Yahoo's! tax-free! Alibaba! switcheroo! gets! a! rough! ride! from! US! taxmen!
Not going to make this easy
The amazing Yahoo! / Alibaba / SpinCo tax structure has suffered a blow: America's Internal Revenue Service has refused to say whether or not it approves or disapproves of Yahoo!'s tax-avoidance chicanery. And that usually spells trouble.
Back at the start of the year, the Purple Palace announced it would shuffle its roughly US$40 billion worth of Alibaba holdings into the SpinCo entity (later renamed Abaco), and distribute Abaco stock pro rata to existing Yahoo! shareholders.
The upside of the arrangement, as CEO Marissa Mayer said in January, was that it "delivers value directly and exclusively to our shareholders" – ie: it will be a tax-free move.
The January announcement came with the caveat that the arrangement was "subject to regulatory approval." Unfortunately, nine months on, the IRS isn't making any positive noises about it. The tax authority has declined to reveal its opinion on the matter, and that's starting to make people nervous.
In February, Yahoo! asked the US taxmen to rule on the arrangement to give the web company peace of mind that it will eventually be allowed to go through. In this SEC filing on Monday this week, Yahoo! blandly announced the following:
On September 2, 2015, the IRS notified Yahoo's counsel that it had determined, in the exercise of its discretion, not to 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. Following receipt of such notification, Yahoo withdrew its request for a ruling on September 2, 2015.
As this Quartz piece explains, the deal is potentially falling foul of the "active trade or business" requirement, which says a spinoff has to actually do more than hold shares in another company.
While Yahoo! says it hasn't abandoned the idea, and may still pursue it without the IRS's early approval, that's how it's being seen by Wall Street. The Wall Street Journal has the most optimistic take, calling the plan "in jeopardy" in a paywalled piece. CNBC reports that Yahoo! shares fell 4.4 per cent in after-hours trading. Bloomberg reports that the share-offloading process was on track in May, but by July, IRS officials started asking questions and seeking legal guidance. ®