The Web portal said Tuesday that the IRS has declined to rule on the legality of the maneuver, signaling that the government may be leaning against approving the strategy.

Yahoo, which had planned to complete the spin off in the fourth quarter, said it would continue to work on the tax issue. But the company said it that it had withdrawn its request for an IRS ruling on Wednesday.

As reported earlier this year, Yahoo announced plans to spin off its massive investment in Alibaba amid pressure from Wall Street to return money to shareholders. Yahoo’s plan was to put the shares in an independent public company called Aabaco Holdings, which would control Yahoo’s nearly 384 million shares of Alibaba stock worth $23 billion at current market value.

Under the plan, Yahoo would no longer own the Alibaba stake. Instead, it would be distributed among Yahoo shareholders. With the spin out, Yahoo had hoped to avoid a multi billion dollar tax bill. But now the plan’s future is uncertain.

In after hour trading, just after disclosing the latest wrinkle, Yahoo’s shares (YHOO) fell 3.9% in after hours trading.

In February, Yahoo submitted its tax plan to the IRS for regulatory ruling. But according to Yahoo, the IRS declined to rule that the proposed deal would be tax-free. In a regulatory filing Tuesday, Yahoo made clear that the IRS had yet to make a final decision on whether the proposed plan was taxable.

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