Yahoo could lose billions from the IRS nonruling

Yahoo just scored a definite maybe.

According to a filing on Tuesday, the troubled Internet company was informed by the Securities and Exchange Commission that the government agency will not rule on whether Yahoo can spin off its Alibaba shares in a tax-free manner.

Should Yahoo decide to stay the course with its most prized asset, the IRS could tax the new entity at a later date. The difference between no tax (Yahoo's preference) on the $23.4 billion stake and a 40 percent capital gains tax is more than $9 billion.

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Investors are now left to discount the risk.

"Basically, all the government did is say we're not going to tell you ahead of time—we're not going to give you a safe haven," said Laura Martin, an analyst at Needham & Co. "The risk-reward just got worse."

Martin has a "buy" rating on the stock and a $55 price target, 78 percent above Tuesday's closing price of $30.90.

Yahoo CEO Marissa Mayer has been at this for a while. In January, she announced plans to spin off Yahoo's Alibaba shares into a separate company, subsequently dubbed Aabaco. The publicly-traded Yahoo will retain the core business.

As we all know by now, investors ascribe very little value to any of that other stuff. Yahoo's market cap, including its Alibaba stake, is $29 billion.

Now that the SEC has decided to not decide, the direction Yahoo takes is up to the board and its law firm, Skadden, Arps, Slate, Meagher & Flom.

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"Work proceeds on the pending Aabaco spin-off plan," the Sunnyvale, California-based company said in the filing. Company representatives didn't respond to requests for comment.

It's not like investors have been wildly excited about their prospects headed into this week. Yahoo shares have tumbled 39 percent this year, badly underperforming the S&P 500, which has dropped 4.4 percent. Much of that is reflective of a 41 percent plunge in Alibaba shares.

Robert Peck, an analyst at SunTrust Robinson Humphrey, wrote in a report last month that the market "has already baked in the worst case" for Yahoo and assumed a 40 percent tax on the Alibaba stake. A fortuitous tax-free spinoff would value the stock at $48, Peck wrote.

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In a note after Tuesday's filing, CRT Research analyst Robert Coolbrith echoed that sentiment. The bullish case, according to Coolbrith, is that the size of the Yahoo deal shouldn't be of grave concern to regulators and that recent history favors the company.

Most notably, just last year John Malone's Liberty Interactive spun out an entity called LIberty TripAdvisor Holdings, consisting of stock in TripAdvisor and BuySeasons.

"We believe that YHOO has both relevant tax law and precedent transactions on its side," Coolbrith wrote. He has a "buy" rating and $52 price target.