Seven former subsidiaries of Tyco International Ltd. are challenging almost $3 billion in income adjustments related to intercompany financing of acquisitions and restructurings in the late 1990s.
Taxes and penalties due exceed $1 billion on the deals, which the company structured as loans and the Internal Revenue Service says aren’t “bona fide debt” for federal income tax purposes, Bloomberg BNA reported.
After the recession and a scandal that sent two top executives to prison, Tyco spun off its medical products and electronics companies in 2007 into two separate, publicly traded companies. In 2012, the company reorganized again. Its security firms now operated as ADT Corp. and businesses that sell valves and controls are part of Pentair Inc.
In 14 separate petitions last month, the companies say the IRS acted arbitrarily in disregarding interest deductions and in re-characterizing interest payments as dividends for a series of intercompany loans. They argued that the terms of the loans were “consistent with what would ordinarily have been available to the debtor from a third-party lender.”
The IRS “erroneously disregards the fact that the loans here involved exhibited the formalities of third-party debt,” including loan agreements with stated interest rates, specified repayment schedules and maturity dates, the companies said.
After re-characterizing interest on the loans, the IRS imposed withholding taxes on several of the companies. Those amounts also are in dispute.
Six petitions were filed by Tyco Electronics Corp., a Pennsylvania company that is successor in interest to the former Tyco International (PA) Inc., which had been organized to acquire an electronics manufacturer in 1999. Several petitions relate to that deal, the largest involving a $237 million deficiency for tax year 2000 after a loan re-characterization.
Three were filed by Tyco Electronics Corporate Holdings Inc. The company is challenging deficiencies of $287 million and $290 million for the 1999 and 2000 tax years and withholding tax deficiencies of $39.5 million and $24.6 million for the same periods. It is also challenging another $3 million deficiency connected to a re-characterization.
The remaining petitions were filed by five corporations that had been spun off in reorganizations in 2007 and 2012.
In a July filing with the Securities and Exchange Commission, Tyco said it had received notices asserting that “several of its former U.S. subsidiaries owe additional taxes of $883.3 million plus penalties of $154 million based on audits of the 1997 through 2000 tax years of the Company and its subsidiaries as they existed at that time.”
The notices assert that “substantially all” of Tyco’s intercompany debt originated between 1997 and 2000 shouldn’t be treated as debt. Consequently, the IRS disallowed interest and related deductions totaling $2.86 billion, the company said.
If the IRS prevails, Tyco said, “it would have an adverse impact on interest deductions related to the same intercompany debt in subsequent time periods, totaling approximately $6.6 billion, which we expect the IRS to also disallow.”
The parent is now a Swiss firm created from the July 1997 acquisition of Tyco International Ltd., a former Massachusetts corporation, by ADT Ltd., a Bermuda public company. Following the merger, ADT changed its name to Tyco International Ltd.
According to the 8-K, Tyco operates under tax-sharing agreements negotiated with Covidien and TE Connectivity in 2007 and with ADT and Pentair in 2012.
Several of the petitions concern the acquisition of AMP Inc. by Tyco International (PA) in 1999, a deal that involved a mixture of equity and debt financing and is an example of the kind of complex intercompany financing employed by Tyco.
Tyco Electronics, now a subsidiary of TE Connectivity Ltd., is listed as successor in interest to TIPA, AMP Inc. and three other former Tyco subsidiaries. Tyco Electronics is challenging re-characterization of debt related to TIPA’s acquisition of AMP Inc. and Raychem Corp. in 1999.
TIPA was specifically organized to acquire AMP. After a failed hostile takeover of AMP by Allied Signal, Tyco bought the company in a stock-for-stock exchange. It incorporated TIPA in Pennsylvania as a subsidiary of Tyco International in 1998.
TIPA bought Tyco International shares in 1999, with a total value of $11.8 billion. Tyco International sold shares valued at $5 billion to TIPA in exchange for $5 billion in notes and contributed the remaining $6.8 billion in stock for the merger.
For the note, TIPA and Tyco International had a master loan agreement and seven promissory notes for between $150 million and $1.5 billion, interest rates of between 6.18 percent and 8.33 percent, and terms of between three and 20 years. Tyco International transferred the loans to S.a.r.l., its primary intercompany lender.
The transfer had no U.S. tax effect and the loans “had the characteristics of bona fide indebtedness,” including the expectation that the loans would be repaid from operating cash flows, the petition says.