(Bloomberg) Yahoo! Inc. is pushing ahead with plans to spin off its stake in Alibaba Group Holding Ltd. after comments by the IRS triggered a share slump amid concerns the deal could hit a snag.

Potential IRS changes to the tax-free treatment of spinoffs shouldn’t affect previously filed requests, the Web portal said in an e-mailed statement. Yahoo has already lodged its plan and is still working toward undertaking the transaction in the fourth quarter, it said.

The stock fell 7.6 percent Tuesday on concerns that Internal Revenue Service changes would affect efforts to exit from Alibaba. The shares recovered somewhat on Wednesday. Any obstacle to the spinoff would erode the appeal for shareholders who bought Yahoo betting they essentially would get a tax-free payout when the deal closes.

The spinoff is a critical step for Chief Executive Officer Marissa Mayer after coming under pressure from Starboard Value LP and other investors to return cash to shareholders, find ways to cut taxes and avoid major acquisitions. The company’s Asian assets, including a stake in Yahoo Japan Corp., have supported Yahoo’s value, giving Mayer cover as she works to turn around the Sunnyvale, California-based company.

Yahoo unveiled the plan in January as it seeks to maximize the return of cash to shareholders. The potential change would affect IRS rules for spinoffs by creating new U.S. guidelines that might require a minimum size for active businesses inside the spun-off company.

Potential Changes
Isaac Zimbalist, senior technician reviewer at the IRS Office of Associate Chief Counsel (Corporate), said on Tuesday that the agency is considering changes to rules concerning spinoffs. The IRS will hold off on requests for rulings that are received starting Tuesday as the issue is studied, he said at a D.C. Bar Association event. Requests already received will move forward, but that is subject to change. It wasn’t clear what would happen to requests, such as Yahoo’s, that are already in the pipeline.

“The issue comes down to whether we’ve dropped a hot-dog stand or a lemonade stand into a business that is primarily publicly traded stocks, cash and other wonderful things that I call appreciated property,” Zimbalist said.

Yahoo’s plan is to put its Alibaba holding into a new company that will own all of its 384 million shares in the Chinese company as well as an online service for setting up and running small enterprises.

The Alibaba stake was valued at nearly $40 billion when the spinoff was announced. Shares in the new company would be distributed to existing Yahoo shareholders.

Shares Slump
Yahoo shares closed at $40.98 on Tuesday, their lowest level since October. The stock rose 3.4 percent to $42.37 at 9:34 a.m. Wednesday in New York.

Earlier Tuesday, Mayer said efforts to complete the spinoff are on track. “It’s a surprising amount of work,”she said at an investor conference.

Representatives of Alibaba and SoftBank Corp., its biggest shareholder, declined to comment.

The U.S. tax code doesn’t focus on the size of the active business inside a spinoff, Robert Willens, a New York-based tax consultant, said in a note to clients on Tuesday. At worst for Yahoo, he wrote, the IRS is changing its position on so-called private-letter rulings, the guidance it provides for deals that are in the works, but the law won’t change.

“While Yahoo has been mum regarding what its ruling request addressed,” Willens wrote, “the feeling is that one of the issues it sought guidance on was the very issue the service is now rethinking.”

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