IRS Rejects Yahoo's Tax-free Request On Alibaba Spin-off

(RTTNews) - Yahoo! Inc. (YHOO) failed to get the advance approval it sought from The Internal Revenue Service for a plan to spin off its stake in Alibaba Group Holding Limited (BABA) without incurring taxes.

The IRS last week notified Yahoo's counsel that it had determined not to grant requested ruling. At the same time, the IRS indicated that it had not concluded that the proposed spin-off transaction was taxable and therefore was not ruling adversely on the request. Yahoo then withdrew its request for a ruling, the company said in a regulatory filing on Tuesday.

Subsequent to the IRS's decision with respect to its ruling request, Yahoo confirmed with its tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP, that the discretionary decision by the IRS not to grant Yahoo's ruling request with respect to the ATB Requirement did not reflect any change in U.S. tax law with respect to the tax-free treatment of the proposed spin-off and would not affect Skadden's ability to render an opinion that, under current law and subject to certain factual representations and assumptions, the currently proposed spin-off will satisfy all of the requirements for tax-free treatment under the Code, including the ATB Requirement.

Work proceeds on the pending Aabaco spin-off plan. Yahoo said that its board will continue to carefully consider the Company's options, including proceeding with the spin-off transaction on the basis of an opinion of counsel.

On January 27, 2015, Yahoo! Inc. announced a plan for a spin-off of all of Yahoo's remaining holdings in Alibaba Group Holding Limited into a newly formed independent registered investment company. As previously disclosed, the name selected for the new company is Aabaco Holdings, Inc. The stock of Aabaco will be distributed pro rata to Yahoo stockholders, resulting in Aabaco becoming a separate publicly traded registered investment company.

On July 17, 2015, Aabaco filed its initial Registration Statement on Form N-2 with the U.S. Securities and Exchange Commission . Upon completion of the transaction, Aabaco would own, directly or indirectly, all of Yahoo's remaining 384 million Alibaba shares, and a 100 percent ownership interest in Aabaco Small Business, LLC or "ASB", a newly formed entity which will own Yahoo Small Business, a current operating business of Yahoo that will also be transferred to Aabaco as part of the transaction.

On February 26, 2015, Yahoo submitted to the IRS a request for a private letter ruling with respect to whether Aabaco's ownership and operation of ASB would satisfy the active trade or business requirement.

On May 19, 2015, the IRS announced that it was reconsidering its ruling policy with respect to the ATB Requirement.

On July 31, 2015, the IRS formally announced that it was studying potential new administrative guidance with respect to certain issues under Section 355 of the Code, including the ATB Requirement.

On September 2, 2015, the IRS notified Yahoo's counsel that it had determined, in the exercise of its discretion, not to grant the requested ruling. At the same time, the IRS indicated that it had not concluded that the proposed spin-off transaction was taxable and therefore was not ruling adversely on the request. Following receipt of such notification, Yahoo withdrew its request for a ruling on September 2, 2015.

YHOO closed Tuesday trading at $30.90, down $0.68 or 2.15%. In after hours, the stock further dropped $1.22 or 3.95%.