IRS rejects Yahoo's tax-free request on Alibaba spinoff. Stock tanks

Who is Jack Ma?
Who is Jack Ma?

Yahoo's spinoff of its massive stake in Alibaba just got dealt a blow by the government.

Yahoo (YHOO) had been hoping the IRS would bless the spinoff as a tax-free transaction, saving investors huge sums of money.

Yahoo owns about 384 million shares of Alibaba (BABA), worth about $23 billion. The spinoff is the centerpiece of CEO Marissa Mayer's plans to return cash to shareholders.

However, Yahoo told investors in a filing Tuesday that the IRS has rejected its request for a special tax ruling on the deal.

It calls into question the prospect of the transaction going forward as presently envisioned.

Despite the rejection, Yahoo said in the filing that it will continue to work on the spinoff.

Shares of Yahoo fell 4% in after-hours trading following the news.

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Related: Alibaba sales stall

The IRS notified Yahoo on September 2 that would not grant the company's requested ruling. Two days later Yahoo disclosed to shareholders the departure of Aman Kothari, its chief accounting officer.

Yahoo said one option is to go forward with the deal on the basis of an opinion from its lawyers that the transaction will satisfy requirements for tax-free treatment.

Yahoo also said that even though the IRS had rejected a special tax ruling, it hadn't explicitly said the deal was taxable either.

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