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Why Is Yahoo Spinning Off Its Core Businesses? The IRS.

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By Casey C. Sullivan, Esq. on December 10, 2015 11:59 AM

Maybe you heard the news yesterday. Yahoo, one of the world's largest Internet companies, announced that it will be spinning off its core businesses in order to hang on to its $32 billion stake in Alibaba, the massive Chinese e-commerce company. The decision is the exact opposite of the plan proposed by Yahoo CEO Marissa Mayer almost a year ago.

Why is Yahoo ditching its main businesses in order to retain Alibaba stock? What caused the unexpected about face? The IRS, of course.

An Unexpected Reversal

First, a bit of backstory. Yahoo acquired a 15 percent stake in Alibaba a decade ago for what The New York Times describes as a "pittance." Alibaba now dominates Chinese e-commerce, accounting for almost all of the country's online sales. It's China's Amazon, eBay, PayPal, and more -- all in one company. In 2014, Yahoo sold $10 billion in Alibaba stock, taking a $3 billion tax hit in the process.

In January of 2015, Mayer announced a plan to revitalize Yahoo: increase Yahoo's valuation by spinning off the Alibaba stock into a separate holding company and focusing on Yahoo's core businesses, such as Yahoo Japan, Tumblr, and other websites.

The idea, according to Bloomberg, was to allow Yahoo to sell some of its $32 billion Alibaba stake without paying taxes. It was based on a strategy pioneered by Liberty Ventures, which essentially created a new company as a vehicle for a stock sale. There, Liberty created a new business unit specifically to sell its stake in TripAdvisor. That unit took out a $400 million loan, destined for Liberty, its stock spun off to Liberty shareholders, and TripAdviser would acquire the unit in exchange for its own stock. The stock is transferred and no taxes are payed. Yahoo wanted to follow suit.

The IRS Clamps Down

Unfortunately for Yahoo, the IRS was not supportive of the scheme. In September, Yahoo announced that the IRS had declined to give a "private letter ruling," approving the spinoff. That left the real risk that the IRS could refuse to treat the spin off as a tax-free exchange, putting Yahoo at risk of a $10 billion tax bill.

In October, Mayer said she was still ready to continue full steam ahead with the plan, convinced that the law was on its side. Wall Street, however, was not. Yahoo's stock price dropped as the market bristled at the risk of au unpredictable and massive potential tax hit. (Those taxes could come unexpectedly, too. Audits and challenges could be raised up to seven years after the spinoff.)

"The tax attorneys were telling them one thing, and the market was telling them something else," Ben Schachter, an analyst with Macquarie Securities, explained to The New York Times. "They decided to succumb to the shareholder pressure."

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