

6.	Income Taxes

The Company recognized income tax benefits of $32.1 million and $10.3 million on income from continuing operations before income taxes of $83.8 million and $77.1 million for the three months ended December 25, 2015 and December 26, 2014, respectively. This resulted in effective tax rates of negative 38.3% and negative 13.4% for the three months ended December 25, 2015 and December 26, 2014, respectively.

The effective tax rate for the three months ended December 25, 2015, as compared with the three months ended December 26, 2014 decreased by 24.9 percentage points. This net decrease was predominately due to recent acquisitions and reorganizations, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. Of the 24.9 percentage point decrease in tax rate, 6.0 percentage points can be attributed to the change in operating income and 15.8 percentage points to the change in amortization, while 3.1 percentage points relate to acquisition financing and other non-acquisition related items.

As a part of the Ikaria integration, the Company entered into an internal installment sale transaction during the three months ended December 25, 2015. The Ikaria internal installment sale transaction resulted in a decrease of $537.6 million to the deferred tax liability associated with the Inomax and terlipressin intangible assets, a $521.9 million increase to the deferred tax liability associated with an installment sale note receivable, a $42.8 million increase to the current income tax liability, a $26.0 million increase to deferred tax charges and a $1.1 million increase to prepaid taxes.

As part of the Therakos integration, the Company entered into an internal installment sale transaction during the three months ended December 25, 2015. The Therakos internal installment sale transaction resulted in a decrease of $268.5 million to the deferred tax liability associated with the Cellex and XTS intangible assets, a $251.5 million increase to the deferred tax liability associated with an installment sale note receivable, a $17.3 million increase to the current income tax liability and a $0.3 million increase to prepaid taxes.

During the three months ended December 25, 2015, the Company recognized an income tax benefit of $2.7 million associated with the CMDS business, as discussed in Note 3, in discontinued operations within the unaudited condensed consolidated statement of income. As a result of the sale, the Company recognized a deferred tax asset for non-U.K. net operating losses of $29.5 million and a corresponding valuation allowance, which resulted in no net impact on income tax expense or benefit.

The Company's unrecognized tax benefits, excluding interest, totaled $78.7 million at December 25, 2015 and $89.2 million at September 25, 2015. The net decrease of $10.5 million primarily resulted from net decreases to prior period tax positions of $10.3 million and settlement of $0.3 million, which were partially offset by increases in the current year activity of $0.1 million. Of the $10.3 million decrease in prior period tax positions, $6.8 million was related to the sale of the CMDS business. If favorably settled, $76.9 million of unrecognized tax benefits at December 25, 2015 would favorably impact the effective tax rate. The total amount of accrued interest related to these obligations was $38.8 million at December 25, 2015 and $41.7 million at September 25, 2015.

On January 19, 2016, Tyco International plc (“Tyco International”) announced it had entered into an agreement with the IRS to resolve certain disputes currently before the U.S. Tax Court. The disputes involve IRS audits of Tyco International for years in which companies that are now subsidiaries of Mallinckrodt were subsidiaries of Tyco International. Mallinckrodt is not a participant in the tax sharing agreement between Medtronic plc (as successor to Covidien plc), Tyco International and TE Connectivity and will not share in or be responsible for any payments to be made under the terms of the tentative resolution.

It is reasonably possible that within the next twelve months, as a result of the resolution of various Domestic and International examinations, appeals and litigation, additions related to prior period tax positions and the expiration of various statutes of limitation, that the unrecognized tax benefits will decrease by up to $37.4 million and the amount of related interest and penalties will decrease by up to $30.1 million. Included within such amounts are possible releases associated with the final settlement of the Tyco-controlled debt litigation.