What's a Reverse Morris Trust?

Definition of 'Reverse Morris Trust'

Excerpt:

A tax-avoidance strategy, in which a corporation wanting to dispose of unwanted assets can do so while avoiding taxes on any gains from those assets. The Reverse Morris Trust starts with a parent company looking to sell assets to a smaller external company. The parent company then creates a subsidiary, and that subsidiary and a smaller external company merge and create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right and economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company.

The Reverse Morris Trust originated from the Morris Trust. In 1966, the case Commissioner vs. Mary Archer W. Morris Trust went to court, and Morris Trust received a favorable ruling. Due to this ruling, a loophole was created for companies to avoid taxes when looking to sell unwanted assets. The difference between the Morris Trust and the Reverse Morris Trust is that in the Morris Trust, the parent company merges with the target company and no subsidiary is created. For example: A telecom company, looking to sell off old landline to smaller companies in rural areas could use this technique. The telecom company might not wish to spend the time or resources to upgrade those lines to broadband or fiber optic lines, so they could sell these assets using this tax-efficient transfer.

Comment: Upcoming example is Dupont

DuPont Co. (DD) is considering alternatives to a planned spinoff of its performance chemicals unit, which may pave the way for a deal with Tronox Ltd. (TROX) Tronox shares rose the most since February. DuPont is considering a so-called Reverse Morris Trust for the unit that makes titanium-dioxide pigment, Teflon and refrigerants, Chief Financial Officer Nicholas Fanandakis said today. A Reverse Morris Trust may create “synergies” with a potential partner, he said. The company, the largest U.S. chemical maker by market value, announced plans in October to spin off the unit because of volatile earnings. In a Reverse Morris Trust, a company first spins off unwanted assets to its stockholders. The tax-free transaction is completed when the new company merges with a smaller company, giving shareholders of the spinoff a majority stake. “We are open to the possibility of someone coming in with an RMT or even a sale, a direct purchase opportunity,” Fanandakis said today at Goldman Sachs Group Inc.’s Basic Materials Conference in New York. “It’s got to be of sufficient value, though, to offset the risk and uncertainty that we would take with that endeavor versus pursuing the spin path.”