
Yahoo! and Its Shareholders May Be in for a Serious Tax Bill
Despite its best intentions, Yahoo! may not be very inspiring and entertaining for its shareholders much longer.
As Yahoo! (YHOO) gets ready to spin out the rest of its remaining stake in Alibaba (BABA) - Get Report , the major concern has been who foots the tax bill -- the spin-off company, Aabaco, or Yahoo!.
Whomever gets stuck with the bill may wind up owing a whole lot more than they bargained for.
SunTrust analyst Bob Peck, who in recent weeks has suggested that Yahoo! CEO Marissa Mayer should step down and recently sent a letter to the company's board of directors, believes the tax bill for Aabaco could wind up being worth more than Aabaco is actually worth:
"As we pointed out in our previous note, we think that if the IRS were to ultimately tax the spin transaction, that not only would Aabaco need to indemnify Yahoo and pay the taxes, but that the indemnification payment itself would likely be taxable. This would equate to ~50% of Aabaco's value. However, to pay the indemnification, Aabaco would likely need to sell shares of Alibaba which we believe could be taxable on a non- stepped up cost basis (taking the tax hit to ~70%). Further, shareholders could also have a tax bill, as the spin may be a "quasi dividend", taking the tax bill to ~100%. Finally, China could elect to follow the US move and tax it at 10%. Together, these taxes would usurp >100% of Aabaco's value."
Though Peck believes that the spin-off, which may happen in January next year (despite Mayer and her team repeatedly saying it would happen in the fourth quarter), will be "likely tax free," there is a chance the IRS may eventually tax the spin-off, something that would not sit well with shareholders.
Peck believes that the combined entity, Yahoo!'s core business and its ownership stake in Alibaba and Yahoo! Japan ultimately total $40 billion, nearly a 25% discount to where Yahoo! shares are currently trading.
If the spin-off is indeed taxed, it seems as if Aabaco shareholders and not Yahoo! shareholders would bear the brunt of the cost. In the past, Peck has estimated the total tax bill at $19 billion. If that is the case, any tax ruling probably wouldn't take place until 2017, after the IRS looks at Yahoo!'s documents, with the case potentially going to court.
The next step in this seemingly never-ending process is the arrival of a letter from Yahoo!'s law firm Skadden Arps, which Peck believes will show no tax liability is due.








