Yahoo Inc (YHOO.O) shares fell 7.6 per cent on Tuesday on concerns that a possible change in US tax regulations would affect Yahoo's planned spinoff of its stake in Alibaba Group Holding Ltd (BABA.N).
The change - discussed by a US Internal Revenue Service official in Washington - could complicate the plan announced by Yahoo in January to spin off its 15 per cent stake in Alibaba tax free.
Yahoo did not respond immediately to a request for comment.
The IRS is considering a change to its rules on spinoffs and may suspend new requests, according to a statement from the Internal Revenue Service. It said an official described the agency's process at a legal conference on Tuesday.
The IRS said it had been asked whether it is considering a change in its rules on "spin-offs in which the active trade or business of the distributing corporation or the controlled corporation is small in relation to its other assets."
Speaking at a legal conference, the IRS official said, "We are thinking about it. But we have made no decisions."
The official added, "While we are studying these matters, ruling requests that are already in house will continue to be handled in the normal fashion for now, but this may change. Requests received after this announcement may be held in abeyance as we study the area, and ultimately we may decide not to entertain these ruling requests at all."
Yahoo Chief Financial Officer Ken Goldman in an April earnings conference call said that Yahoo had submitted a request already to the IRS on the plan to spin off the Alibaba stake into a company with a small operating unit.
Still, investors took the IRS comments as a threat to Yahoo's plan.
"The concern is there may be road blocks to this event," said Colin Gillis, BGC Partners analyst, referring to Yahoo's spinoff of the Alibaba stake. Shareholders may also worry about the prospects for a potential spinoff of the company's Japan business, Gillis said.
Almost 30 million shares in Yahoo changed hands between 3:40 p.m. EDT (1940 GMT) and the 4 p.m. market close, out of the 41.9 million shares traded in the full session. The trading volume was almost three times Yahoo's 10-day average.
Shares of Alibaba closed up 1.3 per cent at $88.21 (S$117). Shares of Yahoo fell $3.38 to $40.98.
"People are interpreting (the IRS change) as negative for Yahoo right off the bat," Victor Anthony, analyst at Axiom Capital.