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EXHIBIT 10.7
TAX INDEMNIFICATION AGREEMENT
This Tax Indemnification Agreement (this "Agreement") is made this ___ day of
____________, 1998, by and among Rock Financial Corporation, a Michigan
corporation ("Rock"), and each of Xxxxxx Xxxxxxx, Xxxx Xxxxxxx and Xxxxxxx
Xxxxx (collectively, the "Shareholders").
R E C I T A L S
A. Rock made an election to be treated as an S corporation within the meaning
of Section 1361 of the Internal Revenue Code of 1986, as amended (the "Code"),
and corresponding provisions of state income tax law, for the period commencing
March 1, 1992, to the date of termination of such election upon Rock's issuance
of stock to the public pursuant to an initial public offering ("IPO") of such
stock (the "S Period").
B. Rock will be a C corporation within the meaning of Section 1361 of the
Code and corresponding provisions of state income tax law from and after the
date of termination of Rock's S election.
C. Pursuant to Section 1362(e)(2) of the Code, Rock's income or loss for all
of 1998 will be pro rated among the days in 1998 for purposes of allocating
Rock's income for 1998 between (i) the period commencing on January 1, 1998,
and ending on the last day of the S Period and (ii) the balance of the year,
provided that such allocation is not required under Section 1362(e)(6)(D) of
the Code to be based on a closing of the books.
D. The Board of Directors of Rock is expected to declare a dividend, payable
to shareholders of record on the date preceding the day that Rock's S election
is revoked, in the amount determined by Rock to be Rock's "accumulated
adjustments account" within the meaning of Section 1368(e) of the Code, which
accumulated adjustments account includes (is increased by) the amount of Rock's
taxable income allocable to the Shareholders during the S Period.
NOW, THEREFORE, in consideration of the premises and of the mutual agreements
contained herein, the parties hereto agree as follows:
1. Covenants of Rock.
(a) Promptly following the issuance of stock to the public pursuant to the
IPO, Rock shall distribute to the Shareholders cash in the amount of Rock's
accumulated adjustments account as of the end of 1997, adjusted for Rock's
estimate of income or loss for the period from January 1, 1998 through the
last day of the S Period, taking into account Rock's projection of income or
loss for all of 1998 and the allocation of such income or loss ratably over
the days in 1998.
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(b) Rock shall, as soon as practical following the end of 1998, determine
(i) Rock's income or loss for 1998, (ii) the allocation of such income or
loss as between (A) the period commencing on January 1, 1998 and ending on
the last day of the S Period and (B) the balance of 1998, using the method
prescribed by Section 1362(e) of the Code and (iii) the balance, if any, of
Rock's accumulated adjustments account.
(c) Promptly following the determination and allocation of Rock's income
or loss for 1998 pursuant to (b) above, but in any event within the one year
"post-termination transition period" as defined in Section 1377(b)(1) of the
Code, Rock shall pay, to the Shareholders, the balance of Rock's accumulated
adjustments account, if any, as determined pursuant to (b) above.
2. Representations, Warranties and Covenants of Shareholders. The
Shareholders jointly and severally represent, warrant and covenant to Rock
that:
(a) The Shareholders have duly and timely filed, or will duly and timely
file, their personal income tax returns for each period with or within which
ends any taxable year of Rock included in the S period ("Shareholder Tax
Returns").
(b) The Shareholders have duly included, or will duly include, in their
Shareholder Tax Returns their respective shares of Rock's taxable income from
all sources through and including the last business day of the S Period (the
"S Corporation Taxable Income").
(c) There are no audits, inquiries, investigations or examinations
relating to any of the Shareholder Tax Returns pending, and there are no
claims which have been asserted relating to any of the Shareholder Tax
Returns which, if determined adversely, would result in the assertion by the
Internal Revenue Service, Michigan Department of Treasury or any other tax
authority or agency of any income tax ("Tax") deficiency against Rock.
(d) To the extent that the amount distributed to them pursuant to Section
1(a) above exceeds the amount of Rock's accumulated adjustments account as
determined pursuant to Section 1(b) above (but without taking into account
the distribution pursuant to Section 1(a) above), the Shareholders shall
promptly remit the difference to Rock.
3. Indemnifications.
Following the "post termination transition period" as defined in Section
1377(b)(1) of the Code:
(a) The Shareholders, jointly and severally, shall be responsible for and
shall indemnify and save and hold harmless Rock from and against all Tax,
interest and penalties imposed on Rock resulting from a final determination
of an adjustment to the
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Shareholders' taxable income resulting in a decrease in the Shareholders' S
Corporation Taxable Income and a corresponding increase in Rock's taxable
income.
(b) Rock shall indemnify and save and hold harmless each Shareholder from
and against all Tax, interest and penalties imposed on such Shareholder
resulting from a final determination of an adjustment to Rock's taxable
income resulting in a decrease in Rock's taxable income and a corresponding
increase in such Shareholder's S Corporation Taxable Income. Further, Rock
shall indemnify and hold harmless each Shareholder from and against Tax
incurred by such Shareholder resulting from the receipt of any
indemnification payments made to such Shareholder pursuant hereto.
(c) The Shareholders or Rock, as the case may be, shall make any payment
required under this Section 3 within thirty (30) days after receipt of notice
from the other party that a payment is due by such party to the appropriate
taxing authority.
(d) If a Tax audit is commenced with respect to the S Period or any Tax is
claimed for which the Shareholders would be required to indemnify Rock,
written notice thereof shall be given to the Shareholders as promptly as
practicable; provided, however, that the failure to give timely notice shall
not affect rights to indemnification hereunder except to the extent that the
Shareholders demonstrate actual damage caused by such failure. After such
notice, if the Shareholders shall acknowledge in writing to Rock that they
are obligated under the terms of their indemnity hereunder in connection with
such audit or claim, then the Shareholders shall be entitled, if they so
elect, to take control of the defense and investigation of such audit or
claim and to employ and engage attorneys of their own choice to handle and
defend the same, at the Shareholders' cost, risk and expense provided that
the Shareholders and their counsel shall proceed with diligence and in good
faith with respect thereto. Rock shall cooperate in all reasonable respects
with the Shareholders and such attorneys in the defense and investigation of
such audit or claim and any appeal arising therefrom, and shall not enter
into any agreement with any tax authority with respect to such audit or claim
without the prior consent of the Shareholders; provided, however, that Rock
may, subject to the Shareholders' control of the defense and investigation of
such audit or claim, at its own cost, participate in the defense and
investigation of such audit or claim and any appeal arising therefrom.
4. Notice. All notices and other communications made in connection with this
Agreement shall be in writing and shall be deemed given when delivered
personally or sent by facsimile transmission to the numbers indicated below (if
physical confirmation of transmission is retained) or on the third succeeding
business day after being mailed by registered or certified mail, deposited in
the United States mail, postage prepaid, return receipt requested, to the
appropriate party at its or his address below or at such other address for such
party as shall be specified by written notice when in fact delivered pursuant
hereto:
If to Rock, at:
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Xxx Xxxxxxx
c/o Rock Financial Corporation
00000 Xxxxxxxxx Xxxx
Xxxxxx Xxxxx
Xxxxxxx Xxxxx, Xxxxxxxx 00000
Fax: (000) 000-0000
If to the Shareholders, at:
Xxx Xxxxxxx
c/o Rock Financial Corporation
00000 Xxxxxxxxx Xxxx
Xxxxxx Xxxxx
Xxxxxxx Xxxxx, Xxxxxxxx 00000
Fax: (000) 000-0000
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By:
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Its:
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XXX XXXXXXX
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XXXX XXXXXXX
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XXXXXXX XXXXX
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