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IRS 'Studying Issues' Over Yahoo-Alibaba Spin-Off

by Mike Godfrey, Tax-News.com, Washington

16 September 2015


The US Internal Revenue Service (IRS) has confirmed that it is studying issues with regard to spin-offs, such as search engine company Yahoo's plans for its remaining holdings in Alibaba Group.

Yahoo intends to create a new independent, publicly traded, non-diversified, closed-end management investment company, Aabaco Holdings, which will receive Yahoo's remaining holdings of around 15 percent in Alibaba, the Chinese online marketplace. Aabaco shares worth around USD25bn will be distributed to Yahoo's shareholders on a pro-rata basis.

The spin-off is intended to avoid a capital gains tax bill on Yahoo, which could amount to 40 percent of the value of its Alibaba shareholding if the transaction was to be classified as a share sale.

In a bid to satisfy the tax-free spin-off rules requiring that the transaction be carried out for a business purpose, with the requirement that a new entity should house an "active trade or business," Aabaco will also control Yahoo Small Business, which helps US merchants set up websites. However, the stake in Alibaba will still initially account for over 95 percent of Aabaco's total assets.

Although Yahoo is not mentioned by name, Notice 2015-59, issued on September 15, describes the types of transactions that concern the Treasury Department and the IRS, and requests comments regarding those transactions.

It announces that the agency and Treasury are "studying issues relating to certain distributions, in which property becomes the property of a regulated investment company or a real estate investment trust, in which the active business is small relative to other assets, or in which there is a substantial amount of investment assets."

Yahoo had also hoped to receive a tax ruling from the IRS with regard to the spin-off. However, Revenue Procedure 2015-43, issued at the same time as Notice 2015-59, adds this type of transaction to the areas of the US tax code "on which the IRS will not issue letter rulings or determination letters" as to whether their distributions of property are allowed under the US tax code.

For example, it confirms that it will not issue a ruling if, "immediately after any such distribution, the fair market value of the gross assets of the trade or business on which the distributing corporation relies to satisfy the active trade or business requirement of [the US tax code] is less than five percent of the total fair market value of the gross assets of such corporation."

TAGS: capital gains tax (CGT) | compliance | tax | investment | business | tax compliance | revenue guidance | commerce | equity investment | Internal Revenue Service (IRS) | ministry of finance | tax authority | e-commerce | multinationals | United States

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