Form of Tax Indemnification Agreement

TAX INDEMNIFICATION AGREEMENT


TAX INDEMNIFICATION AGREEMENT, dated as of __________, 2002 (the "Agreement"), among Bakers Footwear Group, Inc., a Missouri corporation (the "Company"), and the persons listed on SCHEDULE A attached hereto (individually, a "Stockholder" and, collectively, the "Stockholders").


WHEREAS, the Company is and has been an "S corporation" (within the meaning of section 1361(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code")) since January 1, 1984;


WHEREAS, the Company contemplates a public offering (the "Offering") of its stock;


WHEREAS, the execution of this Agreement by the Company and the Stockholders is a condition to the closing (the "Closing") of the contemplated Offering;


WHEREAS, it is anticipated that the Company's election to be an S corporation will terminate as a result of revocation of such status in accordance with section 1362(d)(1) of the Code, the day prior to the day of the Closing;


WHEREAS, in connection with the Offering, the Company and Stockholders wish to provide for certain indemnification with respect to the Company's prior status as an S corporation.


NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, and intended to be legally bound hereby, the parties hereto agree as follows:


ARTICLE I.
DEFINITIONS


1.1. Definitions. The following terms as used herein have the following meanings:


"Closing Date" means the date on which the Offering closes.


"C Short Year" means that portion of the S Termination Year of the Company beginning on the Termination Date and ending on the last day of the S Termination Year.


"C Taxable Year" means any taxable year (or portion thereof) of the Company during which the Company is a C corporation, including the C Short Year.


"Final Determination" means the final resolution of any income tax liability (including all related interest and penalties) for a taxable period. A Final Determination shall result from the first to occur of:


(i) the receipt from the Internal Revenue Service (the "IRS") of a fully executed Waiver of Restrictions on Assessment and Collection of Deficiency in Tax Acceptance of Overassessment (the "Waiver") on Federal Revenue Form 870 or 870-AD (or any successor comparable form or the expiration of a comparable period with respect to any comparable agreement or form under the laws of any other jurisdiction), unless, within such period, the applicable taxpayer gives notice of that taxpayer's intention to attempt to recover all or part of any amount paid pursuant to the Waiver by filing a timely claim for refund;


(ii) a decision, judgment, decree or other order by a court of competent jurisdiction that is not subject to further judicial review (by appeal or otherwise) and has become final;


(iii) the execution of a closing agreement under section 7121 of the Code or the receipt of written notification from the IRS of an offer in compromise under section 7122 of the Code or the execution of a comparable agreement under the laws of any other jurisdiction; or


(iv) any other event that the parties hereto agree is a final and irrevocable determination of the liability at issue.


"S Short Year" means that portion of the S Termination Year beginning on the first day of such taxable year and ending on the day immediately preceding the Termination Date.


"S Taxable Year" means any taxable year (or portion thereof) of the Company during which the Company was an S corporation, including the S Short Year.


"S Termination Year" means the taxable year of the Company that includes the Termination Date.


"Tax Liability" means any federal or state income tax liability. For purposes of this Agreement federal income tax liability shall be deemed to be (i) the highest applicable individual federal income tax rate, multiplied by (ii) a Stockholder's allocable portion of the Company's taxable income. For purposes of this Agreement, state income tax liability shall be deemed to be (i) the highest applicable individual state income tax rate, multiplied by (ii) a Stockholder's allocable portion of the Company's taxable income in that state. Tax Liability shall also include any interest and penalties.


"Taxing Authority" means the IRS or any comparable state or foreign taxing authority.


"Termination Date" means the date on which the S corporation status of the Company will terminate pursuant to section 1362(d) of the Code.


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ARTICLE II.
TERMINATION OF S CORPORATION STATUS AND ALLOCATION OF INCOME


2.1. Termination of S Corporation Status. The Company and the Stockholders shall cause the Company to terminate its S corporation status pursuant to section 1362(d)(1) of the Code no later than one day before the Closing by filing the form attached hereto and marked as EXHIBIT 1 no later than one day before the Closing. The Stockholders shall each consent to the revocation of the S corporation election by providing the Company with the statement of consent, attached hereto and marked as EXHIBIT 2, no later than one day before the Closing.


2.2. Allocation Election. The Company shall elect to allocate the items described in section 1362(e)(2)(A) of the Code between its two taxable years ending and beginning, respectively, on the date before the Termination Date and the date of the Termination Date under "normal tax accounting rules" pursuant to section 1362(e)(3)(A) of the Code, i.e., the "closing of the books method," by filing the form attached hereto and marked as EXHIBIT 3. The Stockholders shall each consent to such election by filing the forms attached hereto and marked as EXHIBIT 4 pursuant to section 1362(e)(3)(B) of the Code.


ARTICLE III.
OBLIGATIONS


3.1. Liability for Taxes Incurred by Stockholders During the S Short Year. Each Stockholder shall (i) duly include, in such Stockholder's own federal and state income tax returns, all items of income, gain, loss, deduction or credit attributable to the S Short Year in a manner consistent with the Form 1120S and the schedules thereto (and the corresponding state income tax forms and schedules) to be filed by the Company with respect to such period, (ii) file such returns no later than the due date (including extensions, if any) for filing such returns, and (iii) pay any and all taxes required to be paid for his or its taxable year that includes the S Short Year.


3.2. Liability for Taxes Incurred by the Company During the S Short Year and the C Short Year. The Company shall (i) be responsible for and effect the filing of all federal and state income tax returns for the Company with respect to the S Short Year and the C Short Year, (ii) accurately prepare and timely file such Company returns, and (iii) pay any and all taxes re ...