On Monday, another significant blow struck Yahoo’s plan of spinning off its Alibaba stake, which is worth $24 billion as the US taxman said that they had some serious concerns pertaining to deals that were similar to the one proposed by Yahoo. The Internal Revenue Service (IRS) said that it had some questions about spin-offs that involve a small operating business coming together with an investment vehicle that’s substantially larger. Yahoo wasn’t specifically mentioned by the IRS, but the statement was made a week after the Silicon Valley company had mentioned that the tax services had declined its request for a so-called private letter ruling.
This left the company in limbo regarding what action to take with the 15% stake that it holds in Alibaba, the Chinese ecommerce group. Yahoo had announced its intention of spinning off its shares in Alibaba in January into a new entity that would be named Aabaco, along with a small operating business that would be made from Yahoo Small Business. It provides website design and domain hosting services to owners of small businesses. The company had seemed pretty confident at that time that it would have no difficulty in obtaining a private letter, which would enable it to make the arrangement and reduce its tax burden.
Some lawyers said that the comments made about Yahoo by the IRS had been very negative. On Monday, an official IRS document was issued, which said that the tax service and the Treasury were worried about the balance between operating businesses and investment assets in spin-off deals and organizations. The document asserted that concern was directed towards transactions where the controlled or distributing corporation owns a small portion of Qualifying Business Assets as opposed to others. It was concluded that distributions pertaining to Qualifying Businesses may not be much justifiable under current law.
The Obama administration has been making an effort in eliminating corporate tax loop holes, which also include the inversion deals where a US company is purchased by a foreign company for lowering the tax burden of the former. A lawyer at one of New York’s largest firms said that the IRS wouldn’t give happy news to the Yahoo board members. After the comments of the tax service, the circumstances relating to the spin-off plan have undergone substantial change. The ruling will also be a blow for Marissa Mayer, the company’s chief executive, as she not only failed to get the desired seal from the IRS, but also lost key staff members.
This includes head of Middle East, Europe and Africa region, Dawn Airey and Kathy Savitt, the chief marketing officer. Since the announcement of the spinoff in January, there has been a significant decline in Alibaba’s shares and the same amount has also been lost by Yahoo’s stock. As per Monday’s closing price, Yahoo’s 384 million shares in Alibaba are worth $24 billion. Another lawyer said that there had been chances of Yahoo moving ahead with the spinoff before the comments of the IRS came to light.