TAX SHARING AGREEMENT
Agreement effective as of the first day of the consolidated return year
beginning ____________________ 1998, by and between Transition Leasing
Management, Inc. ("Parent"), a Texas corporation, Transition Auto Finance, Inc.,
a Texas corporation, ("TAFI") and Transition Auto Finance II, Inc., a Texas
corporation ("TAFI-II").
W I T N E S S E T H
WHEREAS, each of TAFI and TAFI-II are subsidiaries of Parent and the
parties hereto (hereinafter sometimes referred to singularly as a "Member" and
collectively as "Members") are part of an affiliated group ("Affiliated Group")
as defined by the Internal Revenue Code of 1986, as amended ("Code"), Section
1504(a); and
WHEREAS, such Affiliated Group filed a consolidated federal income tax
return in accordance with Section 1501 of the Code for tax years ending prior to
July 1, 1994, and is required to file consolidated income tax returns for years
subsequent thereto; and
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for allocating the consolidated "federal income tax liability" (as
determined under Regulations Section 1.1502-2) of the Affiliated Group among its
Members (as required by Section 1552(a) of the Code) and the manner in which
such liability shall be paid;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. A U.S. consolidated federal income tax return shall be filed by Parent
for each taxable year in respect of which this Agreement is in effect and for
which the Affiliated Group is required or permitted to file a consolidated
federal income tax return. Parent and each subsidiary shall execute and file
such consents, elections, and other documents that may be required or
appropriate for the proper filing of such returns.
2. The Affiliated Group acknowledges that the consolidated federal income
tax liability of such Affiliated Group shall be apportioned among the Members in
accordance with the method set forth in Section 1552(a)(1) of the Code.
3. In order to compensate Members of the Affiliated Group for the use of
net operating losses or tax credits in arriving at the consolidated federal
income tax liability of the Affiliated Group, the Members of the Affiliated
Group agree to determine and allocate the tax liability of the Affiliated Group
among themselves in the following manner:
STEP 1. The consolidated federal income tax liability of the
Affiliated Group, as determined under Regulations Section 1.1502-2
shall be allocated to the Members in accordance with Regulations
Section 1.1552-1(a)(I);
STEP 2. An additional amount shall be allocated to each Member
equal to 100 percent of the excess, if any, of (1) the "separate
return tax liability" (as defined below) of such Member for the
taxable year, over (2) the tax liability of such Member in accordance
with Step 1 of paragraph 3 of this Agreement. For purposes of the
preceding sentence, the "separate return tax liability" of each Member
for the taxable year shall be determined as if such Member were filing
a separate tax return under the Code, with the modifications set forth
in Regulation Section l.1552-1(a)(2)(ii). If the computation of a
Member's separate return tax liability as provided herein does not
result in a positive amount such Member's separate return tax
liability shall be deemed to be zero.
STEP 3. The total of any additional amounts allocated to Members
pursuant to Step 2 of paragraph 3 of this Agreement shall be paid
strictly as provided in paragraph 6, and subject to the principles of
paragraph 4, of this Agreement by such Members to those other Members
which had items of income, deductions, net operating losses, or tax
credits to which such total is attributable pursuant to a consistent
method which reasonably reflects such items of income, deductions, net
operating losses, or tax credits (such consistency and reasonableness
to be determined by the party charged with the administration of this
Agreement in accordance with paragraph 5 of this Agreement). However,
for this purpose, the amounts paid to Members will generally be deemed
consistent and reasonable if paid on a basis equal to highest marginal
corporate tax rate in effect with respect to net operating losses
utilized and 100 percent of tax credits utilized (unless, due to
special circumstances, this would be inequitable) and which is
substantiated by specific records maintained by the Affiliated Group
for such purposes.
Under the principles of Revenue Ruling 66-374, 1966-2 C.B. 427, the "net
operating loss" of a Member is the deduction which such Member would have had
available if it actually filed a separate return for the year and thus would
not include any portion of a Member's net operating loss sustained in a prior
or subsequent year which had been absorbed by the Affiliated Group or by the
Member in computing actual liabilities for prior or subsequent years.
Notwithstanding the preceding sentence, no benefit under Step 3 of paragraph 3
of this Agreement shall be granted a Member unless the net operating loss is
availed in reducing the consolidated federal income tax liability. The rules
stated in the previous sentences regarding carryover net operating losses will
also apply in the computation of other carryover items such as investment tax
credits, foreign tax credits, and charitable contributions deductions.
4. Regarding the application of the allocation method in paragraph 3 of
this Agreement, the following principles will govern:
(a) Allocation of the consolidated federal income tax liability for
the Affiliated Group under Step 1 of paragraph 3 of this Agreement, shall
(in accordance with Regulations Section 1.1552-1(b)(2)) in the amount
allocated to each Member (i) decrease the earnings and profits of such
Member and (ii) be treated as a liability of such Member for such amount.
The Members agree that any liability created hereby shall not be satisfied
by an actual payment between Members but rather that the amount shall be
treated as paid through
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a distribution with respect to stock, a contribution of capital, or
combination thereof, as the case may be, following the principles of
Regulation Section 1.1552-l(b)(2).
(b) Allocations under Step 2 and Step 3 (but not Step 1) to
individual Members of the Affiliated Group will create liabilities and
receivables among such Members under the principles of Regulations
Section 1.1552-1(b)(2). The Members agree that any liability created
hereby shall not be satisfied by an actual payment between Members but
rather that the amount shall be treated as paid through a distribution
with respect to stock, a contribution of capital, or combination thereof,
as the case may be, following the principles of Regulation Section
1.1552-1 (b)(2).
5. The provisions of this Agreement shall be administered by Parent.
6. Parent shall prepare and file, or cause to be prepared and filed, all
consolidated federal income tax returns, and estimated tax returns and all
state, local consolidated combined or unitary income tax returns and estimated
tax returns thereof, Parent shall pay all taxes due with respect to such returns
and shall indemnify and hold harmless each Subsidiary against all liability in
respect thereof, For purposes of state, and local consolidated, combined and
unitary income taxes, principles analogous to those in paragraph 3 of this
Agreement shall be used to determine the liability therefor and payments to be
made.
7. If the consolidated federal income tax liability is adjusted for any
taxable period, whether by means of an amended return, claim for refund, or
after-tax audit by the Internal Revenue Service, the liability of each Member
shall be recomputed under paragraphs 2 and 3 of this Agreement to give effect to
such adjustments. In the case of a refund, the Parent shall be entitled to
retain any such refund, subject only to its obligation under paragraph 6.
8. This Agreement shall apply to the taxable year specified in the
preamble of this Agreement, and all subsequent taxable years no earlier than the
repayment of indebtedness represented by up to $10,000,000 of TAFI-II's 11%
Secured Notes, and any subsequent financing programs. Notwithstanding such
termination, this Agreement shall continue in effect with respect to any payment
or refunds due for all taxable periods prior to termination.
9. This Agreement constitutes the entire agreement of the Members
concerning the subject matter hereof and supersedes all other agreements,
whether or not written. This Agreement shall not be amended unless the Members
agree in writing thereto and in no event shall any amendment hereto be made
until the indebtedness represented by the Floating Rate Secured Notes or any
subsequent financing programs has been fully paid.
10. All material including, but not limited to, returns, supporting
schedules, work papers, correspondence, and other documents relating to the
consolidated federal income tax returns filed for a taxable year during which
this Agreement was in effect shall be made available to any Member to the
Agreement during regular business hours for a minimum period equal to applicable
federal record retention requirements,
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11. All determinations required hereunder shall be made by the independent
accounting firm regularly employed by Parent at the time of such determination.
Such determination shall be binding and conclusive upon the parties hereto for
the purposes hereof.
12. Any Member corporation which leaves the consolidated group shall be
bound by this Agreement with respect to periods during which it was a member of
the consolidated group.
13. The Members hereto specifically recognize that from time to time other
companies may become Members of the Affiliated Group and hereby agree that such
new Members may become parties to this Agreement by executing the master copy of
this Agreement which shall be maintained at Parent's headquarters. It will not
be necessary for all the other Members to resign the Agreement but the new
Member may simply sign the existing Agreement and it will be effective as if the
old Members had resigned.
14. Any alteration, modification, addition, deletion, or other change in
the consolidated income tax return provisions of the Code or the regulations
thereunder shall automatically be applicable to this Agreement mutatis mutandis.
15. Failure of one or more parties hereto to qualify by meeting the
definition of Member of the "Affiliated Group" shall not operate to terminate
this Agreement with respect to the other parties as long as two or more parties
hereto continue so to qualify.
16. This Agreement shall bind and inure to the respective successors and
assigns of the parties hereto; but no assignment shall relieve any party of its
obligations hereunder.
17. This Agreement shall be governed by the laws of the State of Texas.
IN WITNESS WHEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the date first written above.
Date: TRANSITION LEASING MANAGEMENT, INC.
------------------ a Texas corporation
By:
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Name:
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Title:
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Date: TRANSITION AUTO FINANCE, INC.
------------------ a Texas corporation
By:
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Name:
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Title:
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Date: TRANSITION AUTO FINANCE II, INC.
------------------ a Texas corporation
By:
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Name:
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Title:
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