By Douglas MacMillan And John D. McKinnon
Shares of Yahoo Inc. slid about 8% in late-afternoon trading
Tuesday on worries the company's plan for a tax-free spinoff of
shares of Alibaba Group Holding Ltd. could face unexpected
regulatory challenges.
An Internal Revenue Service official said Tuesday the agency is
considering changes to its rules governing spinoffs, Bloomberg News
reported. Isaac Zimbalist, a senior technician reviewer at the
IRS's Office of Associate Chief Counsel, was speaking at a D.C. Bar
Association event.
In a statement, IRS officials said they are studying the
possibility of a rule change but said "we have made no decisions as
to the current ruling practice, as to whether to issue guidance
regarding this aspect and related aspects of spinoffs, or as to
what the substance of any guidance might be."
A Yahoo spokeswoman declined to comment on the IRS official's
comments.
The matter remains murky for now. Even if there is a change to
the rules, it isn't clear that Yahoo's planned spinoff of its
Alibaba shares would be affected. "Ruling requests that are already
in-house will continue to be handled in the normal fashion for now,
but this may change," the IRS said.
Completing the spinoff is now crucial for Yahoo Chief Executive
Marissa Mayer, who, nearly three years into her tenure has failed
to show meaningful growth in the company's core ad business.
Yahoo's stock gains under Ms. Mayer are largely tied to investors'
growing enthusiasm for its Alibaba stake and the CEO's commitment
to return billions of dollars to shareholders through a
spinoff.
For a spinoff to be tax-free, the IRS requires companies to
include an active, operating business in the group that is being
spun off.
When Yahoo unveiled the spinoff plan in January, its Alibaba
holdings were worth about $40 billion. It said Yahoo Small
Business, a division that sells tools to help small-business owners
market and sell their goods online, would be separated from Yahoo
and added to a new company called SpinCo that would also house the
Alibaba shares.
The Yahoo division makes about $50 million in earnings before
interest, taxes, depreciation and amortization, or less than 4% of
Yahoo's total Ebitda last year.
The IRS may start requiring companies to include a substantial
operating business in the group being spun off, Mr. Zimbalist said
in his comments, according to Bloomberg.
"The issue comes down to whether we've dropped a hot dog stand
or a lemonade stand into a business that is primarily publicly
traded stocks, cash and other wonderful things that I call
appreciated property," Mr. Zimbalist said, according to the
report.
Yahoo expects the spinoff in the fourth quarter.
Appearing at an event organized by J.P. Morgan on Monday, Yahoo
CEO Marissa Mayer said there is still "a lot of work to do" to
ensure the spinoff goes as planned.
"There's the legal and regulatory work-stream and then there's
the act of actually separating out Yahoo Small Business into a
separate entity and a separate company," Ms. Mayer said, according
to a transcript of her comments. "Things are on track, but there's
a lot of people at Yahoo who are working very hard to make sure
that we are able to set up the entity and get it trading in [the
fourth quarter] the way that we would like."
Write to Douglas MacMillan at douglas.macmillan@wsj.com and John
D. McKinnon at john.mckinnon@wsj.com
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