ≤50%).
- Wes Gray gives the concrete example that an 11-stock equal-weight portfolio would satisfy the IRS diversification test.
Don't Rely On Engineering To Beat 351 Intent
- Financial engineering can technically satisfy 351 rules (e.g., borrow to buy many tiny holdings) but risks violating the statute's intent and attracting a substance-over-form challenge.
- Wes Gray warns regulators can collapse step transactions and view the whole as tax-free diversification, not allowed by Congress.