BEIJING, CHINA - NOVEMBER 9: In this handout image provided by Alibaba, CEO of Alibaba.com Jack Ma speaks at a launch ceremony on November 9, 2005 in Beijing, China. Alibaba.com Corporation, China's largest e-commerce company, announced today the relaunch of Yahoo! China, with a new home page and business model focused on search. As part of the relaunch, Yahoo! China's search brands, including Yisou.com, have been consolidated and rebranded as "Yahoo! Search". (Photo by Natalie Behring/Alibaba via Getty Images)
Photograph by Natalie Behring — Alibaba/Getty Images

There's too much risk and too little upside.

By Don Reisinger
December 4, 2015

Yahoo’s hopes of spinning off its stake in China-based e-commerce giant Alibaba are in serious jeopardy, according to analysts. And there may be good reason for that.

Bob Peck, an analyst at SunTrust Robinson Humphrey, wrote in a note on Friday that Yahoo’s YHOO board will “likely” make the decision to “pause” its proposed plan to spin off the company’s Alibaba BABA shares. In the note, Peck said that the decision, which could be made this week during the company’s board meetings, may ultimately come down to growing interest in Yahoo’s core business, including its search and advertising operations, as well as shareholder concerns over a possible tax liability related to the spin-off.

“We think the board will adapt its decisions to new information that avails itself,” Peck wrote, pointing to recent news of several companies reportedly circling Yahoo in hopes of acquiring its core business.

Scott Kessler, equity analyst at Standard & Poor’s, told Fortune in an interview on Friday that he agrees Yahoo’s board should scuttle plans for a spin-off, saying that the “timing is inopportune.”

Yahoo, which declined to comment on its plans, announced its plan to spin off its stake in Alibaba in January. The move was touted by the company as an ideal way to get full market value out of its 15% stake in Alibaba. Most importantly, it was a tax-free solution.

Yahoo acquired a 40% stake in Alibaba in 2005 for $1 billion and control over Yahoo China. In 2012, Alibaba paid Yahoo $7.6 billion in cash and stock to buy back approximately 20% of its shares. Yahoo has since divested yet more shares in Alibaba, bringing its current stake to 15%, or approximately $30 billion, based on the e-commerce giant’s $206.9 billion market cap.

According to Kessler, “for the better part of a decade” Yahoo has been evaluating ways to get its full value out of Alibaba. Yahoo’s issue, however, has long been that selling off $30 billion in Alibaba stock would result in what Kessler believes, could be an approximate $10 billion capital gains tax bill from the Internal Revenue Service.

Yahoo’s January announcement provided a way forward without paying taxes. The plan would see Yahoo spin off its $30 billion stake in Alibaba into a company it’s currently calling Aabaco. While Aabaco would retain ownership in Alibaba, the company would be public and raise billions of dollars based on that stake. Investors, according to Kessler, would be investing in Alibaba’s value, in the hopes that it would rise.

But in order for the spin-off to be tax-free under current U.S. regulations, the company must have an operating segment. Yahoo said in January that the operating segment would be “a legacy, ancillary Yahoo business,” not part of the company’s core operation.

Speculation among investors and analysts, however, continues over whether the spin-off would indeed be tax-free.

In September, Yahoo—seemingly concerned about the possibility itself—announced that it had requested a “private letter” from the IRS, effectively endorsing the deal and ensuring it would not face a tax liability at some point in the future. The IRS declined, and nearly a week later, issued a formal “no-rule” policy on the Alibaba spin-off. The agency also said that it would study the type of transaction Yahoo would use to spin off Alibaba, and potentially release new regulations to block the loophole.

Yahoo followed that with a statement to investors saying that it was pushing ahead with the spin-off. The company argued that its advisors, including the outside law firm Skadden, Arps, Slate, Meagher & Flom, had said it would not face a tax liability. The company also cited a comment made by an IRS official saying the modified rules, if passed, would impact only new spin-offs and not those that are already in process.

Still, questions remain. While Kessler is certain that Yahoo carefully evaluated its options and has reason to trust its law firm (the firm issued a 100-page letter penned by a former IRS attorney explaining why, under current regulations, the spin-off is not taxable), he says it’s impossible to know for sure if Yahoo will eventually be slapped with a tax bill.

“The problem is there is no certainty here,” he says. “The IRS could, in a couple of years, deem the transaction taxable and want $10 billion in taxes. It’s possible Yahoo would not need to face tax liabilities, but on the other hand, the IRS’ inaction suggests it’s not quite as clear as Yahoo thinks.”

There’s another wrinkle that may be giving the board pause: talk of a possible sale of Yahoo’s core business.

This week, reports have been swirling that Yahoo’s board is exploring the possibility of selling Yahoo media properties, e-mail, and advertising businesses. Several potential suitors have been identified, including Verizon VZ , InterActive Corp. IACI , and others. Yahoo’s core business could fetch as much as $8 billion to the right buyer. Perhaps most importantly for shareholders, a sale of Yahoo’s core business would create the same scenario as the spin off—a company without the poor-performing core operation—but eliminate the risk of eventually facing a massive tax liability, since Alibaba would stay within the current company and therefore not be part of any transaction.

It’s a scenario that Jeffrey Smith, CEO of Starboard Value, a major investor in Yahoo and one of its most outspoken critics, says is ideal for the company.

“Given the strong interest in an acquisition of Yahoo’s core business, the uncertainty and unacceptable risk around both the plan to spin Aabaco, the eternal, elusive hope for a public turn-around, and the strong support from shareholders to abandon the proposed spin and sell the core business, clearly the best outcome for shareholders would be for Yahoo’s board to immediately abandon the spin and commence a competitive process to sell its valuable core business at the highest price possible,” Smith says. “It is imperative for Yahoo’s board to understand its fiduciary responsibility is to the shareholders and act as proper stewards of shareholder value.”

Still, Yahoo has faced backlash over the spin-off for months and has not backed down. Now faced with the prospect of selling its core business and the possibility of eventually facing a tax liability that would effectively amount to one-third its current value, the company will again need to decide whether to move forward with the spin off in the face of opposition.

Only this time, the opposition is much bigger and much louder.

For more on Marissa Mayer and Yahoo, check out the following Fortune video:

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