ADT 2015 Annual Report Download - page 168

FORM 10-K
number of these adjustments, a few significant items raised by the Internal Revenue Service (“IRS”) remain open
with respect to the audits of the 1997 through 2007 tax years. On July 1, 2013, Tyco announced that the IRS
issued Notices of Deficiency to Tyco primarily related to the treatment of certain intercompany debt transactions
(the “Tyco IRS Notices”). These notices assert that additional taxes of $883 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 indicated 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 the Company 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. No payments with respect to the Tyco IRS Notices would be required until the
dispute is resolved in the U.S. Tax Court. At the request of the IRS the trial start date was postponed and
rescheduled for October 2016.
During fiscal year 2015, the IRS concluded its field examination of certain of Tyco’s U.S. federal income
tax returns for the 2008 and 2009 tax years of Tyco and its subsidiaries. Tyco received anticipated Revenue
Agents’ Reports (“RARs”) proposing adjustments to certain Tyco entities’ previously filed tax return positions,
including the predecessor to ADT, relating primarily to certain intercompany debt. In response, Tyco filed a
formal, written protest with the IRS Office of Appeals requesting review of the RARs. Tyco has advised the
Company that it strongly disagrees with the IRS position and intends to vigorously defend its prior filed tax
return positions and believes the previously reported taxes for the years in question are appropriate.
If the IRS should successfully assert its positions with respect to the matters described above, the
Company’s 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, Tyco is responsible for the first $500 million
of tax, interest and penalty assessed against pre-2013 tax years including its 27% share of the tax, interest and
penalty assessed for periods prior to Tyco’s 2007 spin transaction (“Pre-2007 Spin Periods”). In accordance with
the 2012 Tax Sharing Agreement, the amount ultimately assessed against Pre-2007 Spin Periods with respect to
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 the Company 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. The Company
believes that its income tax reserves and the liabilities recorded in the Consolidated Balance Sheet for the 2012
Tax Sharing Agreement continue to be appropriate. However, the ultimate resolution of these matters is
uncertain, and if the IRS were to prevail, it could have a material adverse impact on the Company’s financial
position, results of operations and cash flows, potentially including a significant reduction in or the elimination of
the Company’s available NOL and credit carryforwards. Further, to the extent ADT is responsible for any
liability under the 2012 Tax Sharing Agreement, there could be a material impact on its financial position, results
of operations, cash flows or its effective tax rate in future reporting periods.
In fiscal year 2014, Tyco advised the Company of pending IRS settlements related to certain intercompany
corporate expenses deducted on the U.S. income tax returns for the 2005 through 2009 tax years. The settlements
reduced the Company’s NOL carryforwards, resulting in a decrease to the Company’s net deferred tax asset of
approximately $17 million.
Other liabilities in the Company’s Consolidated Balance Sheets as of both September 25, 2015 and
September 26, 2014 include $19 million for ADT’s obligations under certain tax related agreements entered into
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