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EXHIBIT 10.5
TAX
RESPONSIBILITY ALLOCATION AGREEMENT (the "Agreement"), dated as
of
August 12, 2003, between Merck & Co.,
Inc., a New Jersey Corporation
("Distributing"), and Medco Health
Solutions, Inc., a Delaware corporation
("Controlled" and together with
Distributing, the "Companies").
WHEREAS,
Distributing owned 100% of the membership interests in Merck
Medco
Care LLC, a Delaware limited liability
company ("Medco") and, as part of a plan
intended to culminate in the Distribution
(as defined below), has caused Medco
to convert under Delaware law to a
corporation which has adopted the name of
Controlled;
WHEREAS,
pursuant to such plan, the board of directors of Distributing
has
determined it would be in the best
interests of Distributing and its
shareholders to distribute (the
"Distribution") all of Distributing's shares in
Controlled to the Distributing shareholders
on the terms and conditions set
forth in the Master Separation and
Distribution Agreement dated the date hereof
between Distributing and Controlled (the
"Distribution Agreement") (the date of
such Distribution, the "Distribution
Date");
WHEREAS, the
Companies intend that the Distribution qualify as a tax-free
spin-off pursuant to Section 355 and as a
reorganization pursuant to Section
368(a)(1)(D) of the Internal Revenue Code
of 1986, as amended (the "Code");
WHEREAS, as of
the date hereof, Distributing is the common parent of an
affiliated group of domestic corporations,
including Controlled, which has
elected to file consolidated U.S. federal
income tax returns and, as a result of
the Distribution, Controlled will not be a
member of such group for the portion
of the taxable year following the
Distribution or in future taxable years;
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WHEREAS, the
Companies desire (i) to allocate the responsibilities for
Income Tax (as hereinafter defined) of
Controlled, (ii) to allocate the
responsibilities for Other Controlled Tax
(as hereinafter defined) and (iii) to
provide for certain additional Tax (as
hereinafter defined) matters;
NOW, THEREFORE,
in consideration of the mutual covenants and agreements
contained herein, the Companies (each on
behalf of itself, each of its
subsidiaries as of the Distribution Date,
and its future subsidiaries) hereby
agree as follows:
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ARTICLE I
DEFINITIONS
The following
terms shall have the following meanings (such meanings to
apply equally to both the singular and the
plural forms of the terms defined).
All section references are to this
Agreement unless otherwise stated.
"Affiliate"
means any entity that is directly or indirectly under the
Control of the person or entity in
question.
"Control" means
the possession, directly or indirectly, of the power to
direct or cause the direction of the
management and policies of a person,
whether through ownership of voting
securities, by contract or otherwise.
"Controlled
Business" means any businesses formerly carried out by
Distributing (directly or indirectly), that
are now carried out by the
Controlled Group and any assets owned
directly or indirectly by Distributing
that are now owned by the Controlled
Group.
"Controlled
Combined Income Tax" shall mean, with respect to any period for
which the Controlled Group is included in
any of Distributing's combined or
unitary groups, the liability for state or
local Income Tax of the Controlled
Group computed as though the Controlled
Group filed a Tax Return separate from
Distributing for such taxable period, which
amount shall not be less than zero.
"Controlled
Federal Income Tax" shall mean, with respect to any period for
which the Controlled Group is included in
Distributing's consolidated group, the
liability for U.S. federal Income Tax
(including "alternative minimum tax", if
any) of the Controlled Group computed as
though the Controlled Group filed a
U.S. federal Income Tax Return separate
from Distributing for such taxable
period, which amount shall not be less than
zero.
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"Controlled
Group" shall mean, collectively or separately, Controlled and
any Affiliate of Controlled for which
Controlled has any direct or indirect Tax
liability.
"Controlled
Incorporation Date" means May 21, 2002, the date Controlled was
incorporated.
"Controlled
Separate Income Tax" shall mean any state or local Income Tax
imposed on any member of the Controlled
Group (which is not a Controlled
Combined Income Tax).
"Distributing
Group" shall mean, collectively or separately, Distributing
and any Affiliate of Distributing for which
Distributing has any direct or
indirect Tax liability, other than any
member of the Controlled Group.
"Distributing
Subsidiary" shall mean an Affiliate of Distributing other
than Controlled or any Affiliate of
Controlled.
"Income Tax"
shall mean any tax imposed on net income, including the
Michigan Single Business Tax, but not
including Washington State's "business and
occupation tax" or any municipal gross
receipts tax ("patente") imposed in
Puerto Rico.
"IRS Private
Letter Ruling" means the supplemental private letter ruling
from the United States Internal Revenue
Service issued in connection with the
Distribution on July 14, 2003, and, to the
extent not superceded by such private
letter ruling, the private letter ruling
from the United States Internal Revenue
Service issued in connection with the
Distribution on September 30, 2002
"Other
Controlled Tax" means any Tax of the Controlled Group or with
respect to the Controlled Business that is
not an Income Tax (whether payable
directly by Controlled
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Group or payable by a combined or unitary
group that includes the Controlled
Group to the extent of Controlled Group's
portion of such Tax).
"Post-Distribution Period" means all taxable periods or portions of
periods
beginning on or after the Distribution
Date.
"Post-Incorporation Period" means all taxable periods or portions
of
periods beginning on or after the
Controlled Incorporation Date.
"Pre-Distribution Period" means all taxable periods or portions of
periods
ending before the Distribution Date.
"Pre-Incorporation Period" means all taxable periods or portions of
periods
ending before the Controlled Incorporation
Date.
"Tax" means any
income, gross income, gross receipts, profits, capital
stock, franchise, withholding, payroll,
social security, workers compensation,
unemployment, disability, property, ad
valorem, stamp, excise, severance,
occupation, service, sales, use, license,
lease, transfer, import, export, value
added, alternative minimum, estimated or
other similar tax (including any fee,
assessment, or other charge in the nature
of or in lieu of any tax) imposed by
any governmental entity or political
subdivision thereof, and any interest,
penalties, additions to tax, or additional
amounts in respect of the foregoing
imposed on any taxpayer or consolidated,
combined or unitary group of taxpayers.
"Tax Authority"
means, with respect to any Tax, the governmental entity or
political subdivision thereof that imposes
such Tax, and the agency (if any)
charged with the collection of such Tax for
such entity or subdivision.
"Tax Benefit"
means the amount that any item of loss, deduction or credit
(or any other item) decreases Taxes paid or
payable including any interest with
respect thereto or
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interest that would have been payable but
for such item, net of any Tax imposed
on such interest.
"Tax Contest"
means an audit, review, examination, or any other
administrative or judicial proceeding with
the purpose or effect of
redetermining any Tax (including any
administrative or judicial review of any
claim for refund).
"Tax Detriment"
means the amount that any item of income or gain (or any
other item) increases Taxes paid or payable
including any interest with respect
thereto.
"Tax Return"
means any report of Tax due, any claims for refund of Tax
paid, any information return with respect
to Tax, any election made with respect
to Tax, or any other similar report,
statement, declaration, or document
required to be filed under the Code or
other law in respect of Tax, including
any attachments, exhibits, or other
materials submitted with any of the
foregoing, and including any amendments or
supplements to any of the foregoing
for any taxpayer or consolidated, combined
or unitary group of taxpayers.
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ARTICLE II
RESPONSIBILITY FOR TAX
2.01
Responsibility for Tax.
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(a) Distributing shall
be responsible for and indemnify and hold
harmless the Controlled Group from (i) any
liability for Controlled Federal
Income Tax and Controlled Combined Income
Tax with respect to the Pre-
Distribution Period (other than Income
Taxes described in Section 2.01(g)); (ii)
any Controlled Separate Income Tax with
respect to the Pre-Incorporation Period;
(iii) any Income Tax of the Distributing
Group by reason of Controlled Group
being severally liable for such Income Tax
pursuant to Treasury Regulations
Section 1.1502-6 or any analogous provision
of state or local law; and (iv) any
item described in Section 3.01(a) to the
extent not covered by Section 3.01(b).
(b) Notwithstanding
the provisions of clause (i) of Section 2.01(a),
for all periods in which Controlled is a
member of Distributing's consolidated
group, Controlled shall be responsible for
and shall pay to Distributing, on or
prior to the Distribution Date, an amount
equal to the estimate of the
Controlled Federal Income Tax for such
periods, as determined by Distributing in
good faith and in the ordinary course of
business.
(c) Notwithstanding
the provisions of clause (i) of Section 2.01(a),
for all periods in which Controlled or any
other member of the Controlled Group
is a member of a state or local
consolidated, combined or unitary group of which
any member of the Distributing Group is the
parent, Controlled shall be
responsible for and shall pay to
Distributing, on or prior to the Distribution
Date, an amount equal to the estimate of
the
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Controlled Combined Income Tax for such
periods, as determined by Distributing
in good faith and in the ordinary course of
business.
(d) Controlled shall
be responsible for, and indemnify and hold
harmless the Distributing Group from (i)
all Income Tax of the Controlled Group
with respect to a Post-Distribution Period;
(ii) any Controlled Separate Income
Tax with respect to the Post-Incorporation
Period; (iii) Income Taxes described
in Section 2.01(g); (iv) all Other
Controlled Tax (regardless of which period it
relates to); and (v) any act for which
Controlled is liable under Section
3.01(b).
(e) For purposes of
this Agreement, in the case of any taxable period
that begins before and ends after the
Distribution Date, the amount of
Controlled Federal Income Tax and/or
Controlled Combined Income Tax payable for
a portion of a period shall be the amount
which would have been payable if that
portion of a period constituted a separate
taxable period beginning on the date
such portion of a period began and ending
on the date such portion of a period
ended, or in such other manner as the
parties may agree.
(f) For purposes of
this Agreement, in the case of any taxable period
that begins before and ends after the
Controlled Incorporation Date, the amount
of Controlled Separate Income Tax payable
for a portion of a period shall be the
amount which would have been payable if
that portion of a period constituted a
separate taxable period beginning on the
date such portion of a period began and
ending on the date such portion of a period
ended, or in such other manner as
the parties may agree.
(g) In the event that
any jurisdiction determines that the income of
any member of the Controlled Group is
included or includible with the income of
any member
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of the Distributing Group for purposes of
calculating the combined,
consolidated, or unitary Tax liability of
the Distributing Group and, as of the
date hereof, the income of such member of
the Controlled Group was not so
included by any member of the Distributing
Group in a combined, consolidated, or
unitary group of which such member of the
Distributing Group was the common
parent, Controlled shall be responsible for
and shall pay to Distributing any
Income Tax liability incurred by any member
of the Distributing Group as a
result of such determination.
2.02 Refunds and
Tax Benefits.
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(a) Refunds and
Carrybacks. (i) Except as provided in (v) or (vi)
below, Distributing shall be entitled to
any refunds of Controlled Federal
Income Tax and Controlled Combined Income
Tax (including refunds paid by means
of a credit against other or future Tax
liabilities) arising with respect to
taxable periods ending on or before the
Distribution Date and Controlled shall
be entitled to any refunds of Income Tax of
the Controlled Group (including
refunds paid by means of a credit against
other or future Tax liabilities)
arising with respect to taxable periods
beginning on or after the Distribution
Date. Distributing and Controlled agree to
allocate such refunds (including
refunds paid by means of a credit against
other or future Tax liabilities)
arising with respect to taxable periods
that begin before and end after the
Distribution Date to whichever of
Distributing, Controlled, or both initially
bore the items to which such refund is
attributable.
(ii) Except as
provided in (v) below, Distributing shall be
entitled to any refunds of Controlled
Separate Income Tax (including refunds
paid by means of a credit against other or
future Tax liabilities) arising with
respect to taxable periods ending
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on or before the Controlled Incorporation
Date. Controlled shall be entitled to
any refunds of Controlled Separate Income
Tax paid by or on behalf of the
Controlled Group (including refunds paid by
means of a credit against other or
future Tax liabilities) arising with
respect to taxable periods beginning on or
after the Controlled Incorporation Date.
Distributing and Controlled agree to
allocate such refunds (including refunds
paid by means of a credit against other
or future Tax liabilities) arising with
respect to taxable periods that begin
before and end after the Controlled
Incorporation Date to whichever of
Distributing, Controlled, or both initially
bore the items to which such refund
is attributable.
(iii) Controlled shall be entitled to any refunds or credits of
Other Controlled Tax (including refunds
paid by means of a credit against other
or future Tax liabilities).
(iv) Controlled shall
promptly forward to Distributing or
reimburse Distributing for any refunds due
Distributing (pursuant to the terms
of this Section 2.02(a)) after receipt
thereof (less any net Tax Detriment
imposed with respect to such refunds or any
interest paid with respect to such
refunds), and Distributing shall promptly
forward to Controlled or reimburse
Controlled for any refunds due Controlled
(pursuant to the terms of this Section
2.02(a)) after receipt thereof (less any
net Tax Detriment imposed with respect
to such refunds or any interest paid with
respect to such refunds). In the case
of a refund received in the form of a
credit against other or future Tax
liabilities, reimbursement in respect of
such refund shall be due in each case
on the due date for payment of the Tax
against which such refund has been
credited. If Distributing reasonably so
requests, Controlled, at Distributing's
expense, shall file for and
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pursue any refund to which Distributing is
entitled under this Section 2.02(a).
If Controlled reasonably so requests,
Distributing, at Controlled's expense,
shall file for and pursue any refund to
which Controlled is entitled to under
this Section 2.02(a).
(v) Distributing
agrees that if the Controlled Group carries
back any item of loss, deduction or credit
which arises in any taxable period
the Income Tax for which Controlled is
responsible, into any taxable period the
Income Tax for which Distributing was
responsible, then Controlled shall be
entitled to any Tax Benefit or refund of
Tax realized as a result of the
carryback.
(vi) Notwithstanding
anything to the contrary in this Section
2.02, Distributing shall not be entitled
to, and Controlled shall be entitled
to, any refunds or credits with respect to
Income Tax for which Controlled was
liable under Section 2.01(g).
(b) Allocation of
Benefits. If as a result of or in settlement of any
Tax Contest, any adjustments shall be made
to any Tax Returns relating to Income
Tax of the Controlled Group or the
Distributing Group for any period in which
Distributing was responsible for all or a
portion of such Income Tax, and if
such adjustment results in both (x) any Tax
Detriment to Distributing or any
Affiliate of Distributing and (y) any Tax
Benefit to which the Controlled Group
is entitled, then Controlled shall pay to
Distributing the amount of such Tax
Benefit at such time or times as and to the
extent that the Controlled Group
realizes such benefit through a refund of
Tax or reduction in the amount of Tax
which the Controlled Group would otherwise
have had to pay if such adjustment
had not been made. For purposes of clause
(x), an Affiliate of Distributing
shall include (but not be limited to)
members of the Controlled Group with
respect to (a) Controlled
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Federal Income Tax and/or Controlled
Combined Income Tax and (b) for the
Pre-Incorporation Period, Controlled
Separate Income Tax.
If as a result of or in settlement of any Tax Contest, any
adjustments
shall be made to any Tax Returns relating
to Income Tax of the Controlled Group
for any period in which Controlled is
liable hereunder for all or a portion of
such Income Tax, and if such adjustment
results in both (x) any Tax Detriment to
the Controlled Group with respect to such
period and (y) any Tax Benefit to
which Distributing or any Affiliate of
Distributing is entitled hereunder, then
Distributing shall pay to Controlled the
amount of such Tax Benefit at such time
or times as and to the extent that
Distributing or any Affiliate of Distributing
realizes such benefit through a refund of
Tax or reduction in the amount of Tax
which Distributing or such Affiliate of
