Reverse Morris Trust

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DEFINITION of 'Reverse Morris Trust'

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.

BREAKING DOWN 'Reverse Morris Trust'

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.

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