(Bloomberg) Yahoo! Inc. on Tuesday is expected to reveal something most companies usually try to keep secret: how it plans to avoid a multibillion-dollar tax bill.
The Web portal has spent more than a year figuring out how to cash out a chunk of its $40 billion stake in China-based Alibaba Group Holding Ltd. Typically, a U.S. company faces a federal tax bill of about 35 percent when it sells stock in another enterprise for cash.
Yahoo took a $3 billion tax hit last year when it sold about $10 billion in Alibaba shares. This time around, activist investors are leaning on the Sunnyvale, California-based company to be more savvy.
Marissa Mayer, Yahoo’s chief executive officer, probably will maintain at least part of the Alibaba holding to keep a finger in China’s fast-growing Web market. Were Yahoo to sell the entire stake, it could face a federal tax bill of as much as $14 billion.
Here are some of Yahoo’s options to avoid capital-gains tax, both legal:
Mimicking Malone
Last summer, John Malone’s Liberty Ventures wanted to avoid taxes on selling its stake in travel website TripAdvisor Inc. Liberty did so by transferring that stake, as well as online costume-retailer BuySeasons, to a new unit created specifically for the deal.
Under the plan, the new unit took out a $400 million bank loan. Most of that cash was destined for Liberty and the new unit’s stock spun off to Liberty shareholders.
The expectation was that TripAdvisor would acquire the new unit in exchange for the travel site’s own stock. TripAdvisor also agreed to repay the $400 million loan.
When it’s all wrapped up, Liberty Ventures gets cash and exits TripAdvisor—without incurring the tax bill a straight sale would trigger. Liberty’s shareholders get stock in TripAdvisor as though Liberty had distributed its holding in the site to its own investors. Liberty’s investors also don’t face taxes on the deal.
In Yahoo’s case, it would spin off its stake into a new entity, which would borrow money and distribute the cash to the Internet company.
“The tax savings sort of gets carved up between the two parties and they each get a chunk,” said Robert Willens, an independent tax-accounting analyst in New York City.
Channeling Buffett
Another option is to follow Warren Buffett’s lead, with what’s known in tax circles as the cash-rich split.
Berkshire Hathaway Inc. and Graham Holdings Co. last March agreed to a deal that lets Buffett’s company unload its stake in the former Washington Post Co. while avoiding capital-gains tax.
That deal called for Graham to transfer cash and a Miami television business—combined, roughly equal to Berkshire Hathaway’s investment—into a new subsidiary. Graham then shifts stock in that new unit to Berkshire Hathaway, while Buffett’s company moves its Graham stake back to the media company.
Economically, it’s as though Berkshire Hathaway sold its Graham stake for cash—and a TV station. But because the deal is structured as an exchange of shares, not a straight-up sale, it gets tax-free treatment.
Were Yahoo to follow this route, it would exchange Alibaba shares for a stake in a new unit that would consist mostly of cash. Alibaba would have to shed some assets for Yahoo to get the advantage of such a deal; a cash-only transaction probably would trigger a tax bill. Accounting experts say it shouldn’t be difficult to find something to throw in the pot.
—With assistance from Brian Womack in San Francisco and Alex Sherman in New York.
