Real estate bond

[Table of Contents](#ifce71646d6a145519f2ac4db7d9b12ca_7) Note 9.    LEGAL CONTINGENCIESEaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations and indemnity claims, tax audits, patent infringement, personal injuries, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the Condensed Consolidated Financial Statements.  Note 10.     INCOME TAXESThe effective income tax rate for the third quarter of 2022 was expense of 15.5% compared to expense of 43.4% for the third quarter of 2021. The effective income tax rate for the first nine months of 2022 was expense of 15.4% compared to expense of 29.8% for the first nine months of 2021. The decrease in the effective tax rate in the third quarter and first nine months of 2022 was primarily due to the one-time tax impact on the gain from the sale of the Hydraulics business in the third quarter of 2021 discussed in Note 2.Brazil Tax Years 2005-2012The Company has two Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $26 million plus $98 million of interest and penalties (translated at the September 30, 2022 exchange rate). The Company is challenging this assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April 27, 2022, the Company filed a motion for clarification relating to that decision. On May 20, 2022, the court largely upheld its prior decision without further clarification. On June 9, 2022, the Company filed its notice of appeal to the second level court. The Company intends to continue its challenge of this assessment in the judicial system. As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $31 million plus $106 million of interest and penalties (translated at the September 30, 2022 exchange rate), which the Company is challenging in the judicial system. This case is still pending resolution at the first judicial level.Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of certain assets as security for the alleged deficiencies. As of September 30, 2022, the Company pledged Brazilian real estate assets with net book value of $19 million and provided additional security in the form of bank secured bonds and insurance bonds totaling $110 million and a cash deposit of $18 million (translated at the September 30, 2022 exchange rate).U.S. Tax Years 2005-2006In 2011, the United States Internal Revenue Service (IRS) issued a Statutory Notice of Deficiency for the Company’s United States subsidiaries (Eaton US) for the 2005 and 2006 tax years (the 2005-06 Notice), which Eaton US contested in United States Tax Court. The 2005-06 Notice proposed assessments of $75 million in additional taxes plus $52 million in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed the 2005-2010 tax years. Eaton US has continued to apply the APA pricing methodology for 2011 through the current reporting period. Immediately prior to the 2005-06 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. The case in Tax Court involved whether the IRS improperly cancelled the APAs. On July 26, 2017, the Tax Court issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements. On May 24, 2021, the IRS filed a notice to appeal the Tax Court’s ruling to the United States Sixth Circuit Court of Appeals. In July 2022, the Sixth Circuit panel heard oral arguments, and on August 25, 2022, issued a ruling in favor of Eaton US, confirming that the IRS must abide by the terms of the APAs. The Sixth Circuit’s ruling did not have a material impact on the Company’s consolidated financial statements. The IRS has until November 23, 2022 to file a petition with the U.S. Supreme Court, if they elect to do so.  
  
  
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