1
TAX SHARING AGREEMENT EXHIBIT 10.16 (3)
This tax sharing agreement (the "Agreement") is entered into by American States
Insurance Company ("ASIC"), a corporation organized under the laws of the State
of Indiana, and American Economy Insurance Company ("AEIC"), a corporation also
organized under the laws of the State of Indiana, and is effective as of
January 1, 1996. Lincoln National Corporation ("LNC"), as the ultimate parent
of a group of affiliated corporations filing a consolidated return (the "LNC
Consolidated Group"), is also a party to this Agreement. This Agreement
applies to federal, state, local, and foreign income taxes, including any
interest and penalties assessed for any such taxes, arising for any taxable
year ("Tax Year") during which ASIC owns any AEIC stock. This Agreement
supersedes all prior tax sharing agreements between ASIC and AEIC or any
subsidiaries of ASIC and AEIC, except to the extent otherwise noted. As
described more fully below, the rights and obligations of ASIC and AEIC depend
upon the amount of AEIC stock owned by ASIC, and on whether ASIC and AEIC are
members of an affiliated group that files a consolidated federal income tax
return.
SECTION I. AEIC IN CONSOLIDATED GROUP
A. Management of Tax Disputes and Tax Computations. For any Tax Year or
portion of a Tax Year in which AEIC is a member of the LNC Consolidated Group,
LNC shall be responsible for managing the filing of tax returns and for
determining the appropriate strategy for handling audits and disputes with
taxing authorities. Additionally, LNC shall be responsible for the final
determination of all computations required under this Agreement.
B. Calculation of AEIC's Tax Liability. For any Tax Year in which AEIC
is a member of the LNC Consolidated Group, the LNC Consolidated Group's federal
income tax liability shall be allocated between AEIC and the remainder of the
LNC Consolidated Group as follows:
1. Separate Tax Liability. Periodic computations shall be made of
the federal income tax liability of AEIC, on a hypothetical separate return
basis ("Separate Tax Liability"), for each Tax Year, or for any part of a Tax
Year during which AEIC is included in the LNC Consolidated Group. Computations
shall be made at least once per quarter to support the required payments of
quarterly estimated taxes and shall also be made at the time of the original and
extended due dates for the filing of the federal income tax return for each Tax
Year. Such Separate Tax Liability shall be calculated as follows:
a. AEIC shall be treated as a corporation which files a
federal income tax return separate from the LNC Consolidated Group, except as
otherwise provided in this Agreement.
119
2
b. For purposes of this calculation, AEIC shall be treated as
if it had never been included in the LNC Consolidated Group.
c. Gains and losses on intercompany transactions shall be
disregarded until such time as they are recognized in the consolidated federal
income tax return of the LNC Consolidated Group.
d. Income, gain, deductions, credits, and similar items of
AEIC described in Treasury Regulation section 1.1552-1(a)(2)(ii) shall
generally be taken into account in the manner specified in that subdivision.
e. To the extent that AEIC is unable to avail itself of
special rules applicable only to small corporations, lower tax rates applicable
to part or all of the income of a single corporation, the exemption provided in
Internal Revenue Code section 59A (applicable to the environmental tax) or any
other similar item because it participates in the filing of the federal income
tax return of the LNC Consolidated Group, AEIC shall not use such benefit in
calculating its Separate Tax Liability.
f. Income, gain, deductions, credits, and similar items of
AEIC shall not be included to the extent attributable to a period commencing on
or after the date that AEIC ceases to be includible in the LNC Consolidated
Group.
g. For each quarter of a Tax Year that AEIC has net operating
losses, net capital losses, tax credits or any other tax benefits that have not
been used to decrease AEIC's Separate Tax Liability in the current Tax Year
("Excess Tax Items") that can be used as hypothetical carry back items against
prior hypothetical AEIC separate return Tax Years ("Carry Back Items"), ASIC
shall reimburse AEIC for the use of such Carry Back Items at the rate AEIC
would have been entitled to receive had such Carry Back Items actually been
used in an AEIC claim for refund.
h. To the extent that Excess Tax Items can ultimately be used
as hypothetical carry forward items against future hypothetical AEIC Tax Years
("Carry Forward Items"), AEIC shall be entitled to use such Excess Tax Items to
offset future years' income but will be required to reimburse ASIC to the
extent that paragraph 2.c., below, applies.
2. Excess Tax Items, Generally.
a. To the extent that the LNC Consolidated Group can use an
Excess Tax Item, which has not otherwise been used as a Carry Back Item, to
decrease its federal income tax liability for that quarter after taking into
account all similar items from the other affiliated corporations in the LNC
Consolidated Group, ASIC shall reimburse AEIC at an amount equal to the actual
decrease in the tax liability
120
3
of the LNC Consolidated Group for any Excess Tax Items used, notwithstanding
the fact that AEIC could not use these Excess Tax Items in calculating its
Separate Tax Liability.
b. To the extent that the Excess Tax Items are not used under
paragraphs a. or 1.g. above, AEIC shall be entitled to a reimbursement from
ASIC if and when such Excess Tax Items actually reduce the LNC Consolidated
Group's federal income tax payments, or when the LNC Consolidated Group
actually receives a refund of previously paid taxes, to the extent that such
refund payment is directly attributable to such Excess Tax Items.
c. To the extent that AEIC receives a payment from ASIC for the
actual use of Excess Tax Items pursuant to paragraphs a. or b., above, ASIC
shall be entitled to reimbursement from AEIC for the full amount of such
payments to the extent that AEIC may use such Excess Tax Items as Carry Forward
Items. To the extent that AEIC has been compensated by ASIC under a prior tax
sharing agreement for an amount which would qualify as an Excess Tax Item under
this Agreement, ASIC shall also be entitled to reimbursement from AEIC for the
full amount of such prior payments to the extent that AEIC may use such Excess
Tax Items as Carry Forward Items.
d. Nothing in this entire Section I. shall be interpreted to
entitle AEIC to more than a single use of any Excess Tax Items, Carry Back
Items, Carry Forward Items, or any other items which reduce the tax liability
of AEIC.
3. Alternative Minimum Tax Periods.
a. If the LNC Consolidated Group is required to pay Alternative
Minimum Tax ("AMT") for any taxable quarter, then the AMT amount shall be
divided among all of the corporations in the LNC Consolidated Group which would
have had to pay AMT if their tax liability had been calculated on a separate
return basis. The allocation of AMT shall be in proportion to the amount of AMT
each corporation would have had to pay on a hypothetical separate return basis.
Any amount of AMT so apportioned to AEIC shall be available for use as an AMT
credit in calculating AEIC's Separate Tax Liability for future taxable periods
in which the AMT credit may actually be used by the LNC Consolidated Group.
This provision also shall apply to the extent that the LNC Consolidated Group
becomes subject to AMT for prior Tax Years as a result of an IRS audit or other
adjustment to the tax liability payable.
b. If AEIC would be required to pay AMT based upon the
calculation of its Separate Tax Liability, but the LNC Consolidated Group is
not required to pay AMT for that taxable quarter, then AEIC shall not be
required to pay the AMT
121
4
amount to ASIC. Instead, AEIC shall pay to ASIC an amount equal to its
Separate Tax Liability calculated without regard to the AMT provisions.
4. Interest and Penalties.
a. If, after netting interest payable by the LNC Consolidated
Group against interest payable by the IRS for a given Tax Year, the LNC
Consolidated Group is required to pay interest to the IRS as a result of any
increase in tax liability for a given Tax Year, such interest shall be divided
among all of the corporations in the LNC Consolidated Group whose tax liability
increased from the initial calculation at the time of the filing of the LNC
consolidated tax return for that Tax Year. This allocation shall be made in
proportion to the increase in tax liability of AEIC as compared to the increase
in tax liability of all members of the LNC Consolidated Group.
b. If, after netting interest payable by the LNC Consolidated
Group against interest payable by the IRS for a given Tax Year, the LNC
Consolidated Group is entitled to receive interest from the IRS as a result of
any decrease in tax liability for a given Tax Year, such interest shall also be
divided among all of the corporations in the LNC Consolidated Group whose tax
liability decreased from the initial calculation at the time of the filing of
the LNC consolidated tax return for that Tax Year. This allocation shall be
made in proportion to the decrease in tax liability of AEIC as compared to the
decrease in tax liability of all members of the LNC Consolidated Group.
c. Any tax penalties imposed by a taxing authority shall be the
responsibility of the corporation whose tax position or tax item caused the
imposition of such penalties.
5. Payments. Payments between ASIC and AEIC shall be made as follows:
a. Within five days following the due date of the quarterly
estimated federal income tax payment for the LNC Consolidated Group, AEIC shall
pay to ASIC the full amount (if any) of its Separate Tax Liability for that
taxable quarter. Also, to the extent that an Excess Tax Item can be used to
reduce the amount of the estimated federal income tax payment for the LNC
Consolidated Group in a given tax quarter, ASIC shall reimburse AEIC for the
use of that item within five days following the due date of such quarterly
payment. Likewise, to the extent that AEIC can use an Excess Tax Item for which
it has received payment from ASIC pursuant to Section
122
5
I.B.2., above, as a Carry Forward Item, AEIC shall reimburse ASIC for such
amounts as described in Section I.B.2.c., above, within five days of the
quarter in which it may use the Carry Forward Item.
b. Within five days following the last date for filing a
request for an extension to file the annual federal income tax return, an
adjusting payment shall be made between ASIC and AEIC which is equal to the
difference between the quarterly payments made pursuant to paragraph a. above,
and the estimated annual Separate Tax Liability of AEIC.
c. Within 45 days after the filing of the annual federal
income tax return of the LNC Consolidated Group, adjusting payments shall be
made between ASIC and AEIC to the extent of any difference between the payments
made pursuant to paragraph a. or b. above, and the annual Separate Tax
Liability of AEIC. In the event that an Excess Tax Item cannot be used to
offset the federal income tax liability of the LNC Consolidated Group for the
current Tax Year, but AEIC can use such an item as a Carry Back Item, then the
reimbursement by ASIC to AEIC contemplated in Section I.B.1.g., above, shall
also be made within 45 days after the filing of the annual federal income tax
return of the LNC Consolidated Group.
d. Within 45 days of a settlement of any IRS audit dispute,
adjusting payments shall be made between ASIC and AEIC as necessary as a result
of such settlement.
e. LNC shall be responsible for making all required federal
income tax payments for the LNC Consolidated Group.
6. Information. If any information relevant to making any calculation
covered by this Agreement is particularly within the knowledge or possession of
AEIC or any subsidiary of AEIC, AEIC shall promptly provide such information to
LNC and shall also provide any supporting schedules, data or details which LNC
may reasonably request.
7. State Taxes. To the extent that any state tax system permits or
requires that the tax liability of affiliated corporations be computed on a
consolidated, affiliated, unitary or combined basis ("Combined Return Basis")
and AEIC files on a Combined Return Basis with one or more other corporations
in the LNC Consolidated Group, AEIC's state tax liability shall be calculated
and allocated in a manner comparable to that provided in Section I of this
Agreement.
123
6
SECTION II. AEIC NOT CONSOLIDATED
A. Responsibility for Tax Returns and Tax Payments. For any period in
which ASIC owns any stock of AEIC, but AEIC is not included in the LNC
Consolidated Group, AEIC shall be responsible for filing all federal, state,
local, and foreign tax returns relevant to it and shall also be responsible for
paying any such taxes payable by it. Furthermore, any federal, state, local,
or foreign tax liabilities which are not calculated on a consolidated basis
with part or all of the LNC Consolidated Group shall be the responsibility of
the entity incurring such liability even if AEIC is filing as part of the LNC
Consolidated Group for federal income tax purposes.
B. Management of Tax Disputes and Tax Computations. For any Tax Year or
portion of a Tax Year in which ASIC owns sufficient AEIC stock to result in
ASIC and AEIC being treated as a consolidated group for financial statement
reporting purposes, ASIC shall be consulted prior to determining the strategy
for handling audits and disputes with taxing authorities, including, but not
limited to, whether or not to appeal or litigate one or more issues and any
proposed settlements of issues.
C. Carry Over Attributes from Consolidated Periods.
1. General Carry Over Provisions. To the extent that AEIC carries
forward tax attributes for which it has already received compensation from ASIC
pursuant to the terms of Section I. above, AEIC shall reimburse ASIC for the
previous payment by ASIC to AEIC, at the time of the deconsolidation of ASIC
and AEIC. To the extent that AEIC has paid ASIC for a Separate Tax Liability
for which it remains liable after leaving the LNC Consolidated Group, ASIC
shall reimburse AEIC for the previous payment by AEIC to ASIC at the time of
the deconsolidation of ASIC and AEIC. Similarly, to the extent that the
ultimate amount of tax paid differs from the amount of tax liability initially
calculated for any given Tax Year in which AEIC was included in the LNC
Consolidated Group, ASIC or AEIC, as the case may be, shall be required to pay
and entitled to receive amounts sufficient to compensate for this difference.
2. AMT Credits. In the event that AEIC leaves the LNC Consolidated
Group, the amount of AMT credit which it shall be allowed to carry over without
any obligation to reimburse ASIC shall not exceed the amount allocated pursuant
to Section I.B.3, above. ASIC shall be reimbursed by AEIC to the extent that
any AMT credit actually carried over exceeds the amounts calculated in Section
I.B.3., at the time of the deconsolidation. Also, AEIC shall be reimbursed by
ASIC to the extent that it is permitted to carry over less than the amount
calculated in Section I.B.3.
124
7
3. Prior Consolidation Impacts. Neither LNC nor any member of the LNC
Consolidated Group shall be liable for any payment to AEIC should the amount of
tax that AEIC pays in any such later year on a separate return basis or as a
member of another consolidated group be increased as a result of AEIC having
been a member of the LNC Consolidated Group.
4. Elections Impacting Prior Consolidated Periods. In the event that
AEIC wishes to make an election for tax purposes which may adversely affect tax
positions taken by the LNC Consolidated Group during Tax Years when it was a
member of the LNC Consolidated Group, AEIC shall submit to LNC a written
request for permission to make such an election. LNC shall not unreasonably
withhold such written permission to make a tax election which may be beneficial
to AEIC after it leaves the LNC Consolidated Group. AEIC shall, as a condition
of receiving written permission to make the tax election, reimburse LNC for any
and all additional tax costs incurred by the LNC Consolidated Group in
connection with permitting such an election to be made.
SECTION III. GENERAL ITEMS
A. Interaction with Prior Tax Periods
1. Tax Payments for Prior Periods. To the extent that the tax
liability initially allocated to AEIC for a prior tax period is subsequently
redetermined, as a result of filing an amended return, the outcome of an IRS
examination, the retroactive application of a new tax law or tax regulation, or
other similar modifying action or item, AEIC shall pay ASIC for any such
increases to AEIC's tax liability and is also entitled to receive a payment
from ASIC for any decreases in tax liability attributable to AEIC.
2. Prior Tax Payments. To the extent that AEIC paid to ASIC an amount
for its share of the LNC Consolidated Group's federal income tax liability or
to the extent that it pays an amount pursuant to paragraph 1. above, AEIC shall
be entitled to consider the amount of such prior payments when determining
whether or not Carry Back Items may be used to offset tax payments for prior
years.
3. Interest and Penalties for Prior Periods. Any interest and
penalties payable by any member of the LNC Consolidated Group relating to Tax
Years prior to this Agreement shall be subject to the terms of Section I.B.4 to
the extent that they become payable after the effective date of this Agreement.
125
8
B. Filing Relevant Items. AEIC agrees to file any elections, consents,
and other documents and take any other actions which may be necessary or
appropriate to carry out the purposes of this Agreement.
C. Inclusion of AEIC Subsidiaries. If AEIC owns, acquires or creates any
subsidiary corporation which is an includible corporation as that term is
defined in IRC section 1504, such subsidiary corporation shall be subject to
this Agreement. AEIC shall treat each such subsidiary corporation as if AEIC
has an identical tax sharing Agreement to this Agreement between itself and the
subsidiary corporation, unless AEIC and such subsidiary have entered into a
separate tax sharing Agreement which has been approved in writing by LNC.
D. Applicability to Succeeding Entities. This Agreement shall be binding
on any successor of the parties to this Agreement, including but not limited to
any successor of LNC, ASIC or AEIC, to the same extent as if the successor had
been an original party to this Agreement.
E. Provision of Items to Defend Tax Positions. Both ASIC and AEIC agree
to cooperate in supplying information reasonably requested by the other party
in order to make any computations required under this Agreement and for the
purpose of defending tax examinations, including appeals and litigation.
F. Maintenance of Books and Records. ASIC and AEIC agree to maintain
internal accounting books and records for themselves and each of their
subsidiaries in a manner consistent with U.S. generally accepted accounting
principles and relevant statutory accounting principles. Furthermore, ASIC and
AEIC agree to account for any intercompany transactions entered into by them or
any of their subsidiaries and to make such information available to the other
party for tax purposes both when such transactions are entered into and when
such intercompany transactions become currently taxable.
126
9
G. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Indiana and no state court other than
the courts of the State of Indiana shall have jurisdiction over disputes
between the parties concerning the validity, performance, interpretation or
construction of this Agreement.
LINCOLN NATIONAL CORPORATION
Date: August 13, 1996 By /s/ Xxxxxxx X. Xxxxxxx
-----------------------------------------------------
Xxxxxxx X. Xxxxxxx
Executive Vice President and Chief Financial Officer
AMERICAN STATES INSURANCE COMPANY
Date: 8-22-96 By /s/ Xxxx X. Xxxxxxxxxx
-----------------------------------------------------
Xxxx X. Xxxxxxxxxx
Senior Vice President and Treasurer
AMERICAN ECONOMY INSURANCE COMPANY
Date: 8-22-96 By /s/ Xxxxxx X. Xxxxx
-----------------------------------------------------
Xxxxxx X. Xxxxx
Vice President
127
