Yahoo CEO Marissa Mayer is spinning off the company's prized stake in China's Alibaba Group Holding Ltd in a move that will enable Yahoo to avoid paying billions of dollars in future taxes.

A newly formed entity called SpinCo will inherit ownership of Yahoo's 384 million Alibaba shares when the tax-free spinoff is completed toward the end of this year.

Yahoo's own stock gained $3.51, or more than 7 percent, to $51.50 in extended trading Tuesday after Mayer disclosed her plans for Yahoo's 15 percent stake in Alibaba.

The much-anticipated announcement overshadowed Yahoo's results for the final three months of last year.

Yahoo Inc invested just $1 billion in Alibaba nearly a decade ago, a bargain that subjected the company to massive tax bills as it has whittled its stake during the past three years. Yahoo said it will be able to avoid taxes by spinning off the stake into a separate, independent company instead. Yahoo shareholders will get shares in the new company.

The spinoff is subject to various regulatory approvals from the Internal Revenue Service and the Securities and Exchange Commission. Yahoo is targeting the fourth quarter, after the expiration of a one-year lock-up agreement requiring Yahoo to hold on to the shares.

The Alibaba stake is currently worth $39 billion, intensifying the shareholder pressure on Mayer to come up with a plan to minimize future taxes. The Alibaba investment is also worth far more than Yahoo's. Yahoo has been struggling to generate more revenue for the past six years while rivals Google Inc and Facebook Inc grabbed a bigger piece of digital marketing budgets.

Alibaba had its initial public offering of stock on the New York Stock Exchange in September. The Chinese company is attractive to investors in part because most of its users visit on smartphones and other mobile devices at least once a month - important as computing shifts away from traditional laptops and desktops.

Investments in Alibaba, China's largest e-commerce company, and Yahoo Japan are the main reason Yahoo's stock has more than tripled since Mayer defected from Google to become Yahoo's CEO two and a half years ago. Yahoo is retaining its nearly 36 percent stake in Yahoo Japan, currently worth nearly $7 billion, BGC Financial analyst Colin Gillis estimated.

"This is ideal for shareholders and shows that (Mayer) is aligning herself with shareholder interests, at least for now," Gillis said.

The handling of Yahoo's Alibaba stake is so important to shareholders that one activist investor, hedge fudge manager Jeffrey Smith of Starboard Value, has threatened to spearhead an attempt to oust Mayer if she didn't adopt a strategy that minimizes taxes. Smith also has been pressuring Mayer to commit to returning most of any future Alibaba windfalls to shareholders instead of spending the money to buy other companies, unless she embraces his call for Yahoo to merge with rival AOL Inc.

A tax-free spinoff of the Alibaba stake ranked high on Smith's agenda.

Starboard Value did not immediately respond to a request for comment.