SunTrust's Bob Peck Shows Further Concern With Possible Tax Implications For Yahoo!'s Alibaba Spin

• Yahoo! Inc. YHOO shares have declined 36.94 percent year to date, from a share price of $50.51 on December 31, 2014.
• Robert S. Peck of SunTrust Robinson Humphrey has maintained a Buy rating and price target of $40 on the company.
• If the IRS views the Aabaco spin as taxable, Peck mentioned that in the worst case scenario, the taxes could add up to more than 100 percent of the Aabaco spin value.

Analyst Robert Peck said that although the spin off proceeds were expected to be tax free, if the worst case scenario did come to fruition, it would present “a potential significant strategic risk for the CEO.”

Even if the IRS did tax the transaction, Peck believes that Aabaco would need to “indemnify Yahoo and pay the taxes, but that the indemnification payment itself would likely be taxable.” This was add up to about 50 percent of Aabaco’s value.

However, according to the SunTrust report, in order to pay the indemnification, Aabaco might need to sell Alibaba Group Holding Ltd BABA shares, which could be taxable “on a non-stepped up cost basis.”

In addition, shareholders might also be taxed in the event that the spin is viewed as being “quasi dividend.” This would take the total taxes up to 100 percent. If then China chooses to mimic the US and tax the transaction at 10 percent, the total taxes would add up to more than the full value of the transaction.

Peck highlighted, however, that any tax ruling would take place only in 2017, “after reviewing Yahoo's 2016 filed docs and could ultimately go to court.”