The highly publicized and mostly popular news that Dell, Inc. will be acquiring rival cloud computing company EMC Corp. for $67 billion may be in doubt with a report Tuesday that the takeover may result in an insanely crazy tax bill.

Re/Code quotes the proverbial insiders as being worried Dell could end up having a tax bill from the Internal Revenue Service (IRS) of up to $9 billion following a regulatory review as a result of Dell’s proposal to use a new type of stock share to help pay for the acquisition.

The report further claims that the concerns are partially as a result of EMC’s investment in VMware as the value of that investment has risen by “tens of billions of dollars” since EMC acquired a majority stakeholding in 2003.

Under the current acquisition offer Dell is meant to be paying EMC shareholders the equivalent of $33.15 a share for the company consisting of $24.05 per share in cash with the remainder of $9.10 coming via a payment of tracking stock linked to VMware that is intended to offset the amount of debt Dell would have to take on to make the deal happen.

If the IRS was to find against the deal as it stands Dell would have to take on even more debt again to finance the EMC deal, resulting in the deal ending up with a not-insignificant sum of $50 billion in debt.

Tax lawyer Michael Solomon told Seeking Alpha that Dell needs to convince the IRS it’s effectively giving EMC shareholders (through the VMware tracking stock) a stake in Dell, noting “the deal raises a factual question as to whether or not the EMC shareholders are basically getting stock in Dell as the result of this merger.”

“If yes, then I expect the IRS would approve it. If it’s deemed to be a constructive distribution of the VMware subsidiary, in that case the deal fails.”

Risky business

While it’s unlikely the acquisition deal will collapse at this stage, despite the worries of people within Dell itself and outside it, what the IRS rules is not only of concern for this deal but for the broader technology sector as a whole.

The treatment of capital gains in the United States has always been far more favorable than many other Western jurisdictions who happily tax that gain at every step along the way; the IRS ruling that Dell has to pay a $9 billion tax bill may have a chilling effect across the broader merger & acquisition marketplace and may even see American companies offshore in an attempt to avoid this happening to them in the future if the IRS rules that way.

Investors are worried as well with EMC’s stock price down about 9 percent Tuesday, along with VMware’s stock down nearly 17 percent on the report.

Image credit: SiliconANGLE, theCUBE.