The plan of Yahoo!’s CEO, Marissa Mayer, to spin off the compay’s $34 billion stake in Alibaba, without paying any tax could find some resistance from the federal tax authorities. On Tuesday, tax lawyers in Washington were informed by an official of the Internal Revenue Service that potential changes were being weighed by the agency regarding the treatment of some types of tax-free spinoffs. The I.R.S is especially concerned about those spinoffs in particular in which an operating business owns a small percentage of a new publicly traded company, according to the official. This is exactly the type of spinoff that had been proposed in January by Yahoo!’s Chief executive.
It is intended by the internal company to bundle its small business division into a new company, which also includes about 380 million shares of Alibaba and then spin it off to shareholders of the company later this year. The shares of Yahoo! declined in the last half-hour of trading on Tuesday since the IRS review became public, which was approximately 7.6%. More than half of the stock market valuation of the company is based on its share in Alibaba. However, analysts said that it remained unclear if any change in the treatment of spinoffs and tax would have an impact on transactions that are already underway such as the Alibaba-Yahoo transaction.
The change is rather ambiguous because it isn’t clear if it is applicable to current deals. If the disposal of Alibaba by Yahoo was taxed fully, it is estimated that the fair value of Yahoo’s share would be about $40 each or remain at the current level. But, if the spinoff occurs according to Yahoo’s vision i.e. remains tax-free, then the share price of Yahoo would increase to about $55. No comment was made by a Yahoo spokeswoman. Currently, a spinoff shouldn’t just include assets such as tax, but also comprise of an operating business in order to be considered as a tax-free transaction.
Firm guidelines haven’t been established by the IRS about how important the operating business has to be for the spinoff company. Yahoo Small Business is the operating unit that the company intends to bundle with its Alibaba stake. As per Amit Kumar, who managed the unit until last year, this is a strong business, but never fit with the rest of the company’s portfolio. He said that the profitability and revenue profile of the business was quite strong as compared to other Yahoo businesses.
However, Yahoo chose to spin it off because they don’t consider it an important element of its core business. Isaac Zimbalist, the IRS official cautioned in his remarks that no changes or decisions had been made by the agency to its procedures and the transactions that had been put forward before would be handled in the same way, but there could be change coming. The comments made by Mr. Zimbalist had been confirmed by a spokeswoman for the IRS. In April, Yahoo had informed investors that a letter for private ruling had been submitted.