The transactions, in each case, qualify as a 'D' reorganization because there is no longer, for that purpose, a post-distribution maintenance of control requirement. Accordingly, the "asset movement" (from target to Newco) is tax-free. Moreover, the Newco stock is received by the target's shareholders on a tax-free basis. That is because the requirements of Sec. 355 are satisfied, and finally, because the target shareholders obtain in excess of 50 percent of the value and voting power of the acquirer's stock.
The distribution (of Newco's stock by the target) is also tax-free because the transaction does not run afoul of Sec. 355(e). That section, which as Congress intended when it enacted the 1997 changes, now has hegemony with respect to the taxability of Morris Trust transactions—either of the reverse or forward variety.
To be sure, Sec 355(e) operates where, in connection with an otherwise qualifying spin-off, the former shareholders of the distributing corporation (target) cede 50 percent or more of the stock of such corporation (to outsiders) as part of a "plan or series of related transactions." What's more, the above-cited reverse Morris Trust transactions do not violate Sec. 355(e) because in each instance, the shareholders of the target succeed well in excess of 50 percent of the acquirer's outstanding stock.
However, the reason why the latest generation of spin-off/acquisition transactions are structured as reverse Morris Trust transactions can be directly traced to the relaxation of the 'D' reorganization requirements—the beneficial elimination of the post-distribution maintenance of control condition. That is why these deals can now be structured in the most direct manner; as a drop down of the wanted business to Newco, a spin-off of Newco, and a business combination involving Newco and the acquirer.
That is, of course, as long as the shareholders of the target obtain a greater than 50 percent interest in the acquirer, so the entire transaction can be accomplished on a fully tax-free basis.
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