Avteam Tax Allocation & Indemnification Agreement

Exhibit 10.6


AVTEAM TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT


THIS AVTEAM TAX ALLOCATION AND INDEMNIFICATION AGREEMENT is entered into as of this 5th day of December, 1996 between Donald A. Graw ("Stockholder"), and AVTEAM, INC., a Florida corporation, formerly known as Interstar Trading Corporation (the "Company").


W I T N E S S E T H :


WHEREAS, Stockholder owns 500,000 shares of the sole class of stock in the Company, constituting ___ percent of the total outstanding shares of stock in the Company;


WHEREAS, pursuant to that certain Stock Purchase Agreement by and among the Company and the persons listed on the signature pages thereto (the "Purchasers"), dated as of December 5, 1996, the Purchasers will purchase shares of the newly-authorized preferred stock of the Company and, in connection therewith, the Company's subchapter S corporation status will be terminated;


WHEREAS, such termination, under Code Section 1362(e), will result in the Company's 1996 calendar tax year being divided in two (2) separate tax years, the first of which begins on January 1, 1996 and ends on the day immediately preceding the day such termination is effective (the "1996 S Short Year") and the second of which begins on the day such termination is effective and ends on December 31, 1996 (the "1996 C Short Year"); and


WHEREAS, since its inception the Company has made, is making or will make distributions payable to Stockholder in amounts intended to equal the amount of the Company's accumulated adjustments account, as that term is defined in Code Section 1368(e)(1), calculated taking into account all items of income, gain, deduction, loss and credit through the last day of the Company's 1996 S Short Year; and


WHEREAS, on December 3, 1996, the Board of Directors of the Company executed a resolution of the directors (the "Resolution"), a copy of which is attached hereto as Exhibit A, by which certain distributions will be made to Stockholder (collectively, the "Distributions") determined based on Stockholder's pro rata share (based on Stockholder's share ownership reflected in Schedule A) of both (A) $795,229, which is the amount of the Company's undistributed U.S. federal taxable income as reported by the Company on Form 1120S for the Company's 1995 tax year and (B) $4,120,000, which is the estimated amount of the Company's U.S. federal taxable income for its 1996 S Short Year; and


WHEREAS, the amount of the Distributions, although intended to equal Stockholder's pro rata share of such taxable income for the Company's 1995 tax year and its 1996 S Short Year, may, in fact, be less or more than such amounts; and 2


WHEREAS, the Company and Stockholder have determined it to be in their mutual best interests to set forth in this Agreement certain provisions designed to adjust such Distributions in order to achieve the intended results of the Distributions totaling the amount of Stockholder's pro rata share of the Company's U.S. federal taxable income for the Company's 1995 tax year and its 1996 S Short Year; and


WHEREAS, as an inducement to the Purchasers to purchase preferred stock of the Company, the Company and the Stockholder have entered into this Agreement.


NOW, THEREFORE, in consideration of the mutual promises contained herein, Stockholder and the Company hereby agree as follows:


SECTION 1. DEFINITIONS. For purposes of this Agreement:


1.1 "Additional Amounts" means any interest, penalties or additions to tax imposed or assessed by the Internal Revenue Service (the "Service") or any other taxing authority, as a result of any liability for Taxes, as defined herein.


1.2 "Additional Taxes" means, for any Pre-Closing Date Period, as that term is defined herein, the excess of (i) the product of (A) forty percent (40%) and (B) the amount of income of the Company taxable to Stockholder under Code Section 1366 as reported for federal income tax purposes on the Company's Forms 1120S for the 1995 tax year or its 1996 S Short Year, as the case may be, calculated after taking into account any adjustment by the Service or any other taxing authority to such reported amounts (other than a Stockholder Adjustment) constituting a "determination" within the meaning of Code Section 1313 or comparable provision of state law over (ii) an amount equal to the product of (x) forty percent (40%) and (y) the amount of income of the Company taxable to the Stockholder as reported on the Company's Forms 1120S for the 1995 tax year or its 1996 S Short Year.


1.3 "Audit" means any audit, investigation or exam by the Service
or any other taxing authority.


1.4 "Company Adjustment" means any adjustment by the Service or any other taxing authority of income, gain, deduction, loss, credit or other allowance (i) that causes any item of net income of the Company that was taken into account and reported by the Company on its Forms 1120S for federal income tax purposes for the 1995 tax year or its 1996 S Short Year to be included in taxable income in a Post-Closing Date Period and not to be included in taxable income in a Pre-Closing Date period or that causes any deduction, loss, credit or other allowance of the Company, which deduction, credit or other allowance has the effect of reducing taxable income that was taken into account and reported by the Company on its Form 1120 for federal income tax purposes in a Post-Closing Date Period, to be taken into account in a Pre-Closing Date Period and not to be taken into account in a Post-Closing Date Period, and/or (ii) which results in Taxes and/or Additional Amounts in respect thereof being imposed on Company as a


2 3


result of the Company not qualifying as an S corporation for any period prior to the end of the 1996 S Short Year.


1.5 "Indemnitee" means the party, whether the Company or Stockholder, as the context indicates and as the case may be, entitled to receive an indemnification payment from the other party pursuant to this Agreement; provided, however, that if Stockholder shall be the Indemnitee, all rights of the Indemnitee under Section 5 hereof may be exercised only by the Stockholder Representative.


1.6 "Indemnitor" means the party, whether the Company or Stockholder, as the context indicates and as the case may be, obligated to indemnify the other party pursuant to this Agreement; provided, however, that if Stockholder shall be the Indemnitor, all rights of the Indemnitor under Section 5 hereof may be exercised only by the Stockholder Representative.


1.7 "Post-Closing Date Period" means any taxable year of the Company ending after the first day of the 1996 C short tax year.


1.8 "Pre-Closing Date Period" means any taxable year of the Company ending before the first day of the 1996 C short tax year .


1.9 "Stockholder Adjustment" means any adjustment by the Service or any other taxing authority of income, gain, deduction, loss, credit or other allowance that causes any item of net income of the Company that was taken into account and reported by the Company on its Form 1120 for federal income tax purposes in a Post-Closing Date Period, to be included in taxable income in a Pre-Closing Date Period and not to be included in taxable income in a Post-Closing Date Period or that causes any deduction, loss, credit or other allowance of the Company, which deduction, loss, credit or other allowance has the effect of reducing taxable income that was taken into account and reported by the Company on its Forms 1120S for federal income tax purposes for the 1995 tax year or its 1996 S Short Year, to be taken into account in a Post-Closing Date Period and not to be taken into account in a Pre-Closing Date Period.


1.10 "Stockholder Representative" means Leon Sragowicz, or such other shareholder of the Company which all of the shareholders listed on Schedule A designate to the Company as the Shareholder Representative.


1.11 "Tax Claim" means any written or oral claim or notice by the Service or any other taxing authority for Taxes and/or Additional Amounts including, without limitation, an assessment for Taxes.

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