IRS declined to bless Yahoo's planned tax-free Alibaba spin-off, sending its shares down about 4%.

According to Business Insider, Yahoo owns 384 million shares of Chinese tech giant Alibaba, which is worth $23 billion. Yahoo plans to turn that into a separate company with its small-business unit in a tax-free transaction that allows it to give much of the value back to Yahoo shareholders. However, IRS declined to grant Yahoo's request. It doesn't mean the IRS rejected Yahoo's plan directly. IRS is simply telling Yahoo it can't be too confident about the approval of the deal. 

During the SEC filing Tuesday, Yahoo said, "On September 2, 2015, the IRS notified Yahoo's counsel that it had determined, in the exercise of its discretion, not to grant the requested ruling. 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."

CNN reports that an hour after the news about the rejection came out, Yahoo's shares dropped 4%. But Yahoo said, it will continue to work on its planned Alibaba spin-off despite IRS's rejection.

In a Forbes report, Yahoo's chief executive Marissa Mayer already announced plans for Alibaba spin-off back in January. Yahoo proposed to spin its Alibaba share into a new registered investment company dubbed "Aabaco Holdings."

Yahoo expected the spin-off to be finished by the end of the year. It still believes that its lawyers will satisfy the requirements of the IRS to pull through with the transaction.

Yahoo said, "Work proceeds on the pending Aabaco spin-off plan. Yahoo's Board of Directors will continue to carefully consider the Company's options, including proceeding with the spin-off transaction on the basis of an opinion of counsel."

Yahoo investors are also anticipating this spin-off as they long have been clamoring for the company to cash out its Alibaba investment and give the proceeds back to them.