Why a Reverse Morris Trust Is Path for AT&T-Discovery

To carry out the planned merger of their media operations, AT&T Inc. and Discovery Inc. proposed a tax-advantaged transaction known as a Reverse Morris Trust. This route can be attractive to highly leveraged corporations such as AT&T, the world’s most heavily indebted nonfinancial company. The goal is for AT&T and its shareholders to see no tax on gains from the deal.

It’s essentially a tax-free spinoff with a twist: The spunoff entity joins a third party in a prearranged merger. In this case, AT&T proposes to 1) spin off (or split off) WarnerMedia, which includes brands like HBO, CNN, and TBS; 2) merge it with Discovery; and 3) have its shareholders retain more than 50% ownership of the newly merged company, a crucial test to keep the arrangement tax-free. Spinning off or splitting off a subsidiary are two paths to the same goal, with the difference being who receives the shares of the new company.