The hedge fund that took on Marissa Mayer is reportedly urging Yahoo to drop its Alibaba spin-off plan

The Yahoo Inc. shareholder Starboard Value LP has urged the online media company to halt the plan to sell its stake in Alibaba Group Holdings Ltd because of the risk of incurring taxes on the sale, The Wall Street Journal reported.

The activist investor instead wants Yahoo to sell its struggling internet business, the newspaper reported on Wednesday, citing a letter Starboard sent to Yahoo.

"If you stay on the current path, we believe the potential penalty for being wrong is just too great," Starboard writes, according to The Journal.

Starboard supported the sale of Yahoo's stake of more than $20 billion in Alibaba before the US Internal Revenue Service denied Yahoo's request for a private letter ruling on whether the spin-off would be considered tax-free.

Yahoo said in September that it would proceed with the planned spin-off of its stake in the Chinese e-commerce giant even after the IRS declined its request.

Yahoo, which has been struggling to revive its core online advertising business, expects to close the stake sale in the fourth quarter ending December 31. If the IRS denies the tax-free status later, Yahoo's shareholders may have to pay about $9 billion in taxes.

When Starboard first took a large position in Yahoo last fall, its biggest demand was that Mayer find a tax-free way to sell its stake in Alibaba and return the profits to shareholders. Since the activist fund made its position known, it has also pushed for Yahoo to merge with AOL, a plan that fell through when AOL was bought by Verizon.

Starboard and Yahoo were not available for comment outside regular US business hours.

(Reporting by Ismail Shakil in Bengaluru; Editing by Anupama Dwivedi)