In order to talk about Reverse Morris Trust, we need to discuss Morris Trust. And then we will talk about why this is relevant.
Morris Trust was a company that, in the 1960s, received a tax-bill for unpaid taxes for a $413.44. The trust was being held at American Trust Company. The tax bill was a result of ATC merging with a competitor. Mind you, nothing about the Trust had changed, it’s just that the merger created a transaction with tax consequences.
The tax liability is created for the target company because the target company, presumably, sells its shares at a premium to the buyer. The Reverse Morris Trust puts the tax liability to buyer instead, which it may be able to offset with other expenses. (Expenses reduce income, lowering the tax liability.)
The mechanics goes something like this. Buyer wants to buy Target and Target wants to sell to Buyer. Buyer divests a portion of itself into a newly created subsidiary. At this point Buyer own 100% of the subsidiary. Buy SELLS 49% of the shares of the subsidiary to Target for a price. The price costs Target its whole company. So, now, the subsidiary includes 100% of Target and a line of business from Buyer. Having sold 49% of the subsidiary, Buyer retains control. Target, having BOUGHT 49% of a company using itself as the price, it writes off the expense of purchasing those shares. The Target is allowed to merge with the subsidiary. See the trick here? Buyer SOLD while Target BOUGHT.
Executing an RMT is difficult. Buyers and Sellers must find each other for not just for the M&A and the right price, but then also willing to go through with this complicated transaction method. While tax compliance isn’t my area of expertise or interest, business is. M&A is an interesting area that creates many compliance issues, including tax compliance. Tax avoidance is legal, but tax evasion is illegal. RMT offers a way to avoid taxation when done right.
About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.