Yahoo's Reverse Spinoff Also Has Tax Risks; Will It Happen?

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Dec. 11 — Yahoo! Inc.'s plan to spin off the company's core business might run into the same tax risks that the now-defunct intention to separate the stake in Alibaba Group Holding Inc. faced, raising questions about whether the company will go through with the transaction.

“The IRS is likely to evaluate the reverse spin in exactly the same way as it viewed the ‘forward' spin,” Jonathan Talansky, a member at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, told Bloomberg BNA Dec. 11. “The key difference, however, is that the amount of tax at stake under the reverse spin is far less than was the case previously.”

The new plan, which Chief Executive Officer Marissa Mayer said could take more than a year to complete, could be a stopgap measure to placate investors and buy Yahoo time to structure a series of deals with clearer tax outcomes, said Robert Willens, a tax consultant in New York.

The Internal Revenue Service could issue guidance in coming months that would greatly curb tax-free spinoffs where the active trade or business is small or there are a substantial amount of investment assets (237 DTR G-1, 12/10/15).

Saga Continues

Yahoo's year-long spinoff saga has been influenced by activist shareholder Starboard Value LP, which pushed for the Alibaba spinoff and then later changed its position in favor of the core business separation. The IRS, which declined to issue a ruling on the deal in September, is closely watching transactions like Yahoo's, which are causing unease among investors about possible taxation of the deal (224 DTR G-3, 11/20/15).

Potential buyers, including private equity firms or Verizon Communications Inc., could emerge with attractive offers for the company's search and display advertising business, Willens said, leaving Yahoo with the “pleasant task of figuring out how to monetize” its $8.5 billion Yahoo Japan and $30 billion Alibaba stakes.

Follow the Leader

The company could divest Yahoo Japan by following the lead of Dow Chemical Co. and Corning Inc. Corning announced Dec. 11 it plans to make the chemical maker the sole owner of the co-owned Dow Corning Corp. through a cash-rich split-off, Willens said. The plan, in which Corning exchanges stock of the company for stock of a “cash-rich” subsidiary, is done on a tax-free basis.

The parameters of cash-rich split-offs are very well-known and not subject to the adverse interpretation by the IRS, Willens said. Alibaba could then acquire Yahoo, which would consist solely of the Alibaba shares, through a tax-free downstream merger, he said.

“I'll be surprised if they ever actually did the spinoff. Something will happen. A whole year is a long time,” Willens said. The reverse spinoff proposal “reduces the cost of being wrong, but it is still a large cost.”

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