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Item 1. Legal Proceedings

2025-05-01 compared with 2024-10-24 · 31 added, 26 removed, 55 unchanged (51% 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, as updated in Part II, “Item 1.

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

Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2024.

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.

1 unchanged sentence

Federal Income Tax Dispute

On September 17, 2015, the Company received a Statutory Notice of Deficiency (“Notice”) from the United States Internal Revenue Service (“IRS”) seeking approximately $3.3 billion of additional federal income tax for years 2007 through 2009.

On September 17, 2015, the Company received a Notice from the IRS seeking approximately $3.3 billion of additional federal income tax for years 2007 through 2009.

In the Notice, the IRS stated its intent to reallocate over $9 billion of income to the U.S.

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parent company would report as compensation from its foreign licensees.

The Company and the IRS memorialized this accord in a closing agreement resolving that dispute (“Closing Agreement”).

The Company and the IRS memorialized this accord in the Closing Agreement resolving that dispute.

The Closing Agreement provided that, absent a change in material facts or circumstances or relevant federal tax law, in calculating the Company’s income taxes going forward, the Company would not be assessed penalties by the IRS for using the agreed-upon tax calculation methodology that the Company and the IRS agreed would be used for the 1987 through 1995 tax years.

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The matter remains subject to the IRS’ litigation designation, preventing the Company from any attempt to settle or otherwise mutually resolve the matter with the IRS.

The Company consequently initiated litigation by filing a petition in the U.S.

Tax Court (“Tax Court”) in December 2015, challenging the tax adjustments enumerated in the Notice.

The Company consequently initiated litigation by filing a petition in the Tax Court in December 2015, challenging the tax adjustments enumerated in the Notice.

Prior to trial, the IRS increased its transfer pricing adjustment by $385 million, resulting in an additional tax adjustment of $135 million.

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The trial was held in the Tax Court from March through May 2018, and final post-trial briefs were filed and exchanged in April 2019.

On November 18, 2020, the Tax Court issued an opinion (“Opinion”) in which it predominantly sided with the IRS but agreed with the Company that dividends previously paid by the foreign licensees to the U.S.

On November 18, 2020, the Tax Court issued the Opinion in which it predominantly sided with the IRS but agreed with the Company that dividends previously paid by the foreign licensees to the U.S.

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 certain U.S.

On November 8, 2023, the Tax Court issued a supplemental opinion, 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.

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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.

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.

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 positions.

In addition, for its litigation with the IRS and for purposes of its appeal of the Tax Court decision, the Company continues to evaluate 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.

Raimondo , which overruled the Chevron case.

Since 1984, the Chevron case 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.

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

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.

The Company paid the IRS Tax Litigation Deposit 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.

For the three months ended March 28, 2025, the Company recorded net interest income of $53 million related to this tax payment in the line item income taxes in our consolidated statement 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 sheets as of March 28, 2025 and December 31, 2024.

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

Court of Appeals for the Eleventh Circuit.

The Company filed its principal appellate brief with the U.S.

Court of Appeals for the Eleventh Circuit on March 12, 2025.

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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We concluded, based on the technical and legal merits of the Company’s tax positions, that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal.

In addition, we considered a number of alternative transfer pricing methodologies, including the methodology asserted by the IRS and affirmed in the Opinions (“Tax Court Methodology”), that could be applied by the courts upon final resolution of the litigation.

In addition, we considered a number of alternative transfer pricing methodologies, including the Tax Court Methodology, that could be applied by the courts upon final resolution of the litigation.

Based on the required probability analysis, we determined the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax.

1 unchanged sentence

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 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.

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 28, 2025.

However, based on the required probability analysis and the accrual of interest through the current reporting period, we updated our tax reserve as of March 28, 2025 to $483 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.

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Additional income tax and interest on any unpaid potential liabilities for the 2010 through 2024 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%.

The Company estimates the impact of the continued application of the Tax Court Methodology for the three months ended March 28, 2025 would increase the potential aggregate incremental tax and interest liability by approximately $400 million.

We currently project the continued application of the Tax Court Methodology in 2025, assuming similar facts and circumstances as of December 31, 2024, would result in an incremental annual tax liability that would increase the Company’s effective tax rate by approximately 3.5%.

Environmental Matter

On April 11, 2025, the Commissioner of the Department of Licensing and Consumer Affairs and the Government of the United States Virgin Islands (“USVI”) filed a lawsuit against the Company, CC One Virgin Islands as well as other unrelated parties in the Superior Court of the Virgin Islands, Division of St.

Croix, concerning the environmental impacts of plastic packaging in the USVI.

The complaint asserts claims for (1) violations of USVI consumer protection statutes and (2) public nuisance.

The complaint seeks injunctive relief, restitution and civil penalties 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