Yahoo Shares Tumble on Concern Over Regulatory Treatment of Alibaba Stock Spinoff

By Douglas MacMillan And John D. McKinnon 

Shares of Yahoo Inc. plunged about 8% in the final minutes of trading on Tuesday on concern 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 on Tuesday said 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 D.C. Bar Association event.

In a statement read at the event, 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."

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," Zimbalist said, according to the report.

Yahoo expects the spinoff to occur in the fourth quarter.

Appearing at an event organized by J.P. Morgan on Monday, Ms. 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 [e-mail] and John D. McKinnon at [e-mail]

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