Yahoo Expects Reverse Spinoff Will Be Taxable

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Feb. 2 — Yahoo! Inc. is slowing down plans to spin off its core business—and turning toward a possible sale—after expectations of a tax-free transaction waned.

The reverse spin is “likely” to be taxable, rather than the tax-free transaction the company originally planned, Chief Financial Officer Kenneth A. Goldman said Feb. 2 on a conference call. The company is exploring “additional strategic options” while it continues to pursue the spinoff plan.

The reverse spin is still seen as the “most viable” option, Chief Executive Office Marissa Mayer said. Goldman said a spinoff could take up to a year to complete, and is “confident” it will be finished in 2016.

This obstacle in Yahoo's spinoff saga, which is entering its second year, could be seen as a boon for the Internal Revenue Service. The agency began in September studying transactions where the active trade or business is relatively small, or where there is a large proportion of investment assets, in response to an increasing number of requests for rulings on what the IRS considered to be aggressive interpretations of tax-free spinoffs under tax code Section 355.

Spinoff Saga

Yahoo announced a plan in February 2015 to separate its stake in Alibaba Group Holding Ltd., and had intended to complete the deal before the end of 2015. After the IRS declined to give the company a letter ruling confirming tax aspects of the transaction, Yahoo announced a reverse spin to separate the company's core business in December (239 DTR G-2, 12/14/15).

The IRS could issue rules in coming months that could stymie Yahoo's spinoff plan. The IRS guidance is expected to address issues tied to business purpose, active trade or business, and the device test, which doesn't allow spinoffs to be used as a means to distribute earnings and profits to shareholders. A Treasury Department official said in January that the IRS is “very actively” working on guidance, though didn't comment on timing (21 DTR G-6, 2/2/16).

To contact the reporter on this story: Laura Davison in Washington at ldavison@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com