Daily Management Review

Spinoof Denial by IRS to Derail Yahoo's Plans to Gain from Alibaba Deal


Spinoof Denial by IRS to Derail Yahoo's Plans to Gain from Alibaba Deal
Dealing a setback blow to Yahoo Inc.’s tax-free plan to spin off some $23 billion worth of shares in Alibaba Group Holding Ltd, the federal government denied the internet company tax spinoffs.
This could potentially jeopardizing one of Chief Executive Marissa Mayer's defining moves in her three years running the company.

On Tuesday, Yahoo revealed, via a filing with the US Securities and Exchange Commission, that it was withdrawing its application for a tax spinoff after it realized that its application would be rejected by the Internal Revenue Service.   

However Yahoo clarified that it was not ruling out the spinoff as the IRS indicated it has not concluded the planned spinoff should be taxable.

“Yahoo’s board will continue to carefully consider the company’s options, including proceeding with the spinoff transaction,” said Yahoo General Counsel Ron Bell in the filing.

While a spokesperson from the IRS said the agency doesn’t comment on individual taxpayers. A Yahoo spokeswoman declined to comment beyond admitting to the filing.
Since the announcement in January by Yahoo about its plan to spin off 384 million Alibaba shares which is equivalent to about 15% of the Chinese e-commerce giant, there were concerns among the Yahoo investors about the tax issues.
In case the IRS completely rejects Yahoo’s tax spinoff proposal, the IT giant would be left with just two choices - incurring a tax in the billions of dollars or scrapping the plan for a spinoff altogether.

The deal as well as the tax spinoff is very important to Ms. Mayer as she is accused of having failed to show meaningful growth in the company’s core ad business.

In the months following the January announcement, shares of the Yahoo have been rising primarily riding on the investors’ growing enthusiasm for its Alibaba stake and the CEO’s commitment to return billions of dollars to shareholders through a spinoff.

The value of the Alibaba stake has declined after it took had reached $40 billion when Yahoo unveiled its spinoff plan.

However shares of the IT major fell since May after the IRS indicated that the agency was considering changes to its rules governing spinoffs.

Yahoo, aware of the possibility of rejection of a spinoff, had listed the possibility of a rejection by the IRS as the first “risk factor” in its registration statement for Aabaco. This is the planned new spinoff company. yahoo also expressed doubts about tax releif from the deal in China.

 “The board of directors at Yahoo is not going to risk incurring billions of dollars in taxes unless it has adequate assurance that the transaction will be tax free,” said Gary Friedman, a tax partner at law firm Debevoise & Plimpton LLP.

Apart from obtaining a a tax-free spinoff from the IRS< Yahoo can also seek the opinion of an outside legal counsel.

“It would be difficult for outside counsel to provide Yahoo with a tax opinion that reaches a very high level of certainty now that the IRS has refused to rule,” Mr. Friedman said.

 “It’s been anything but a smooth ride toward monetizing Alibaba. We find ourselves in situation now where it’s uncertain how this will proceed,” said Brian Wieser, an analyst at Pivotal Research.
(Source:www.reuters.com & www.wsj.com) 

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