Yahoo Warns of Possible Alibaba Tax Issues -- 3nd Update

By Douglas MacMillan 

Yahoo Inc. warned investors Friday its planned spin-off of shares in Alibaba Group Holding Ltd. may incur a previously unexpected tax bill.

In Yahoo's registration statement for Aabaco Holdings Inc., the new public company that would be created by the spin-off, Yahoo said its proposal for a tax-free spinoff may still be rejected by U.S. or Chinese tax regulators. The move would "materially reduce" the cash it has to distribute to investors, Yahoo said.

Tax concerns have weighed on Yahoo investors since the company announced its planned spin-off earlier this year. The Internal Revenue Service said in May that the agency is considering changes to its rules governing spinoffs, sending Yahoo shares sliding.

Chief Executive Marissa Mayer said at a tech conference last month she has been "reassured" the proposed changes weren't directed at Yahoo specifically, and that she believes the proposed IRS changes wouldn't affect her plan because it has already been filed.

Still, Yahoo listed the possibility of a rejection by the IRS as the first "risk factor" in its registration statement for Aabaco. Yahoo also said it faces "uncertainties" around whether the plan will qualify for exemption of taxes by Chinese authorities.

Completing the spinoff is important for Ms. 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.

After the spinoff, Aabaco will own about 384 million Alibaba shares, representing about a 15% stake in the Chinese electric-commerce giant, and a 100% stake in a new entity that will own Yahoo Small Business. Those shares are worth about $32 billion based on Alibaba's Friday closing price of $83.37 on the New York Stock Exchange.

Aabaco will operate as a closed-end fund, with plans to invest at least 80% of its total assets in Alibaba shares under normal market conditions.

--Josh Beckerman contributed to this article.

Write to Douglas MacMillan at [e-mail]

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