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Item 1. Legal Proceedings

2024-10-24 compared with 2024-07-29 · 23 added, 33 removed, 58 unchanged (49% of the section changed)

1 unchanged sentence

Information regarding reportable legal proceedings is contained in Part I, “Item 3.

Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2023, as updated in Part II, “Item 1.

Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarter ended June 28, 2024.

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

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

Federal Income Tax Dispute matter.

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

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

On August 2, 2024, the Tax Court entered a decision reflecting additional federal income tax of $2.7 billion for the 2007 through 2009 tax years.

With applicable interest, the total liability for the 2007 through 2009 tax years resulting from the Tax Court’s decision is $6.0 billion, for which the IRS issued the Company invoices on September 3, 2024.

The Company paid those invoices on September 10, 2024, which stopped interest from accruing on the additional tax due for the 2007 through 2009 tax years.

That amount, plus interest earned, would be refunded in full or in part if the Company’s tax positions are ultimately sustained on appeal.

For the three and nine months ended September 27, 2024, the Company recorded net interest income of $14 million related to this tax payment in the line item income taxes in our consolidated statements of income, in accordance with our accounting policy.

The payment of the IRS invoices and the related accrued interest were recorded in the line item other noncurrent assets in our consolidated balance sheet as of September 27, 2024.

On October 22, 2024, the Company appealed the Tax Court’s decision to the U.S.

Court of Appeals for the Eleventh Circuit.

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 .

6 unchanged sentences

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 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 June 28, 2024 to $456 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.

In that event, the Company would likely be subject to significant additional liabilities for tax years 2007 through 2009, and potentially also for subsequent years, which could have a material adverse impact on the Company’s financial position, results of operations and cash flows.

The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinions, assuming such methodology were to be ultimately upheld by the courts, and the IRS were to decide to apply that methodology to subsequent years, with consent of the federal courts.

This impact would include taxes and interest accrued through December 31, 2023 for the 2007 through 2009 litigated tax years and for subsequent tax years from 2010 through 2023.

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 September 27, 2024.

However, based on the required probability analysis and the accrual of interest through the current reporting period, we updated our tax reserve as of September 27, 2024 to $465 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 adjustments proposed by the IRS and sustained by the Tax Court could ultimately be upheld.

In that event, the Company would not receive a refund of the applicable portion or all of the $6.0 billion it paid in response to the IRS invoices issued in September 2024 and the related accrued interest receivable of $14 million as of September 27, 2024.

Additionally, the Company would likely be subject to significant additional liabilities for subsequent years, which could have a material adverse impact on the Company’s financial position, results of operations and cash flows.

The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinions for the 2010 through 2023 tax years, assuming such methodology were to be ultimately upheld by the courts, and the IRS were to decide to apply that methodology to subsequent years, with consent of the federal courts.

This impact would include taxes and interest accrued through December 31, 2023.

The calculations incorporated the estimated impact of correlative adjustments to the previously accrued transition tax payable under the 2017 Tax Cuts and Jobs Act.

The Company estimates that the potential aggregate incremental tax and interest liability could be approximately $16 billion as of December 31, 2023.

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 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%.

The Company and the IRS are now in the process of agreeing on the tax impacts of the Opinions.

Subsequent to the completion of this process, the Tax Court will render a decision in the case.

The Company will have 90 days thereafter to file a notice of appeal to the U.S.

Court of Appeals for the Eleventh Circuit.

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.

The Company estimates that the potential aggregate remaining incremental tax and interest liability for the tax years 2010 through 2023 could be approximately $10 billion as of December 31, 2023.

Additional income tax and interest on any unpaid potential liabilities for the 2010 through 2023 tax years 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 and nine months ended September 27, 2024 would increase the potential aggregate incremental tax and interest liability by approximately $400 million and $1.1 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%.

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