Tyco ( TYC) may have to pay as much as $1.7 billion to the Internal Revenue Service to settle an investigation focusing on allegations that the company failed to pay sufficient taxes, according to a person familiar with negotiations between the IRS and Tyco. It is not clear when a settlement between the IRS and the company might be announced, but indications that Tyco may have to pay such a large sum to the government could hamper the company's efforts to raise billions of dollars in new funds by February of next year, when $3.9 billion of bank debt comes due, as well as $2.3 billion of convertible bonds. Tyco has $12 billion of debt and other obligations maturing in 2003. The IRS and Tyco also have not yet agreed on an exact sum Tyco should pay, according to the person familiar with discussions. But while the IRS feels it could be owed more than $1.7 billion, it is prepared to settle close to that figure, this person says. Tyco didn't return calls seeking comment, though a company spokesman told other news organizations that "it's not true we are in any such negotiations." A former press spokesman who still works for the company declined to comment, saying he was no longer authorized to speak to the media. IRS representatives could not be reached. Because Tyco is based offshore in Bermuda, it has enjoyed an income tax rate well below the statutory U.S. rate. The impact of the company's offshore status on its tax bill may have been a natural target for investigations conducted by government and law enforcement agencies. Any back-tax settlement also would include a commitment by Tyco to move its legal domicile back to the U.S., according to the person familiar with the talks. The company's Bermuda registration came about in 1997, when it conducted a merger with security company ADT, which already had a Bermuda domicile. The troubled conglomerate is also being probed by the Securities and Exchange Commission and the Manhattan district attorney. The latter has accused Tyco's former CEO Dennis Kozlowski and ex-finance chief Mark Swartz of looting the company.
In addition, Tyco's accounts are currently being reviewed by PriceWaterhouseCoopers as part of its regular fiscal year-end audit. And, facing suspicions among investors that former managers cooked the company's books, Tyco's new management set up an internal probe under outside lawyer David Boies. Dow Jones Newswires reported Wednesday that the company was in talks with Morgan Stanley and Bank of America for a $1.5 billion loan with a one-year term. This could represent a move to raise money to pay off any outstanding back taxes. Until last year, Kozlowski and Swartz enjoyed strong reputations as visionary managers, and Tyco enjoyed a market worth of more than $100 billion. But fraud charges against the executives, a slowdown in Tyco's main businesses, a cash squeeze, and allegations that Tyco's accounting is not clean have crushed the stock this year. Under its new CEO Ed Breen, however, Tyco has rallied strongly off its yearly lows as investors have bet that investigations won't turn up anything that would imply the company is far less profitable than its books suggest.