Summary
Johnson Controls International plc (JCI) disclosed on July 1, 2013, that it received Notices of Deficiency from the IRS concerning historical tax years of former Tyco International subsidiaries (1997-2000). The IRS is asserting additional taxes of $883.3 million plus $154 million in penalties, related to the disallowance of approximately $2.86 billion in intercompany debt deductions. The company strongly disagrees with the IRS's position and intends to contest the proposed adjustments in U.S. Tax Court, believing it has strong defenses. While the company states no payments are due until the dispute is resolved, which could take years, a negative outcome could materially impact JCI's financial condition, results of operations, and cash flows. Notably, if the IRS's position is upheld, it could also lead to the disallowance of an additional $6.6 billion in interest deductions in subsequent periods. The company also detailed its tax-sharing agreements with Covidien, TE Connectivity, ADT, and Pentair, which would allocate a portion of any potential liabilities to these entities.
Key Highlights
- 1IRS has issued Notices of Deficiency for former Tyco subsidiaries, asserting $883.3 million in additional taxes and $154 million in penalties for tax years 1997-2000.
- 2The core of the dispute centers on the IRS's disallowance of $2.86 billion in intercompany debt interest deductions.
- 3JCI strongly disputes the IRS's position and plans to challenge the assessment in U.S. Tax Court.
- 4Resolution of this tax dispute could take several years, and no payments are immediately required.
- 5An unfavorable outcome could materially impact JCI's financial condition, results of operations, and cash flows.
- 6Potential disallowance of $6.6 billion in future interest deductions if the IRS prevails on the current issue.
- 7Significant tax-sharing agreements are in place with Covidien, TE Connectivity, ADT, and Pentair, which will allocate a portion of any tax liabilities.