ADT 2009 Annual Report Download - page 112

proposed adjustments. Subsequently, the Company developed proposed amendments to U.S. federal
income tax returns for additional periods through 2006. 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 such adjustments 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. While the final adjustments cannot be determined until 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.
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, which result in cash payments, 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. and certain non-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 Agreement’s sharing formula. In addition, Covidien and
Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing
Agreement’s sharing formula.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay
its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party
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, we could be
legally liable under applicable tax law for such liabilities and required to make additional tax payments.
Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our
agreed-upon share of our, Covidien’s and Tyco Electronics’ tax liabilities.
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.
The private letter rulings 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
20 2009 Financials