Reverse Morris trust

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A Reverse Morris Trust is a transaction that allows a tax free transfer of assets, stock, and/or cash between companies.

There are many ways to structure a Reverse Morris Trust and each example has its own intricacies.

A Reverse Morris Trust for spin-offs 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

RMTs can also be structured as a split-off (see below).

Example:

Liberty Capital and News Corp were involved in a transaction where Liberty Exchanged Time Warner stock for cash and the ownership of the Atlanta Braves. Neither company paid taxes on the transaction. In this case a cash rich split-off technique was used. Since less than 75% of the deal was in cash (1.38 bn in cash) and the rest was valued through the Braves (460 mm) this transaction was tax-free. The selling party (Liberty) is required to own the opposing party's stock (TWX) for 5 years and must sell at least half of the shares they own. Normally, Liberty would pay taxes on the appreciation of TWX shares and TWX would pay taxes on the appreciation of the Atlanta Braves and in this case neither paid any taxes.

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