United States

Yahoo confirms IRS refusal to rule on taxability of Alibaba spin-off


In a public filing on Sept. 8, 2015, Yahoo confirmed that the IRS has declined to rule on its proposed Alibaba spin-off and confirmed the withdrawal of its ruling request. Denial and withdrawal of the ruling request does not mean that the spin-off will not qualify under section 355. The denial to rule comes on the heels of the IRS decision in May 2015 to take a pause in rulings related to the active trade or business (ATB) requirement on certain section 355 transactions and subsequent announcement of a project on the section 355 ATB requirement. In Yahoo’s case, as in many section 355 transactions involving real estate investment trusts, the relative size of the ATB in comparison to the other assets (Alibaba shares) is insignificant and the IRS is questioning whether the sole purpose of inclusion is to satisfy the ATB requirement. Some see these transactions as abusive in taking advantage of the tax code, while others question whether these types of transactions run afoul of section 355’s “device” test, aimed at preventing transactions that are used primarily as a device to distribute earnings and gains free of taxation; $10 billion worth of taxes to Yahoo as of their Q2 filing.

Yahoo is continuing to work on its planned spin-off without the IRS’s blessing and may instead rely solely on its tax advisor’s opinion as to the transaction’s qualification as tax free. It is not clear whether more ruling requests will be declined in the wake of Yahoo’s or when guidance will be available on ATB requirements from the July project. It is clear, however, that these issues are something to be on the lookout for and take into account in tax planning.


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