

6.	Income Taxes

The Company recognized an income tax benefit of $89.3 million and $1.2 million on income from continuing operations before income taxes of $106.4 million and $54.4 million for the three months ended June 24, 2016 and June 26, 2015, respectively. This resulted in effective tax rates of negative 83.9% and negative 2.2% for the three months ended June 24, 2016 and June 26, 2015, respectively. The Company recognized income tax benefits of $175.0 million and $45.6 million on income from continuing operations before income taxes of $256.9 million and $172.6 million for the nine months ended June 24, 2016 and June 26, 2015, respectively. This resulted in effective tax rates of negative 68.1% and negative 26.4% for the nine months ended June 24, 2016 and June 26, 2015, respectively.

The effective tax rate for the three months ended June 24, 2016, as compared with the three months ended June 26, 2015 decreased by 81.7 percentage points. Included within this net decrease was a 21.0 percentage point decrease attributable to differing levels of income from continuing operations before taxes for the three months ended June 24, 2016 as compared with the three months ended June 26, 2015. Also within this decrease was a 25.8 percentage point decrease related to the tax benefit of a U.K. tax credit on a dividend between affiliates, which occurred within the three months ended June 24, 2016, and a 12.4 percentage point decrease attributable to the recognition of previously unrecognized tax benefits. The remaining 22.5 percentage point 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 this 22.5 percentage point decrease to the tax rate, 16.0 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.

The effective tax rate for the nine months ended June 24, 2016, as compared with the nine months ended June 26, 2015 decreased by 41.7 percentage points. Included within this net decrease was an 11.0 percentage point decrease attributable to differing levels of income from continuing operations before taxes for the nine months ended June 24, 2016 as compared with the nine months ended June 26, 2015. Also within this decrease was a 10.7 percentage point decrease related to the tax benefit of a U.K. tax credit on a dividend between affiliates, which occurred within the nine months ended June 24, 2016, and a 2.5 percentage point decrease attributable to the recognition of previously unrecognized tax benefits. The remaining 17.5 percentage point 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 this 17.5 percentage point decrease to the tax rate, 10.8 percentage points can be attributed to the change in operating income and 6.7 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 $0.9 million. Significant components of this increase include $26.1 million of deferred tax assets associated with net operating losses partially offset by $21.1 million of deferred tax liabilities associated with intangibles and $3.8 million associated with inventory.

During the nine months ended June 24, 2016, the Company recognized an income tax benefit of $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 $117.8 million at June 24, 2016 and $89.2 million at September 25, 2015. The net increase of $28.6 million primarily resulted from a net increase to current year positions of $43.7 million, which was partially offset by decreases from settlements of $2.4 million, net decreases to prior period tax positions of $10.9 million, and a decrease from a lapse of statute of limitations of $1.8 million. The increase to current year positions of $43.7 million is predominately related to the recharacterization of existing non-current deferred tax liabilities as unrecognized tax benefits. This recharacterization did not impact the effective tax rate within the period. If favorably settled, $116.1 million of unrecognized tax benefits at June 24, 2016 would favorably impact the effective tax rate. The total amount of accrued interest related to these obligations was $21.6 million at June 24, 2016 and $41.7 million at September 25, 2015.

On January 19, 2016, Tyco International plc (“Tyco International”) announced it had entered into Stipulations of Settled Issues with the IRS to resolve certain disputes before the U.S. Tax Court. The disputes involved IRS audits of Tyco International for years in which companies that are now subsidiaries of Mallinckrodt were subsidiaries of Tyco International. On May 31, 2016, the U.S. Tax Court entered decisions consistent with the Stipulations of Settled Issues. As a result, all aspects of the disputes that were before the U.S. Tax court and Appeals Division of the IRS have been resolved for audit cycles from 1997-2007. 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 settlement.

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 $31.0 million and the amount of related interest and penalties will decrease by up to $20.1 million. Included within such amounts are releases indirectly associated with the final settlement of the Tyco-controlled debt litigation.

On April 1, 2016, the Company realized a tax benefit of $27.4 million resulting from a U.K. tax credit on a dividend between affiliates. The related tax receivable is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.