Medtronic 2015 Annual Report Download - page 40

several of Tyco International’s former U.S. subsidiaries owe additional taxes of $914 million plus penalties of $154 million
based on audits of the 1997 through 2000 tax years of Tyco International and its subsidiaries as they existed at that time. These
amounts exclude interest and do not reflect the impact on subsequent periods if the position taken by the IRS is ultimately
proved correct. The IRS has asserted in the Notices of Deficiency that substantially all of Tyco International’s intercompany
debt originating during the years 1997 through 2000 should not be treated as debt for U.S. federal income tax purposes, and has
disallowed interest deductions related to the intercompany debt and certain tax attribute adjustments recognized on Tyco
International’s U.S. income tax returns totaling approximately $3.0 billion. On July 22, 2013, Tyco International filed a petition
with the U.S. Tax Court contesting the IRS assessment. The outcome of any such litigation is uncertain and could result in a
significant increase in liability for taxes arising during these periods. In particular, if the IRS is successful in asserting its claim,
it would likely assert that approximately $6.6 billion of interest deductions with respect to Tyco International’s intercompany
debt in subsequent time periods should also be disallowed.
The Company has provided reserves for potential payments of tax to various tax authorities related to uncertain tax positions.
However, the calculation of such tax liabilities involves the application of complex tax regulations in many jurisdictions.
Therefore, any dispute with a tax authority may result in a payment that is significantly different from current estimates. If
payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities generally would
result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the Company’s
estimate of tax liabilities proves to be less than the amount for which it is ultimately liable, we would incur additional charges to
expense and such charges could have a material adverse effect on our business, results of operations, financial condition and
cash flows.
If the distribution of Mallinckrodt ordinary shares to Covidien shareholders in 2013, the distribution of Covidien and TE
Connectivity common shares by Tyco International to its shareholders in 2007 or certain internal transactions undertaken in
anticipation of either the 2013 or the 2007 separation are determined to be taxable for U.S. federal income tax purposes, we
and Covidien could incur significant U.S. federal income tax liabilities.
Covidien received an IRS ruling substantially to the effect that, for U.S. federal income tax purposes, (i) certain transactions
effected in connection with its 2013 separation of Mallinckrodt qualify as transactions under Sections 355 and/or 368(a) of the
Code, and (ii) the distribution qualifies as a transaction under Sections 355 and 368(a)(1)(D) of the Code. In addition to
obtaining the IRS ruling, Covidien received a tax opinion from Skadden, Arps, Slate, Meagher & Flom LLP, in form and
substance acceptable to Covidien, which relied on the effectiveness of the IRS ruling, substantially to the effect that, for U.S.
federal income tax purposes, the distribution and certain transactions entered into in connection with the distribution qualify as
transactions under Sections 355 and/or 368(a) of the Code.
Tyco International has 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 by Tyco International to its shareholders, substantially to the
effect that the distribution, except for cash received in lieu of a fractional share, of Covidien shares and the TE Connectivity
common shares, qualifies as tax-free under Sections 368(a)(1)(D) and 355 of the Code. The private letter rulings also provided
that certain internal transactions undertaken in anticipation of the separation from Tyco International qualify for favorable
treatment under the Code. In addition to obtaining the private letter rulings, Tyco International obtained tax opinions from the
law firm of McDermott Will & Emery LLP confirming the tax-free status of the distribution and certain internal transactions.
The private letter rulings and the opinions relied on certain facts and assumptions, and certain representations and undertakings
(a) in the case of the 2013 separation, from Covidien and Mallinckrodt, and (b) in the case of the 2007 separation, from
Covidien, TE Connectivity and Tyco International, regarding the past and future conduct of their respective businesses and
other matters. Notwithstanding the private letter rulings and the tax opinions, the IRS could determine on audit that the 2013
distribution or the 2007 distribution or the related internal transactions should be treated as taxable transactions if it determines
that any of the respective facts, assumptions, representations or undertakings is not correct or has 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
distributions, or if the IRS were to disagree with the conclusions of the tax opinions that are not covered by the IRS rulings.
We could incur significant U.S. federal income tax liabilities or tax indemnification obligations, whether under applicable law
or the tax matters agreement that was entered into with Mallinckrodt, if it is ultimately determined that certain related
transactions undertaken in anticipation of the 2013 distribution are taxable. We could also incur significant U.S. federal income
tax liabilities if it ultimately is determined that certain internal transactions undertaken in anticipation of Covidien’s separation
from Tyco International should be treated as taxable transactions.
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