This article first appeared in the July 21, 2015 edition of Tax Notes Today.
After the markets closed July 17, Yahoo Inc. announced that it still plans to complete the spinoff of its holdings in Alibaba Group in the fourth quarter of 2015, asserting it also has the right to waive a condition that it receive a favorable private letter ruling from the IRS before the spinoff.
Yahoo announced in January that it plans to spin off its holdings in Alibaba and Yahoo Small Business (to be renamed Aabaco Small Business LLC) into SpinCo (to be named Aabaco Holdings Inc.). In its July 17 SEC filing, Aabaco Holdings Inc. said Yahoo has "sole and absolute discretion" to waive in whole or in part the condition that it receive a favorable letter ruling from the IRS on some tax aspects of the spinoff. Aabaco also said Yahoo could waive the condition that it receive an opinion from Skadden, Arps, Slate, Meagher & Flom LLP providing that the spinoff "will qualify as a tax-free transaction to Yahoo and its stockholders under Sections 355 and 368(a)(1)(D)."
The filing also confirmed that the transaction will implicate the small active trade or business (ATB) issue, stating that the anticipated value of Aabaco's "Alibaba Shares will exceed 95 percent of the value of its total assets immediately after the Spin-Off." The filing added that although Aabaco will trade as a registered investment company, its concentrated ownership of Alibaba shares means that it won't be treated as a regulated investment company or RIC but rather as a taxable C corporation for federal tax purposes.
Aabaco's registration statement mentioned the additional risk associated with the ATB size study underway at the IRS Office of Associate Chief Counsel (Corporate). "The IRS recently announced that it is reconsidering its ruling policy with respect to certain issues under Section 355 of the Code, which could potentially impact Yahoo's ability to obtain the IRS Ruling. Accordingly, there is a risk that the IRS might not issue the IRS Ruling or might determine to promulgate new administrative guidance prior to the Spin-Off that could adversely impact the tax-free treatment of the Spin-Off even if Yahoo previously received the IRS Ruling," according to the statement.
Yahoo's ability to waive receipt of a will-level opinion from Skadden as a condition precedent to the spinoff differs from the spinoff transaction by Liberty Interactive Corp. of its appreciated stake in TripAdvisor Inc. According to the registration statement filed in connection with that spinoff, Liberty's board of directors was specifically not allowed to waive the condition that Liberty receive a similar opinion from Baker Botts LLP.
When Liberty's SpinCo (Liberty Tripadvisor Holdings Inc.) filed its registration statement about 16 weeks before its August 27, 2014, spinoff, Liberty had already received its favorable letter ruling from the IRS.
One similarity between the registration statements in the Liberty spinoff and the planned Yahoo spinoff is that both provided that the section 355-related legal opinions will rely on the continued validity of the IRS's respective letter rulings. The ruling in the Liberty spinoff is believed to be LTR 201435005.
However, unlike the Liberty spinoff, the registration statement filed in connection with the planned Yahoo spinoff contains a qualification for possible changes in the law: "The legal authorities upon which the opinion of Skadden Arps is based are subject to change or differing interpretations at any time, possibly with retroactive effect."
According to Yahoo's January 27 release announcing the spinoff, the transaction was always scheduled to occur during the fourth quarter of 2015 but "after the expiration of our one-year lock-up agreement on the Alibaba shares entered into in connection with the IPO." SEC registration statements are typically filed at least a couple of months before the going-public event.
Yahoo is scheduled to have its second quarter earnings call July 21.