Activist investor Starboard LP. urged Yahoo Inc. to call off the ongoing sale of its stake in Chinese ecommerce behemoth Alibaba Group Holdings Ltd. in a letter late Wednesday, as the deal could end up costing Yahoo billions in taxes, according to the Wall Street Journal.

Starboard, which supported the spinoff earlier this year, reversed its position after a September decision by the U.S. federal government not to pass a ruling on whether Yahoo’s stake sale -- previously thought to be tax free -- would incur billions of dollars in taxes.

However, it is unclear if Yahoo can reverse the deal at this point as the company said last month that it expected the spinoff to be completed by January, as it had believed the IRS would eventually approve the deal, the Wall Street Journal said.

Starboard’s letter urged Yahoo to sell off its struggling Internet business and expressed frustration with Yahoo’s response. The hedge fund, which has the grim reputation of once ousting the entire board of Darden Restaurants Inc, said it was no longer sure if the $23 billion deal would get a clean chit from the IRS. Yahoo’s stock is down by about 35 percent this year.

“If you stay on the current path, we believe the potential penalty for being wrong is just too great,” Starboard wrote in the letter, according to the Journal.

Starwood also suggested that instead of pursuing the stake sale, Yahoo should keep its stake in Alibaba and Yahoo Japan and sell its legacy Internet business. While that would also attract IRS attention, the bill would be smaller given the massive gains on Yahoo’s Alibaba shares, Starboard’s letter said, according to the Journal.

Starboard’s discomfort over tax concerns may have reportedly stemmed from a change of guard at the IRS earlier this year. Yahoo’s spinoff of its 15 percent stake in Alibaba was finalized under the supervision of former associate chief counsel of the IRS, William Alexander, who was central in the agency's decision to allow tax breaks to companies to conduct spinoffs. However, his successor, Bob Wellen, led the agency to issue the September notice to Yahoo that has since cast doubts that shareholders may have to lose billions in taxes over the spinoff, according to reports.

"It is a sea change in attitudes," Robert Willens, president of tax and accounting consulting firm Robert Willens LLC. told, a website which tracks private equity financing. "Bill Alexander was very permissive of tax-free spinoffs and Wellen has turned against everything Bill stood for. They couldn't be more diametrically opposed to each other."