IRS casts Yahoo’s proposed spinoff of shares in Alibaba deeper into uncertainty
By holding its tongue, the Internal Revenue Service has cast Yahoo’s proposed spinoff of shares in Alibaba deeper into uncertainty, sending Yahoo shares down on an otherwise up day for the stock market.
Yahoo had asked the IRS to rule that it would not owe taxes in a spinoff of about $23 billion worth of stock in China’s Alibaba Group. The IRS declined to make an advance ruling — though it could still approve or deny the tax-exempt status at a later date. The spinoff is planned for later this year.
The deal is designed to save billions in taxes and to placate investors who have long demanded Yahoo Chief Executive Marissa Mayer reverse the fortunes of the beleaguered Sunnyvale, Calif., company, which has struggled in its core business, selling online advertising.
Yahoo said it will continue to move forward with the spinoff. which would create a separate public company that primarily would hold the Alibaba shares. The spinoff would also include Yahoo’s small-business services division and be named Aabaco Holdings.
The IRS non-ruling was revealed by Yahoo on Tuesday in a Security and Exchange Commission filing.
The uncertainty sent Yahoo shares down 2.15% Tuesday, closing at $30.90. The company’s stock was trading as high as $51.75 in November 2014 but has largely been in decline since.
It’s not the first time the tax issue has hit Yahoo’s stock. Shares skidded nearly 8% lower May 19 when an IRS official said the agency was weighing how to handle spinoffs like the one Yahoo was proposing.
Technically, according to tax experts, spinoffs of pure stock are taxable. But if an operating company is part of the mix, the IRS has tended to approve tax-free status. That’s why Yahoo’s small-business unit was added to Aabaco.
But the IRS is considering complaints that such “devices” are accounting trickery. The IRS official at the May 19 meeting wondered whether adding a hot-dog stand to a stock spinoff would qualify it for tax-free treatment.
Yahoo still believes its lawyers can successfully argue for a tax-free spinoff, the filings said.
“Yahoo’s board of directors will continue to carefully consider the company’s options, including proceeding with the spinoff transaction on the basis of an opinion of counsel,” according to the filings.
The company reported a loss of nearly $22 million in the second quarter, though its revenue remained unchanged from a year earlier at $1.04 billion.
The spinoff, which was first revealed in January, was viewed as a way to get cash into the hands of frustrated shareholders and assure them that Yahoo would not use the holdings to make smaller acquisitions.
Yahoo had warned investors in July that the proposed spinoff could generate an unanticipated tax bill. The IRS said in May that it would consider changing tax rules for spinoffs, though it was unclear whether that would affect pending requests such as Yahoo’s.
Alibaba, an e-commerce giant based in Hangzhou, China, went public on Wall Street last September, raising a record $25.03 billion.
Most of Yahoo’s gains have been related to the strength of its 15% stake in Alibaba.
Yahoo has been hampered by stagnant advertising revenue as the Web portal has been eclipsed by rivals such as Google Inc.
Mayer has introduced new products this year such as fantasy sports betting and a live video texting app that is aimed at boosting its mobile presence.
The company is playing catch-up with industry trends that favor mobile technology and video advertising.
david.pierson@latimes.com
Twitter: @dhpierson
