I bet Marissa Mayer wishes she had minored in corporate taxes.
Ms. Mayer, Yahoo’s chief executive, studied computer science at Stanford, specializing in artificial intelligence. If only there was an algorithm to devise a tax-efficient corporate restructuring. Machine learning cannot sort through an infinite number of strategic tax options and choose the best one. Nor can machines reliably predict how the human beings at the I.R.S. will apply uncertain law to a complex area like corporate tax.
And the tax code, not computer code, is what Yahoo’s shareholders care about.
Ms. Mayer inherited a major tax headache when she became Yahoo’s chief in 2012. In 2005, Yahoo invested $1 billion in Alibaba.com, a growing Chinese e-commerce site. As the Alibaba investment grew in value, so too did the tax liability that Yahoo would pay if it sold the shares.
When Alibaba went public in 2014, Yahoo sold a chunk of its shares for about $7 billion. The sale led to a tax bill of more than $2 billion. Yahoo’s remaining stakes in Alibaba and Yahoo Japan together represent most of the market value of Yahoo, making it difficult for investors to evaluate Yahoo’s core business, such as it is.
In January, Yahoo announced a spinoff plan. The deal is intended to deliver the value of the Alibaba holdings to its shareholders without having the deal treated as a sale for tax purposes, which would force the company to pay corporate taxes on the appreciation of the value of the stock.
The idea is that SpinCo, a new subsidiary, would hold the Alibaba shares. Yahoo would then distribute shares of SpinCo to Yahoo’s shareholders. Presumably, Alibaba would eventually buy the shares of Spinco in exchange for new shares of Alibaba, extinguishing the “stub” shares.
As is customary, Yahoo indicated when announcing the plan that it would secure a legal opinion from the law firm Skadden on the tax-free treatment of the transaction and a favorable private letter ruling from the I.R.S. on certain unspecified aspects of the deal.
Generally speaking, a private letter ruling gives a taxpayer a green light to engage in a planned transaction, provided that the facts given to the I.R.S. are accurate.
Speaking at a bar association conference on Tuesday, an I.R.S. lawyer said that the agency would hold off on new requests for spinoff rulings. Yahoo’s stock dropped 7.5 percent on the news. The stock price largely rebounded on Wednesday as the company reaffirmed its plans.
The legal requirements for a tax-free spinoff have two elements that are important here.
First, SpinCo must contain an “active trade or business,” a term of art that distinguishes between real operating businesses and passive investment vehicles. To meet the active trade or business requirement, Yahoo plans to stick Yahoo Small Business, a division with about $50 million in earnings before interest, taxes, depreciation and amortization, into SpinCo.
The problem is that a division with $50 million in earnings is trivial compared to the $35 billion of Alibaba stock. Gluing a horn on a horse’s head doesn’t make it a unicorn.
The second issue — closely related to the first — is whether the spinoff is a dividend in disguise. The tax code says the transaction cannot be used principally as a “device” for the distribution of earnings and profits.
If Yahoo were to distribute shares of Alibaba to each of its existing shareholders, it would have to pay a tax of about $12 billion on the appreciation of those shares. This is the tax that Yahoo wants to avoid.
The tax policy underlying the tax-free spinoff rules is reasonably straightforward. When breaking up a business makes sense because the parts are worth more than the whole, the tax code should not stand in the way.
Hewlett-Packard, for example, is separating its corporate hardware and services business from its personal computer and printer business. It should be able to do so without triggering a tax. Imposing a tax on corporate divisions might distort legitimate business deals, creating a drag on economic growth.
The problem here is that Yahoo doesn’t have two real businesses that it wants to divide. It just wants to get the Alibaba stock into the hands of its shareholders.
Absent tax considerations, Yahoo would obviously just distribute the shares, or sell the Alibaba stock and distribute the cash. The only reason anyone is talking about a spinoff is to try to distribute appreciated property to shareholders without paying corporate taxes.
The I.R.S. has been sensitive to criticism that it is giving away the store. It suspended private letter rulings on certain publicly traded partnerships, called PTPs, and real estate investment trusts, or REITs, for a time in response to concerns that its generous ruling policy was eroding the corporate tax base. Rulings on those issues have resumed, but on a more restricted basis and only after new regulations scuttled speculation that International Paper might become an energy PTP.
The I.R.S. is likely to take its time. It has no legal obligation to issue a ruling at all. Indeed, the I.R.S. has for years maintained a policy against ruling on business purpose and “device” issues in advance.
The substantive issue goes well beyond Yahoo: Berkshire Hathaway, Liberty Media and other companies have successfully pursued similar strategies to avoid corporate-level taxes on the sale of appreciated property. The Yahoo deal is simply the wakeup call that has forced the issue to the top of the policy agenda.
The Yahoo spinoff, to borrow a phrase from “The Princess Bride,” is only mostly dead. Yahoo can legally proceed without a private letter ruling. It’s hard to know if investors would stomach the tax risk, but a legal opinion from Skadden isn’t a trifle. Moreover, Skadden lawyers are known for their effectiveness at aggressively lobbying Treasury and I.R.S. officials and persuading them of the merits of a client’s position.
Unless Skadden works a miracle, the spinoff creates a nasty tax risk for shareholders, and the uncertainty would cloud the valuation of Yahoo and SpinCo for years.
- http://bit.ly/1An9ye4
Niciun comentariu:
Trimiteți un comentariu