Technology

Yahoo! Inc.: Alibaba Group Holding Ltd Spin Will Still Be Tax-Free

Yahoo shares began to rally today after plunging on Tuesday after the IRS announced it might make a major change in policy regarding the tax implications of spinoffs. One of the reasons Yahoo stock has been flying so high is because of how much the company (and shareholders too) stands to gain from spinning off its stake in Alibaba.

Yahoo! Inc.: Alibaba Group Holding Ltd Spin Will Still Be Tax-Free

Yahoo shares on the rise in active trading

The stock plunged on Tuesday as investors began to worry that they wouldn’t see any tax benefit from the Alibaba spinoff. However, Yahoo management has apparently calmed some of them down as the stock started rising again today.

Shares rose as much as 4.01% to $42.63 per share. Volume also went through the roof, climbing to nearly 41.5 million shares as of the last two hours of trading. The average daily volume is just 14.8 million shares.

Yahoo says IRS change won’t affect it

Yahoo reassured investors that it won’t have to pay taxes on the spinoff of its Alibaba share, reports Hannah Kuchler of the Financial Times. The IRS announced that it was reviewing the tax rules on spinoffs and planning to set a minimum size for the active business instead of the investment holdings in a structure.

Management for Yahoo said they had already requested a private letter ruling on the planned spinoff of its $33 billion stake in Alibaba. This means that if and when the IRS does make changes in the tax rules on spinoffs, it shouldn’t affect Yahoo because it wouldn’t apply to requests that had been filed previously.

Yahoo aims to finish the spinoff by the fourth quarter of this year.

Raymond James trims price target

Analysts from multiple firms issued reports with their views on how the possible IRS rule change could affect Yahoo. The reports were written before Yahoo management made their comments. Raymond James analyst Aaron Kessler and his team cut their price target from $58 to $51 per share but maintained their Outperform rating on Yahoo.

The main reason for this was because they reduced their probability that Yahoo would complete the tax-free spinoff of the Alibaba stake from 80% to 60%. Their new model implies a 15% tax rate on the spin. The other reason was because they reduced their target price for Alibaba to $98 per share