ADT 2013 Annual Report Download - page 92

FORM 10-K
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 than 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 stockholders 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 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 Distribution or the internal transactions should be treated as
taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not
correct or has been violated, or that the Distribution, the Pentair Distribution or the internal transactions should
be taxable for other reasons, including as a result of significant changes in stock or asset ownership after the
Distributions. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the
courts, and the IRS or the courts may not agree with the opinion. In addition, the opinion was based on current
law, and cannot be relied upon if current law changes with retroactive effect. If the Distribution ultimately is
determined to be taxable, the Distribution could be treated as a taxable dividend or capital gain to our
stockholders as of the date of the Distribution for U.S. federal income tax purposes, and those stockholders could
incur significant U.S. federal income tax liabilities. In addition, Tyco would recognize gain in an amount equal to
the excess of the fair market value of shares of our common stock and the Pentair common shares distributed to
28