EXHIBIT 10.17
Tax Sharing and Tax Services
Agreement
This Agreement is entered into the day of , 1996,
by and among Xxxxxx Industries Inc. ("Industries"), Xxxxxx Entertainment
Inc. ("Entertainment") and Xxxxxx Micro Inc. ("Micro") (Entertainment
and Micro are sometimes hereinafter referred to collectively as the
"Subsidiaries" and individually as a "Subsidiary").
WHEREAS, Industries is the common parent corporation of an
affiliated group of corporations (the "Affiliated Group") within the
meaning of section 1504(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), which files consolidated federal income tax returns
("Consolidated Federal Returns");
WHEREAS, the Subsidiaries are currently wholly-owned subsidiaries of
Industries and members of the Affiliated Group;
WHEREAS, Industries files consolidated, combined or unitary state
income tax returns (collectively, "Consolidated State Returns") in certain
states for groups of corporations which include the Subsidiaries;
WHEREAS, Industries is distributing all of its stock in each of the
Subsidiaries to certain of the shareholders of Industries in split-off
transactions (each, a "Split-off" and together, the "Split-offs");
WHEREAS, the parties hereto desire to set forth their agreement
concerning the manner in which various matters relating to federal state
and foreign taxes based upon income (collectively, "Income Taxes") will be
handled after the dates of the Split-offs;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Termination of Other Income Tax Sharing Agreements. Any existing
Income Tax sharing agreements or arrangements, whether written or
unwritten, between Industries and a Subsidiary shall terminate on the date
of the Split-off of such Subsidiary, (the "Subsidiary's Split-off Date"),
and this Agreement shall thereafter constitute the sole Income Tax sharing
agreement between Industries and such Subsidiary.
2. Filing of Income Tax Returns and Payment of Tax Liability.
(a) Federal Income Tax Returns.
(i) Return for Affiliated Group. Industries will prepare and file
the Consolidated Federal Return for the Affiliated Group for the taxable year
which includes a Subsidiary's Split-off Date.
(ii) Separate Federal Income Tax Returns. Industries shall prepare
on behalf of each Subsidiary, in consideration of a fee to be negotiated by
the parties, a separate federal income tax return for the short taxable year
of such Subsidiary which begins immediately after such Subsidiary's Split-off
Date.
(b) State Income Tax Returns.
(i) Consolidated State Income Tax Returns. Industries shall
prepare and file state income tax returns for the taxable year which includes
a Subsidiary's Split-off Date for those states in which Consolidated State
Returns are filed.
(ii) Separate State Income Tax Returns. With respect to those
states in which a Subsidiary files a separate income tax return, Industries
shall prepare on behalf of such Subsidiary, in consideration of a fee to be
negotiated by the parties, an income tax return for the taxable year of the
Subsidiary which includes such Subsidiary's Split-off Date. With respect to
those states in which Consolidated State Returns are filed in accordance with
Section 2(b)(i) above, Industries shall prepare on behalf of each Subsidiary,
in consideration of a fee to be negotiated by the parties, a separate income
tax return for the short taxable year of the Subsidiary which begins
immediately after such Subsidiary's Split-off Date.
(c) In preparing the Consolidated Federal Return and any Consolidated
State Returns for the taxable period which includes a Subsidiary's Split-off
Date, the items attributable to such Subsidiary for the portion of such
taxable period ending on the Subsidiary's Split-off Date shall be determined
by closing the books of the Subsidiary as of the Subsidiary's Split-off Date.
All such returns shall be prepared using the same procedures and on the same
basis as returns for prior periods, except as the parties hereto may otherwise
agree.
(d) Payment of Tax.
(i) Consolidated Federal and State Returns. Within thirty (30)
days after the Consolidated Federal Return and each Consolidated State
Return for the taxable year which includes a Subsidiary's Split-off Date is
filed, Industries shall notify such Subsidiary of the amount of the tax
liability reflected on such return which is allocable to such Subsidiary.
Such Subsidiary shall pay to Industries, within ten (10) days after the
date of such notice, the excess of the amount of tax liability reflected on
such tax return which is allocable to the Subsidiary over the amount
previously paid by such Subsidiary to Industries with respect to the
Subsidiary's tax liability for such taxable year, together with interest,
at the intercompany rate of interest determined by Industries' Treasury
Department (the "Inter-Company Rate") for such period, on such excess
amount for the period from the date the tax return is filed until the date
of payment by the Subsidiary. In the event that the amount of tax
liability reflected on such tax return which is allocable to the Subsidiary
is less than the amount previously paid by such Subsidiary to Industries
with respect to the Subsidiary's tax liability for such taxable year,
Industries shall pay such Subsidiary the difference, together with interest
at the Inter-Company Rate on such amount for the period from the date the
tax return is filed until the date of payment to the Subsidiary; provided,
however, that interest shall only be paid to the extent such Subsidiary's
overpayment was used to fund an underpayment by Industries or another
Subsidiary or interest on such overpayment was actually received from the
relevant taxing authority. Industries shall allocate the tax liability
reflected on the Consolidated Federal Return and each Consolidated State
Return in accordance with the method prescribed in Treas. Reg. Section
1.1552-1(a)(3).
(ii) Separate Federal and State Returns. Each Subsidiary
shall be responsible for the payment of any Income Tax liability reflected
on the Separate Income Tax returns prepared by Industries on behalf of such
Subsidiary pursuant to Sections 2(a)(ii) and 2(b)(ii) of this Agreement.
3. Subsequent Adjustments.
(a) In the event that adjustments are made to a Consolidated Federal
Return, a Consolidated State Return or a foreign or separate state Income
Tax return of Industries or a Subsidiary for any taxable year or portion
thereof ending on or before the date of the Split-off of Micro (the "Micro
Split-off Date"), whether by reason of an audit, amended return or
otherwise, and such adjustments result in an increase in the Income Tax
liability for such taxable period, the responsibility for the payment of
such increase in Income Tax liability and any interest, penalties, or
additions to tax imposed with respect to such increase (collectively, a
"Deficiency") shall, except as provided Section 3(c) and Section 4(b)
below, be determined in the following manner:
(i) The amount of a Deficiency shall first be offset against and
reduce the amount reflected in the reserve for taxes recorded on the books of
Industries as of the Micro Split-off Date (the "Reserve"). Industries shall be
responsible for payment of the amount of such Deficiency which is offset
against the Reserve in accordance with this Section 3(a)(i).
(ii) To the extent that the amount of a Deficiency exceeds the
balance in the Reserve (after giving effect to any prior reduction in the
Reserve made pursuant to this Agreement), the parties hereto shall be
responsible for the payment of the amount of such excess in the following
proportions:
Industries 23.01 percent
Micro 72.84 percent
Entertainment 4.15 percent;
(iii) Provided, however, that in the event that a Deficiency
involves a timing issue and results in a decrease in income or an increase
in a deduction, credit or other tax attribute (an "Offsetting Adjustment")
for a taxable period or portion thereof beginning after the Micro Split-off
Date, the amount of the Deficiency to be taken into account for purposes of
applying Sections 3(a)(i) and 3(a)(ii) above shall be reduced by the
present value (using a discount rate equal to 10 percent) of the tax
benefit (based on the applicable maximum corporate tax rate in effect on
the date of such adjustment) which will result from the Offsetting
Adjustment and the Subsidiary benefiting from such Offsetting Adjustment
shall pay 100 percent of the foregoing reduction in the Deficiency.
(b) In the event that a Deficiency is imposed with respect to a
Consolidated Federal Return or Consolidated State Return, or a foreign or a
separate state Income Tax Return of Entertainment, and any portion of such
Deficiency is attributable to items of Entertainment for the period beginning
immediately after the Micro Split-off Date and ending on the date of the
Split-off of Entertainment (the "Interim Period"), such portion of the
Deficiency (the "Interim Period Deficiency") shall first be offset against and
reduce the amount reflected in the reserve for taxes recorded on the books of
Industries for the Interim Period (the "Interim Period Reserve"), which shall
be established using the same procedures and on the same basis as in prior
periods. Industries shall be responsible for payment of the amount of any
Interim Period Deficiency which is offset against the Interim Reserve pursuant
to this Section 3(b). To the extent that the Interim Period Deficiency exceeds
the balance in the Interim Period Reserve (after giving effect to any prior
reduction in the Interim Period Reserve made under this Agreement),
Entertainment shall be solely responsible for the payment of the amount of
such excess.
(c) Notwithstanding the provisions of Section 3(a) or 3(b), (i) if
either the Split-off of Micro or the Split-off of Entertainment fails to
qualify for tax-free treatment under Section 355 of the Code as the result
of the breach by one of Industries, Micro or Entertainment of a
representation or covenant contained in Section 6.2 or Section 6.3 of the
Amended and Restated Exchange Agreement dated September 4, 1996, as amended
and restated on October 17, 1996 (the "Exchange Agreement"), to which
Industries and the Subsidiaries are parties, the responsibility for the
payment of any resulting Deficiency shall be borne solely by the
corporation which committed such breach; and in the event the Deficiency
results from the breach by more than one of the corporations of such
representations or covenants, the responsibility for the payment of the
Deficiency shall be shared by each of the corporations which committed such
breach in the proportion which the percentage specified for such
corporation in Section 3(a)(ii) bears to the sum of the percentages
specified therein for each of the corporations which committed such breach;
and (ii) if a Deficiency is attributable to a transaction, other than the
Split-offs, which was consummated pursuant to the Amended and Restated
Reorganization Agreement dated September 4, 1996, as amended and restated
on October 17, 1996 (the "Reorganization Agreement"), among Industries,
Micro and Entertainment, the responsibility for the payment of such
Deficiency shall be borne 23.01 percent by Industries, 72.84 percent by
Micro and 4.15 percent by Entertainment, as determined after the
application of the procedures set forth in Section 3(a)(iii), if
appropriate.
(d) In the event that the Split-off of Entertainment fails to
qualify for tax-free treatment under Section 355 of the Code and Section
3(c)(i) of this Agreement is not applicable, the amount of the resulting
Deficiency shall first be offset against and reduce the amount reflected in
the Interim Reserve and, to the extent that such Deficiency exceeds the
balance in the Interim Reserve (after giving effect to any prior reduction
in the Interim Reserve made under this Agreement), shall then be offset
against and reduce the balance reflected in the Reserve (after giving
effect to any prior reduction in the Reserve made under this Agreement);
provided, however, that no such offset against and reduction of the Reserve
shall be permitted if (i) the Split-off of Entertainment was not completed
in accordance with the provisions of the Exchange Agreement and the
Reorganization Agreement, or (ii) the facts and circumstances of the Split-
off of Entertainment differed in any material respect from the description
thereof (including the representations relating thereto) set forth in the
private letter ruling dated October 16, 1996 from the Internal Revenue
Service regarding the Split-offs unless a supplemental private letter
ruling reasonably satisfactory to Micro addressing any such differences is
obtained prior to such Split-off. Industries shall be responsible for the
payment of the amounts of such resulting Deficiency which are offset
against the Interim Reserve and the Reserve in accordance with this Section
3(d). To the extent that the amount of the resulting Deficiency exceeds
the amount offset against the Interim Reserve and the Reserve under this
Section 3(d), the responsibility for the payment of such excess amount
shall be borne 23.01 percent by Industries, 72.84 percent by Micro and 4.15
percent by Entertainment. In all other instances, the Deficiency shall be
borne 84.72 percent by Industries and 15.28 percent by Entertainment.
4. Refunds.
(a) In the event that a refund of Income Tax (other than a
refund attributable to a carryback of a loss or tax credit) is received by
Industries with respect to a Federal Consolidated Return or a State
Consolidated Return for any taxable year or portion thereof ending on or
before a Subsidiary's Split-off Date, the portion of such refund which is
attributable to items of a Subsidiary shall be promptly paid by Industries
to such Subsidiary, together with any interest received on such portion;
provided, however, that in the event that a refund is received with respect
to an amount of a Deficiency which was paid by Industries or a Subsidiary
in accordance with Section 3 above, Industries and each Subsidiary shall be
entitled to the portion of such refund, together with interest thereon,
which is the same as the proportion of the Deficiency which was paid by
such party.
(b) In the event that a Subsidiary has a net operating loss, net
capital loss or credits against tax for a taxable year beginning after such
Subsidiary's Split-off Date which, under applicable federal or state law,
may be carried back to a Consolidated Federal Return or State Consolidated
Return for a taxable period or portion thereof of the Subsidiary which ends
on or before such Subsidiary's Split-off Date, Industries shall pay to such
Subsidiary, within ten (10) days of the receipt of such refund, the amount
of the Income Tax benefit actually received by the Affiliated Group or the
applicable state consolidated, combined or unitary group, as the case may
be, as a result of such carryback. The tax benefit received as a result of
a carryback shall be considered to be equal to the excess of (i)
the Income Taxes which would have been payable for the taxable period to which
the loss or credit is carried in the absence of such carryback over (ii) the
Income Taxes actually payable for such period after taking such carryback into
effect. In the event that any portion of a carryback is disallowed following
payment to a Subsidiary of the tax benefit received from such carryback, the
Subsidiary shall repay to Industries the amount which would not have been
payable to the Subsidiary hereunder if only the portion of the carryback
actually allowed had been taken into account.
5. Allocation of Items. In the case of an assessment or refund
which is imposed or received with respect to an Income Tax Refund filed for
a taxable period that includes but does not end on a Subsidiary's Split-off
Date, the amount of the assessment or refund which relates to the portion
of the taxable period ending on such Subsidiary's Split-off Date shall be
determined by allocating the items to which the assessment or refund
relates to the date on which such items are properly taken into account for
Income Tax purposes, and in the case of any item which cannot be allocated
to a specific date, by ratably allocating such item between the portion of
the taxable period ending on such Subsidiary's Split-off Date and the
portion of the taxable period beginning immediately after such Subsidiary's
Split-off Date based on the number of days in such respective portions.
6. Certain Changes. Following a Subsidiary's Split-off Date, neither
Industries nor such Subsidiary shall, without the prior written consent of the
other parties to this Agreement, make or change any Income Tax election, adopt
or change any accounting method, file any amended Income Tax Return or agree
to or settle any claim, proposed adjustment or assessment if such action would
result in an increase in Income Tax liability or a reduction in any deduction,
credit, loss or other Income Tax attribute for any taxable period or portion
thereof of Industries or such Subsidiary which ends on or before such
Subsidiary's Split-off Date.
7. Deductions Related to Options. It is agreed by the parties that
where an option to purchase stock of Industries which is held by an
employee of Industries or Entertainment is converted in connection with the
Micro Split-off into an option to purchase stock of Micro, and Micro issues
its stock to such employee pursuant to the exercise of the converted
option, then, to the extent that Industries or Entertainment is entitled to
an Income Tax deduction for the amount of compensation which results to the
employee from exercise of the converted option, Industries or Entertainment
shall pay to Micro the amount of the tax benefit received by such
corporation from the compensation deduction.
8. Contests. Industries shall have the right to control any audit,
administrative or judicial proceeding involving a claim, proposed
adjustment, assessment or other contest with respect to a Consolidated
Federal Return, Consolidated State Return, or a separate Income Tax return
filed by Industries or a Subsidiary for any taxable period or portion
thereof ending on or prior to such Subsidiary's Split-off Date, and
Industries shall have the right to determine when to settle such claim,
adjustment, assessment or contest; provided, however, that Industries shall
consult with a Subsidiary regarding any such proceeding to the extent that
such proceeding may affect the tax liability of such Subsidiary for a
taxable period or portion thereof beginning after such Subsidiary's Split-
off Date and shall obtain the consent of a Subsidiary, which consent shall
not be unreasonably withheld, to any proposed settlement if such settlement
would increase the tax liability of such Subsidiary for a taxable period or
portion thereof beginning after such Subsidiary's Split-off Date. The
legal fees and other expenses incurred by Industries in connection with any
such proceeding shall be borne 23.01 percent by Industries, 72.84 percent
by Micro and 4.15 percent by Entertainment for proceedings related to
periods ending on or before the Micro Split-off Date. For proceedings
relating to the Interim Period, any such fees and expenses shall be borne
84.72 percent by Industries and 15.28 percent by Entertainment. Industries
shall allow a Subsidiary and its counsel to participate in any such
proceeding to the extent that the proceeding relates to such Subsidiary,
and the legal fees and other expenses incurred by a Subsidiary in this
regard shall be borne by the parties in the same proportions set forth in
the immediately preceding sentence.
9. Cooperation and Assistance. Industries and each Subsidiary agree
to provide each other with such cooperation and information as either of
them may reasonably request in connection with the preparation of Income
Tax returns, amended returns, claims for refunds or other income tax
filings or the conduct of any audit, administrative or judicial proceeding
relating to Income Taxes. Industries and each Subsidiary further agree to
retain all books, records, documents, accounting data or other information
which relate to Income Tax returns for taxable periods ending on or prior
to or which include such Subsidiary's Split-off Date, until the expiration
of the applicable statute of limitations (giving effect to any extension,
waiver or mitigation thereof).
10. Governing Law. This Agreement shall be construed under and governed
by the laws of the State of Tennessee.
11. Headings. The headings contained in this Agreement are for
reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
12. Entire Agreement; Amendment; Waiver. This Agreement
constitutes the entire agreement between the parties with respect to the
subject matter hereof and may not be altered or amended except in writing
signed by the parties. The failure of a party hereto at any time to
require the performance of any provision hereunder shall in no manner
affect the right to enforce the same. No waiver by any party hereto of any
condition, or of the breach of any provision of this Agreement shall be
deemed or construed as a further or continuing waiver of any such condition
or of the breach of any other provision herein contained.
13. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. This Agreement shall not be construed so as
to benefit any person other than the parties hereto and such successors and
assigns.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first written above.
XXXXXX INDUSTRIES INC.
By: ___________________________
Title: ________________________
XXXXXX ENTERTAINMENT INC.
By: ___________________________
Title: ________________________
XXXXXX MICRO HOLDINGS INC.
By: ___________________________
Title: ________________________
