SAN FRANCISCO (AFP) - Yahoo shares slid on Tuesday (Sept 8) after the Internal Revenue Service refused to promise that the Internet pioneer's plan for spinning off its Alibaba holdings would sidestep US taxes.

Yahoo shares sank nearly three per cent to US$30.03 in after-market trades that followed release of word that the IRS declined a request for a preliminary ruling that the way the spin-off is structured satisfies requirements for avoiding taxes on the multi-billion-dollar stake in Alibaba.

"The IRS notified Yahoo's counsel that it had determined, in the exercise of its discretion, not to grant the requested ruling," Yahoo said in a Securities and Exchange Commission filing on Tuesday.

"At the same time, the IRS indicated that it had not concluded that the proposed spin-off transaction was taxable and therefore was not ruling adversely on the request."

Yahoo in July formally notified US regulators that it is spinning off its stake in Chinese e-commerce giant Alibaba to an independent new company called Aabaco Holdings.

Aabaco will wind up owning approximately 384 million shares of Alibaba Group, representing an interest of about 15 per cent, according to an SEC filing.

The move was designed to sidestep taxes and appease investors eager to tap into Yahoo's rich stake in Alibaba. The IRS decision to remain mum about the deal for now raised worry by investors that a big tax bill may be in store.

Under the spinoff plan, which was announced early this year, all outstanding shares of Aabaco will be distributed to Yahoo stock holders.

Yahoo will also transfer to Aabaco services for small businesses that it hosts in its Internet cloud.

Yahoo bought a 40 per cent stake in the Chinese company in 2005 for US$1 billion.