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EXHIBIT 10.6
S CORPORATION TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT
THIS S CORPORATION TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (the
"Agreement") is made and entered into this ____ day of April, 1998 between
AMERICAN AIRCARRIERS SUPPORT, INC., a South Carolina corporation (the
"Company") and XXXXXX X. XXXXX, XX. AND XXXX X. XXXXX (collectively the
"Stockholders) (the Company and the Stockholders are hereinafter referred to
individually as "party" and collectively as the "parties").
WITNESSETH:
WHEREAS, the Company contemplates a public offering of its stock in
order to raise additional equity capital for the purpose of expanding the
operations of the business, reducing indebtedness of the Company, making
payment of an S Corporation distribution and other corporate purposes (the
"Public Offering");
WHEREAS, upon completion of such Public Offering, the Company plans to
distribute a Special Dividend to the Stockholders in an amount equal to the
lesser of $2,000,000 or one-half of the Company's undistributed Accumulated
Adjustments Account as defined in Section 1368(e)(1) of the Code (as
hereinafter defined) as of the close of the Short S Year after all tax payment
distributions have been made (as hereinafter defined).
WHEREAS, the Company and the Stockholders have entered into this
Agreement as a condition to the foregoing distribution and the contemplated
Public Offering;
WHEREAS, from its inception, the Company has been taxed as an S
corporation (as defined in the Code) and will continue to be an S corporation
until the Termination Date (as hereinafter defined), after which it will be
taxed as a C corporation;
WHEREAS, the Stockholders currently are the only stockholders of the
Company, and will continue to be so until the closing of the Public Offering
(the "Closing"); and
WHEREAS, the Company and the Stockholders wish to provide for a tax
allocation and indemnification agreement in connection with the Company's
termination as an S corporation.
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NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. The following terms, as used herein, have the
following meanings:
"C Short Year" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(B) of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Special Dividend" means a cash distribution of the lesser of
$2,000,000 or one-half of the Company's estimated accumulated adjustment
account as of the Termination Date.
"S Corporation Period" means the period commencing on inception and
ending on the Termination Date.
"S Corporation Taxable Income" means the taxable income of the Company
from all sources during the S Corporation Period.
"S Short Year" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(A) of the Code.
"S Termination Year" shall have the meaning set forth in Section
1362(e)(4) of the Code.
"Tax Distribution" means the distribution of cash to pay the
Stockholders' federal and state income taxes calculated at the highest
applicable rates on the pass-through of items of income of the Company.
"Termination Date" means the date on which the S corporation status of
the Company is terminated pursuant to section 1362(d)(1) of the Code.
ARTICLE 2
ELECTION TO TERMINATE; S TERMINATION YEAR
2.1 Termination of S Status. The parties intend to terminate the
Company's status as an S corporation by electing to do so under Code Section
1362(d)(1).
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2.2 Effective Date. Pursuant to Section 1362(d)(1) of the Code,
the election to terminate the Company's status as an S corporation shall be
effective on the date immediately preceding the date of the Public Offering
which shall be the "Termination Date".
2.3 S Termination Year. The Company's fiscal year in which the S
corporation status of the Company is terminated will be an S Termination Year
for federal tax purposes.
2.4 S Short Year. Pursuant to Section 1362(e)(1) of the Code, the
S Termination Year of the Company shall be divided into two short taxable
years: an S Short Year and a C Short Year. The S Short Year of the Company
shall be that portion of the Company's S Termination Year beginning on the
first day of such fiscal year and ending on the day immediately preceding the
Termination Date. For federal income tax purposes, the Company will be treated
as an S corporation during its S Short Year.
2.5 C Short Year. Pursuant to Section 1362(e)(1)(B) of the Code,
that portion of the S Termination Year of the Company beginning on the
Termination Date and ending on the last day of the 1998 fiscal year, shall be
the C Short Year of the Company. For federal income tax purposes, the Company
will be taxed as a C corporation during its C Short Year.
ARTICLE 3
ALLOCATION OF INCOME
3.1 Allocation Election. The Company intends to allocate tax
items to its S Short Year and C Short Year pursuant to the method contained in
Section 1362(e)(3) of the Code, but may allocate pursuant to any other
permitted method under Section 1362(e) of the Code.
3.2 Payment of Tax for Short Year. As soon as reasonably possible
after the close of the S Short Year, the Company shall make a Tax Distribution
to the Stockholders to pay any applicable federal and state income taxes at the
highest applicable rates. This Tax Distribution is in addition to any other
Tax Distribution that has been made or will be made with regard to the payment
of any applicable federal and state income taxes at the highest applicable
rates for the tax year ending December 31, 1997.
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ARTICLE 4
TAXES
4.1 Liability for Taxes Incurred During S Corporation Years
Including S Short Year. The Stockholders, severally and not jointly, covenant
and agree that they shall pay any and all taxes attributable to their allocable
shares of taxable income of the Company they are required to pay for all
taxable periods (or that portion of any period including the S Short Year)
during which the Company was an S corporation. The Company shall pay a Tax
Distribution as set forth herein.
4.2 Liability for Taxes Incurred During C Corporation Years
Including C Short Years. The Company covenants and agrees that the Company
shall pay any and all taxes attributable to taxable income of the Company
required to be paid by the Company for the C Short Year and all taxable periods
thereafter during which the Company is a C corporation.
4.3 Company's Indemnification for Tax Liabilities. The Company
hereby agrees to indemnify, defend and hold harmless each Stockholder from and
against any and all losses, liabilities, obligations, damages, impositions,
assessments, fines, deficiencies, costs and expenses, including without
limitation, attorneys' and accountants' fees and expenses to represent
Stockholders during any audit and subsequent contest or litigation of said
taxes, with respect to all federal and state income taxes of any kind
whatsoever (computed at the highest federal and/or state income tax rate in
effect for the year of adjustment) including interest, penalties and additions
to taxes, imposed upon a Stockholder as a result of any final determination of
an adjustment (by reason of an amended return, claim for refund, audit or
otherwise) including any increase in items of income or gain or any decrease in
items of loss, deduction or credit, reported to such stockholder by the Company
with respect to the Company's S Corporation Period, but such adjustment or
change shall not include (i) an adjustment or change which results in an
increase in an item of income or gain reported to a Stockholder by the Company
with respect to one or more of the taxable years falling
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within the Company's S Corporation Period and a corresponding decrease in an
item of income or gain with respect to one or more of the other taxable years
falling within the Company's S Corporation Period; or (ii) an adjustment or
change which results in a decrease in an item of loss, deduction or credit
reported to a Stockholder by the Company with respect to one or more of the
taxable years falling within the Company's S Corporation Period and a
corresponding increase in an item of loss, deduction or credit with respect to
one or more of the other taxable years falling within the Company's S
Corporation Period. Any such payment to a Stockholder pursuant to this Section
4.3 shall be made on a "grossed-up" basis, so that in the event any amount
received hereunder by a Stockholder constitutes taxable income to such
Stockholder, the amount of such payment hereunder shall be computed so that the
Stockholder receives full indemnification hereunder on an after-tax basis.
The Company acknowledges further that it shall be solely responsible
for any federal, state and local taxes (including interest and penalties, if
any) relating to the Built-in Gains tax imposed by Section 1374 of the Code and
the tax on Excess Passive Investment Income imposed by Section 1375 of the
Code, if any.
4.4 Stockholders' Indemnification for Tax Liabilities. The
Stockholders, severally (according to the percentage of the outstanding shares
of the Company's Common Stock owned by each Stockholder for the years of
adjustment) and not jointly, hereby agree to indemnify, defend and hold
harmless the Company from and against all liability with respect to all federal
and state income taxes of any kind whatsoever (computed at the highest federal
and/or state income tax rate in effect for the year of adjustment) including
interest, penalties and additions to taxes resulting from any final
determination of an adjustment (by reason of an amended return, claim for
refund, audit or otherwise) to the Stockholders' taxable income resulting in a
decrease in the Stockholders' S corporation taxable income and a corresponding
increase in the federal or state, as the case may be, income tax liability
payable by the Company. Notwithstanding the foregoing, the amount of the
payments made by a Stockholder pursuant to this Section 4.4 shall not exceed an
amount, if any, by which (i) the amount of the reduction in the federal and
state income tax liability and interest thereon of the Stockholder which
results from the shifting of S corporation taxable income to a C corporation
taxable year of the Company, exceeds (ii) all reasonable costs incurred by the
Stockholder reasonably attributable to securing such reduction in tax
liability.
4.5 Payments. The Stockholders or the Company, as the case may
be, shall make any payment required under this Agreement within thirty (30)
calendar days after receipt of notice from the other party that a payment is
due by such party to the appropriate taxing authority.
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4.6 Subrogation. The party (or parties) providing the indemnity
under either Section 4.3 or Section 4.4 (defined solely for purposes of this
Section 4.6 as the "Indemnifying Party") shall be subrogated to all rights of
recovery (the "Subrogation Claims") that the party (or parties) being
indemnified under Section 4.3 or Section 4.4, respectively (defined solely for
purposes of this Section 4.6 as the "Indemnified Party"), may have against any
person or organization in respect of the tax liabilities for which the
Indemnifying Party is providing indemnity. Such right of subrogation shall not
exceed the amount paid by the Indemnifying Party to the Indemnified Party. The
Indemnified Party shall execute and deliver instruments and papers and do
whatever else is reasonably necessary to secure such rights of subrogation for
the Indemnifying Party. The Indemnified Party shall provide all reasonable
assistance as requested by the Indemnifying Party in order for the Indemnifying
Party to pursue the Subrogation Claims. The Indemnified Party shall do nothing
after any Subrogation Claim arises to prejudice the rights of the Indemnifying
Party.
4.7 Payments After Post-Termination Transition Period. If any
Stockholder is required to include any payment received pursuant to this
Agreement after the expiration of the "post-termination transition period" (as
defined in Section 1377(b) of the Code) in computing his gross income in a tax
return, other than any payment made under Section 4.3 where the Stockholder
failed to give the Company timely notice to allow the Company to make such
payment prior to the expiration of the "post-termination transition period",
then (i) the Stockholder shall notify the Company of such inclusion in income,
and (ii) in addition to all other payments made under this Agreement, the
Company shall also pay to the Stockholder an amount which, when added to the
payment so included, will place the recipient Stockholder in the same net
after-tax position that he would have been in had the payment not been so
included.
4.8 Notices of Audits and Adjustments.
(a) If any Stockholder receives notice of an intention by a
taxing authority to audit any return of the Stockholder that includes
any item of income, gain, deduction, loss or credit reported by the
Company with respect to the Company's S Corporation Period, such
Stockholder shall inform the Company, in writing, of the audit
promptly after receipt of such notice. If any Stockholder receives
notice from a taxing authority of any proposed adjustment for which
the Company may
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be required to indemnify the Stockholder hereunder (a "Proposed
Adjustment"), the Stockholder shall give notice to the Company of the
Proposed Adjustment promptly after receipt of such notice from a
taxing authority. Upon receipt of such notice from a Stockholder, the
Company may, by in turn giving prompt written notice to each of the
Stockholders, request that the Stockholders contest such Proposed
Adjustment. If the Company shall request that any Proposed Adjustment
be contested, then the Stockholders shall, at the Company's
expense,contest the Proposed Adjustment or permit the Company and its
representatives, at the Company's request and expense, to contest the
Proposed Adjustment (including pursuing all administrative and
judicial appeals and processes). The Company shall pay to the
Stockholders on demand all costs and expenses (including attorneys'
and accountants' fees) that the Stockholders may incur in contesting
such Proposed Adjustments at audit or subsequent litigation. No
Stockholder shall make, accept or enter into a settlement or other
compromise with respect to any taxes indemnified hereunder, or forego
or terminate any proceeding undertaken hereunder without the consent
of the Company, which consent shall not be unreasonably withheld.
(b) If the Company receives notice of an intention by a
taxing authority to audit any return of the Company that includes any
item of income, gain, deductions, loss or credit reported by the
Company with respect to the period during which the Company was a S
corporation, the Company shall inform the Stockholders, in writing, of
the audit promptly after receipt of such notice. If the Company
receives notice from a taxing authority of any proposed adjustment for
which any of the Stockholders may be required to indemnify the Company
hereunder (a "Company Proposed Adjustment"), the Company shall give
notice to each of the Stockholders of the Company Proposed Adjustment
promptly after receipt of such notice from a taxing authority. Upon
receipt of such notice from the Company, any of the Stockholders may,
by in turn giving prompt written notice to the Company, request that
the Company contest such Company Proposed Adjustment. If any of the
Stockholders shall request that any Company Proposed Adjustment be
contested, then the Company shall contest the Company Proposed
Adjustment (including pursuing all administrative and judicial appeals
and processes) at the Company's expense and shall permit the
Stockholder to participate in such proceeding. The Company shall not
make,
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accept or enter into a settlement or other compromise with respect to
any taxes indemnified hereunder, or forego or terminate any proceeding
undertaken hereunder without the consent of the Stockholders, which
consent shall not be unreasonably withheld.
ARTICLE 5
DISTRIBUTIONS
5.1 Distribution of Accumulated Adjustments Account. Prior to the
consummation of the Public Offering, the Company's board of directors shall
declare a special cash dividend (the "Special Dividend") payable to the
Stockholders separate from any and all Tax Distributions. The Special Dividend
will be equal to the lesser of $2,000,000 or one-half of the Company's
estimated accumulated adjustments account (as the term is defined in Section
1368 of the Code) (the "AAA") as of the Termination Date. The Company agrees
to pay the Special Dividend to the Stockholders promptly following the Public
Offering and that: (a) if the Special Dividend exceeds the amount per the
formula set forth as finally determined by the Company's accountants in the
course of preparing the Company's tax returns for the 1998 year (the "Final
AAA"), such excess shall be paid by the Stockholders to the Company, and (b) if
the amount of AAA distribution per the formula set forth exceeds the Special
Dividend, such excess shall be paid by the Company to the Stockholders, in
either case, within thirty (30) days of the date of such determination and
together with interest thereon, at the Applicable Federal Rate (as defined in
Section 1274 of the Code) in effect as of the date of such payment, for the
period from the date the Special Dividend was paid to the date of such payment.
The Final AAA shall be determined by the Company's tax return for the Company's
S Short Year in a manner consistent with prior practice.
ARTICLE 6
MISCELLANEOUS
6.1 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
counterparts collectively shall constitute one 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, firm or
corporation, other than the parties hereto or
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their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
6.3 Cost of Enforcement; Interest. If, within thirty (30) days
after demand to comply with the obligations of one of the parties to this
Agreement served in writing on the other, compliance or reasonable assurance of
compliance is not forthcoming, and the other party engages the services of an
attorney to enforce rights under this Agreement, the prevailing party in any
action shall be entitled to recover all reasonable costs and expenses
(including reasonable fees of attorneys and legal assistants, whenever
incurred, whether before trial or appellate proceeding, at trial, on appeal or
otherwise).
6.4 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with the laws of the State of South
Carolina, other than those provisions relating to the conflict of laws of
different jurisdictions if the effect of the application of such provisions
would be to cause the laws of a jurisdiction other than South Carolina to apply
hereto.
6.5 Jurisdiction; Venue. The parties agree that jurisdiction for
any litigation arising out of this Agreement or any document delivered in
connection herewith shall be in Charlotte, North Carolina.
6.6 Notices. All notices and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given when received, if personally delivered; when transmitted, if
transmitted by electronic fax, telecopy or similar electronic transmission
method; the day after it is sent, if sent by recognized expedited delivery
service; and five days after it is sent, if mailed, first class mail, postage
prepaid. In each case notice shall be sent to the parties at Xxxx Xxxxxx Xxx
0000, Xxxxxxxxx, Xxxxx Xxxxxxxx 00000 or to such other address as any party
shall have specified by notice in writing to the other parties.
6.7 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a written agreement executed by all of the
parties hereto.
6.8 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors and permitted
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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.
6.9 Interpretation. The title, article and section headings
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.
6.10 Severability. In the event that any one or more of the
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.
6.11 Entire Agreement. This Agreement embodies the entire
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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
AMERICAN AIRCARRIERS SUPPORT, INC.
By
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/s/Xxxxxx X. Xxxxx, Xx.(SEAL)
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XXXXXX X. XXXXX, XX.
/s/ Xxxx X. Xxxxx (SEAL)
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XXXX X. XXXXX
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