Majority Of Yahoo's Alibaba Stake Could Be Lost In Taxes, Bob Peck Warns

• Yahoo! Inc. YHOO shares are down 7 percent in the last three months, after hitting a high of $37.67 on July 29.
• SunTrust Robinson Humphrey’s Robert S. Peck maintained a Buy rating on the company, with a price target of $40.
• Two-thirds of the company’s stake in Alibaba Group Holding Ltd BABA may be at risk in the one tax scenario, Peck said.

Analyst Robert Peck mentioned that many investors may already know of the 0 percent tax possibility related to the Aabaco spin, if the IRS rules the spin is tax free. Investors may also know of the tax scenario of about 40 percent, if the IRS treats it as fully taxable.

Peck added, however, that investors may not be as aware of the scenario where about two-thirds of Yahoo’s stake in Alibaba [Rated: Buy] is at risk of being lost in taxes. He pointed out that there is a risk of taxes being “higher than most realize (if taxed).”

The SunTrust report noted that there could be three possible tax outcomes that could equate to more than 60 percent of Alibaba’s value in Yahoo shares:

1. IRS taxes the spin and Aabaco pays about 12B to Yahoo as per the indemnification agreement
2. The indemnity itself is deemed as taxable, creating an additional tax liability of about $4B that Aabaco will need to defray
3. China may decide to tax the spin, creating an additional tax burden of $3B

“At current prices, that would imply ~$19B in taxes that Aabaco would need to pay (likely by selling ~240M of its ~384M BABA shares),” Peck wrote.

The analyst added, “We point out that when Yahoo started down the path, investors largely presumed the company would get a tax free ruling from the IRS (PLR)…The Board, given fiduciary responsibility, could therefore look at other possible tax-efficient outcomes or further delay the spin if there is enough risk.”