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IRS declines to rule on tax status of Yahoo spinoff

Lack of decision could hinder the spin off of Chinese e-commerce giant Alibaba. Yahoo says it's still working on a plan.

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Yahoo's plan to spin off its Alibaba shares just got more complicated. RUBEN SPRICH/Reuters/Corbis

Yahoo has been trying to spin off its shares in Chinese e-commerce giant Alibaba in an effort to save billions on taxes. But the Internal Revenue Service has dealt a potential blow to Yahoo's plan.

The Sunnyvale, California-based Internet giant said Tuesday that the IRS had, "in the exercise of its discretion," declined to rule on the tax-free status of the spinoff. However, Yahoo said the IRS didn't explicitly say the transaction is taxable, which means a deal could still be done.

The plan is mostly a technical one: spinning off Yahoo's 15 percent stake -- currently valued at more than $23 billion -- means the company may be able to avoid the billions of dollars in taxes it would have to pay if CEO Marissa Mayer simply sold the shares and returned the cash to Yahoo investors.

Yahoo's stock fell almost 4 percent in after-hours trading. The company declined to provide additional comment.

For Mayer, the news is the latest setback in her effort to turn around the lumbering company. Since she took the helm in 2012, Mayer has worked to return Yahoo to relevance after rivals like Google and Facebook overtook its main Web advertising business. Analysts say part of what has kept Yahoo's stock price afloat is its stake in Alibaba.

Yahoo's plan for its stake in Alibaba, which pulled off the biggest initial public offering ever last year, hit a roadblock in May when the IRS said it was considering rule changes around spinoffs.

After getting the news from the IRS, Yahoo said it withdrew its proposal on September 2. However, the Internet giant hasn't given up.

"Yahoo's Board of Directors will continue to carefully consider the Company's options, including proceeding with the spin-off transaction," Yahoo wrote in an SEC filing.