how a reverse morris trust works
rmts originated as a result of a 1966 ruling in a lawsuit against the internal revenue service irs which created a tax loophole to avoid taxes when selling unwanted assets 1the rmt starts with a parent company that decides to divest itself of certain assets it no longer desires it seeks to sell these assets to a third party company the parent company either has an existing wholly owned subsidiary or creates one it transfers the assets to the subsidiary it then spins off or splits off the subsidiary next that subsidiary and the third party company merge to create an unrelated company the unrelated company then issues shares to the original parent company s shareholders the parent company can also receive debt securities and cash from the transaction if those shareholders control at least 50 1 of the voting right and economic value in the unrelated company the rmt is complete the parent company has effectively transferred the assets tax free to the third party company tax savingsthe rmt transaction provides a company and its shareholders with the opportunity to divest specific assets without receiving a tax bill as part of the transaction the company can receive cash and reduce its debt with no consequential capital gains tax a key tax avoidance feature of the rmt is that after the formation of the merged and unrelated company stockholders of the original parent company must own at least 50 1 of the shares and voting rights of the merged firm this makes the rmt only attractive for third party companies that are about the same size or smaller than the spun off subsidiary to qualify for tax free treatment the transaction must meet the requirements set forth by irc section 355 2the difference between a morris trust and a reverse morris trust is that with the former the parent company merges directly with the target company and no subsidiary is used benefits of a reverse morris trustexamples of a reverse morris trust a telecom company wishes to sell old landlines to smaller companies in rural areas because it doesn t want to spend the time or resources required to upgrade those lines to broadband or fiber optic lines in 2007 verizon communications announced a planned sale of certain landline operations in the northeast to fairpoint communications to meet the tax free transaction qualification verizon transferred unwanted landline operation assets to a separate subsidiary and distributed its shares to its existing shareholders 3verizon then completed the rmt transaction with fairpoint that gave the original verizon shareholders a majority stake in the newly merged company and fairpoint s original management the green light to run the newly formed business 3 lockheed martin divested its information systems global solutions isgs business segment in 2016 like verizon it used the rmt by forming a new offshoot company that then merged with leidos holdings a defense and information technology company 4leidos holdings paid a 1 8 billion cash payment while lockheed martin reduced approximately 3 of its outstanding common shares lockheed martin stockholders involved in the transaction then owned a 50 5 stake in leidos overall the transaction was valued at an estimated 4 6 billion 4