

6.	Income Taxes

The Company recognized an income tax benefit of $53.6 million and $34.1 million on income from continuing operations before income taxes of $66.7 million and $41.1 million for the three months ended March 25, 2016 and March 27, 2015, respectively. This resulted in effective tax rates of negative 80.4% and negative 83.0% for the three months ended March 25, 2016 and March 27, 2015, respectively. The Company recognized income tax benefits of $85.7 million and $44.4 million on income from continuing operations before income taxes of $150.5 million and $118.2 million for the six months ended March 25, 2016 and March 27, 2015, respectively. This resulted in effective tax rates of negative 56.9% and negative 37.6% for the six months ended March 25, 2016 and March 27, 2015, respectively.

The effective tax rate for the three months ended March 25, 2016, as compared with the three months ended March 27, 2015 increased by 2.6 percentage points. Included within this net increase was a 17.1 percentage point increase attributable to diminutive income from continuing operations before taxes for the three months ended March 27, 2015, partially offset by a 14.5 percentage point decrease predominately due to recent acquisitions, 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 14.5 percentage point decrease to the tax rate, 9.5 percentage points can be attributed to the change in operating income and 5.0 percentage points related to changes in acquisition financing and amortization, as well as other non-acquisition related items.

The effective tax rate for the six months ended March 25, 2016, as compared with the six months ended March 27, 2015 decreased by 19.3 percentage points. This net decrease was predominately due to recent acquisitions, 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 19.3 percentage point decrease to the tax rate, 12.8 percentage points can be attributed to the change in operating income and 6.5 percentage points related to changes in acquisition financing and amortization, as well as 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.

The Hemostasis Acquisition resulted in a net deferred tax asset increase of $1.2 million. Significant components of this increase include $26.1 million of deferred tax assets associated with net operating losses partially offset by $22.5 million of deferred tax liabilities associated with intangibles and $2.1 million associated with inventory.

During the three and six months ended March 25, 2016, the Company recognized an income tax benefit of $0.2 million and $2.9 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 $94.5 million at March 25, 2016 and $89.2 million at September 25, 2015. The net increase of $5.3 million primarily resulted from a net increase to current year activity of $10.0 million, which was partially offset by decreases from settlements of $1.9 million, net decreases to prior period tax positions of $1.9 million, and a decrease from a lapse of statute of limitations of $0.9 million. If favorably settled, $92.7 million of unrecognized tax benefits at March 25, 2016 would favorably impact the effective tax rate. The total amount of accrued interest related to these obligations was $37.4 million at March 25, 2016 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 $37.6 million and the amount of related interest and penalties will decrease by up to $29.6 million. Included within such amounts are possible releases associated with the final settlement of the Tyco-controlled debt litigation.