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EXHIBIT 10.6
EXECUTION AGREEMENT
TAX SHARING AGREEMENT
This Tax Sharing Agreement (the "Agreement"), dated as of
February 4, 2004, is made by and among Town
Sports International Holdings, Inc.,
a Delaware corporation ("Holdings"), Town
Sports International, Inc., a New York
corporation ("TSI"), and the other
signatories to this Agreement (the
"Subsidiaries").
WHEREAS, Holdings 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"); and
WHEREAS, TSI is a member of the affiliated group of which
Holdings is the common parent corporation,
and each of the Subsidiaries is a
wholly-owned subsidiary of TSI; and
WHEREAS, Holdings, TSI and the Subsidiaries will file
consolidated income tax returns as required
by Section 1501 of the Code and
similar laws of other jurisdictions;
and
WHEREAS, Holdings, TSI and the Subsidiaries desire to agree
upon a method for determining the financial
consequences to each party resulting
from the filing of a consolidated income
tax return; and
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties
hereby agree as follows:
1.
DEFINITIONS.
(a)
For
purposes of this Agreement, the terms set forth below
shall have the following meanings.
(i)
"Alternative Minimum Tax" shall mean the tax imposed
by Section 55(a) of the Code.
(ii)
"Consolidated Federal Tax Liability" shall mean, with
respect to any taxable year, the
Alternative Minimum Tax and Regular Tax to be
actually paid by the Holdings Group with
respect to such taxable year (without
taking into account any carry-backs of tax
attributes from later taxable years).
(iii) The
"Federal Tax Liability" of any Subgroup shall
mean, with respect to any taxable year, the
sum of the Subgroup's liability for
Regular Tax and for Alternative Minimum Tax
for such taxable year, and any
interest, penalties, and other additions to
such taxes for such taxable year,
computed as if the Subgroup were not part
of the Holdings Group, but rather were
a separate affiliated group of corporations
filing a consolidated United States
federal income tax return pursuant to
Section 1501 of the Code. Such computation
shall be made (A) without regard to the
income, deductions (including net
operating loss and capital loss deductions)
and credits in any year of any
member of the Holdings Group which is not a
member of the Subgroup, (B) with
regard to net operating loss and capital
loss carry-forwards from earlier years
(but not carry-backs from later years) of
the Subgroup, (C) with regard to the
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minimum tax credits of the Subgroup and (D)
as though the highest rate of tax
specified in subsection (b) of Section 11
of the Code were the only Regular Tax
rate applicable to the Subgroup.
(iv)
"Holdings Group" shall mean Holdings, TSI and the
Subsidiaries and any other corporation
that, from time to time, joins with
Holdings in the filing of a consolidated
United States federal income tax
return.
(v) "Regular
Tax" shall mean the tax imposed by Section
11 of the Code.
(vi)
"Subgroup" shall be comprised of any member of the
Holdings Group (other than Holdings) and
its direct corporate subsidiaries that
would be eligible, from time to time, to
join with such member in the filing of
a consolidated United States federal income
tax return if such member were not a
member of the Holdings Group.
(vii)
"Subgroup Additional Tax Amount" shall mean the
excess of (A) the sum of a Subgroup's
Federal Tax Liability for the period
beginning when such Subgroup entered the
Holdings Group and ending in the
taxable year at issue over (B) the sum of
such Subgroup's Subgroup Payment for
the period beginning when such Subgroup
entered the Holdings Group and ending in
the taxable year at issue.
(viii) "Subgroup
Parent" means the corporation that is the
controlling member of a Subgroup. In the
case of a Subgroup that consists of a
single corporation, Subgroup Parent means
that corporation.
(b) For all
purposes of this Agreement, unless the context
otherwise requires, the definitions of
terms not defined herein shall be
determined by reference to applicable
law.
2.
UNITED STATES FEDERAL INCOME TAXES.
(a)
References. All references in this Section 2 to taxes or
matters related to taxes are references to
United States federal income taxes
and related United States federal income
tax matters.
(b) Tax
Sharing.
(i) With
respect to any taxable year of each Subgroup,
each Subgroup Parent shall pay to Holdings
an amount equal to the lesser of (A)
the Subgroup's Federal Tax Liability or (B)
the amount equal to the product of
the Consolidated Federal Tax Liability for
such Taxable year and a fraction (1)
the numerator of which is the taxable
income of such Subgroup for such taxable
year (or zero, if such taxable income is
negative), where the taxable income is
calculated on the basis of the assumption
that such Subgroup had filed separate
federal income tax returns for such taxable
year and all prior years and (II)
the denominator of which is the sum of the
taxable income for such taxable year
of each Subgroup of the Holdings Group
which has positive taxable income for
such taxable year, where taxable income of
a Subgroup of the Holdings Group is
calculated on the basis of the assumption
that such Subgroup had filed a
separate federal income tax return for such
taxable year and all prior taxable
years. The actual
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amount of tax required to be paid by any
Subgroup pursuant to the preceding
sentence is hereinafter referred to as the
"Subgroup Payment."
(ii)
In the event that the Consolidated Federal Tax
Liability for any taxable year exceeds the
sum of the Subgroup Payments of the
Subgroups for such year (such excess
hereinafter referred to as the "Additional
Tax Amount"), Holdings may collect from
each Subgroup an amount equal to the
lesser of (A) the Subgroup Additional Tax
Amount of such Subgroup and (B) an
amount equal to the product of the
Additional Tax Amount and a fraction (I) the
numerator of which is the Subgroup
Additional Tax Amount of such Subgroup and
(II) the denominator of which is the sum of
the Subgroup Additional Tax Amounts
for all Subgroups.
(c) Estimated
Payments. Not later than thirty days prior to each
date on which an estimated federal income
tax installment is due (a "Tax Payment
Date"), Holdings shall determine, and
notify each Subgroup Parent of, (i) the
amount of the applicable required
installment of the required annual payment of
the Holdings Group under Section 6655(d) of
the Code and (ii) the amount of such
required installment calculated solely by
reference to the Subgroup consistent
with the methodology under Section 2(b) of
this Agreement (the "Subgroup
Estimated Payment"). Each Subgroup Parent
shall then pay to Holdings, on (but no
earlier than) the date which is three
business days prior to such Tax Payment
Date, the Subgroup Estimated Payment thus
determined.
(d) Payment of
Taxes at Year-End.
(i) Holdings
shall determine, and notify each Subgroup
Parent of, the Subgroup Payment within 60
days following the end of the taxable
year for which the payment is to be made.
On (but no earlier than) the date
which is three business days prior to the
last date prescribed by law for
payment of the consolidated United States
federal income tax liability of the
Holdings Group for such year, each Subgroup
Parent shall pay to Holdings an
amount equal to the excess, if any, of the
Subgroup Payment over the total
Subgroup Estimated Payments with respect to
such taxable year. A similar rule
shall apply to the extent the amount of the
Subgroup Payment determined within
the 60-day period specified in this clause
(i) is adjusted at or prior to the
time at which the consolidated federal
income tax return for such year is filed.
(ii)
If, as a result of the operation of Section 2(c), the
aggregate amount of the Subgroup Payments
for a Subgroup for a given taxable
year is greater than the applicable
Subgroup Payment, then Holdings shall
promptly remit the excess to such Subgroup
Parent. A similar rule shall apply to
the extent the amount o
