What is Reverse Moristrast (RMT)?
Reverse Moristrast (RMT) is a tax optimization strategy that allows companies wishing to spin off their assets and sell them to stakeholders without paying taxes on the profits earned from the disposal.
RMT is a form of organization that allows a spin-off subsidiary to be combined with another company tax-free if all legal requirements for the spin-off are met. To form an RMT, the parent company must first spin off its subsidiary or other unwanted assets to another company. The company is then merged or combined with a company interested in acquiring the asset.
- Reverse Moristrast (RMT) allows businesses to spin off and sell their assets while avoiding taxes.
- RMT begins with the parent company trying to sell its assets to a third party.
- After the RMT is formed, the shareholders of the original company will own at least 50.1% of the value and voting rights of the merged or merged company.
Mechanism of Reverse Moristrast (RMT)
The RMT was ruled in a 1966 proceeding against the Internal Revenue Service, resulting in a tax loophole to avoid taxes when selling unwanted assets.
RMT begins with the parent company trying to sell its assets to a third party. The parent company then creates a subsidiary, which merges with a third-party company to create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. The RMT is complete if those shareholders control at least 50.1% of the voting rights and economic value of the unrelated company. The parent company effectively transferred the assets to a third party tax-free.
An important function of maintaining the tax exemption status of RMT is that after the establishment of RMT, the shareholders of the original parent company own at least 50.1% of the value and voting rights of the merged or merged company. This makes RMT attractive only to third-party companies that are about the same size or smaller than the split subsidiary.
RMT’s third-party companies also have greater flexibility in gaining board control and appointing senior management, despite holding shares in non-dominant trusts. Worth mentioning.
The difference between Morris Trust and Reverse Morris Trust is that in Morris Trust, the parent company merges with the target company and no subsidiary is established.
Example of reverse moristrast (RMT)
Carriers who want to sell their old landlines to small local businesses can use this technique. Telecommunications companies may not want to spend time or resources upgrading these lines to broadband or fiber optic lines, so they can use this tax-effective transfer to sell these assets.
In 2007, Verizon Communications announced plans to sell its landline business to Fairpoint Communications on certain routes in the northeastern region. Verizon transferred unnecessary landline assets under management to another subsidiary and distributed its shares to existing shareholders in order to qualify for tax exempt transactions.
Verizon then completed the RMT restructuring with Fairpoint, giving former Verizon shareholders a majority stake in the newly merged company, and Fairpoint’s former management to run the newly established business. I gave a green light.
In another example, Lockheed Martin sold from the Information Systems and Global Solutions (ISGS) business segment in 2016. Like Verizon, it set up a new branch to implement RMT and then merged with defense and information technology company Leidos Holdings.
Raids Holdings made a cash payment of $ 1.8 billion and Lockheed Martin reduced about 3% of its outstanding common stock. Later, Lockheed Martin’s shareholders involved in the transaction owned a 50.5% stake in Leidos. Overall, the transaction was valued at an estimated $ 4.6 billion.
How does Reverse Mori Trust work?
Reverse moristrast is a strategic way to sell a department tax-free if all legal requirements are met. To receive the Reverse Morris Trust, one company creates a new company for this division and merges it with another. Importantly, the shareholders of the parent company must own at least 50% of the newly established company.
Why do companies choose Reverse Moristrast?
If your company is focused on its core business and wants to sell its assets in a tax-effective way, you might opt for the Reverse Morris Trust. This allows the parent company to raise funds and reduce debt while selling unwanted business assets. This type of transaction can be useful for very debt-rich companies.
Is Reverse Mori Trust Commonly Used?
Very few reverse Morris trusts occur each year. In contrast, dozens of traditional spin-offs have been announced. Part of the reason behind this is that the Reverse Morris Trust is followed by certain requirements. Only certain companies can apply and must generate positive income in the five years prior to the transaction.