Popularity Rises Among Reverse Morris Trusts

When the Internal Revenue Service sent a bill for $413.44 to the Mary Archer W. Morris Trust in 1964, a legal battle ensued.  The IRS claimed the trust owed unpaid taxes on shares it held in American Trust Co., a small North Carolina bank that had recently merged with a rival.  What resulted was the “Reverse Morris Trust.”

Now, fifty years later, big U.S. companies looking to release unwanted divisions without paying large taxes are increasingly using RMTs.  This is used when a parent company has a subsidiary that it wants to sell in a tax-efficient manner.  The parent company will complete a spin-off of a subsidiary to the parent company’s shareholders.  

RMTs have grown more popular in recent years as companies (often spurred by activist hedge funds) focus on what they do best and looking to shed pieces that may not fit.  The trusts combine the best of both worlds, “It gets the unwanted asset out of the [parent company] tax-free, and shareholders get all the benefit and upside of a prearranged M&A combination.” 

See Liz Hoffman, What’s a ‘Reverse Morris Trust’ and Why Is Everybody Doing One?, The Wall Street Journal, March 27, 2015.