Yahoo abandons Alibaba spin-off
Contemplates core business spin instead
TAX ALERT |
After a tumultuous year that saw the IRS decline to rule on the spin, pause rulings on section 355 spin-offs and issue Rev. Proc. 2015-43 and Notice 2015-59, (all possibly in part because of their ruling request), Yahoo announced on Dec. 9, 2015, that it was abandoning its plan to spin-off its stake in Alibaba. In an about-face from their previous stance, Yahoo cited public perception of tax risk, which would have depressed the value of the spinco, as the major factor influencing their decision to abandon the spin-off plan. A very real tax risk that stems from the IRS potentially challenging their spin-off and subjecting Yahoo and its shareholders to tax on what was intended to be a tax free transaction.
Instead, Yahoo now intends to spin-off their core businesses into a separate publicly traded company. This plan achieves the same operational result for Yahoo and its shareholders as if they had spun out Alibaba except that both Yahoo and the shareholders will incur taxable gain on the distribution of the core business and/or dividend income as the case may be. This is less desirable in theory but reversing the spin and paying some tax was deemed preferable by Yahoo for the certainty it gives on the transaction. The core businesses being much less valuable than the Alibaba shares, and the unrealized gain on those assets likely much less than the unrealized gain on the Alibaba shares, allows for a much smaller tax bill with significantly less risk.
Previously, the spin-off of Alibaba shares was accompanied by a rather insignificant active trade or business (ATB) in relation to the value of the shares. This was viewed by some to be abusive of the tax code and to run afoul of section 355’s device test that is aimed at preventing transactions that are primarily used as a device to distribute earnings and gains free of taxation. Upon examination it was not clear whether or not the ATB included would have been large enough to satisfy this test. The newly proposed transaction is not intended to represent a tax free spin, but because the Alibaba shares would stay in Yahoo, the unrealized gain on those shares will remain deferred.
The IRS goals with the issuance of Rev. Proc. 2015-43 and Notice 2015-59 were to put taxpayers on notice that transactions such as the Yahoo spin of Alibaba were susceptible to IRS scrutiny and hopefully limit such transactions. Based upon the decision by Yahoo, it would appear the IRS has succeeded.