A spinoff or other distribution by a company of subsidiary stock is not always tax free, due to the anti-Morris Trust rules under Code Sec. 355(e).The code requires that a distributing parent corporation recognize gain on an otherwise tax-free spinoff of its controlled subsidiary's stock, if this is done "as part of a plan (or series of related transactions)" to have one or more persons acquire a 50 percent or greater interest in either the parent or the controlled corporation.

Reduced to simpler terms, it prevents a spinoff or similar distribution from helping fund an acquisition. Complications result primarily because acquisitions for these purposes are not restricted to purchase transactions. An acquisition occurs if one or more persons directly or indirectly acquire 50 percent or more of the vote or value of the stock of the controlled or distributing corporation pursuant to a plan or arrangement.

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