EXHIBIT 10.36
BREAKAWAY SOLUTIONS, INC.
S CORPORATION TERMINATION, TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT
This S CORPORATION TERMINATION, TAX ALLOCATION AND INDEMNIFICATION
AGREEMENT (the "Agreement"), between Breakaway Solutions, Inc., a Delaware
corporation (the "Company"), and Xxxxx Xxxxxxxx ("Stockholder,") (the Company
and the Stockholder are hereinafter referred to individually as a "party" and
collectively as the "parties").
WHEREAS, the Company is an S corporation, as defined in Section 1361 of the
Code (as hereinafter defined) and will continue to be an S corporation until the
Termination Date (as hereinafter defined); and
WHEREAS, Stockholder owns eighty-eight (88%) of the outstanding capital
stock of the Company; and
WHEREAS, it is anticipated that the Company will offer and sell to Internet
Capital Group, LLC, a Delaware limited liability company (collectively, the
"Investors"), shares of Series A Preferred Stock of the Company (the
"Financing"); and
WHEREAS, in connection with the closing of the Financing, the Stockholder
and the Company wish to revoke the Company's status as an S Corporation; and
WHEREAS, the Stockholder and the Company wish to enter into an agreement as
to the termination of the Company's status as an S corporation, the method used
to allocate the Company's income during its S Termination Year (as hereinafter
defined) pursuant to Code Section 1362(e)(3), and the indemnification of the
Company with respect to certain tax matters.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. The following terms, as used herein, have the following
meanings:
"C SHORT YEAR" means the portion of the S Termination Year of the
Company beginning on the Termination Date and ending on December 31, 1999.
"CODE" means the Internal Revenue Code of 1986, as amended, and, in
the context of a state or local tax, a reference to the Code or a section of the
Code includes any similar applicable provision of state or local law.
"EXCESS DISTRIBUTIONS" means the excess of cash or property
distributions by the Company to a Stockholder over the federal and state income
taxes paid (less amounts refunded or credited to such Stockholder) by the
Stockholder with respect to the taxable income of the Company for all periods
during which the Company has been an S corporation, including the S Short Year.
"S SHORT YEAR" means that portion of the S Termination Year of the
Company beginning on January 1, 1999, and ending on the Termination Date.
"S TERMINATION YEAR" means the Company's fiscal year beginning January
1, 1999.
"TAXES" means all taxes, however denominated, including any interest,
penalties or additions to tax that may become payable in respect therewith,
imposed by any federal, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include, without
limiting the generality of the foregoing, all income, payroll and employee
withholding, unemployment insurance, social security, sales and use, excise,
profits, value added, ad valorem, occupancy, disability, franchise, gross
receipts, environmental, occupation, real and personal property, stamp,
transfer, license, net worth, real property gains, capital, worker's
compensation taxes.
"TAX RETURNS" means all reports, estimates, information statements and
returns relating to, or required to be filed in connection with, any Taxes.
"TERMINATION DATE" means the date on which S corporation status of the
Company is terminated as a result of revocation of such status in accordance
with Section 1362(d)(1) of the Code or otherwise.
ARTICLE II
TERMINATION
2.1 TERMINATION OF S STATUS. The Company's S corporation status shall be
terminated as a result of revocation of such status pursuant to Section
1362(d)(1) of the Code. The Company agrees to execute and file with the Internal
Revenue Service an executed election in substantially the form attached hereto
as Exhibit A, prior to the Termination Date. The termination of the Company's S
corporation status shall be effective on the closing of the Financing.
2.2 STOCKHOLDER CONSENT. Stockholder agrees to execute and deliver to the
Company an executed consent in substantially the form attached hereto as Exhibit
B, prior to the Termination Date.
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ARTICLE III
ALLOCATION OF INCOME
3.1 ALLOCATION ELECTION. The Company agrees to elect and the Stockholder
agrees to consent, pursuant to Section 1362(e)(3) of the Code, to allocate tax
items to its S Short Year and C Short Year pursuant to normal tax accounting
rules (the "closing of the books method") rather than by the pro rata allocation
method contained in Section 1362(e)(2) of the Code. The Company and Stockholder
agree to take all necessary actions under Treasury Regulation Section 1.1362-6
to cause such election and consents and the revocation election and consents to
be effective for federal income tax purposes, including the execution and
delivery, by Stockholder, to the Company of a consent in substantially the form
attached hereto as Exhibit C, prior to the Termination Date. Additionally, the
Company agrees to execute and attach to its tax return filed with the Internal
Revenue Service an executed election in substantially the form attached hereto
as Exhibit D.
ARTICLE IV
TAX RETURNS AND INDEMNIFICATION
4.1 FILING TAX RETURN FOR THE TERMINATION YEAR. The Company shall be
responsible for and shall effect the filing of all Tax Returns required to be
filed by the Company with respect to all taxable periods ending prior to, with
or within the Termination Year. The Company shall cause such returns to include
the Company's income from all sources for all periods covered by such returns.
4.2 STOCKHOLDER INDEMNIFICATION FOR TAX LIABILITIES. Except with respect to
any tax jurisdiction that does not recognize S corporation as pass-through
entities and to the extent any tax jurisdiction does not accord S corporation
tax treatment to nonresident stockholders, Stockholder hereby indemnifies and
agrees to hold the Company harmless from, against and in respect of any U.S.
federal or state income tax liability (including interest and penalties), if
any, resulting from the Company failing to qualify as an S corporation under
Code Section 1361(a)(1) (as enacted and in effect prior to the Termination Date)
for every taxable year on or before the Termination Date as to which the Company
filed or files Tax Returns claiming status as an S corporation, PROVIDED,
HOWEVER, that the total payments to be made by Stockholder pursuant to this
Section 4.2 shall not exceed the lesser of (i) the Excess Distributions received
by the Stockholder with respect to all taxable years in which such Stockholder
was a Stockholder and (ii) three hundred sixty-five thousand dollars ($365,000).
4.3 AUDIT AND CONTEST RIGHTS. The parties hereto shall cooperate with each
other in the conduct of any audit or other proceeding relating to Taxes. Within
ten (10) days of the notice of any proposed or threatened adjustment which could
give rise to a claim for indemnification under Section 4.2, the Company shall
notify the Stockhoklder
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thereof and thereafter, the Stockholder shall have the right to control any
resulting proceedings and to determine when, whether and to what extent to
settle any such claim, assessment or dispute. The Company shall not make any
election, take any tax return position, or agree to any adjustment or
adjustments that would have the effect of increasing any tax liability with
respect to any period ending on or before the Termination Date without obtaining
the prior written consent of the Stockholder. The Company agrees to execute any
powers of attorney or other documents necessary to permit the Stockholder to
conduct such proceedings.
4.4 PAYMENTS. Stockholder shall make such payment required under Section
4.2 within thirty (30) days after the final determination of any tax liability
resulting in a claim for indemnification. For purposes of this section, "final
determination" shall mean any final tax assessment, judgment or decree by the
Internal Revenue Service or any court or administrative agency for which no
appeal or further hearing is possible or perfected, or a settlement with the
Internal Revenue Service, which settlement is consented to by the parties
hereto.
4.5 REFUNDS. The Company shall be entitled to any refund of Taxes imposed
on the Company, PROVIDED, that if Stockholder is required to make any payments
pursuant to Section 4.2 hereof and the Company thereafter receives a refund of
any Taxes to which such payments relate, the Company, within ten (10) days of
receipt of such refund, shall pay over to Stockholder such refund, including any
interest received with respect thereto.
ARTICLE V
[reserved]
ARTICLE VI
THIRD PARTY BENEFICIARIES
6.1 The parties agree that the holders of Series A Preferred Stock of the
Company are intended to be third party beneficiaries of this Agreement, and if
for any reason the Company fails to assert its rights pursuant to this
Agreement, any of such holders of Series A Preferred Stock shall have the right
to assert any and all of the Company's rights hereunder on behalf of the
Company.
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ARTICLE VII
MISCELLANEOUS
7.1 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which collectively shall
constitute an instrument representing the Agreement between the parties hereto.
7.2 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is intended,
or shall be construed, to confer upon or give any person, form or corporation,
other than the parties hereto, the holders of Series A Preferred Stock of the
Company or their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
BREAKAWAY SOLUTIONS, INC.
By:/S/ XXXXXX XXXXXX
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Xxxxxx Xxxxxx
Date: DECEMBER 23, 1998
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STOCKHOLDER:
/S/ XXXXX XXXXXXXX
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Xxxxx Xxxxxxxx
Date: DECEMBER 23, 1998
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[SIGNATURE PAGE TO THE S CORPORATION TERMINATION, TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT]
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