ADT 2009 Annual Report Download - page 204

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes (Continued)
adjustments made by tax authorities to Tyco’s, Covidien’s and Tyco Electronics’ U.S. and certain
non-U.S. income tax returns. All costs and expenses associated with the management of these shared
tax liabilities are shared equally among the parties. As of September 25, 2009 and September 26, 2008,
Tyco has recorded a net receivable from Covidien and Tyco Electronics of $98 million and $126 million,
respectively, of which $95 million and $113 million, respectively, are included in other noncurrent assets
and $3 million and $13 million, respectively, are included in prepaid expenses and other current assets
as the Company’s estimate of their Tax Sharing obligations. Other liabilities include $554 million as of
both September 25, 2009 and September 26, 2008 for the fair value of Tyco’s obligations under the Tax
Sharing Agreement. Tyco assesses the shared tax liabilities and related guaranteed liabilities at each
reporting period. The receivable and liability were initially recognized with an offset to shareholders’
equity in 2007. In the first quarter of 2008, in connection with the adoption of the guidance pertaining
to the accounting for uncertain income tax positions and the related increase in uncertain tax positions
for shared tax liabilities under the Tax Sharing Agreement, Tyco increased its receivable from Covidien
and Tyco Electronics under the Tax Sharing Agreement with a corresponding increase to other income,
net by $40 million ($0.08 for both basic and diluted earnings per share). In addition, $14 million of
expense for other activity was recorded in accordance with the Tax Sharing Agreement during 2009.
Tyco will provide payment to Covidien and Tyco Electronics under the Tax Sharing Agreement as
the shared income tax liabilities are settled. Settlement is expected to occur as the audit process by
local taxing authorities is completed for the impacted years and cash payments are made. Given the
nature of the shared liabilities, the maximum amount of potential future payments is not determinable.
Such cash payments, when they occur, will reduce the guarantor liability as such payments represent an
equivalent reduction of risk. The Company also assesses the sufficiency of the Tax Sharing Agreement
guarantee liability on a quarterly basis and will increase the liability when it is probable that cash
payments expected to be made under the Tax Sharing Agreement exceed the recorded balance.
During the fourth quarter of 2009, the Company, as Audit Management Party under the Tax
Sharing Agreement, reached a settlement agreement with the IRS on certain deductions taken by Tyco,
Covidien and Tyco Electronics on pre-separation tax returns filed for the periods 2001 to 2004. The
settlement did not have a material effect to the Company’s results of operations, financial position or
cash flows. Additionally, the Company considered the potential impact of the settlement as part of its
quarterly assessment of the guarantee liability and concluded that no adjustment to liability was
needed.
In the event the Separation is 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 each company as a result thereof. If such
determination is not the result of actions taken by any of the three companies after the Separation,
then Tyco, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%, respectively, of
any taxes imposed on any of the companies as a result of such determination. Such tax amounts could
be significant. The Company is responsible for all of its 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
112 2009 Financials