A hedge fund with a stake in Yahoo urged the Internet giant last month to drop its planned spinoff of its stake in China's Alibaba and instead sell the 'core' search business.

The call by hedge fund Starboard Value came with Yahoo on track to set up a new corporate entity holding the Alibaba stake in coming months that would be spun off.

But that spinoff plan has been clouded by concerns that it may not get tax-free status from US authorities, resulting in a hefty tax bill for Yahoo shareholders.

Starboard said in a letter to Yahoo's board and chief executive Marissa Mayer that the spinoff of the entity called Aabaco Holdings 'is not Yahoo's best alternative' and argued that 'instead, you should be exploring a sale of Yahoo's core search and display advertising businesses.'

The original decision to split Yahoo's holding in Alibaba was seen as an attempt to calm restless shareholders, starting with activist fund Starboard, which lobbied for the strategy.

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