New Bill on Tax-Free Spin-Off/Mergers May Pass

A bill in Congress with substantial lobbying support from investment banks would ease the restrictions on tax-free Morris trust deals.  In a Morris trust deal a corporation, A, spins off a wholly-owned subsidiary, A', and then merges the subsidiary into another independent corporation, B, in a stock swap statutory merger.  If the shareholders of A' own a majority of the stock in the resulting corporation the deal is tax-free.  The new bill would relax the majority ownership requirement and make the technique more available in more deals.  The new rule makes sense as long as the IRS can collapse deals that are disguised cash for stock payments (by, for example, A incurring debt before the deal, and dropping the debt into the sub, A', which is absorbed by B in the merger.)