Yahoo shares sink on IRS/Alibaba blow

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The Internal Revenue Service denied Yahoo's request for a letter ruling that the company's spinoff of its shares in Alibaba would be tax-free, potentially striking a blow to a key component of the company's strategy.

But Yahoo, in a Securities and Exchange Commission filing, also said the IRS had not explicitly said the proposed spinoff was taxable, leaving some hope a deal could still be done.

Yahoo shares fell 4.4 percent in after-hours trading. The Alibaba shares intended to go into the spinoff were worth roughly $23.5 billion at Tuesday's prices, accounting for more than 80 percent of Yahoo's market capitalization.

Yahoo said in January it would spin off 384 million shares of Alibaba into a new entity called Aabaco Holdings. That entity would also own and operate the current Yahoo Small Business platform.

In February, Yahoo asked the IRS for a ruling that the structure of Aabaco would qualify the spin-off for tax-free treatment.

But in May, the IRS said it was reconsidering its rules on spinoffs, which raised fears that Yahoo's deal might be impacted. On Sept. 2, the tax agency notified Yahoo it would not grant the requested ruling.

"At the same time, the IRS indicated that it had not concluded that the proposed spin-off transaction was taxable and therefore was not ruling adversely on the request," Yahoo said in its SEC filing.

The company said it was proceeding with the planned spinoff and considering options, including going ahead with the deal on the basis of an opinion from its lawyers that the deal would still be tax-free.