Tax Analysts Blog

Yahoo's Spinoff Has a Decidedly Nonbusiness Purpose

Posted on Jul 21, 2015

Yahoo wants to spin off its holding in Alibaba. It had already sold a lot of its stake in the Chinese giant, but it retains a 15 percent share. The goal of the spinoff is supposedly to allow Yahoo to focus on its core business, but the reality is that CEO Marissa Meyer needs to show some profits to buy time with jittery investors. That means the spinoff needs to raise as much money as possible, which brings tax minimization into play. In fact, a tax-free transaction is so critical to Yahoo that it could cancel the spinoff if it doesn't receive a favorable ruling from the IRS.

This isn't the place to detail the technical side of the Yahoo/Alibaba transaction. (Tax Analysts’ Amy Elliott has done an excellent job of that already.) However, activist investing group Starboard Value LP, has pressured it to minimize the tax consequences. Doesn't that make it seem like tax considerations are driving the bus? If Yahoo is engaging in this type of spinoff transaction only because of the quirky nature of tax rules (and the IRS's shifting interpretations of them), doesn't that make it clear that those rules are distorting economic and business decisions?

Yahoo isn't doing anything wrong by trying to take advantage of the tax-free spinoff rules. There's nothing illegal about it, and it's not a form of tax evasion. But it is a very questionable form of tax avoidance sanctioned by IRS ruling policy. The IRS is now considering changing course, at least on spinoffs. According to an IRS official who spoke June 11, the Service is considering whether spinoffs that don't involve continuing entanglements between the companies should receive favorable rulings. Almost immediately after the official spoke, Yahoo's shares dropped and analysts began questioning the future of the Alibaba deal. One recently wrote that there is now a 30 percent chance that the Yahoo transaction will be taxable.

The latest from Yahoo is that it can go through with the Alibaba spinoff even if it doesn't receive a favorable ruling from the IRS. That condition of the deal is at its sole discretion, the company said July 20. The statement seemed designed to shore up investor confidence before the July 21 release of what is expected to be a disappointing report on earnings.

What happens with Yahoo and Alibaba is almost beside the point. What’s important is that the spinoff has highlighted a major problem with U.S. tax law and how it is administered. Too often the only reason that deals are structured in a certain way (or, worse, even entered into at all) is solely because of how the IRS has interpreted the code. And too often these interpretations allow form to trump substance, to the detriment of the U.S. fisc. The IRS should be commended for finally taking a look at spinoffs that might not result in a separation of two businesses. But it has a lot more work to do if it's going to make sure that tax considerations aren't driving business decisions.

Correction: July 22, 2015: The posting originally stated that raising cash was a motivation for the spin-off. Yahoo has stated that it has other business purposes for the transaction, not the raising of cash. Tax Analysts regrets the error.

Read Comments (3)

Ward 6Jul 22, 2015

So if I understand your premise, you believe firms should not take tax and
regulatory impacts into account when making business decisions? That's
certainly not the law today: "[W]e do not intend to suggest that a transaction
which has actual, objective effects on a taxpayer's non-tax affairs must be
disregarded merely because it was motivated by tax considerations." ACM
Partnership, 3rd Cir. 1998.

Tim LJul 23, 2015

Perhaps the tax law should simply allow this spin off to be tax free. The
operations continue in corporate form where income is taxed twice.

Mike Winston, CFAJul 28, 2015

See our response to this editorial in the July 28th edition of Tax Notes. Alternatively here.

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