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.

The IRS Wants More Levy Power

The IRS wants Congress to expand its tax levy authority.

This is a response against the taxpayer protections under the IRS Restructuring and Reform Act of 1998 (RRA). One of the changes required the IRS to provide at least 30 days notice of a levy action, as well as the taxpayer right to appeal such action. The purpose is to slow down collections and allow the taxpayer to propose alternatives or to reiterate information that collections has chosen to ignore.

After enactment of the RRA, the number of IRS levies dropped by approximately 85 percent, from 473,000 for fiscal 1998 to 75,000 in fiscal 2000. This has reversed recently, and there was a 73 percent increase from fiscal 2009 to 2010. During fiscal 2010 the IRS filed approximately 667,000 levies.

The IRS does have some valid arguments. In some circumstances, timing requirements may require multiple levy actions. Some sources of income are difficult to reach and are currently beyond the reach of a continuous levy.

NOTE: A continuous levy remains in effect until cancelled and provides recurrent cash to the IRS. The most common example is a wage garnishment. This is in contrast to a bank levy, which is good for only one instance. Should the IRS want more cash, it has to file another bank levy.

The IRS wants to expand the continuous levy to reach rental income, nonemployee compensation, royalties and fishing boat proceeds.

Then there are questionable IRS arguments. For example, the Treasury Inspector General for Tax Administration (TIGTA) reviewed a sample of 30 cases where the taxpayer appealed a levy action. It found that appeals can be used to delay collection action. Gosh, I could have told them that without a study; it doesn’t mean, however, that the appeal right per se is without merit. In 28 cases Appeals upheld the levy action. The IRS extrapolates this to mean that the appeals protection under RRA is being abused.

Let’s talk about IRS abuses. The RRA protections were not enacted because the IRS was an innocent party. There are cases where the IRS has pursued levies for less than $30.  There are cases of IRS levies without any notification. We presently have a representation client where collections is pursuing more than $20,000 while we simultaneously are reducing that amount by almost 80 percent through a reconsideration. We put in a CDP request to put the brakes on collections and clue them that there is a favorable adjustment coming from exam. Do I even need to comment on IRS inflexibility with an unemployed/underplayed taxpayer who cannot continue a payment plan at the same amount as before being unemployed/underemployed?

Let me clue you in on a tax “secret.” The IRS says it will work with you if circumstances overwhelm your payment plan. However, the IRS keeps a golden key to itself. The IRS can reject a restructuring if one has defaulted on a payment plan. Think about this. I have a client who entered into a payment plan. Circumstances have been difficult, including foreclosure. She has continued her payments to the IRS, although sometimes in smaller amounts than agreed to. She takes pride in having lived up to her obligation. I contacted the IRS to formally restructure the plan to something like the following:

                First three months          $25 per month

                Next three months         $50 per month

                Next three months         $75 per month

               

The IRS refused. Why? Because she “defaulted” on her plan. Now think about this for a moment. My client is held in the same regard as a tax scofflaw who has never paid and has no intention of ever paying. Her default? She reduced her payment because she works for $7.50 per hour and is broke. She did not miss a payment, mind you, only reduced it. To be fair, we will work something out with the IRS, but it is a needless headache for both her and me. I do think it shows a blockheaded attitude at the IRS. Some of us – government employees excluded, apparently – can be fired.

Count me on the “nay” side of any proposal to expand IRS levy authority. Show me some proof of “kinder and gentler” before I board this bus.

The IRS Is Selling a Super Bowl Ring

I am a huge NFL fan. It is, without a doubt, my favorite sport.

Did you hear about Fuzzy Thurston’s tax problems?

Who is Fuzzy? His actual name is Fred Thurston. He played with the Green Packers from 1959 to 1967. He played guard in the first two Super Bowls under Vince Lombardi.

He was considered a tough football player and part of the famed “Power Sweep.” When asked how he prepared for the bitter cold of the Ice Bowl on December 31, 1966 at Lambeau Field against the Dallas Cowboys, he replied “About 10 vodkas.”

After football he became a restaurateur. He and partners, including Max McGee, opened a restaurant named Left Guard in Menasha, Wisconsin and eventually had six locations throughout Wisconsin. Fuzzy played left guard – hence the name of the restaurant.

The trouble arose with employment taxes. Somewhere between 1978 and 1980 the Janesville restaurant failed to remit payroll taxes withheld from employees. We have spoken of withholding before. These penalties are some of the toughest in the IRS arsenal. It makes sense, if you remember that these are withheld taxes. The money belongs to the employees, and the employer is merely a conduit for remittance to the Treasury. When the employer fails to remit, it not only deprives the Treasury but it has also robbed from its employees.

So Fuzzy had a withholding problem. The tax action goes against the company and the responsible persons at the company. As a partner, Fuzzy must have had enough authority to be considered a responsible person. So were his partners. His partners paid-off their actions, but Fuzzy fought his. The initial judgment against him in 1984 was approximately $190,000.

Fuzzy continued to fight. His liability, with interest and penalties for more than 25 years, is a little more than $1.7 million. The IRS is selling off his football paraphernalia, including his 1960 Packers helmet, two 1960 footballs signed by Packers players and Vince Lombardi, his NFL championship rings from 1958, 1961, 1962 and 1965,  and Fuzzy’s Super Bowl II ring. The IRS is searching for his Super Bowl I ring also, but it hasn’t turned up.

It’s an unfortunate story, but I have to point out that Fuzzy either dug in his heels unreasonably or otherwise received horrendous tax advice. Perhaps he felt that his partners stole from him and that he wasn’t responsible. Fine, but a quick education from his accountant might have included the concept of surrogate liability, and that as a partner in the restaurant he had triggered that liability. At that point it was not a matter of right or wrong, but rather a matter of emergency room decision-making. Stop the bleed, clot the wound, stabilize the patient, live to fight another day. I have to believe he could have come up with $190,000 in 1984. He could then have sued his partners, if it made him feel better. But he was not going to win the responsible person action against him with the IRS.