Reverse Morris trust

Reverse Morris trust

A Reverse Morris Trust is a transaction that allows a tax free merger of two companies:

A Reverse Morris Trust is structured as such:

- Parent company has a division (sub-company) that it wants to sell tax efficiently

- Parent company completes a tax-free spin-off of sub-company to Parent company shareholders

- Sub-company then merges with a target company to create merge company

- Merge company must be owned by more than 50% of original parent company shareholders, thus sub-company must be the dominant party in the merger with target company

-Target company's managers run the new company

Example: Verizon spun-off access lines to Fairpoint. These access lines could not stand alone, they needed a company to run them. Thus, they completed a Reverse Morris Trust with Fairpoint where the original Verizon shareholders had a majority ownership however the Fairpoint management ran the new company. Verizon was able to divest their access lines in a tax free manner as they continue to focus on higher growth wireless business.

History:

A 1966 court ruling IRS vs. Morris Trust resulted in a ruling in favor of Morris Trust. The original Morris Trust structure is similar to the current RMT structure, however instead of spin co. merging with another company, the remain co. (or parent co.) would merge with a new company.

Since then companies and lawyers have been attempting to circumvent taxes through sales and exchanges of assets. In 1997, the courts ruled against this case and now only allow Reverse Morris Trusts


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