ADT 2011 Annual Report Download - page 126

Examinations and audits by tax authorities, including the Internal Revenue Service, could result in
additional tax payments for prior periods.
The Company and its subsidiaries’ income tax returns periodically are examined by various tax
authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues
and proposed tax adjustments, in particular, with respect to tax years preceding the 2007 Separation.
We are reviewing and contesting certain of the proposed tax adjustments. Although we expect to
resolve a substantial number of the proposed tax adjustments with the IRS, a few significant items are
expected to remain open with respect to the audit of the 1997 through 2004 years. As of the date
hereof, it is unlikely that we will be able to resolve these open items, which primarily involve the
treatment of certain intercompany transactions during the period related to the audits, through the IRS
appeals process. As a result, we may be required to litigate these matters. The calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude
of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities
for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional income taxes will be due. These tax liabilities are reflected
net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and
circumstances. We have assessed our obligations under the Tax Sharing Agreement and determined that
the recorded liability is sufficient to cover the indemnifications made by us under such agreement.
However, such amount could differ materially from amounts that are actually determined to be due,
and any such difference could materially adversely affect our financial position, results of operations or
cash flows.
If the distribution of Covidien and TE Connectivity common shares to our shareholders or certain
internal transactions undertaken in connection with the 2007 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 TE Connectivity 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 Code. The private
letter rulings also provided that certain internal transactions undertaken in anticipation of the
2007 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 TE Connectivity 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 TE Connectivity 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 2007 Separation should be treated as taxable transactions.
2011 Financials 23