S CORPORATION TERMINATION, TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT
THIS S CORPORATION TERMINATION, TAX ALLOCATION AND INDEMNIFICATION
AGREEMENT (the "Agreement"), dated as of the 17th day of November, 1999, among
Xxxx Xxxxxxx ("Xxxxxxx"), Xxxxx XxXxxxx ("XxXxxxx") (Xxxxxxx and XxXxxxx are
hereinafter sometimes referred to individually as a "Shareholder" and
collectively as the "Shareholders") and Infinite Technology Group Ltd., a New
York corporation (the "Company"), (the Company and the Shareholders are
hereinafter sometimes 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, each of the Shareholders owns 50% of the outstanding capital
stock of the Company; and
WHEREAS, it is anticipated that the Company will effect an initial public
offering of common stock of the Company (the "Offering"), and that Xxxxxxxx,
Xxxxxx and Xxxxxxxxxx, Inc. (the "Underwriter") shall be the lead underwriter
for the Offering; and
WHEREAS, in connection with the Offering the Company's status as an S
corporation shall automatically terminate; and
WHEREAS, the Shareholders 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 Shareholder over the federal and state income taxes paid
(less amounts refunded or credited to such Shareholder) by the Shareholder 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 automatically terminated as a result of the closing of the Offering.
ARTICLE II
TERMINATION
2.1 TERMINATION OF S STATUS. The Company's S corporation status shall be
automatically terminated as a result of the Offering. The Company agrees to
execute and file with the Internal Revenue Service any required documentation in
connection with such termination, prior to the closing of the Offering. The
termination of the Company's S corporation status shall be effective on the
closing of the Offering.
2.2 SHAREHOLDER CONSENT. The Shareholders agree to execute and deliver to
the Company an executed unanimous consent, prior to the Termination Date.
ARTICLE III
ALLOCATION OF INCOME
3.1 ALLOCATION ELECTION. The Company agrees to elect and the Shareholders
agree to consent, pursuant to Section 1362(e)(3) of the Code, to allocate tax
items to its S Short Year and C Short Year by the pro rata allocation method
contained in Section 1362(e)(2) of the Code, rather then pursuant to normal tax
accounting rules (the "closing of the books method").
The Company and the Shareholders agree to take all necessary actions to cause
such election and consents and the revocation election and consents to be
effective for federal income tax purposes, 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.
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 SHAREHOLDER 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 Shareholders, each Shareholder hereby agrees to
indemnify and hold the Company harmless from, against and with respect to up to
50% 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.
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 Shareholders thereof and thereafter, the Shareholders 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 Shareholders. The Company agrees to execute any
powers of attorney or other documents necessary to permit the Shareholders to
conduct such proceedings.
4.4 PAYMENTS. Each Shareholder 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, however, that if the Shareholders are 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 each Shareholder a pro
rata amount of such refund, including any interest received with respect
thereto.
ARTICLE V
PAYMENT FOR ESTIMATED TAX LIABILITY
5.1 PAYMENT BY COMPANY. Within sixty (60) days of the Termination Date,
the Company shall make a payment to each Shareholder equal to each Shareholder's
estimated tax liability pursuant to Section 4.2 of this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 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.
6.2 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 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 as of
the date first set forth above.
INFINITE TECHNOLOGY GROUP LTD.
By: /s/ Xxxxx XxXxxxx
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Name: Xxxxx XxXxxxx
Title: President
/s/ Xxxx Xxxxxxx
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Xxxx Xxxxxxx
/s/ Xxxxx XxXxxxx
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Xxxxx XxXxxxx
