ADT 2012 Annual Report Download - page 119

We are responsible for all of our own taxes that are not shared pursuant to the 2012 Tax Sharing
Agreement’s sharing formulae, and Tyco and Pentair are responsible for their tax liabilities that are not subject to
the 2012 Tax Sharing Agreement’s sharing formulae. We also have sole responsibility for any income tax
liability arising as a result of our acquisition of Broadview Security in May 2010, including any liability of
Broadview Security under the tax sharing agreement between Broadview Security and The Brink’s Company
dated October 31, 2008 (collectively, the “Broadview Tax Liabilities”). Costs and expenses associated with the
management of Shared Tax Liabilities and Broadview Tax Liabilities are generally shared 20% by Pentair,
27.5% by ADT, and 52.5% by Tyco.
All the tax liabilities that are associated with our businesses, including liabilities that arose prior to the
Separation, have become our tax liabilities. Although we have agreed to share certain of these tax liabilities with
Tyco and Pentair pursuant to the 2012 Tax Sharing Agreement, we remain primarily liable for all of these
liabilities. If Tyco and Pentair default on their obligations to us under the 2012 Tax Sharing Agreement, we
would be liable for the entire amount of these liabilities. In addition, if another party to the 2012 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, Tyco’s and Pentair’s tax liabilities.
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; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from our current
estimate of tax liabilities. Under the 2012 Tax Sharing Agreement, Tyco has the right to administer, control and
settle all U.S. income tax audits for periods prior to and including September 28, 2012. The timing, nature and
amount of any settlement agreed to by Tyco may not be in our best interests. All other tax audits will be
administered, controlled and settled by the party that would be responsible for paying the tax.
To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement and if our estimate
of tax liabilities proves to be less that the amount for which we are ultimately liable, we would incur additional
income tax expense, which could have a material adverse impact on our financial condition, results of operations,
cash flows or our effective tax rate in future reporting periods.
If the distribution of ADT or Pentair common shares by Tyco to its shareholders or certain internal
transactions undertaken in anticipation of such distributions are determined to be taxable for U.S.
federal income tax purposes, we, our shareholders that are subject to U.S. federal income tax and/or Tyco
could incur significant U.S. federal income tax liabilities.
Tyco has received a private letter ruling from the IRS regarding the U.S. federal income tax consequences of
the distribution of ADT common shares by Tyco to its shareholders (the “Distribution”) and the distribution of
Pentair common shares by Tyco to its shareholders (the “Pentair Distribution” and, together with the
Distribution, the “Distributions”) to the effect that, for U.S. federal income tax purposes, the Distribution will
qualify as tax-free under Section 355 of the Code and the Pentair Distribution will qualify as tax-free under
Sections 355 and 361 of the Code, except for cash received in lieu of a fractional share of our common stock and
the Pentair common shares. The private letter ruling also provides that certain internal transactions undertaken in
anticipation of the Distributions will qualify for favorable treatment under the Code. In addition to obtaining the
private letter ruling, Tyco obtained an opinion from the law firm of McDermott Will & Emery LLP confirming
the tax-free status of the Distributions for U.S. federal income tax purposes. The private letter ruling and the
opinion rely on certain facts and assumptions and certain representations and undertakings from us, Pentair and
Tyco regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the
private letter ruling and the opinion, the IRS could determine on audit that the Distribution, the Pentair
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