Wall Street Is Backing Tax-Free De-Merger Legislation

by Mike Godfrey, Tax-News.com, Washington

17 March 2006

Virginia Republican Representative Eric Cantor, a member of the House Ways and Means Committee, is sponsoring a bill which would allow a wider range of corporate divestments to be carried out on a tax-free basis.

So-called Morris Trust transactions, named after a 1960's court case that upheld the ability to do them tax-free, allow a company to spin off a subsidiary into an outside company without incurring a tax charge on the disposal. But the process was abused in the 1990s, and Congress passed a law in 1997 to restrict transactions to those in which no cash changes hands and in which the de-merged unit's shareholders end up as majority owners of the external company. Normally that means merger partners must be smaller, restricting the pool of potential deal candidates.

Investment banks would profit from any relaxation of the rules, and Goldman Sachs seems to have been lobbying for the measure. Cantor's wife, Diana, is a former vice president at Goldman Sachs, although Cantor denies that she is involved in the lobbying effort. Federal filings show that Section 355(e) of the tax code — the section covering tax-free spinoffs — was one of the issues for which the firm recorded $800,000 in lobbying expenses in the second half of 2005.

Robert Willens, a tax accounting specialist at Lehman, told the Wall Street Journal that investment banks "are betting on a substantial increase in deal activity should this legislation be enacted, as companies will have a much easier time shedding units on a tax-efficient basis. And that increase, of course, will result in a corresponding increase in fees for the [investment] banks."

Mr Cantor's chief of staff, Rob Collins, says that his boss plans to try to attach his measure to a bill moving through the legislative process, but hasn't decided yet on which one.

Recent deals which have used 'Morris Trust' structures include Walt Disney's disposal of most of its radio business and Alltel Corp. disposal of its local telephone division. In the mid-1990s, Morris Trust deals included the transfers of Times Mirror's cable division to Cox Communications, Viacom's cable assets to TCI Communications, Rockwell's aerospace assets to Boeing, Tenneco's gas pipeline business to El Paso Energy, and Morton International's air bag business to Autoliv AB. By closing the Morris Trust loophole in 1997, the Joint Committee on Taxation expected the US Treasury to generate $280 million in new tax revenues.

The proposed legislation would eliminate the majority ownership requirement for de-merged units; but the Joint Committee on Taxation hasn't yet said how much Mr. Cantor's bill could cost the government in lost revenue.

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