What changed in this filing

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Item 1. Legal Proceedings

2024-07-29 compared with 2024-05-02 · 32 added, 9 removed, 59 unchanged (41% of the section changed)

3 unchanged sentences

The following updates and restates the description of the previously reported U.S.

Federal Income Tax Dispute matter.

Federal Income Tax Dispute matter and describes a new environmental matter.

Management believes that, except as disclosed in “U.S.

Federal Income Tax Dispute” below, the total liabilities of the Company that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Company taken as a whole.

Federal Income Tax Dispute

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parent company in reliance upon the Closing Agreement should continue to be allowed to offset royalties, including those that would become payable to the Company in accordance with the Opinion.

On November 8, 2023, the Tax Court issued a supplemental opinion (together with the original Tax Court opinion, “Opinions”), siding with the IRS in concluding both that the blocked-income regulations apply to the Company’s operations and that the Tax Court opinion in 3M Co.

On November 8, 2023, the Tax Court issued a supplemental opinion (together with the original Tax Court opinion, “Opinions”), siding with the IRS in concluding both that certain U.S.

tax regulations (known as the blocked-income regulations) that address the effect of certain Brazilian legal restrictions on royalty payments by the Company’s licensee in Brazil apply to the Company’s operations and that the Tax Court opinion in 3M Co.

Commissioner (February 9, 2023) controlled as to the validity of those regulations.

The Company believes that the IRS and the Tax Court misinterpreted and misapplied the applicable regulations in reallocating income earned by the Company’s foreign licensees to increase the Company’s U.S.

Moreover, the Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by

the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional.

Moreover, the Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional.

The Company intends to assert its claims on appeal and vigorously defend its position.

In addition, for its litigation with the IRS and for purposes of its appeal of the Tax Court decision, the Company is currently evaluating the implications of several significant administrative law cases recently decided by the U.S.

Supreme Court, most notably Loper Bright v.

Raimondo , which overruled Chevron U.S.A., Inc.

NRDC (“ Chevron ”).

Since 1984, Chevron had required that courts defer to agency interpretations of statutes and agency action.

EPA and Garland v.

Cargill , two of the recent decisions, the U.S.

Supreme Court demonstrated how courts are to rule on agency interpretations and actions without the deference previously required by Chevron.

In determining the amount of tax reserve to be recorded as of December 31, 2020, the Company completed the required two-step evaluation process prescribed by Accounting Standards Codification 740, Accounting for Income Taxes .

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parent company by its foreign licensees, in reliance upon the Closing Agreement, that would be recharacterized as royalties in accordance with the Opinions and the Company’s analysis.

The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of March 29, 2024.

The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of June 28, 2024.

However, we updated our calculation of the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax.

As a result of the application of the required probability analysis to these updated calculations and the accrual of interest through the current reporting period, we updated our tax reserve as of March 29, 2024 to $ 447 million.

While the Company strongly disagrees with the IRS’ positions and the portions of the Opinions affirming such positions, it is possible that some portion or all of the adjustment proposed by the IRS and sustained by the Tax Court could ultimately be upheld.

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Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid.

The Company estimates the impact of the continued application of the Tax Court Methodology for the three months ended March 29, 2024 would increase the potential aggregate incremental tax and interest liability by approximately $ 500 million.

The Company estimates the impact of the continued application of the Tax Court Methodology for the three and six months ended June 28, 2024 would increase the potential aggregate incremental tax and interest liability by approximately $500 million and $1.0 billion, respectively.

We currently project the continued application of the Tax Court Methodology in future years, assuming similar facts and circumstances as of December 31, 2023, would result in an incremental annual tax liability that would increase the Company’s effective tax rate by approximately 3.5%.

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Court of Appeals for the Eleventh Circuit.

The IRS will then seek to collect, and the Company expects to pay, any additional tax related to the 2007 through 2009 tax years reflected in the Tax Court decision (and interest thereon).

The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax years, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately $ 5.9 billion (including interest accrued through March 29, 2024), plus any additional interest accrued through the time of payment.

The IRS will then seek to collect any additional tax related to the 2007 through 2009 tax years reflected in the Tax Court decision (and interest thereon).

The Company expects to pay such amounts at some point between the issuance of the Tax Court decision and the date the amounts are due pursuant to the notice of collection from the IRS.

The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax years, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately $6.0 billion (including interest accrued through June 28, 2024), plus any additional interest accrued

through the time of payment.

Some or all of this amount, plus accrued interest, would be refunded if the Company were to prevail on appeal.

Environmental Matter

On June 20, 2024, the Mayor and City Council of Baltimore filed a lawsuit against the Company and several unrelated parties in the Circuit Court for Baltimore City, Maryland, concerning the environmental impacts of plastic packaging on the city’s lands and waterways.

The complaint asserts claims for (a) violations of various state statutes and local ordinances that prohibit littering or improper dumping of waste on public or private property;

(b) unfair, abusive or deceptive trade practices;

(d) design defects;

(e) public nuisance;

(f) failure to warn;

and (g) negligence.

The complaint seeks injunctive relief, compensatory damages and punitive damages but does not specify an amount of damages sought.

The Company believes it has strong defenses to the claims.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Legal Proceedings