Yahoo Inc (YHOO) Could Face $11 A Share Hit From Adverse Tax Ruling: Capstone

Yahoo Inc (YHOO) Could Face $11 A Share Hit From Adverse Tax Ruling: Capstone

Internet giant Yahoo could be looking at a big hit due to an adverse tax ruling, according to research firm Capstone. David Barrosse of Capstone Research says there’s a good chance that Yahoo will suffer an adverse tax ruling related to the sale of its Alibaba (BABA) shares in the next few months. He calculates this ruling by the IRS could impact Yahoo by as much as $11 a share.

Of note, Yahoo shares dropped by $3.37 per share, or almost 8%, when the news broke on May 19th that the IRS was considering a change in the tax accounting for spin offs. However, the stock rebounded in the following days when Yahoo said it still planned to move forward with the Alibaba Holdings (BABA) transaction. The stock was impacted by the report today and was down 2.7% in Thursday trading, we noted a quick summary of the report earlier on Twitter.

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Details on potential adverse tax ruling for Yahoo

The issue arose with comments made by a senior technician reviewer in the IRS’s Office of Associate Chief Counsel at a D.C. Bar Association event. In his remarks, he stated the agency is considering changes to rules relating to spinoffs and the resulting taxation. He also said the IRS will temporarily suspend any ruling requests received starting immediately to allow the agency more time to study the issue. The official noted requests already received would be processed, but that could change. Yahoo filed its ruling request with the IRS in the first quarter of 2015 and has said it hopes to complete the spinoff by the end of the year.

Yahoo Inc YHOO

Barosse elaborates: “Based on our conversations with tax lawyers and lobbyists, Capstone believes that the IRS official’s comments were carefully choreographed by IRS and Treasury, and were designed to send a message to Yahoo concerning the Alibaba spinoff, though neither company was mentioned by name. We have seen prior examples in which IRS officials have announced significant new policies at industry conferences.”

Yahoo said it thinks a negative IRS ruling is not likely because the recent comments do not reflect a change in applicable law and do not impact previously filed rulings.

IRS is likely to focus on this kind of very large transaction

Barrosse also notes that: “Yahoo’s proposed Alibaba spinoff will attract more attention than similar transactions because of its size.”

He points out that Yahoo’s stake in Alibaba has a value of around $34 billion right now, and that the spinoff is designed to save the firm from having to pay some $11 billion in taxes. For perspective, data from Wachtell, Lipton, Rosen & Katz highlights that 201 spinoffs were announced in 2013 and 176 in 2012, with combined values of $33 billion and $41 billion, respectively.

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