IRS Denies Yahoo Advance Tax Ruling in $23 Billion Alibaba Spinoff

Yahoo (YHOO) is revisiting its plan to spin off its $23 billion Alibaba stake into a separate company after the IRS said it would not rule in advance on the tax implications of the deal for shareholders.

In an SEC filing last week, Yahoo said the IRS informed it on September 2 of its decision not to provide the company early guidance on the tax implications of the move ahead of the proposed spin-off. The denial of an advance ruling did not mean the IRS had concluded the proposed spin-off transaction was taxable nor was it an indication it ultimately would do so, the federal agency said.

Yahoo said that its tax counsel advised it the IRS’ decision not to grant the search giant’s request did not change its belief the spin-off would be tax free to shareholders. Stll, the search giant, should it elect to proceed, would move ahead in murky tax waters.

In the wake of the IRS’ response, Yahoo’s board of directors said it will reconsider its options, one of which is still to proceed as planned.

Last January, Yahoo announced its intention to spin-off its 15 percent stake in Alibaba, valued at some $32 billion. In July, Yahoo filed documents with the SEC, providing details regarding the spin-off it planned to call Aabaco Holdings.

Yahoo cautioned in the Form N-2 filing that it could cancel the spin-off should federal tax regulators rule the transaction is not tax-free for shareholders. While authorities reviewed the tax implications of the spin-off, Yahoo presented the plan to shareholders as unencumbered by taxes, hoping, of course, for a favorable advance ruling.

The Aabaco spin-off is intended to transfer the value of Yahoo’s Alibaba stake to its shareholders without the burden of $10 billion in capital gains taxes that would occur if Yahoo sold the stock and paid out the proceeds.

To comply with federal law on tax-free spin-offs, Yahoo has included in the deal a newly-formed entity called Yahoo Small Business–the company’s small business services unit–to satisfy the government’s requirement that an operating business be part of the transaction. Aabaco will own 100 percent of Yahoo Small Business.