On Friday, the tech firm Yahoo! Inc. (NASDAQ:YHOO) filed formal documents in order to spin off its 15 percent stake in Alibaba in the fourth quarter of the year.
Yahoo is wary of the taxes that might be mounted on transactions. In the filing made with the Securities and Exchange Commission, Yahoo has alerted the shareholders that it may cancel the spin-off if there is no prior written assurance from the federal tax authorities for the transactions to be tax free to the shareholders.
Yahoo possesses 384 million shares of the Chinese company that are supposed to be worth about $32 billion. The spin-off was announced in January and is aimed at transferring the value of that stock to Yahoo’s shareholders without having to pay for the capital gains tax of more than $10 billion. It will apply if Yahoo would simply sell the stock and return the cash to the shareholders.
According to the federal law, such spin-off must involve an operating business and not simply the stock holdings in order to qualify for the tax free status. In the past, companies have combined many small businesses with massive stock portfolios in their spin offs for meeting the requirements of the law.
An Internal Revenue Service official has released a warning in May that the government was eyeing on making the rules regarding spin-offs stricter. This might pose a threat to the plan of Yahoo.
The Chief Executive of Yahoo, Marissa Mayer has reassured the shareholders that the deal will be carried out as planned, but the stocks of the company have toppled down as the Wall Street is unsure whether the deal will pass with the IRS or not.
Mayer is expected to face the heat of questions in her webcast with analysts that is aimed at discussing the second quarter financial results of the company. However, Yahoo has adopted an open approach and indicated that the deal might be cancelled if there is no re-assurance from the federal tax department for the transactions to be tax free.