4 ms·

I cannot for the life of me figure out how Yahoo! is making this spinoff tax-free. How can a non-Investment Company spin off an Investment Company? How can this

by kolbe 12y ago

I cannot for the life of me figure out how Yahoo! is making this spinoff tax-free. How can a non-Investment Company spin off an Investment Company? How can this new Investment Company be exempt from diversification rules? This is just my opinion, but if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet. And Warren Buffett should be very thankful!

foobarqux 12y ago
What diversification rules?
charlesdm 12y ago
I'm no tax lawyer and have no clue on the specifics of US tax law, but in many jurisdictions it is relatively easy to do a tax neutral demerger of a subsidiary company from a holding company. You essentially defer the capital gain, up until you liquidate that company/stock. Didn't Warren Buffet do something similar by trading P&G stock for Duracell stock a while back, thereby avoiding (deferring) capital gains taxes?
- kolbe 12y ago
  So, you would refer to this action being tax-free, but that the owners of the new subsidiary will still owe cap gains from Yahoo's basis if the subsidiary ever sells the Alibaba stake? I don't really consider that to be a tax-free. Buffett does find creative ways to aviod taxes, but they usually involve the company he owns stock in buying that stock from him in a tax-free exchange. In that case, Buffett exchanged his $3bn worth of P&G stock for $3bn worth of a stake in Duracell. That had allowed him to re-establish his tax basis at the value of Duracel, and avoid cap gains on what he had made on buying P&G earlier.
  - nandemo 12y ago
    See the Bloomberg article linked elsewhere in the comments. In short: 0) the spinout will also run some (non-important) businness and so won't be a pure holding company 1) the spinout is less likely to sell the Alibaba shares and squander out the proceeds, 2) eventually Alibaba itself could buy out the spinout, and then it would have no need to sell its own shares. Surely shareholders would still have to pay capital gain taxes when the spinned-out company gets acquired at a premium, but presumably at a rate better than the 40% Yahoo would have to pay.
  - charlesdm 12y ago
    Not tax free, but definitely tax neutral? It also avoids double taxation at the corporate level, so you are saving on the corporate tax. I like the notion of having to pay tax when you actually get your (cash, not paper) return. Let's say Yahoo were to sell the stock, it would first have to pay corporate tax (35-40%), after which a dividend could be declared (another 15-25% in the hands of the shareholder) The total tax rate as such would be between 45-60% for individual tax payers. Using SpinCo, Yahoo will not have to pay the corporate tax, and investors will only have to pay capital gains tax because they can directly sell SpinCo shares. I'd assume SpinCo shares to trade at a discount to BABA. Re-establishing the tax base would have been better, but I think that one is much harder to do. Another thing to consider is that some non US investors might be holding Yahoo stock through some sort of holding or investment company that can benefit from a participation exemption regime. This means that capital gains are tax exempt at the corporate level, and that no taxation will occur until they make a distribution to shareholders.
jarcane 12y ago
Yes, let us all cheer for the latest means by which a corporation has managed to avoid their tax obligations and continue to be a drain on society. Whee.
- kolbe 12y ago
  I'm not cheering this behavior on. I'm just saying that it is significant.
- henrikschroder 12y ago
  But at least they are delivering excellent value to shareholders!
cmsmith 12y ago
I'm not terribly clear on this either, but who exactly will actually have a quantifiable/taxable gain by this demerger? Yahoo the company used to have some Alibaba, and now they will not. Yahoo the shareholders used to have some Yahoo+Alibaba, now they have some Yahoo and some Alibaba. I'm honestly curious, what would be appropriate to tax here?
discardorama 12y ago
> if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet Yahoo isn't the first to do this; the article mentions a precedent. So, nothing new here.

by kolbe 12y ago

foobarqux 12y ago

What diversification rules?

charlesdm 12y ago

I'm no tax lawyer and have no clue on the specifics of US tax law, but in many jurisdictions it is relatively easy to do a tax neutral demerger of a subsidiary company from a holding company. You essentially defer the capital gain, up until you liquidate that company/stock. Didn't Warren Buffet do something similar by trading P&G stock for Duracell stock a while back, thereby avoiding (deferring) capital gains taxes?

kolbe 12y ago
So, you would refer to this action being tax-free, but that the owners of the new subsidiary will still owe cap gains from Yahoo's basis if the subsidiary ever sells the Alibaba stake? I don't really consider that to be a tax-free. Buffett does find creative ways to aviod taxes, but they usually involve the company he owns stock in buying that stock from him in a tax-free exchange. In that case, Buffett exchanged his $3bn worth of P&G stock for $3bn worth of a stake in Duracell. That had allowed him to re-establish his tax basis at the value of Duracel, and avoid cap gains on what he had made on buying P&G earlier.
- nandemo 12y ago
  See the Bloomberg article linked elsewhere in the comments. In short: 0) the spinout will also run some (non-important) businness and so won't be a pure holding company 1) the spinout is less likely to sell the Alibaba shares and squander out the proceeds, 2) eventually Alibaba itself could buy out the spinout, and then it would have no need to sell its own shares. Surely shareholders would still have to pay capital gain taxes when the spinned-out company gets acquired at a premium, but presumably at a rate better than the 40% Yahoo would have to pay.
- charlesdm 12y ago
  Not tax free, but definitely tax neutral? It also avoids double taxation at the corporate level, so you are saving on the corporate tax. I like the notion of having to pay tax when you actually get your (cash, not paper) return. Let's say Yahoo were to sell the stock, it would first have to pay corporate tax (35-40%), after which a dividend could be declared (another 15-25% in the hands of the shareholder) The total tax rate as such would be between 45-60% for individual tax payers. Using SpinCo, Yahoo will not have to pay the corporate tax, and investors will only have to pay capital gains tax because they can directly sell SpinCo shares. I'd assume SpinCo shares to trade at a discount to BABA. Re-establishing the tax base would have been better, but I think that one is much harder to do. Another thing to consider is that some non US investors might be holding Yahoo stock through some sort of holding or investment company that can benefit from a participation exemption regime. This means that capital gains are tax exempt at the corporate level, and that no taxation will occur until they make a distribution to shareholders.

jarcane 12y ago

Yes, let us all cheer for the latest means by which a corporation has managed to avoid their tax obligations and continue to be a drain on society. Whee.

kolbe 12y ago
I'm not cheering this behavior on. I'm just saying that it is significant.
henrikschroder 12y ago
But at least they are delivering excellent value to shareholders!

cmsmith 12y ago

I'm not terribly clear on this either, but who exactly will actually have a quantifiable/taxable gain by this demerger? Yahoo the company used to have some Alibaba, and now they will not. Yahoo the shareholders used to have some Yahoo+Alibaba, now they have some Yahoo and some Alibaba. I'm honestly curious, what would be appropriate to tax here?

discardorama 12y ago

> if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet Yahoo isn't the first to do this; the article mentions a precedent. So, nothing new here.