ADT 2008 Annual Report Download - page 126

If the distribution of Covidien and Tyco Electronics common shares to our shareholders or certain
internal transactions undertaken in connection with the Separation are determined to be taxable for
U.S. federal income tax purposes, we could incur significant U.S. federal income tax liabilities.
We have received private letter rulings from the IRS regarding the U.S. federal income tax
consequences of the distribution of Covidien and Tyco Electronics common shares to our shareholders
substantially to the effect that the distribution of such shares, except for cash received in lieu of
fractional shares, will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Internal Revenue
Code of 1986 (the ‘‘Code’’). The private letter rulings also provided that certain internal transactions
undertaken in anticipation of the Separation would qualify for favorable treatment under the Code. In
addition to obtaining the private letter rulings, we have obtained opinions from the law firm of
McDermott Will & Emery LLP confirming the tax-free status of the distribution and certain internal
transactions. The private letter rulings and the opinions relied on certain facts and assumptions, and
certain representations and undertakings, from Tyco, Covidien and Tyco Electronics regarding the past
and future conduct of our respective businesses and other matters. Notwithstanding the private letter
rulings and the opinions, the IRS could determine on audit that the distribution or the internal
transactions should be treated as taxable transactions if it determines that any of these facts,
assumptions, representations or undertakings are not correct or have been violated, or that the
distributions should be taxable for other reasons, including as a result of significant changes in stock or
asset ownership after the distribution. If the distribution ultimately is determined to be taxable, we
would recognize a gain in an amount equal to the excess of the fair market value of the Covidien and
Tyco Electronics common shares distributed to our shareholders on June 29, 2007 over our tax basis in
such common shares, but such gain, if recognized, generally would not be subject to U.S. federal
income tax. However, we would incur significant U.S. federal income tax liabilities if it ultimately is
determined that certain internal transactions undertaken in connection with the Separation should be
treated as taxable transactions.
In addition, under the terms of the Tax Sharing Agreement that we have entered into with
Covidien and Tyco Electronics in connection with the Separation, in the event the distribution or the
internal transactions are determined to be taxable and such determination was the result of actions
taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure
would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result thereof. If
such determination is not the result of actions taken after the Separation by Tyco, Covidien or Tyco
Electronics, then we, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%,
respectively, of any taxes imposed on us, Covidien or Tyco Electronics as a result of such
determination. Such tax amounts could be significant. In the event that any party to the Tax Sharing
Agreement defaults in its obligation to pay distribution taxes to another party that arise as a result of
no party’s fault, each non-defaulting party would be responsible for an equal amount of the defaulting
party’s obligation to make a payment to another party in respect of such other party’s taxes.
We share responsibility for certain of our, Covidien’s and Tyco Electronics’ income tax liabilities for tax
periods prior to and including June 29, 2007.
Under the Tax Sharing Agreement, we share responsibility for certain of our, Covidien’s and Tyco
Electronics’ income tax liabilities based on a sharing formula for periods prior to and including
June 29, 2007. More specifically, we, Covidien and Tyco Electronics share 27%, 42% and 31%,
respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to our,
Covidien’s and Tyco Electronics’ U.S. income tax returns, certain income tax liabilities arising from
adjustments made by tax authorities to intercompany transactions or similar adjustments, and certain
taxes attributable to internal transactions undertaken in anticipation of the Separation. All costs and
expenses associated with the management of these shared tax liabilities will be shared equally among
the parties. We are responsible for all of our own taxes that are not shared pursuant to the Tax Sharing
2008 Financials 23