TAX SHARING AGREEMENTTax Allocation or Sharing Agreement |
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Exhibit 10.5
EXECUTION COPY
TAX SHARING AGREEMENT
This Tax Sharing Agreement (this “ Agreement ”) is entered into as of January 15, 2007, by and among Verizon Communications Inc., a Delaware corporation (“ Verizon ”), Northern New England Spinco Inc., a newly formed Delaware corporation and a wholly owned subsidiary of Verizon (“ Spinco ”), and FairPoint Communications, Inc., a Delaware corporation (“ FairPoint ”). Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to such terms in the Merger Agreement, dated as of the date hereof, by and among Verizon, FairPoint and Spinco (the “ Merger Agreement ”).
RECITALS
WHEREAS, Verizon is the common parent corporation of an affiliated group of corporations within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”), that files a consolidated U.S. federal income tax return;
WHEREAS, pursuant to the Merger Agreement and the Distribution Agreement, among other things, Verizon will transfer or cause to be transferred to Spinco or one or more Subsidiaries of Spinco (pursuant to certain preliminary restructuring transactions, including Internal Spinoffs) all of the Spinco Assets and Spinco and/or one or more Subsidiaries of Spinco will assume or cause to be assumed all of the Spinco Liabilities;
WHEREAS, on the Distribution Date, Verizon will distribute all of the issued and outstanding shares of Spinco Common Stock on a pro rata basis to the holders of Verizon Common Stock;
WHEREAS, pursuant to the Merger Agreement, immediately following the Distribution, Spinco will merge with and into FairPoint pursuant to the Merger;
WHEREAS, the parties to this Agreement intend that ( i ) the First Internal Spinoff qualify as a reorganization under Section 368(a)(1)(D) of the Code and a distribution eligible for nonrecognition under Sections 355(a) and 361(c) of the Code; ( ii ) the Second Internal Spinoff qualify as a distribution eligible for nonrecognition under Sections 355(a) and 361(c) of the Code; ( iii ) the Contribution, together with the Distribution, qualify as a tax-free reorganization under Section 368(a)(1)(D) of the Code; ( iv ) the Distribution qualify as a distribution of Spinco stock to Verizon stockholders eligible for
nonrecognition under Sections 355(a) and 361(c) of the Code; ( v ) no gain or loss be recognized by Verizon for U.S. federal income tax purposes in connection with the receipt of the Spinco Securities or the consummation of the Debt Exchange; ( vi ) the Special Dividend qualify as money transferred to creditors or distributed to shareholders in connection with the reorganization within the meaning of Section 361(b)(1) of the Code, to the extent that Verizon distributes the Special Dividend to its creditors and/or shareholders in connection with the Contribution; ( vii ) the Merger qualify as a tax-free reorganization pursuant to Section 368(a) of the Code; and ( viii ) no gain or loss be recognized as a result of such transactions for U.S. federal income tax purposes by any of Verizon, Spinco, and their respective stockholders and Subsidiaries (except to the extent of cash received in lieu of fractional shares); and
WHEREAS, Verizon, Spinco and FairPoint desire to set forth their rights and obligations with respect to Taxes due for periods before and after the Distribution Date and other Tax matters relating to the transactions contemplated by the Merger Agreement and the Distribution Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
“ Affiliate ” has the meaning set forth in the Merger Agreement.
“ Agreement ” has the meaning set forth in the preamble.
“ Applicable Federal Rate ” means the rate computed pursuant to Section 1274(d) of the Code, compounded quarterly, with respect to the applicable period.
“ Code ” has the meaning set forth in the recitals.
“ Contribution ” has the meaning set forth in the Merger Agreement.
“ Distribution ” has the meaning set forth in the Merger Agreement.
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“ Distribution Agreement ” has the meaning set forth in the Merger Agreement.
“ Distribution Date ” has the meaning set forth in the Distribution Agreement.
“ Distribution Disqualification ” means that ( i ) either the Contribution, taken together with the Distribution, or the First Internal Spinoff fails to qualify as a tax-free reorganization under Section 368(a)(1)(D) of the Code pursuant to which no gain or loss is recognized for U.S. federal income tax purposes by any of Verizon, Spinco or their Subsidiaries; ( ii ) any of the Distribution or the Internal Spinoffs fails to qualify as a distribution eligible for nonrecognition under Section 355 of the Code, pursuant to which no gain or loss is recognized for U.S. federal income tax purposes by any of Verizon, Spinco, their Subsidiaries, or the stockholders of Verizon, except to the extent of cash received in lieu of fractional shares; ( iii ) the Debt Exchange (if consummated) fails to constitute a transfer of qualified property to Verizon’s creditors in connection with the reorganization within the meaning of Section 361(c)(3) of the Code; and/or ( iv ) the Special Dividend fails to qualify as money transferred to creditors or distributed to shareholders in connection with the reorganization within the meaning of Section 361(b)(1) of the Code, but only to the extent that Verizon distributes the Special Dividend to its creditors or shareholders. For the avoidance of doubt, a Distribution Disqualification shall occur if Verizon or any of its Subsidiaries recognizes gain pursuant to Section 355(d), 355(e) and/or 355(f) of the Code with respect to the Distribution and/or any Internal Spinoff.
“ FairPoint ” has the meaning set forth in the recitals.
“ FairPoint Group ” means FairPoint and all entities that are Subsidiaries of FairPoint immediately following the Merger.
“ Final Determination ” means a determination within the meaning of Section 1313 of the Code or any similar provision of state or local tax law.
“ Income Taxes ” means any and all Taxes based upon or measured by net or gross income (including alternative minimum tax under Section 55 of the Code and including any liability described in clauses (ii) or (iii) of the definition of “Taxes” that relates to any Income Tax).
“ Merger Agreement ” has the meaning set forth in the preamble.
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“ Non-Preparer Party ” has the meaning set forth in Section 2.02.
“ Other Taxes ” means any and all Taxes other than Income Taxes, including any liability described in clauses (ii) or (iii) of the definition of “Taxes” that relates to any Other Tax.
“ Person ” means any individual, partnership, joint venture, corporation, limited liability company, trust, unincorporated organization, government or department or agency of a government.
“ Post-Distribution Period ” means any taxable year or other taxable period beginning after the Distribution Date and, in the case of any taxable year or other taxable period that begins before and ends after the Distribution Date, that part of the taxable year or other taxable period that begins at the beginning of the day after the Distribution Date.
“ Potential Disqualifying Action ” has the meaning set forth in Section 10.02(b).
“ Pre-Distribution Period ” means any taxable year or other taxable period that ends on or before the Distribution Date and, in the case of any taxable year or other taxable period that begins before and ends after the Distribution Date, that part of the taxable year or other taxable period through the close of the Distribution Date.
“ Spinco ” has the meaning set forth in the preamble.
“ Spinco Group ” means Spinco and all entities that are Subsidiaries of Spinco immediately following the Contribution.
“ Spinco Return ” has the meaning set forth in Section 2.01(b).
“ Spinco Securities ” has the meaning set forth in the Distribution Agreement.
“ Subsidiary ” has the meaning set forth in the Merger Agreement.
“ Tax ” or “ Taxes ” has the meaning set forth in the Merger Agreement.
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“ Tax Attribute ” means any net operating loss carryover or carryback, net capital loss carryover or carryback, investment tax credit carryover or carryback, foreign tax credit carryover or carryback, charitable deduction carryover or carryback or other similar item that could reduce Income Tax for a past or future taxable period.
“ Tax Benefit ” means, in the case of a separate state, local or other Tax Return, the sum of the amount by which the Tax liability (after giving effect to any alternative minimum or similar Tax) of a corporation to the appropriate Taxing Authority is reduced (including by deduction, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest from such government or jurisdiction relating to such Tax liability, and in the case of a consolidated federal Tax Return or combined, unitary or other similar state, local or other Tax Return, the sum of the amount by which the Tax liability of the affiliated group (within the meaning of Section 1504(a) of the Code) or other relevant group of corporations to the appropriate government or jurisdiction is reduced (including by deduction, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest from such government or jurisdiction relating to such Tax liability.
“ Tax Contest ” has the meaning set forth in Section 5.01.
“ Tax Dispute ” has the meaning set forth in Article IX.
“ Tax Dispute Arbitrator ” has the meaning set forth in Article IX.
“ Tax Materials ” has the meaning set forth in Section 10.01(a).
“ Tax Return ” has the meaning set forth in the Merger Agreement.
“ Taxing Authority ” has the meaning set forth in the Merger Agreement.
“ Transactions ” has the meaning set forth in Section 2.04(a).
“ Transfer Taxes ” means any Merger Transfer Taxes and Distribution Transfer Taxes (in each case, having the meaning set forth in the Merger Agreement).
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“ Transition Services Agreement ” has the meaning set forth in the Merger Agreement.
“ Verizon ” has the meaning set forth in the preamble.
“ Verizon Group ” means Verizon and all Subsidiaries of Verizon at any time preceding, at or following the Contribution, but shall not include any member of the Spinco Group.
“ Verizon Consolidated Group ” means any consolidated, combined or unitary group of which any member of the Verizon Group is the common parent corporation at any time.
“ Verizon Return ” has the meaning set forth in Section 2.01(a).
ARTICLE II
TAX RETURNS AND TAX PAYMENTS
Section 2.01 Obligations to File Tax Returns .
(a) Verizon shall file or cause to be filed any Tax Return that is required to be filed after the Distribution Date that includes both ( i ) one or more members of the Verizon Group and ( ii ) one or more members of the Spinco Group or any item of income, loss, gain, deduction or credit relating to the Spinco Business (a “ Verizon Return ”). Each member of the Spinco Group hereby irrevocably authorizes and designates Verizon as its agent, coordinator and administrator for the purpose of taking any and all actions necessary or incidental to the filing of any such Verizon Return and, except as otherwise provided herein, for the purpose of making payments to, or collecting refunds from, any Taxing Authority in respect of a Verizon Return. FairPoint shall cause members of the Spinco Group to promptly prepare and deliver to Verizon in a manner consistent with past practices pro forma Tax Returns and tax information packages with respect to any Verizon Return. In the case of any Verizon Return that includes any member of the Spinco Group or any item relating to the Spinco Business only for the portion of the relevant taxable period that ends on the Distribution Date, Taxes shall be allocated to the portion of such taxable period that ends on the Distribution Date based on an actual or hypothetical closing of the books at the close of the Distribution Date. Except as otherwise provided herein, Verizon shall have the exclusive right to file, prosecute,
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compromise or settle any claim for refund for Taxes in respect of a Verizon Return for which Verizon bears responsibility hereunder and to determine whether any refunds of such Taxes to which the Verizon Consolidated Group may be entitled shall be received by way of refund or credit against the Tax liability of the Verizon Consolidated Group.
(b) FairPoint shall file or cause to be filed any other Tax Return required to be filed after the Distribution Date by or with respect to one or more members of the Spinco Group (a “ Spinco Return ”). All Spinco Returns shall be prepared ( i ) on a basis that is consistent with the Distribution Tax Opinion, the Merger Tax Opinions and the IRS Ruling and ( ii ) in a manner consistent with Verizon’s determination of the adjusted Tax basis of any asset and the amount of any Tax Attribute or any similar item held by the Spinco Group at the time of the Distribution. In the case of any Spinco Return that includes any member of the Spinco Group or any item relating to the Spinco Business only for the portion of the relevant taxable period that begins after the Distribution Date, Taxes shall be allocated to the portion of such taxable period that begins after the Distribution Date based on an actual or hypothetical closing of the books at the close of the Distribution Date.
Section 2.02 Review of Tax Returns . No later than thirty (30) days prior to the date on which any Verizon Return or Spinco Return is required to be filed (taking into account any valid extensions), if the party that is not responsible for preparing such Tax Return under Section 2.01 (the “ Non-Preparer Party ”) is responsible for any portion of the Taxes reported on such Tax Return, the party responsible for preparing such Tax Return under Section 2.01 shall ( a ) submit or cause to be submitted to the Non-Preparer Party such Tax Return for review and comment and ( b ) shall consider in good faithany changes to such Tax Return reasonably requested by the Non-Preparer Party, to the extent that such changes relate to items for which the Non-Preparer Party has responsibility hereunder.
Section 2.03 Obligation to Remit Taxes . Verizon and FairPoint shall each timely remit or cause to be timely remitted to the applicable Taxing Authority any Taxes due in respect of any Tax Return that such party is required to file or cause to be filed (or, in the case of a Tax for which no Tax Return is required to be filed, which is otherwise payable by such party or a member of such party’s affiliated group to any Taxing Authority) and shall be entitled to reimbursement for such payments to the extent provided herein; provided , however, that in the case of any Tax Return, the Non-Preparer Party shall remit to the Party required to file such Tax Return in immediately available funds the amount of any Taxes reflected on such Tax Return for which the Non-Preparer Party is responsible hereunder at least two (2) Business Days before payment of the relevant amount is due to a Taxing Authority.
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Section 2.04 Tax Sharing and Indemnification Obligations .
(a) Spinco and, from and after the Merger, FairPoint shall be liable for and shall indemnify and hold the Verizon Group harmless against any Taxes ( i ) resulting from ( A ) the Internal Spinoffs, the Contribution, the Distribution, the Debt Exchange or any transaction associated therewith (the “ Transactions ”), including Taxes arising from any Distribution Disqualification, to the extent that such Taxes arise as a result of any action (or failure to take any reasonably required action to avoid a Distribution Disqualification) by Spinco or any of its Affiliates following the Effective Time or any action (or failure to take any reasonably required action to avoid a Distribution Disqualification) by FairPoint or any of its Affiliates (excluding the Spinco Group), or ( B ) any breach of any representation, covenant or obligation of Spinco or FairPoint under this Agreement or any other Transaction Agreement to the extent that Taxes resulting from such breach are attributable to ( x ) a Distribution Disqualification or ( y ) a breach of Section 6.02 hereof, ( ii ) arising in the Pre-Distribution Period and attributable to a member of the Spinco Group or to the income, employees, assets or transactions of the Spinco Business, except for Taxes resulting from the Transactions (including Taxes resulting from the triggering into income of any items from intercompany transactions under Section 1.1502-13 of the Treasury Regulations or excess loss accounts under Section 1.1502-19 of the Treasury Regulations) for which either FairPoint or Spinco is not otherwise responsible pursuant to any other provision of this Section 2.04(a) or this Agreement or ( iii ) arising in the Post-Distribution Period and attributable to a member of the Spinco Group or to the assets, employees, or transactions of the Spinco Business. Taxes for which Spinco and FairPoint are responsible pursuant to clause (ii) of the preceding sentence shall be computed ( A ) as if Spinco and its Subsidiaries had always conducted the Spinco Business as a separate affiliated group of companies whose items of income, gain, loss, deduction, and credit for U.S. federal income tax purposes included solely such items attributable to the Spinco Business and none of such items attributable to the Verizon Business and ( B ) by taking into account ( x ) elections and accounting methods actually used in computing such items by the Verizon Consolidated Group in filing its Tax Returns and ( y ) solely items of income, gain, loss, deduction, and credit arising during the taxable periods for which the applicable Tax claim is being brought under Section 2.04(a)(ii).
(b) Except for Taxes for which either Spinco or FairPoint is responsible under Section 2.04(a) or any other provision of this Agreement, Verizon shall be liable for and shall indemnify and hold FairPoint and its Subsidiaries and the Spinco Group harmless against, any Taxes ( i ) of the Verizon Group or any Verizon Consolidated Group or any member thereof or attributable to the employees, assets or transactions of the Verizon Business or ( ii ) of the Spinco Group or any member thereof arising in the period ending on the Effective Time and resulting from the Transactions, including Taxes arising from any Distribution Disqualification.
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