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(Reuters) - Yahoo Inc YHOO.O may have to pay taxes on the $23 billion it hopes to get from the planned spinoff of its stake in Alibaba Group Holdings Ltd (BABA.N), threatening a key element of Chief Executive Officer Marissa Mayer's turnaround strategy.
Yahoo said Tuesday the U.S. Internal Revenue Service (IRS) had denied the company's request for a private letter ruling on whether the spinoff of its stake in the Chinese e-commerce giant would be considered tax free.
Yahoo's shares fell as much as 15.8 percent after the announcement but they pared their losses later in extended trading and were down about 3 percent.
Despite the IRS denial of the letter, Yahoo said the IRS had not concluded the transaction would be taxable. The company said it would weigh its options, including proceeding with the spinoff, according to a regulatory filing.
Investors have closely followed the plans for the spinoff, seeing it as a way to unlock value from the company. Yahoo shareholders feel that the company and its stake in Alibaba would be worth more separately, as long as the spinoff is not subject to tax incurred from selling the shares.
Any hitch in a tax-free transaction would put even more pressure on Mayer, whose turnaround efforts have had little effect on the firm's growth.
Yahoo has been struggling to revive its core online advertising business by spending more to get users on its websites. Analysts have said that Yahoo has done little to fix the damage.
Yahoo plans to spin off its stake in Alibaba into a public company along with Yahoo Small Business, which provides domain names and local marketing.
Even a sale would only ease the scrutiny on Mayer, who has been at the helm of the company since 2012. Investors would then increase pressure on her to make quicker progress in strengthening Yahoo's struggling media and advertising business.
While the move to spin off the stake followed persistent investor demand, the value of the stake has nearly halved since January, when the company first announced the spinoff.
Alibaba shares have fallen 41 percent since the announcement. Yahoo shares have fallen 35.6 percent in the same period.
Reporting by Abhirup Roy and Anya George Tharakan in Bengaluru; Editing by Sriraj Kalluvila, Bernard Orr