ADT 2008 Annual Report Download - page 156

would be required to pay, equally with any other non-defaulting party, the amounts in default. In
addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an
income tax liability were to default in its payment of such liability to a taxing authority, the Company
could be legally liable under applicable tax law for such liabilities and required to make additional tax
payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in
excess of its agreed-upon share of Tyco’s, Covidien’s and Tyco Electronics’ tax liabilities. See Note 14 to
the Consolidated Financial Statements for further discussion of guarantees and indemnifications
extended between Tyco, Covidien and Tyco Electronics.
Other Income Tax Matters
The Company and its subsidiaries’ income tax returns periodically are examined by various tax
authorities. In connection with these examinations, tax authorities, including the Internal Revenue
Service (‘‘IRS’’), have raised issues and proposed tax adjustments. The Company is reviewing and
contesting certain of the proposed tax adjustments. Management has assessed the issues related to
these adjustments for recognition and measurement under FIN No. 48 and has recorded unrecognized
tax benefits in accordance with FIN No. 48. The ultimate resolution of these matters is uncertain and
could result in a material impact to the Company’s financial position, results of operations, cash flows
or the effective tax rate in future reporting periods.
In 2004, in connection with the IRS audit of the 1997 through 2000 years, the Company submitted
to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a
reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the
proposed adjustments, and the Company developed proposed amendments to U.S. federal income tax
returns for additional periods through 2002. On the basis of previously accepted amendments, the
Company has determined that these adjustments will more-likely-than-not be accepted and, accordingly,
has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material
impact on the Company’s financial condition, results of operations or cash flows.
Additionally, during 2008 the Company completed proposed amendments to its U.S. federal
income tax returns for periods subsequent to 2002, which primarily reflect the roll forward through
2006 of the amendments for the periods 1997 to 2002. Such adjustments did not have a material impact
on the Company’s financial condition, results of operations or cash flows. While the final adjustments
cannot be determined until the income tax return amendment process and the IRS review is completed,
the Company believes that any resulting adjustments will not have a material impact on its financial
condition, results of operations or cash flows.
During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco’s U.S.
federal income tax returns for the years 1997 though 2000 and issued anticipated Revenue Agents’
Reports (‘‘RARs’’) which reflect the IRS’ determination of proposed tax adjustments for the periods
under audit. The RARs propose tax audit adjustments to certain of the Company’s previously filed tax
return positions. The Company agreed with the IRS on adjustments totaling $498 million, with an
estimated cash impact to the Company of $458 million, and during the third quarter of 2007, the
Company paid $458 million, of which $163 million related to the Company’s discontinued operations.
The Company appealed other proposed tax audit adjustments totaling approximately $1 billion relating
to Tyco, Covidien and Tyco Electronics, and, as Audit Managing Party as specified in the Tax Sharing
Agreement, the Company intends to vigorously defend its prior filed tax return positions.
During the second quarter of 2008, the IRS issued additional RARs asserting a withholding tax
liability of approximately $106 million associated with the prior proposed tax adjustments related to
Tyco, Covidien and Tyco Electronics for the 1997 to 2000 period. The withholding tax amount asserted
against Tyco is immaterial. During the first quarter of fiscal 2009, the Company reached an agreement
with the IRS appeals team to work towards timely resolution of all unagreed issues related to this time
period. The Company, as Audit Managing Party as specified in the Tax Sharing Agreement, intends to
2008 Financials 53