EXHIBIT 10.4
S CORPORATION TERMINATION AND TAX ALLOCATION
AGREEMENT
July __, 1997
TABLE OF CONTENTS
Page
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ARTICLE I - THE TERMINATION: S TERMINATION YEAR........................... 1
1.1 Termination of S Status........................................ 1
1.2 Effective Date................................................. 2
1.3 S Termination Year............................................. 2
1.4 S Short Year................................................... 2
1.5 C Short Year................................................... 2
ARTICLE II - ALLOCATION OF INCOME.......................................... 2
2.1 Allocation Election............................................ 2
ARTICLE III - TAXES........................................................ 2
3.1 Liability For Taxes Incurred During S Year..................... 2
3.2 Returns and Defense Against Tax Liability...................... 3
ARTICLE IV - DISTRIBUTIONS................................................. 3
4.1 Distribution of S Corporation Income........................... 3
4.2 Post Termination Date Adjustments to Undistributed
S Corporation Income......................................... 4
4.3 Subsequent Adjustment to S Corporation Income.................. 4
ARTICLE V - MISCELLANEOUS.................................................. 4
5.1 Counterparts................................................... 4
5.2 Construction of Terms.......................................... 5
5.3 Governing Law.................................................. 5
5.4 Amendment and Modification..................................... 5
5.5 Assignment..................................................... 5
5.6 Interpretation................................................. 5
5.7 Severability................................................... 5
5.8 Entire Agreement............................................... 5
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S CORPORATION TERMINATION AND TAX ALLOCATION
AGREEMENT
This S CORPORATION TERMINATION AND TAX ALLOCATION AGREEMENT (this
"Agreement"), is made this ___ day of July, 1997 between the A Consulting Team,
Inc., a New York corporation (the "Company"), and Xxxxxx XxxXxx (the Company and
Xxxxxx XxxXxx are hereinafter referred to individually as a "party" and
collectively as the "parties").
WHEREAS, the Company contemplates a public offering of its stock in
order to raise additional equity capital which will be used to repay borrowings
of the Company and be used for general corporate purposes (the "Public
Offering");
WHEREAS, prior to such Public Offering the Company plans to make a
distribution to Xxxxxx XxxXxx in an aggregate amount determined by the Company
to be equal to a reasonable estimate of the Company's undistributed S
corporation income as of the day immediately prior to the Termination Date (as
hereinafter defined) subject to federal income taxation by Xxxxxx XxxXxx;
WHEREAS, the Company and Xxxxxx XxxXxx have entered into this
Agreement as a condition to the foregoing distribution and the contemplated
Public Offering;
WHEREAS, from its inception through December 31, 1994 the Company was
a C corporation as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company became an S corporation as defined in Section 1361 of
the Code on January 1, 1995 and will continue to be an S corporation until the
Termination Date, upon which it will again be a C corporation; and
WHEREAS, Xxxxxx XxxXxx has been the only shareholder of the Company
from the time it became an S corporation, and will continue to be so until
immediately before the closing of the Public Offering (the "Closing").
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
THE TERMINATION: S TERMINATION YEAR
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1.1 Termination of S Status. The Company will terminate its status as
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an S corporation by revoking its election to be an S corporation under Section
1362(d) of the Code.
1.2 Effective Date. Pursuant to Section 1362(d)(1)(D) of the Code,
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the termination of the Company's S corporation status shall be effective on the
date specified by the Company as the date for revocation of its S corporation
status which day shall be no later than the day preceding the Closing (the
"Termination Date").
1.3 S Termination Year. The calendar year in which the S corporation
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status of the Company is terminated will be the S termination year (the "S
Termination Year") for federal tax purposes, as defined in Section 1362(e)(4) of
the Code.
1.4 S Short Year. As provided in Section 1362(e)(1)(A) of the Code,
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the S Short Year of the Company shall be that portion of the Company's S
Termination Year ending on the day immediately preceding the Termination Date.
1.5 C Short Year. Pursuant to Section 1362(e)(1)(B) of the Code, that
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portion of the S Termination Year of the Company beginning on the Termination
Date and ending on the last day of the calendar year shall be the C Short Year
of the Company.
ARTICLE II
ALLOCATION OF INCOME
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2.1 Allocation Election. The Company shall elect to allocate tax items
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to its S Short Year and C Short Year pursuant to the normal tax accounting
method (rather than the pro rata allocation method) contained in Section
1362(e)(3) of the Code.
ARTICLE III
TAXES
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3.1 Liability For Taxes Incurred During S Year. Xxxxxx XxxXxx
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covenants and agrees that: (i) he has duly included, or will duly include, in
his own federal, state and local income tax returns all items of income, gain,
loss, deduction, or credit of the Company that were required to be included in
his federal, state and local income tax returns with respect to any period
during which the Company reported its income as an S corporation and (ii) he has
paid, or will pay, any and all taxes required to be paid by him on such income
for all such taxable periods. Xxxxxx XxxXxx shall pay or reimburse the Company
for any and all federal, state or local corporate income taxes (plus interest
and penalties) the Company is required to pay as a result of the Company's
failure to qualify as an S corporation with respect to tax returns in which the
Company reported its income as an S corporation. Xxxxxx XxxXxx'x
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liability under this Section 3.1 is limited to the aggregate amount of all
distributions received by Xxxxxx XxxXxx from the Company during such S
corporation reporting period, net of taxes paid or payable by Xxxxxx XxxXxx with
respect to such distributions. Any payments obligated to be made pursuant to
this Section 3.1 shall be due and payable within ten (10) business days of the
Company's request.
3.2 Returns and Defense Against Tax Liability. The Company shall be
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responsible for and shall effect the filing of all required federal, state, and
local tax returns for the Company with respect to any and all taxable periods;
provided, however, that Xxxxxx XxxXxx shall have the option to prepare and
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effect the filing of any or all tax returns with respect to the S Termination
Year. The Company shall have full responsibility and discretion in the handling
of any tax controversy, including an audit, a protest to the Appeals Division of
the Internal Revenue Service, any other administrative proceeding and litigation
in Tax Court or any other court of competent jurisdiction (a "Tax Controversy"),
involving a tax return of the Company. However, at Xxxxxx XxxXxx'x option,
Xxxxxx XxxXxx shall have full responsibility and discretion in the handling, at
Xxxxxx XxxXxx'x expense, of any Tax Controversy with respect to any period in
which the Company reported its income as an S corporation. With respect to Tax
Controversies in which Xxxxxx XxxXxx does not elect to control, Xxxxxx XxxXxx
shall be entitled to participate in all matters of the Tax Controversy, shall be
consulted, kept informed, and entitled to attend settlement discussions and
other conferences and meetings. Without the written consent of Xxxxxx XxxXxx,
the Company shall not agree to any tax adjustment for any period commencing on
or after the Termination Date which results in a corresponding increase in the
federal, state or local taxable income of Xxxxxx XxxXxx with respect to taxable
periods ending prior to the Termination Date (including the short taxable period
ending the day before the Termination Date).
ARTICLE IV
DISTRIBUTIONS
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4.1 Distribution of Accumulated Adjustments Account. Prior to the
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Closing of the Public Offering, the Company shall distribute to Xxxxxx XxxXxx an
amount equal to a reasonable estimate of the amount of the Company's
undistributed S corporation income as of the day immediately prior to the
Termination Date subject to federal income taxation by Xxxxxx XxxXxx ("Estimated
Income"); provided, however that any such distribution shall be subject to the
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limitations set forth in Section ___ of the New York General Corporation Law and
any other similar legal limitations.
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4.2 Post Termination Date Adjustments to AA Account Distribution.
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Before the end of the "post-termination transition period" (within the meaning
of Section 1377(b)(1)(A) of the Code), the Company shall determine the amount of
the actual amount of undistributed S corporation income as of the day
immediately prior to the Termination Date subject to federal income taxation by
Xxxxxx XxxXxx ("Actual Income"). The final S corporation federal income tax
return shall reflect the Actual Income and the distribution or repayments, as
the case may be, required to be made pursuant to this Article IV. If the Actual
Income is greater than the Estimated Income, subject to the proviso set forth in
Section 4.1 above, the Company shall make an additional distribution to Xxxxxx
XxxXxx in an amount equal to such excess. If the Estimated Income exceeds the
Actual Income, then Xxxxxx XxxXxx shall return to the Company any such excess.
Any payments obligated to be made pursuant to this Section 4.2 shall be due and
payable within ten (10) business days of the determination by the Company of the
Actual Income.
4.3 Subsequent Adjustment to S Corporation Income. If after the end
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of the "post-termination transition period" items of income, gain, loss,
deduction, or credit of the Company are adjusted (by audit or otherwise) with
respect to any tax return in which the Company reported its income as an S
corporation, then an appropriate payment described in (a) or (b) of this Section
4.3 shall be made. Any payments obligated to be made pursuant to this Section
4.3 shall be due and payable within ten (10) business days of the applicable
parties' request.
(a) If the adjustment has the effect of increasing the undistributed S
corporation income of the Company subject to taxation by Xxxxxx XxxXxx,
then the Company shall pay to Xxxxxx XxxXxx an amount of money equal to all
federal, state or local income taxes (plus interest and penalties) paid or
required to be paid by Xxxxxx XxxXxx as a result of such increase, on an
after-tax basis taking into account the tax consequences to Xxxxxx XxxXxx
from such payment.
(b) If the adjustment has the effect of decreasing the undistributed S
corporation income of the Company subject to taxation by Xxxxxx XxxXxx,
then Xxxxxx XxxXxx shall pay to the Company an amount of money equal to all
refunds of federal, state or local income taxes (including interest
received thereon) received by (or credited to) Xxxxxx XxxXxx as a result of
such decrease.
ARTICLE V
MISCELLANEOUS
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5.1 Counterparts. This Agreement may be executed in several
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counterparts, each of which shall be deemed an original,
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but all of which counterparts collectively shall constitute an instrument
representing the Agreement between the parties hereto.
5.2 Construction of Terms. Nothing herein expressed or implied
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is intended, or shall be construed, to confer upon or give any person, firm
or corporation, other than the parties hereto or their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
5.3 Governing Law. This Agreement and the legal relations
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between the parties hereto shall be governed by and construed in accordance
with the substantive laws of the State of New York without regard to New
York choice of law rules.
5.4 Amendment and Modification. This Agreement may be amended,
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modified or supplemented only by a written agreement executed by the
parties at any time prior to the Termination Date with respect to any of
the terms contained herein.
5.5 Assignment. This Agreement and all of the provisions hereof
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shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties hereto without the prior written consent
of the other parties, nor is this Agreement intended to confer upon any
other person except the parties any rights or remedies hereunder.
5.6 Interpretation. The title, article and section headings
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contained in this Agreement are solely for the purpose of reference, are
not part of the agreement of the parties and shall not in any way affect
the meaning or interpretation of this Agreement.
5.7 Severability. In the event that any one or more of the
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provisions of this Agreement shall be held to be illegal, invalid or
unenforceable in any respect, the same shall not in any respect affect the
validity, legality or enforceability of the remainder of this Agreement,
and the parties shall use their best efforts to replace such illegal,
invalid or unenforceable provisions with an enforceable provision
approximating, to the extent possible, the original intent of the parties.
5.8 Entire Agreement. This Agreement embodies the entire
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agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no representations, promises,
warranties, covenants, or undertakings, other than those expressly set
forth or referred to herein. This Agreement supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter.
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IN WITNESS WHEREOF, the parties have executed this Agreement in
New York, New York as of the date written above.
THE A CONSULTING TEAM, INC.
By: __________________________
Its:_________________
STOCKHOLDER:
______________________________
Xxxxxx XxxXxx
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