ADT 2009 Annual Report Download - page 205

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes (Continued)
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 13
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. The Company has continuing dialog with the IRS
related to these proposed adjustments with the objective of resolving some or all of these matters.
Management has assessed the issues related to these adjustments and has recorded unrecognized tax
benefits pursuant to the guidance for accounting for uncertain income tax positions. 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 certain 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. 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.
The IRS proposed civil fraud penalties against a prior subsidiary that was distributed to Tyco
Electronics in connection with the Separation. The penalties allegedly arise from actions of former
executives taken in connection with intercompany transfers of stock of Simplex Technologies in 1998
and 1999. Based on statutory guidelines, the Company estimates the proposed penalties could range
between $30 million and $50 million. The Company, as Audit Management Party as specified in the Tax
Sharing Agreement, intends to vigorously oppose the assertion of any such penalties against Tyco
Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the
conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company’s former
Chief Tax Officer on a charge of willful filing of a false tax return. This is a pre-Separation shared tax
matter under the Tax Sharing Agreement.
Except for earnings that are currently distributed, no additional material provision has been made
for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized
deferred tax liabilities for temporary differences related to investments in subsidiaries, since the
earnings are expected to be permanently reinvested, the investments are essentially permanent in
duration, or the Company has concluded that no additional tax liability will arise as a result of the
distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if
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