EXHIBIT 10.29
EXECUTION VERSION
TAX INDEMNITY AGREEMENT [N296SK] dated as of
December 20, 2001 (the "Tax Indemnity Agreement") between
CHAUTAUQUA AIRLINES, INC. (the "Lessee") and SILVERMINE
RIVER FINANCE TWO, INC. (the "Owner Participant").
RECITAL
As inducement to the Owner Participant to enter into the transactions
contemplated by that certain Participation Agreement [N296SK] dated as of
December 20, 2001 among Lessee, Owner Participant and Xxxxx Fargo Bank
Northwest, National Association, as Owner Trustee, (the "Participation
Agreement"), and in consideration of the mutual covenants contained herein and
in the Participation Agreement and other documents contemplated thereby, the
Lessee and the Owner Participant hereby agree as follows:
SECTION 1. DEFINITIONS.
(a) The term "Owner Participant" shall include each member of the
affiliated group (within the meaning of Section 1504 of the Code (or any
successor provision thereto)) of which the Owner Participant is a member and
each entity which joins the Owner Participant in filing a combined, unitary or
consolidated state income tax return.
(b) "Tax Attribute Period" shall mean the period beginning on the
Delivery Date and ending on December 31, 2008; PROVIDED that in the event the
depreciation period for the Aircraft is other than the period specified in Tax
Assumption 2(d)(i) as a result of a Lessee Act, such Tax Attribute Period shall
end on the last day of the last taxable year in which a depreciation deduction
for the Aircraft is allowed to Silvermine River Finance Two, Inc.
(c) "Reasonable Basis" for a position exists if tax counsel may
properly advise reporting such position on a tax return in accordance with
Formal Opinion 85-352 issued by the Standing Committee on Ethics and
Professional Responsibility of the American Bar Association.
(d) "Permitted Percentage" shall mean 10% during the Tax Attribute
Period.
(e) Except as otherwise provided herein, capitalized terms used herein
without definition shall have the meanings ascribed thereto in Appendix A to the
Participation Agreement.
SECTION 2. TAX ASSUMPTIONS
The transactions described in the Participation Agreement have been
entered into on the assumptions (the "Tax Assumptions") that for federal income
tax purposes:
(a) the entity created by the Trust Agreement will be treated either as
a "grantor trust" under Sections 671 ET SEQ. of the Code (and any successor
provisions thereto) or
as an agent or nominee of the Owner Participant, and the Owner Participant will
be treated as the owner of the entire trust and be required and entitled to take
into account in computing its taxable income all items of income, gain, loss,
deduction and credit of the trust in accordance with the accrual method of
accounting;
(b) at all times during the period beginning on the Delivery Date and
ending at the end of the Term, the Lease will constitute a "true lease", the
Owner Participant will be treated as the purchaser, sole owner and lessor of the
Aircraft and the Lessee will be treated as the lessee of the Aircraft;
(c) the Owner Participant's taxable year is the calendar year;
(d) the Owner Participant, as the owner of the Aircraft for federal
income tax purposes, will be entitled to the following federal income tax
benefits:
(i) cost recovery deductions equal to 14.29% of Lessor's Cost in
2001, 24.49% of Lessor's Cost in 2002, 17.49% of Lessor's Cost in 2003, 12.49%
of Lessor's Cost in 2004, 8.93% of Lessor's Cost in 2005, 8.92% of Lessor's Cost
in 2006, 8.93% of Lessor's Cost in 2007 and 4.46% of Lessor's Cost in 2008 (the
"MACRS Deductions"); and
(ii) amortization deductions for Transaction Costs paid or
incurred by the Owner Participant in connection with the transactions
contemplated by the Operative Agreements computed on a straight-line basis over
the period commencing on the first day and ending on the last day of the Basic
Term of the Lease (the "Amortization Deductions", and together with the MACRS
Deductions, the "Assumed Tax Benefits");
(e) no amount will be includible in the gross income of the Owner
Participant for income tax purposes with respect to the transactions
contemplated by the Operative Agreements at or at any time prior to the
expiration or earlier termination of the Lease other than (i) Basic Rent and
Renewal Rent in the amounts and at the times required pursuant to the Lease,
accrued and allocated in the manner provided by the Lease, (ii) any payment of
Termination Value (or the payment of amounts calculated by reference thereto) or
sales proceeds pursuant to Section 13 or 14 of the Lease, (iii) any amount paid
to or for the benefit of the Owner Participant and specifically identified or
calculated as interest, (iv) amounts to the extent they are offset by deductions
in the same taxable year to the Owner Participant arising out of the event
causing the inclusion of income (other than the Assumed Tax Benefits), (v) all
amounts payable on a grossed up or After Tax Basis to, or for the benefit of,
the Owner Participant, and (vi) amounts received by or for the benefit of the
Owner Participant pursuant to a warranty claim or as insurance proceeds with
respect to a loss or damage to the Aircraft, to the extent the Owner Participant
actually receives and retains and is not required to pay over such amounts to a
Lessee Person or some other Person unrelated to the Owner Participant;
(f) the Owner Participant will be a domestic corporation subject to a
federal income tax rate of 35% (the "Assumed Federal Rate") and a state and
local income tax rate (before taking into account the deductibility of state and
local income taxes for Federal income tax purposes) of 4.615% (the "Assumed
State and Local Rate"), resulting in a combined rate (after giving effect to the
deductibility of such state and local income taxes for federal income tax
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purposes) of 38% (the "Assumed Tax Rate") in 2001 and in each year thereafter,
and the Owner Participant will have sufficient taxable income to fully utilize
the Assumed Tax Benefits against income taxable at the Assumed Tax Rate;
(g) the Aircraft will be deemed to be placed in service by the Owner
Participant within the meaning of Section 168 of the Code on the Delivery Date;
(h) none of the Owner Participant, the Lessee or any sublessee is, or
at any time during the Term will be, a "tax exempt entity" within the meaning of
Section 168(h) of the Code;
(i) the Owner Participant will not be subject to the alternative
minimum tax under Section 55 of the Code;
(j) no portion of the MACRS Deductions will be recaptured under
Section 1245 of the Code or otherwise during the Term;
(k) the Lease will not be a "disqualified leaseback or long-term
agreement" within the meaning of Section 467(b) of the Code; and
(l) for each taxable year of the Owner Participant during the Tax
Attribute Period not more than the Permitted Percentage of any item of income,
deduction or loss with respect to the transactions contemplated by the Operative
Agreements will be treated for federal income tax purposes as derived from, or
allocable to, sources outside the United States;
The foregoing assumptions will be appropriately modified or adjusted
from time to time to reflect the occurrence of an event for which an indemnity
has been paid pursuant to this Agreement.
SECTION 3. RECORDS AND STATEMENTS.
The Lessee shall, at its expense, maintain such information or records
(including details of the use or operation of the Aircraft outside the United
States) relating to the Aircraft as are regularly maintained by the Lessee or as
may be required by law to be maintained (including, but not limited to, flight
logs). The Lessee shall, at the Lessee's expense, maintain and provide any such
records or information, and such other information customarily maintained by
comparable airlines, as the Owner Participant may reasonably request from the
Lessee to enable the Owner Participant and the Owner Trustee to fulfill their
respective tax filing, tax audit and tax litigation obligations.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.
The Lessee represents, warrants and covenants that:
(a) During the Tax Attribute Period the Aircraft is not and will not be
subject to Section 168(g) of the Code, assuming that the Owner Participant is
not a "tax-exempt entity" within the meaning of Section 168(h)(2) of the Code
and that the Owner Participant has not made an election under Section
168(g)(1)(E) of the Code;
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(b) neither Lessee nor any Person controlled by it, in control of it,
or under common control with it, directly or indirectly, nor any Person claiming
by, through or under the Lessee, nor any sublessee or other user or person in
possession of the Aircraft (or any Parts) during the Term, nor any Affiliate of
any of the foregoing (but excluding the Lessor or the Owner Participant or any
Person claiming by, through or under the Lessor or the Owner Participant but not
so excluding any Person claiming directly or indirectly through or under the
Lease or the Lessee) (each such Person not so excluded, a "Lessee Person") has
claimed or will claim the MACRS Deductions or the Amortization Deductions or any
other depreciation or cost recovery deduction or interest deduction with respect
to the Aircraft for federal, state, local or foreign income tax purposes, or
will claim to be the owner of the Aircraft in respect of any period during the
Term, or has taken or will take any action or position (not required by the
Operative Agreements) inconsistent with the Tax Assumptions or the status of the
Owner Participant as the sole owner of the Aircraft for federal, state, local
and foreign tax purposes;
(c) as of the Delivery Date (i) the Aircraft will not require any
improvements, modifications or additions (other than ancillary items of
removable equipment of a kind that customarily are selected and furnished by
purchasers or lessees of similar aircraft) in order to be rendered complete for
its intended use by the Lessee and (ii) Lessee has no present intention to make
any material nonseverable improvement, modification or addition to the Aircraft;
(d) neither Lessee nor any member of the "lessee group" (as defined in
Rev. Proc. 2001-28, 2001-19 I.R.B. 1156) of which Lessee is a member has, on the
Delivery Date (assuming consummation of the transaction described in
Section 2.01(a) of the Participation Agreement), any investment in the Aircraft
within the meaning of Section 4.04 of Rev. Proc. 2001-28;
(e) intentionally omitted;
(f) any written information supplied by the Lessee (or its agents) to
the Appraiser and relied on by such Appraiser in making the appraisal and
identified to the Lessee in a letter from the Appraiser attached hereto as
Schedule 4(f) was accurate and complete at the time given and as of the Delivery
Date, and the Lessee did not withhold any information in connection with any
request by the Appraiser for information that would render the information
actually provided misleading; and
(g) if at the time of the transfer of title of the Aircraft to the
Lessor on the Closing Date the Aircraft were instead acquired by the Lessee, the
Aircraft would constitute "7 year property" within the meaning of Section
168(e)(1) of the Code in the hands of the Lessee.
SECTION 5. FEDERAL INCOME TAX INDEMNITY.
(a) If for any taxable year, (i) as a result of (A) any act or omission
on the part of the Lessee or any Lessee Person (other than (I) the execution and
delivery of the Operative Agreements or (II) any act permitted or required under
the Operative Agreements, except for any alteration, modification, addition or
improvement to, or any repair, maintenance, substitution, replacement, pooling,
interchange or temporary or permanent removal from service or retirement of, the
Aircraft, any Engine or any Parts by any Lessee Person), (B) the inaccuracy or
breach of
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any representation, agreement, covenant or warranty of the Lessee contained
herein or in any other Operative Agreement or (C) the receipt of any refunds,
damages, insurance, warranty or similar proceeds or requisition, condemnation or
similar proceeds attributable to the Aircraft, any Engine or any Parts, by any
person other than the Owner Participant (or if received by the Owner
Participant, not retained by the same) (each such act, omission, inaccuracy,
breach or event described in clause (A), (B) or (C), a "Lessee Act"), the Owner
Participant shall suffer a loss, disallowance, reduction, elimination,
disqualification or deferral of, shall suffer a delay in claiming, shall not
have the right to claim, or shall be required to recapture (a "Recapture"), all
or any portion of the Assumed Tax Benefits, or (ii) the Owner Participant shall
be required to include in its gross income for federal income tax purposes any
amount other than the amounts described in Section 2(e) hereof (an "Inclusion")
as a result of (A) any alteration, modification, addition or improvement to, or
any repair, maintenance, substitution, replacement, pooling, interchange or
temporary or permanent removal from service or retirement of, the Aircraft, any
Engines or any Parts by any Lessee Person, (B) any payment by the Lessee of Rent
in an amount greater than due, or at a time earlier than at the time required,
pursuant to the Lease, (C) except to the extent such Inclusion constitutes a
Recapture, any receipt of any refunds, damages, insurance, warranty or similar
proceeds or requisition, condemnation or similar proceeds with respect to the
Aircraft, any Engines or any Parts by any person other than the Owner
Participant (or if received by the Owner Participant, not retained by the same),
(D) the Owner Participant's actual or constructive receipt of payments of
Supplemental Rent that are not made on an After Tax Basis to the Owner
Participant, (E) any receipt of earnings on funds held as security for Lessee's
obligations that are not retained by the Owner Participant, or (F) except to the
extent such Inclusion constitutes a Recapture, any Lessee Act described in
Section 5(a)(i)(A) or (B) hereof that results in a disposition of the Aircraft,
any Engine or any Parts for federal income tax purposes (any such event in
clause (i) or (ii) hereinafter being referred to as a "Tax Loss"), then the
Lessee shall pay to the Owner Participant, on an After Tax Basis, an indemnity
in a lump-sum amount computed in accordance with the following sentence. The
lump-sum amount shall be an amount which, taking into account the other payments
under the Operative Agreements and the various increases and decreases in
federal, state and local taxes (and in the case of an Inclusion, foreign taxes),
preserves the yield portion of the Owner Participant's Net Economic Return and
compensates the Owner Participant for the amount of any related interest,
penalties, and additions to tax payable by the Owner Participant. The
computation of such lump-sum amount shall be made by the Owner Participant
utilizing the methodology and assumptions, including the Tax Assumptions,
utilized by the Owner Participant in determining its Net Economic Return, except
as such assumptions shall be varied to take into account such Tax Loss or any
previous Tax Loss for which an indemnity was paid under this Agreement;
PROVIDED, HOWEVER, that in the case of a Tax Loss resulting from an Inclusion,
the computation of such lump-sum amount shall be made on the basis of the Owner
Participant's actual-tax detriments and benefits incurred or anticipated as of
the time of such Tax Loss (including any unavailability of a net operating loss
carryover of the Owner Participant). Further, for purposes of determining the
amounts of the increase and reduction in income taxes as a result of a Tax Loss,
the applicable tax rate shall be the Assumed Tax Rate, except with respect to a
Tax Loss resulting from an Inclusion, the increased and reduced federal, state,
local and foreign income taxes payable by (or not refundable to) the Owner
Participant as a result of such Tax Loss shall be computed by utilizing the
actual rates for federal, state, local and foreign taxes applicable to the Owner
Participant at the time of such Tax Loss. Any Tax Loss attributable to an
Inclusion which
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does not actually result in an increase in the Owner Participant's federal,
state, local or foreign income tax liability (or a decrease in the Owner
Participant's refund of such income taxes) in the year of such inclusion but
which reduces any net operating loss, business credit, foreign tax credit
carryover or other tax attribute of the Owner Participant shall be treated as
giving rise to an actual increase in federal, state, local or foreign income tax
liability in the year for which such tax attribute if not reduced thereby would
have given rise to a reduction in the Owner Participant's federal, state, local
or foreign tax liability.
Each payment by the Lessee pursuant to this Section 5(a) shall be made
within 30 days after receipt of a written demand certifying that there has been
a Tax Loss, describing in reasonable detail the Tax Loss in question, the amount
of additional income tax, interest, penalties and additions to tax and the
calculation of the payment due in respect thereof and describing the event or
condition that the Owner Participant claims gives rise to an obligation by the
Lessee to indemnify hereunder (but in no event earlier that two (2) Business
Days prior to the date on which the Owner Participant is required to pay
additional federal, income taxes as a result of the Tax Loss); PROVIDED THAT, if
a contest of the Tax Loss is being conducted pursuant to Section 7 hereof,
payment (other than payments required under Section 7(b)), shall not be required
from the Lessee until 30 days after the Final Determination of such contest.
(b) If, as the result of a Tax Loss or a change of facts that gave rise
to a Tax Loss, the amount of federal, and as regards any Inclusion, state, local
and foreign income taxes payable by the Owner Participant for any taxable year
shall be less than the amount of such taxes which would have been payable by the
Owner Participant had such Tax Loss or such change not occurred (or as the
result thereof the Owner Participant shall receive a refund of such income
taxes, which shall be greater than the amount of such refund, if any, which the
Owner Participant would have received had such Tax Loss or change not occurred)
(any such tax savings (other than savings already taken into account in
determining the indemnity pursuant to Section 5(a)), a "Correlative Benefit"),
then the Owner Participant shall pay to the Lessee the amount of any actual
resulting reduction in taxes (or increased refund, including any actual interest
(net of any taxes payable with respect to such refund or interest) received or
credited thereon), plus any net additional federal, state, local or foreign tax
benefits or savings actually realized by the Owner Participant as the result of
any payment made pursuant to this sentence (such actual reduction in or
increased refund of income taxes to be determined, with respect to a Tax Loss or
change other than as a result of an Inclusion, on a hypothetical basis, I.E.,
assuming the Owner Participant can utilize any additional tax benefits resulting
from the Tax Loss or change at the Assumed Tax Rate, and with respect to a Tax
Loss resulting from an Inclusion, to be determined on an actual basis, I.E., by
using the actual federal, state, local and foreign income tax rates (and, to the
extent that the Owner Participant utilizes the additional tax benefits as a
reduction or refund of state, local and foreign income taxes otherwise payable
by the Owner Participant, the actual composite state, local and foreign income
tax rates applicable to such reduction or refund) applicable to the Owner
Participant for the year in which such additional benefits arise); PROVIDED,
HOWEVER, that the amount payable by the Owner Participant pursuant to this
sentence shall not exceed the sum of the amounts previously paid by the Lessee
to the Owner Participant pursuant to Section 5(a), less the aggregate amount of
all prior payments by the Owner Participant to the Lessee under this sentence,
with any excess amount otherwise payable being carried forward and available to
reduce PRO TANTO any subsequent obligation of Lessee to Owner Participant
pursuant to Section 5(a); PROVIDED, FURTHER, that the Owner Participant shall
not be obligated to make any payment
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pursuant to this sentence while a Specified Default or Event of Default shall
have occurred and be continuing. If an amount payable by the Owner Participant
to the Lessee pursuant to this Section 5(b) is not paid when due because of the
occurrence and continuation of any Specified Default or Event of Default, such
amount shall be payable by the Owner Participant to the Lessee upon the Lessee's
curing all Specified Defaults or Events of Default. Subject to the provisions
above, each payment made by the Owner Participant to the Lessee pursuant to this
Section 5(b) shall be made within 30 days after the Owner Participant files a
tax return or receives a refund or adjustment from the Internal Revenue Service
which reflects such reduction in federal income tax. For purposes of calculating
indemnity obligations pursuant to Section 5(a) and amounts due to Lessee
pursuant to this Section 5(b), it shall be assumed that the Owner Participant
suffers a Tax Loss or is entitled to Correlative Benefits for state, local and
foreign income tax purposes if and only if the Owner Participant suffers a
corresponding Tax Loss or realizes a corresponding benefit for federal income
tax purposes.
(c) Any taxes that are imposed on the Owner Participant as a result of
the subsequent disallowance of all or any portion of a reduction (or refund) of
the Owner Participant's tax liability for which the Owner Participant has paid
the Lessee pursuant to Section 5(b), shall be treated as a Tax Loss subject to
indemnification under this Agreement without regard to Section 6 or 7 hereof.
(d) (i) If, as a result of the use or operation or location of the
Aircraft outside the United States by any Lessee Person, the Tax Assumption set
forth in Section 2(l) hereof shall be inaccurate during any taxable year of the
Owner Participant included in whole or in part within the Tax Attribute Period
(an "Excess Foreign Allocation"), and if as a result thereof the amount of the
foreign tax credits available for utilization by the Owner Participant for any
taxable year shall be less than the amount of the foreign tax credits that would
have been available for utilization by the Owner Participant if such Tax
Assumption had been accurate (such event being referred to herein as a "Foreign
Tax Credit Loss"), then the Lessee shall pay to the Owner Participant as an
indemnity and on an After Tax Basis an amount which is equal to the actual
increase in the federal income taxes payable by (or not refundable to) the Owner
Participant for such taxable year as a result of such Foreign Tax Credit Loss,
plus the amount of any interest, penalties and additions to tax payable by the
Owner Participant as a result of such Foreign Tax Credit Loss. The amounts of
any increase in federal income taxes payable by (or not refundable to) the Owner
Participant as a result of a Foreign Tax Credit Loss shall be computed on the
assumption that any reduced amount of foreign tax credits of the Owner
Participant is attributable to an Excess Foreign Allocation and foreign source
losses arising from other equipment leasing transactions that provided the Owner
Participant with indemnification for the loss of foreign tax credits, on a PRO
RATA basis, prior to being attributable to any other foreign source deductions
or losses of the Owner Participant.
(ii) If, as a result of (A) a Foreign Tax Credit Loss or an Excess
Foreign Allocation or (B) the usage or location of the Aircraft outside the
United States so that more than the Permitted Percentage of any item of income
or gain with respect to the transactions contemplated by the Operative
Agreements during any taxable year is treated as derived from sources outside
the United States, the amount of the foreign tax credits that the Owner
Participant utilizes against its tax liability for a taxable year exceeds the
amount of such foreign tax credits to which the Owner Participant would have
otherwise been entitled, and
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provided that no Specified Default or any Event of Default shall have occurred
and be continuing (in which event such amounts shall become payable upon the
Lessee's curing such Specified Default or Event of Default), then the Owner
Participant shall pay to the Lessee the amount of any actual reduction in its
Federal income tax liability (or actual increase in a refund of Federal income
taxes owing to the Owner Participant) as a result of such increase in foreign
tax credits, plus any net additional Federal, state, local and foreign income
tax benefits actually realized by the Owner Participant as the result of such
payment; PROVIDED, HOWEVER, that the sum of the amounts payable by the Owner
Participant pursuant to this sentence shall not exceed the sum of the amounts
previously paid by the Lessee to the Owner Participant pursuant to Section
5(d)(i) to the extent not previously taken into account under this provision
(with any excess amount otherwise payable being carried forward and available to
reduce PRO TANTO any subsequent obligation of Lessee to Owner Participant
pursuant to this Section 5(d)) and PROVIDED, FURTHER, HOWEVER, that no payment
shall be required with respect to clause (B) above unless and until the usage or
location outside the United States has resulted in an aggregate amount of
increased foreign tax credits being available to the Owner Participant equal to
the aggregate amount of unindemnified tax increases suffered by the Owner
Participant resulting from the application of the Permitted Percentages during
the Tax Attribute Period. For purposes of this Section 5(d)(ii), in determining
the order in which the Owner Participant utilizes any foreign tax credits
against the Owner Participant's federal income taxes, the Owner Participant
shall be deemed to utilize (A) first, all foreign tax credits other than those
described in clause (B) of this sentence, and (B) then, on a PRO RATA basis, all
foreign tax credits, the utilization of which by the Owner Participant results
from either (x) the carryover or the carryforward of foreign tax credits which
were unutilized due to foreign source losses arising from equipment leasing
transactions that provided the Owner Participant with indemnification for the
loss of foreign tax credits (including this transaction) or (y) foreign source
income or gain generated by such transactions to the extent such foreign source
income or gain is sufficient to give rise to a payment obligation to the Lessee
thereunder.
Once a foreign tax is deemed to be utilized pursuant to the ordering
rules set forth above, it shall not subsequently be recharacterized as not
having been utilized as a result of a foreign tax liability arising in a
subsequent year.
(iii) Each payment by the Lessee pursuant to this Section 5(d)
shall be made within 30 days after receipt of a written demand therefor
accompanied by a written statement describing in reasonable detail the Foreign
Tax Credit Loss in question, the amount of additional Federal income tax,
interest, penalties and additions to tax and the calculation of the payment due
in respect thereof (but in no event earlier than two (2) Business Days prior to
the date such additional Federal income taxes are due); PROVIDED THAT, if a
contest of the Foreign Tax Credit Loss is being conducted pursuant to Section 7
hereof, payment (other than payments required under Section 7(b)) shall not be
required from the Lessee until 30 days after the Final Determination of such
contest. Each payment by the Owner Participant to the Lessee pursuant to this
Section 5(d) in respect of an actual increase in available foreign tax credits
shall be made within 30 days after the Owner Participant files a tax return (or
receives a refund or adjustment) which reflects the utilization of such
increased foreign tax credit. Notwithstanding anything herein to the contrary,
any taxes that are imposed on the Owner Participant as a result of the
subsequent disallowance of the reduction of the Owner Participant's tax
liability, for which reduction the Owner Participant has paid the Lessee
pursuant to this Section 5(d), shall be treated
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as a Foreign Tax Credit Loss subject to indemnification under this Agreement
without regard to Section 6 or 7.
(e) Upon request of the Lessee, the accuracy of the Owner Participant's
calculation of the amount or amounts payable to either the Owner Participant or
the Lessee pursuant to this Section 5 and any recomputations of Termination
Values pursuant to Section 3(d) of the Lease shall be verified by a lease
advisory firm or a nationally recognized firm of accountants to be selected by
the Owner Participant and reasonably acceptable to the Lessee and, in order to
enable such firm to verify such adjustments, the Owner Participant shall provide
to such firm (for their own confidential use and not to be disclosed to the
Lessee or any other person) all information reasonably necessary for such
verification, including any computer analyses used by the Owner Participant to
calculate such amount or amounts. The results of such verification shall be
binding on the parties hereto. The cost of such verification shall be borne by
the Lessee unless it is the determination of such verification that the actual
amount payable deviates, in a manner favorable to the Lessee, by more than 10%
from the amount originally determined by the Owner Participant, in which case
such cost shall be borne by the Owner Participant.
SECTION 6. EXCLUDED EVENTS.
The Owner Participant shall not be entitled to any payment from the
Lessee under Section 5 hereof in respect of any Tax Loss to the extent such Tax
Loss is a result of one or more of the following events:
(a) (i) any voluntary sale, assignment, transfer or other disposition
by the Owner Participant or the Lessor (at the direction of the Owner
Participant) of, the Aircraft, any Engine or any Parts, or of any interest in
the transaction, the Trust, the Trust Estate, the Rent or any Operative
Agreement; or (ii) any involuntary sale, assignment, transfer or disposition of
the Aircraft, any Engine or any Parts or any such interest resulting from the
bankruptcy or insolvency of, or proceedings for the relief of debtors, or
foreclosure proceedings, against the Owner Participant or the Lessor, unless, in
each case, such voluntary or involuntary sale, assignment, transfer or
disposition occurs in connection with the exercise of remedies in connection
with an Event of Default that has occurred and is continuing or in connection
with any substitution or replacement of the Aircraft, any Engine or any Parts by
a Lessee Person;
(b) any event whereby the Lessee is required to pay Termination Value,
or an amount determined by reference thereto, to the extent that such amount has
been paid and such value properly reflects the timing of the tax consequences to
the Owner Participant of such payment and/or the event giving rise to Lessee's
obligation to make such payment;
(c) without the written concurrence of the Lessee, the failure of the
Owner Participant to properly claim or make appropriate elections with respect
to any of the Assumed Tax Benefits, the inclusion by the Owner Participant of
any Recapture or Inclusion in the Owner Participant's gross income as reported
on its federal income tax return (including any amended return) or other tax
filing or document, or the taking of a position by the Owner Participant on a
Federal income tax return (or amended return) that would result in a Foreign Tax
Credit Loss, unless, in any such case, the Owner Participant shall have received
a written opinion of
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independent tax counsel selected by the Owner Participant and reasonably
acceptable to the Lessee that no Reasonable Basis exists for making such claim
or election, failing to so include in gross income, or failing to take such
position with respect to a Foreign Tax Credit Loss (and for this purpose such
counsel may take into account the Lessee's failure to provide accurate and
timely information pursuant to the Lessee's obligations under Section 3 of this
Agreement to furnish information to the Owner Participant);
(d) except in the case of a Tax Loss resulting from a substitution or
replacement of the Aircraft or an Inclusion any amendment or addition to, or
change in the Code or other federal statutes relating to taxation or regulations
promulgated thereunder, which is enacted, adopted or promulgated after the
Delivery Date; PROVIDED that a change in federal income tax rates shall be taken
into account in determining gross-ups;
(e) the failure of the trust created by the Trust Agreement to qualify
as a grantor trust under Section 671 ET SEQ. of the Code, or as a nominee, agent
or partnership for federal income tax purposes, but only to the extent of a
resulting increase in the Lessee's indemnity obligations hereunder;
(f) a determination that the Lease is not a "true lease," or that the
Owner Participant is not the purchaser, owner or lessor of the Aircraft, for
federal income tax purposes, unless, in either case, as a result of a Lessee
Act;
(g) any failure of the Owner Participant to contest a claim in
accordance with the contest provisions in Section 7 hereof, to the extent
Lessee's ability to contest is materially adversely affected;
(h) the willful misconduct or gross negligence by the Owner
Participant;
(i) any amendment or modification to any Operative Agreement not
requested by, or with the written consent of, Lessee unless in connection with
an Event of Default;
(j) the application of Section 168(f), Section 168(g)(7), Section 183,
Section 465, Section 469 of the Code or regulations thereunder but, in each
case, only to the extent of a resulting increase in the Lessee's indemnity
obligations hereunder;
(k) the inability of the Owner Participant to include in its original
tax basis in the Aircraft all or any portion of an amount equal to the Lessor's
Cost, other than as a result of a Lessee Act;
(l) the application of any minimum tax, including the alternative
minimum tax imposed under Section 55 ET SEQ. of the Code but only to the
extent of a resulting increase in the Lessee's indemnity obligations hereunder;
(m) application of the mid-quarter convention described in Section
168(d)(4)(C) of the Code but only to the extent of a resulting increase in the
Lessee's indemnity obligations hereunder;
10
(n) application of Section 467(b)(2) of the Code or the relevant
Treasury Regulations promulgated thereunder (other than as a result of any
adjustment of Basic Rent in connection with an Event of Default);
(o) the treatment of less than the Permitted Percentage of any item of
income, gain, loss, deduction or credit with respect to the Aircraft or the
transactions contemplated by the Operative Agreements as from sources outside
the United States; or
(p) the failure of the Owner Participant to have sufficient taxable
income or tax liability to benefit from the Assumed Tax Benefits;
(q) the status of the Owner Participant as a "tax exempt entity" within
the meaning of Section 168(h) of the Code or as a Person that is not a "United
States person" within the meaning of Section 7701(a)(30) of the Code;
(r) a change in the Owner Participant's taxable year from a calendar
year;
(s) the existence or exercise in accordance with the Lease by the
Lessee of an option to renew the Lease set forth in Section 13(a) of the Lease
or to purchase the Aircraft set forth in Section 13(b) of the Lease or to
terminate the Lease set forth in Section 14 of the Lease;
(t) any event occurring after the expiration or earlier termination of
the Lease and, if required, the return of the Aircraft to Lessor or placement in
storage of the Aircraft in accordance with the terms of the Lease; or
(u) the inclusion of any amount in income of the Lessor or the Owner
Participant with respect to any period upon or after termination of the Lease as
a consequence of any substitution, improvement or modification of the Airframe
or of any Engine.
SECTION 7. CONTEST PROVISIONS.
(a) The Owner Participant shall notify the Lessee within 30 days of
receipt from the Internal Revenue Service of a written proposed or final revenue
agent's report, a 30-day letter or a notice of deficiency (as described in
Section 6212 of the Code), in which an adjustment is proposed to the federal
income taxes of the Owner Participant for which the Lessee would be required to
indemnify the Owner Participant pursuant to this Agreement. The failure of the
Owner Participant to promptly notify the Lessee pursuant to the preceding
sentence shall not relieve the Lessee of its obligation to indemnify the Owner
Participant pursuant to this Agreement, except to the extent such failure
materially adversely impairs the Lessee's ability to contest such adjustment.
If, within 15 days of receipt of notice from the Owner Participant, Lessee
requests, in writing, the Owner Participant to do so, the Owner Participant
shall contest the proposed adjustment, shall consider in good faith any
suggestions made by the Lessee as to the method of pursuing such contest, and,
provided the Lessee is complying with its obligations under this Section 7,
shall not, without the consent of the Lessee, except as provided in this Section
7(a), settle such proposed adjustment; PROVIDED, HOWEVER, that the Owner
Participant shall not be obligated to contest such adjustment unless (i) Owner
Participant shall have received
11
a written opinion of independent tax counsel selected by the Owner Participant
and reasonably acceptable to the Lessee ("Tax Counsel") that there is a
Reasonable Basis for contesting the matter in question, (ii) the amount of the
indemnity potentially payable by Lessee in respect of such adjustment is in
excess of $75,000, (iii) no Event of Default shall have occurred and be
continuing (PROVIDED, HOWEVER, that if an Event of Default other than as a
result of a payment default or bankruptcy shall exist, the foregoing restriction
shall not apply if the Lessee posts a bond to secure payment of amounts that
will fall due in the event of an adverse resolution of the controversy), (iv)
the Owner Participant has determined, in good faith, that the contest shall not
result in a material risk of the loss or forfeiture of the Aircraft (unless the
Lessee has provided to the Owner Participant a bond or other sufficient
protection against such risk of loss or forfeiture reasonably satisfactory to
the Owner Participant) or the imposition of criminal penalties and (v) the
Lessee shall have acknowledged, in writing, that the contest is with respect to
a liability that is the Lessee's responsibility pursuant to this Agreement
except that the Lessee shall not be bound by its acknowledgment of liability to
the extent that the Final Determination articulates conclusions of law and fact
that clearly and unambiguously demonstrate that the Lessee is not liable under
this Agreement for the contested amounts hereunder. The Owner Participant shall
afford Lessee reasonable opportunities to consult with Owner Participant and
shall keep Lessee reasonably informed regarding communications from the Internal
Revenue Service, or in connection with any judicial proceeding, and the nature
of all actions proposed to be taken to contest such proposed adjustment and
consider in good faith such requests as the Lessee shall make concerning the
most appropriate forum and manner in which to proceed, including (w) the
arguments to be made in contesting the proposed adjustment, (x) whether any
action to contest such proposed adjustment will initially be by way of judicial
or administrative proceedings, or both, (y) whether any such proposed adjustment
will be contested by resisting payment thereof or by paying the same and seeking
a refund thereof and (z) if the Owner Participant shall undertake judicial
action with respect to such proposed adjustment, the court or other judicial
body before which such action will be commenced; but in all cases the Owner
Participant shall have ultimate discretion to determine the nature (and forum)
of, and shall control the prosecution of, all such actions. The Owner
Participant shall, if requested by the Lessee in a timely written request, seek
judicial review of any adverse administrative determination and shall, if Tax
Counsel is of the opinion that such appeal is more likely than not to prevail,
appeal an adverse determination by any judicial court; PROVIDED, HOWEVER, that
the Owner Participant shall not be required to appeal, or seek leave to appeal,
an adverse determination to the United States Supreme Court. At any time,
whether before or after commencing to take the action set forth in this Section
7, the Owner Participant may decline to contest or appeal all or any portion of
a proposed adjustment, or may compromise or settle any such proposed adjustment,
by notifying the Lessee in writing that the Lessee is relieved of its obligation
to indemnify the Owner Participant with respect to such adjustment or such
portion, as the case may be; PROVIDED, HOWEVER, that the Lessee shall not be
obligated to indemnify the Owner Participant hereunder with respect to any other
Tax Loss for which a successful contest or appeal is foreclosed as a result of
the failure to take action with respect to such contest or appeal (or the
settlement or compromise of such contest or appeal without the consent of the
Lessee), and the Owner Participant shall repay to the Lessee such amounts
theretofore advanced or paid by the Lessee related to such adjustment, contest
or appeal (other than amounts described in the first sentence of Section 7(b)).
Notwithstanding the foregoing, if the Owner Participant notifies the Lessee that
it does not wish to contest an issue which the Owner Participant has previously
contested in
12
accordance with this Section 7 and which was resolved adversely to the Owner
Participant for an earlier taxable year in a judicial proceeding, then unless
the Owner Participant shall have received an opinion of Tax Counsel that as a
result of a change in law, it is more likely than not that a contest of the
matter in question will be successful, the Owner Participant shall not be
required to contest such issue.
(b) The Owner Participant shall not be required to take any action
pursuant to this Section 7 unless and until the Lessee shall have agreed in
writing to reimburse the Owner Participant in a manner reasonably satisfactory
to Owner Participant (on demand and on a basis grossed-up for all applicable
federal, state, local and foreign taxes) for all reasonable out-of-pocket fees
and expenses, any statutory or regulatory penalties, interest, additions to tax,
or other similar liabilities, costs or losses which the Owner Participant may
incur as a result of contesting the validity of any proposed adjustment
(including, without limitation, any reasonable fees and disbursements of outside
counsel incurred in connection with taking any action or rendering any opinion
described in Section 7(a)). If the Owner Participant determines to contest any
adjustment by paying the additional tax and suing for a refund, the Lessee shall
timely lend to the Owner Participant on an interest-free basis an amount equal
to the sum of any tax, interest, penalties and additions to tax required to be
paid and shall indemnify the Owner Participant in a manner reasonably
satisfactory to the Owner Participant against any adverse tax consequences
resulting from such advance. Upon receipt by the Owner Participant of a refund
(or upon application of an amount otherwise refundable against another tax
liability of the Owner Participant) of any amount paid by it, in respect of
which amount the Owner Participant shall have been paid or advanced an
equivalent amount by the Lessee, the Owner Participant shall pay to the Lessee
the amount of such refund (plus any amounts otherwise refundable but applied
against another tax liability of the Owner Participant) (which, in the case of
any contest in which a loan has been advanced pursuant to this paragraph, shall
be deemed to be in repayment of the loan advanced by the Lessee to the extent
fairly attributable thereto), together with any interest received (including by
way of credit or offset) by the Owner Participant on such refund or application
that is fairly attributable to the amount and the period of such payment or
advance by the Lessee (net of any taxes incurred by the Owner Participant with
respect to the receipt or accrual of such interest), plus any net additional
federal, state, local and foreign tax benefits actually realized by the Owner
Participant as the result of such payment (or any payment under this paragraph);
and, upon disallowance of any such refund, the Lessee shall forgive the amount
of the loan fairly attributable thereto and shall pay to the Owner Participant
the balance of the amount of its indemnity obligation hereunder (including such
amount as shall be equal to the sum, on an After Tax Basis, of any tax,
interest, penalties or additions to tax payable with respect to the forgiveness
of such loan) or if such advance exceeds the amount of such indemnity
obligation, the Owner Participant shall pay such excess to the Lessee. Any
subsequent loss of such refund shall be treated as a Tax Loss subject to
indemnification pursuant to Section 5 hereof without regard to Section 6 (other
than Section 6(c) or (h)) hereof or this Section 7.
(c) If any adjustment referred to in this Section 7 shall be proposed
and the Lessee shall have requested the Owner Participant to contest such
adjustment as above provided and the Lessee shall have duly complied with its
obligations under this Section 7, then notwithstanding any provision to the
contrary in Section 5 hereof, the Lessee's liability with respect to such
adjustment shall become fixed upon a "Final Determination" of such adjustment;
PROVIDED, HOWEVER, that if the opinion of Tax Counsel provided pursuant to
paragraph (a) of this
13
Section 7 is to the effect that there is not a Reasonable Basis for a contest or
the required basis for an appeal, as the case may be, then the Lessee's
obligation to pay such indemnity within 30 days shall become fixed upon receipt
of such opinion by the Lessee. A "Final Determination" with respect to a Tax
Loss shall mean (i) a decision, judgment, decree or other order by any court of
competent jurisdiction, which decision, judgment, decree or other order has
become final after all allowable appeals (in the case of the Owner Participant
as required under this Section 7) by either party to the action have been
exhausted or the time for filing such appeal has expired, (ii) a closing
agreement entered into under Section 7121 of the Code, or any other settlement
agreement entered into in connection with an administrative or judicial
proceeding and with the consent of the Lessee where required, (iii) the
expiration of the time for instituting suit with respect to a notice of
deficiency or (iv) the expiration of the time for instituting a claim for
refund, or if such a claim was filed, the expiration of the time for instituting
suit with respect thereto.
SECTION 8. SURVIVAL OF AGREEMENT.
The obligations and liabilities of the Lessee and the Owner Participant
arising under this Agreement shall continue in full force and effect,
notwithstanding the expiration or other termination of the Lease or the
Participation Agreement, until all such obligations under this Agreement have
been met and all such liabilities under this Agreement have been paid in full.
This Agreement shall inure to the benefit of any successor or assign to the
Owner Participant or the Lessee permitted pursuant to the Participation
Agreement and the Lease; PROVIDED, HOWEVER, that (a) such successor or assign
shall have specifically agreed in writing to be bound by the terms and
conditions of this Agreement to perform the obligations imposed hereunder on the
Owner Participant or the Lessee, as the case may be, in accordance with the
interest of such successor or assign in the Trust or in the Aircraft, the Lease
and the Operative Agreements and (b) in applying the terms hereof to such
successor or assign, the terms "Owner Participant" and "Lessee" as used herein
shall mean such respective successor or assign.
SECTION 9. NOTICES.
Any notice provided for in this Agreement shall be given in the manner
provided in the Participation Agreement.
SECTION 10. PAYMENTS.
Any payments required to be made by the Lessee pursuant to this
Agreement shall be made directly by the Lessee to the Owner Participant, and no
such payment shall constitute part of the corpus of the Trust Estate. Payments
made by the Lessee or the Owner Participant pursuant to this Agreement shall be
made by wire transfer of immediately available funds to such bank and/or account
in the continental United States as specified by the other party in written
directions to the paying party, and if no such direction shall have been given,
by check payable in immediately available funds to the order of such payee and
mailed to such payee by certified mail, postage prepaid, at its address provided
for purposes of the Participation Agreement.
14
SECTION 11. NO SETOFF.
No payment required to be made by the Lessee pursuant to this Agreement
shall be subject to any right of setoff, counterclaim, defense, abatement,
suspension, deferment or reduction, and, except in accordance with the express
terms hereof, the Lessee shall have no right to terminate this Agreement or to
be released, relieved or discharged from any obligation or liability under this
Agreement for any reason whatsoever.
SECTION 12. LATE PAYMENTS, INTEREST.
Any late payment by any party hereto of any of its obligations under
this Agreement shall bear interest at the Past Due Rate.
SECTION 13. EXCLUSIVE REMEDY.
The indemnities and other rights provided to the Owner Participant in
this Agreement shall be the sole remedy of the Owner Participant for a breach or
inaccuracy of any representation, warranty or covenant contained herein or for
loss of income tax benefits, or for Tax Loss resulting from any Inclusion.
SECTION 14. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within such state.
SECTION 15. COUNTERPARTS.
This Agreement may be simultaneously executed in any number of
counterparts, each of which so executed shall be deemed to be an original, and
such counterparts together shall constitute and be one and the same instrument.
SECTION 16. CERTAIN ADJUSTMENTS.
If the Lessee has made payments under this Tax Indemnity Agreement, the
Owner Participant shall, if appropriate, make adjustments to the schedule of
Termination Values (if applicable) to preserve the Owner Participant's Net
Economic Return and to prevent any duplication of payments or any payment for
Tax Losses previously paid. If an event giving rise to the payment of an amount
determined by reference to a schedule of Termination Values shall occur and the
date as of which the Owner Participant shall be affected for tax purposes shall
be earlier or later than the date taken into account in computing such schedule,
such values shall be appropriately adjusted based otherwise on the same
assumptions previously used by the Owner Participant in calculating such
schedule.
15
IN WITNESS WHEREOF, the Lessee and the Owner Participant have caused
this Tax Indemnity Agreement to be duly executed as of the day and year first
above written.
CHAUTAUQUA AIRLINES, INC.
By: /s/ Xxxxxx X. Xxxxxx
--------------------------------
Name: Xxxxxx X. Xxxxxx
Title: Vice President
SILVERMINE RIVER FINANCE TWO, INC.
By: /s/ Xxxxxx Xxx
--------------------------------
Name: Xxxxxx Xxx
Title: Vice President
SCHEDULE 4(f) [letter from Appraiser]
17
NOTE TO EXHIBIT 10.29
The 12 additional Tax Indemnity Agreements are substantially identical in all
material respects to the filed Tax Indemnity Agreement except as follows:
------------------------------------- ----------------------------------- -----------------------------------
TAIL NUMBER CLOSING DATE OWNER-PARTICIPANT
------------------------------------- ----------------------------------- -----------------------------------
N289SK July, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N290SK July, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N291SK August, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N292SK August, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N293SK September, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N294SK September, 2001 General Electric Capital Corp.
------------------------------------- ----------------------------------- -----------------------------------
N295SK November, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
N297SK November, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
N298SK October, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
N299SK November, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
N370SK November, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
N371SK November, 2001 Silvermine River Finance Two, Inc.
------------------------------------- ----------------------------------- -----------------------------------
------------------------------------- ----------------------------------- -----------------------------------
------------------------------------- ----------------------------------- -----------------------------------
------------------------------------- ----------------------------------- -----------------------------------
------------------------------------- ----------------------------------- -----------------------------------
------------------------------------- ----------------------------------- -----------------------------------
