Covidien (NYSE:COV) could wind up stuck with its share of a $1.07 billion tax bill, after the IRS told its former corporate parent, Tyco International (NYSE:TYC), that tax deductions it took from 1997 to 2000 will be disallowed, according to a regulatory filing.
In a "notice of deficiency" issued June 20, the federal tax bureau said loans made between 3 former Tyco divisions for about $3 billion don’t count as debt, meaning the companies now owe $914 million interest deductions to the U.S. Treasury – plus another $154 million in penalties, according to the filing. "No payments with respect to these matters would be required until the dispute is definitively resolved, which, based on the experience of other companies, could take several years."
"We strongly disagree with the IRS’s proposed adjustments, and we understand that Tyco intends to file a petition to the U.S. Tax Court contesting the IRS assessment. We believe there are meritorious defenses for the tax filings in question, that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and existing Treasury regulations, and that the previously reported taxes for the years in question are appropriate," Covidien said in the filing.
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Covidien would owe 42% of any tax liabilities incurred, with Tyco and TE Connectivity owing 27% and 31%, respectively, according to the filing. That puts Covidien’s share of the potential $1.07 billion nut at $448.6 million. The Mansfield, Mass.-based medical device company said it believes it’s set aside enough cash to cover any liability from the 1997-2000 inter-company loans.
But if the tax court decides the IRS is right, the agency would likely nix another $6.6 billion worth of deductions from loans made within Tyco, Covidien said. Its share of that eventuality would amount to $2.77 billion.