Taxes, Organizational Restructuring and Method of Payment Considerations in the Corporate Divestiture Decision: An Analysis of Morris Trust Transaction Structures
Posted: 25 Nov 1996
Date Written: October 1996
We present a model which examines the impact of taxes and the method of payment on the asset sale decision. An important difference between a takeover and an asset sale is that the seller survives as a corporate entity in the latter transaction. Therefore, the net effect of an asset sale depends in part on whether proceeds are retained or distributed. We show how agency considerations and tax effects influence the choice between taxable and nontaxable transactions as well as the method of payment. We also describe and analyze in detail as asset sale structure known as a Morris Trust transaction. The use of a Morris Trust eliminates all corporate and personal taxes in an asset sale. We characterize the type of acquirer and divestor likely to benefit most from this transaction form, but also demonstrate why many asset sales are not structured in this tax-advantaged way.
JEL Classification: G30
Suggested Citation: Suggested Citation