For all the concerns about the potential tax liabilities from Yahoo (YHOO) spinning off its stake in Alibaba, it seems investors are now shaken by the board’s decision not to do it. In fact, amid all the calls to spin off the core business instead, Yahoo has decided to do just that. The company’s shares declined by as much as 3.49% to $33.63 per share during regular trading hours today following the official confirmation of the plan.

Yahoo saves on taxes

Yahoo owns approximately 384 million shares of Chinese e-commerce giant Alibaba (BABA), which was worth about $32 billion pretax or $34 per share of Yahoo. That valuation plunges to $21 per Yahoo share when fully taxed, however, according to Jefferies analysts Brian Pitz and Brian Fitzgerald. If Yahoo had gone ahead with the spinoff of its Alibaba stake, it would have come with a tax bill of approximately $12 billion.

Sterne Agee CRT analyst Robert Coolbrith pegs the tax liability of the previously planned Yahoo spin at about $8 per share and the potential tax bill much higher at about $13.3 billion. So needless to say, the decision not to spin off the Alibaba stake, which is worth much more than Yahoo’s core business will save quite a lot of tax money.

Yahoo’s new spin plan

Instead of proceeding with the Aabaco spin, Yahoo has decided to reverse course and instead spin off its core business. Coolbrith notes that taxes on spinoffs apply to assets that are controlled, which means that the worst-case tax scenario for spinning off the core business is about $5.3 billion – much lower than what the bill would have been on the Alibaba spinoff because the value of the assets being spun off is much lower.

The analyst sees this as being the worst-case scenario because he’s assuming that the reverse spin still gets a tax-free structure. He added that even if the IRS bars the possibility of Yahoo completing the reverse spin tax-free, the company could instead just sell its stake in Yahoo Japan and instead do a taxable spin or sale of its core business. He also believes that Yahoo could have “substantial investment basis” in connection with the many acquisitions it has made since CEO Marissa Mayer took the helm. This could reduce the company’s tax liability even more if the transaction ends up being taxed.