Reverse Morris Trust

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A Reverse Morris Trust in United States law is a transaction that combines a divisive reorganization (spin-off) with an acquisitive reorganization (statutory merger) to allow a tax-free transfer (in the guise of a merger) of a subsidiary.[1]


A Reverse Morris Trust is used when a parent company has a subsidiary (sub-company) that it wants to sell in a tax-efficient manner. The parent company completes a spin-off of a subsidiary to the parent company's shareholders. Under Internal Revenue Code section 355, this could be tax-free if certain criteria are met. The former subsidiary (now owned by the parent company's shareholders, but separate from the parent company) then merges with a target company to create a merged company. Under Internal Revenue Code section 368 (a)(1)(A), this could be largely tax-free if the former subsidiary is considered the "buyer" of the target company. The former subsidiary is the "buyer" if its shareholders (also the original parent company's shareholders) own more than 50% of the merged company. Thus, the former subsidiary will usually have a bigger market capitalization than the target company. The target company's managers rarely run the merged company.


The original Morris Trust structure was the result of a favorable ruling in IRS v. Morris Trust in 1966. The original Morris Trust structure is similar to the above Reverse Morris Trust structure, however instead of a former subsidiary merging with a target company, the parent company would merge with the target company.

Following several leveraged Morris Trust transactions similar to the original Morris Trust transaction, but involving cash and bank loans rather than mere stock, Congress enacted Internal Revenue Code Section 355(e) in 1997. This imposes additional taxation on the distribution in the spin-off step whenever 50% interest in a spun off company is transferred tax-free in the two years following a spin-off.


Verizon wished to sell its access lines to Fairpoint. Rather than simply selling these assets alone to Fairpoint, however, Verizon created a subsidiary (to which it sold these assets) and distributed the shares of this new subsidiary to Verizon's shareholders. They then completed a Reverse Morris Trust with Fairpoint, where the original Verizon shareholders had a majority ownership of the newly merged company and the Fairpoint management ran the new company. Verizon was able to divest their access lines in a tax-free manner as they continued to focus on higher growth wireless business.

Procter & Gamble Co. was planning to sell its Pringles line of snacks to Diamond Foods in a leveraged, reverse Morris Trust split-off. The Pringles business would be transferred to a separate subsidiary which would assume approximately $850 million of debt. However, the two companies were unable to finalize the deal, and in February 2012 Procter & Gamble found another buyer in the Kellogg Company.

Procter & Gamble used a similar transaction structure when it sold Folgers coffee to J.M. Smucker in 2008. Procter & Gamble used the same transaction structure with the sale of 43 of its beauty brands on July 9, 2015 to Coty, Inc.

Lockheed Martin divested a portion of its IS&GS business to Leidos in a $5 billion transaction in early 2016, which included a $1.8 billion one-time special cash payment to Lockheed Martin. Lockheed Martin shareholders received 50.5% equity in Leidos.[2]

On February 2, 2017, Entercom announced that it had agreed to acquire CBS Radio. The sale will be conducted using a Reverse Morris Trust so that it will be tax-free.[3]

On April 1, 2017 HPE's enterprise service division will acquire[4] CSC to form the new company called


  1. ^ Hoffman, Liz. "What’s a ‘Reverse Morris Trust’ and Why Is Everybody Doing One?". WSJ. Retrieved 8 April 2017. 
  2. ^ "Lockheed Martin to Separate and Combine IT and Technical Services Businesses with Leidos". Lockheed Martin. Lockheed Martin. 26 January 2016. Retrieved 29 January 2016. 
  3. ^ Littleton, Cynthia (2 February 2017). "CBS Sets Radio Division Merger With Entercom". Variety. 
  4. ^ Hewlett-Packard Spinoff Is Preparing to Split Again