Wednesday, September 30, 2015

Will Yahoo take Alibaba For A Spin?



I have – on and off – been following the Yahoo and Alibaba story. 

It has to do with a proposed spin of a corporate subsidiary. Unless someone has reason to be there, corporate reorganizations – such as spins - are not the easiest reading.  

To set it up, Yahoo owns approximately 15% of Alibaba Group, which itself is a Chinese internet giant. Yahoo has proposed spinning its Alibaba shares into a separate publicly traded company. Spinning in a tax context means getting it out of Yahoo itself and into the hands of the shareholders. This in turn has caught the IRS’ eye, mostly because Yahoo wants to do this on a tax-free basis.

There is gigantic money here. Yahoo’s stake in Alibaba may be worth around $35 billion. Albeit Yahoo is not intending to spin all its Alibaba stock, it would spin enough to trigger an $8 to $10 billion tax – if its tax advisors do not get it right.

QUESTION: How would you like to be the tax honcho that gives this thing a green light? No pressure …

We have talked about reorganizations before. It is a complicated area of tax law, but they have gained in importance as a means of mitigating the double taxation of corporations.  Proctor & Gamble, for example, uses several flavors of reorganizations on a routine basis. What is different about Yahoo?

In general, the IRS likes to see at least a couple of historically active businesses inside the corporate shell. Perhaps one business makes soap and the other makes baby lotion, and they have for as many years as Carter has liver pills. For whatever reason, the soap business wants to go one way and the baby lotion business another. The IRS sees two historically active businesses before and two afterwards. Comply with some technicalities and the IRS is willing to accept that there exists a business purpose for the reorganization – that is, a purpose other than avoiding the tax man.

Let’s stir the pot. Say that you stuff one of the companies with a lot of investment assets, such as Alibaba stock. How does the IRS feel now?

Well, I suppose that would vary. If the stock were 15% of total assets, I suspect you would not draw a long, piercing stare from the IRS. What if it climbs to 50%, 60%, 70%? We can both anticipate the IRS getting increasingly cynical as those percentages climb.

And that is where Yahoo is going.

Yahoo CEO Marissa Mayer

Yahoo is proposing to stuff Yahoo Small Business, an existing small line of business, into a subsidiary. Yahoo would then drop the Alibaba stock and spin the resulting subsidiary to its shareholders.  The value of the Alibaba stock would completely dwarf the value of Yahoo Small Business.

But why?

Let’s say the new company will be called Yaboo. Yaboo would be stuffed with so much Alibaba stock that it would essentially be a “tracking” stock for Alibaba. Throw in some market arbitrage and Alibaba may find Yaboo an attractive target for acquisition.

Then again, maybe Yahoo just wants to kick Yahoo Small Business out of the nest so it can learn to fly. On the same plane of reality, I am still available if an NFL team wants to make me an offer.

Generally speaking, tax advisors approach the IRS when they get into these high-stakes situations. They may meet informally in order to gauge IRS sentiment before requesting a private letter ruling, for example. The ruling is “private” in that it is directed to one taxpayer (Yahoo) and its unique facts (Alibaba). Yahoo’s advisors would meet with IRS attorneys to discuss, review and argue. If the IRS agrees with the proposed transaction, then Yahoo would request the ruling. If the IRS disagrees, Yahoo would not. It is unlikely that you or I would do this, as failure to submit a ruling request would be considered invitation to an audit. A company the size of Yahoo is under constant audit, however, so this threat is considerably diminished. 

You know – absolutely know – that Yahoo is going to request a private letter ruling. There is way too much money at stake here.

And then on September 2 the IRS came out with Notice 2015-59, saying that it was stopping its practice of issuing rulings on transactions that are suspiciously similar to the proposed Yahoo spin.

Whoa.

Now what does Yahoo do? Does it rely on an opinion from its law firm without an IRS ruling? Does it retract the spin? Does it adjust the spin so the percentages of the stock and active business are not so skewed?

Remember: just because the IRS says it does not make it so. There is complex law here, and a Court may have to decide.

For a tax geek, this is like the latest installment of Mission Impossible.

No comments:

Post a Comment