Questionable Tax Planning Sinks Yahoo

As Yahoo was deciding what to do with its stake in Alibaba a couple of years ago, it settled on a risky form of a tax-free spinoff.  At the time it was announced, a number of tax professionals were surprised.  While a tax-free cash spinoff is legal, Yahoo chose to push the boundaries with a particularly aggressive version. 

In the face of criticism, Yahoo pushed ahead, despite the fact that the potential cost of being wrong was over $10 billion and that Yahoo management would be unable to undertake any signficant corporate activities until the potential liability/IRS audit risk was resolved (many years). 

As criticism mounted, Yahoo approached the IRS. Not surprisingly, the IRS refused to rule on the transaction ahead of time, but instead continued to watch the situation.  

Fast-forward to now.  The market uncertainty about the potential tax cost in the spinoff is being priced into the discount on the spinoff shares, and that, in turn, makes other alternatives, such as selling Yahoo's core business, more attractive.  

It is entirely possible that after the board meetings this week, Yahoo will decide to abandon the Alibaba spinoff and instead to sell its core business, which presumably will not bode well for senior management. 

Alternatives did exist.  Yahoo could have considered keeping Alibaba shares, and doing a spin off of its core business (if that failed, the potential tax cost would be quite small compared to the cost of spinning off Alibaba).

It all could have been avoided with better tax planning!