ADT 2015 Annual Report Download - page 105

FORM 10-K
million plus penalties of $154 million are owed based on audits of the 1997 through 2000 tax years of Tyco and
its subsidiaries, as they existed at that time. Further, Tyco reported receiving Final Partnership Administrative
Adjustments (the “Partnership Notices”) for certain U.S. partnerships owned by its former U.S. subsidiaries, for
which Tyco has informed that it estimates an additional tax deficiency of approximately $30 million will be
asserted. The additional tax assessments related to the Tyco IRS Notices and the Partnership Notices exclude
interest and do not reflect the impact on subsequent periods if the IRS challenge to Tyco’s tax filings is proved
correct. Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments. Consistent with its
petitions filed with the U.S. Tax Court, Tyco has advised us that it strongly disagrees with the IRS position and
believes (i) it has meritorious defenses for the respective tax filings, (ii) the IRS positions with regard to these
matters are inconsistent with applicable tax laws and Treasury regulations, and (iii) the previously reported taxes
for the years in question are appropriate. If the IRS should successfully assert its position, our share of the
collective liability, if any, would be determined pursuant to the 2012 Tax Sharing Agreement. In accordance with
the 2012 Tax Sharing Agreement, the amount ultimately assessed under the Tyco IRS Notices and the
Partnership Notices would have to be in excess of $1.85 billion, including other assessments for unrelated
historical tax matters Tyco has, or may settle in the future, before we would be required to pay any of the
amounts assessed. In addition to the Company’s share of cash taxes pursuant to the 2012 Tax Sharing
Agreement, the Company’s NOL and credit carryforwards may be significantly reduced or eliminated by audit
adjustments to pre-2013 tax periods. NOL and credit carryforwards may be reduced prior to incurring any cash
tax liability, and will not be compensated for under the tax sharing agreement. We believe that our income tax
reserves and the liabilities recorded in the Consolidated Balance Sheet for the 2012 Tax Sharing Agreement
continue to be appropriate. No payments with respect to these matters would be required until the dispute is
resolved in the U.S. Tax Court. A trial date has been set for October 2016. However, the ultimate resolution of
these matters is uncertain, and if the IRS were to prevail, it could have a material adverse impact on our financial
condition, results of operations and cash flows, potentially including a reduction in our available tax attribute
carryforwards.
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
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