1
TAX SHARING AGREEMENT Exhibit 10.16 (7)
This tax sharing agreement (the "Agreement") is entered into by Lincoln
National Corporation ("LNC"), a corporation organized under the laws of the
State of Indiana, and Linsco Reinsurance Company ("Linsco"), a corporation also
organized under the laws of the State of Indiana, and is effective as of
January 1, 1996. This Agreement applies to federal, state, local, and foreign
income taxes, including any interest and penalties assessed for any such taxes,
arising for any taxable year ("Tax Year") during which LNC owns any Linsco
stock. This Agreement supersedes all prior tax sharing agreements between LNC
and Linsco or any subsidiaries of LNC and Linsco, except to the extent
otherwise noted. As described more fully below, the rights and obligations of
LNC and Linsco depend upon the amount of Linsco stock owned by LNC, and on
whether LNC and Linsco are members of an affiliated group that files a
consolidated federal income tax return.
SECTION I. LINSCO IN CONSOLIDATED GROUP
A. Management of Tax Disputes and Tax Computations. For any Tax Year or
portion of a Tax Year in which Linsco is a member of an affiliated group that
files a consolidated return for which LNC is the common parent ("LNC
Consolidated Group"), LNC shall be responsible for managing the filing of tax
returns and for determining the appropriate strategy for handling audits and
disputes with taxing authorities. Additionally, LNC shall be responsible for
the final determination of all computations required under this Agreement.
B. Calculation of Linsco's Tax Liability. For any Tax Year in which
Linsco is a member of the LNC Consolidated Group, the LNC Consolidated Group's
federal income tax liability shall be allocated between Linsco and the
remainder of the LNC Consolidated Group as follows:
1. Separate Tax Liability. Periodic computations shall be made of
the federal income tax liability of Linsco, on a hypothetical separate return
basis ("Separate Tax Liability"), for each Tax Year, or for any part of a Tax
Year during which Linsco is included in the LNC Consolidated Group.
Computations shall be made at least once per quarter to support the required
payments of quarterly estimated taxes and shall also be made at the time of the
original and extended due dates for the filing of the federal income tax return
for each Tax Year. Such Separate Tax Liability shall be calculated as follows:
a. Linsco shall be treated as a corporation which files a
federal income tax return separate from the LNC Consolidated Group, except as
otherwise provided in this Agreement.
b. For purposes of this calculation, Linsco shall be treated as
if it had never been included in the LNC Consolidated Group.
155
2
c. Gains and losses on intercompany transactions shall be
disregarded until such time as they are recognized in the consolidated federal
income tax return of the LNC Consolidated Group.
d. Income, gain, deductions, credits, and similar items of
Linsco described in Treasury Regulation section 1.1552-1(a)(2)(ii) shall
generally be taken into account in the manner specified in that subdivision.
e. To the extent that Linsco is unable to avail itself of
special rules applicable only to small corporations, lower tax rates applicable
to part or all of the income of a single corporation, the exemption provided in
Internal Revenue Code section 59A (applicable to the environmental tax) or any
other similar item because it participates in the filing of the federal income
tax return of the LNC Consolidated Group, Linsco shall not use such benefit in
calculating its Separate Tax Liability.
f. Income, gain, deductions, credits, and similar items of
Linsco shall not be included to the extent attributable to a period commencing
on or after the date that Linsco ceases to be includible in the LNC Consolidated
Group.
g. For each quarter of a Tax Year that Linsco has net operating
losses, net capital losses, tax credits or any other tax benefits that have not
been used to decrease Linsco's Separate Tax Liability in the current Tax Year
("Excess Tax Items") that can be used as hypothetical carry back items against
prior hypothetical Linsco separate return Tax Years ("Carry Back Items"), LNC
shall reimburse Linsco for the use of such Carry Back Items at the rate Linsco
would have been entitled to receive had such Carry Back Items actually been used
in a Linsco claim for refund.
h. To the extent that Excess Tax Items can ultimately be used as
hypothetical carry forward items against future hypothetical Linsco Tax Years
("Carry Forward Items"), Linsco shall be entitled to use such Excess Tax Items
to offset future years' income but will be required to reimburse LNC to the
extent that paragraph 2.c., below, applies.
2. Excess Tax Items, Generally.
a. To the extent that the LNC Consolidated Group can use an
Excess Tax Item, which has not otherwise been used as a Carry Back Item, to
decrease its federal income tax liability for that quarter after taking into
account all similar items from the other affiliated corporations in the LNC
Consolidated Group, LNC shall reimburse Linsco at an amount equal to the actual
decrease in the tax liability of the LNC Consolidated Group for any Excess Tax
Items used, notwithstanding the fact that Linsco could not use these Excess Tax
Items in calculating its Separate Tax Liability.
156
3
b. To the extent that the Excess Tax Items are not used under
paragraphs a. or 1.g. above, Linsco shall be entitled to a reimbursement from
LNC if and when such Excess Tax Items actually reduce the LNC Consolidated
Group's federal income tax payments, or when the LNC Consolidated Group actually
receives a refund of previously paid taxes, to the extent that such refund
payment is directly attributable to such Excess Tax Items.
c. To the extent that Linsco receives a payment from LNC for the
actual use of Excess Tax Items pursuant to paragraphs a. or b., above, LNC shall
be entitled to reimbursement from Linsco for the full amount of such payments to
the extent that Linsco may use such Excess Tax Items as Carry Forward Items. To
the extent that Linsco has been compensated by LNC under a prior tax sharing
agreement for an amount which would qualify as an Excess Tax Item under this
Agreement, LNC shall also be entitled to reimbursement from Linsco for the full
amount of such prior payments to the extent that Linsco may use such Excess Tax
Items as Carry Forward Items.
d. Nothing in this entire Section I. shall be interpreted to
entitle Linsco to more than a single use of any Excess Tax Items, Carry Back
Items, Carry Forward Items, or any other items which reduce the tax liability of
Linsco.
3. Alternative Minimum Tax Periods.
a. If the LNC Consolidated Group is required to pay Alternative
Minimum Tax ("AMT") for any taxable quarter, then the AMT amount shall be
divided among all of the corporations in the LNC Consolidated Group which would
have had to pay AMT if their tax liability had been calculated on a separate
return basis. The allocation of AMT shall be in proportion to the amount of AMT
each corporation would have had to pay on a hypothetical separate return basis.
Any amount of AMT so apportioned to Linsco shall be available for use as an AMT
credit in calculating Linsco's Separate Tax Liability for future taxable periods
in which the AMT credit may actually be used by the LNC Consolidated Group.
This provision also shall apply to the extent that the LNC Consolidated Group
becomes subject to AMT for prior Tax Years as a result of an IRS audit or other
adjustment to the tax liability payable.
157
4
b. If Linsco would be required to pay AMT based upon the
calculation of its Separate Tax Liability, but the LNC Consolidated Group is not
required to pay AMT for that taxable quarter, then Linsco shall not be required
to pay the AMT amount to LNC. Instead, Linsco shall pay to LNC an amount equal
to its Separate Tax Liability calculated without regard to the AMT provisions.
4. Interest and Penalties.
a. If, after netting interest payable by the LNC Consolidated
Group against interest payable by the IRS for a given Tax Year, the LNC
Consolidated Group is required to pay interest to the IRS as a result of any
increase in tax liability for a given Tax Year, such interest shall be divided
among all of the corporations in the LNC Consolidated Group whose tax liability
increased from the initial calculation at the time of the filing of the LNC
consolidated tax return for that Tax Year. This allocation shall be made in
proportion to the increase in tax liability of Linsco as compared to the
increase in tax liability of all members of the LNC Consolidated Group.
b. If, after netting interest payable by the LNC Consolidated
Group against interest payable by the IRS for a given Tax Year, the LNC
Consolidated Group is entitled to receive interest from the IRS as a result of
any decrease in tax liability for a given Tax Year, such interest shall also be
divided among all of the corporations in the LNC Consolidated Group whose tax
liability decreased from the initial calculation at the time of the filing of
the LNC consolidated tax return for that Tax Year. This allocation shall be
made in proportion to the decrease in tax liability of Linsco as compared to the
decrease in tax liability of all members of the LNC Consolidated Group.
c. Any tax penalties imposed by a taxing authority shall be the
responsibility of the corporation whose tax position or tax item caused the
imposition of such penalties.
5. Payments. Payments between LNC and Linsco shall be made as follows:
a. Within five days following the due date of the quarterly
estimated federal income tax payment for the LNC Consolidated Group, Linsco
shall pay to LNC the full amount (if any) of its Separate Tax Liability for that
taxable quarter. Also, to the extent that LNC may use an Excess Tax Item to
reduce the amount of the estimated federal income tax payment for the LNC
Consolidated Group in a given tax quarter, it shall reimburse Linsco for the use
of that item within five days following the due date of such quarterly payment.
Likewise, to the extent that Linsco can use an Excess Tax Item for
158
5
which it has received payment from LNC pursuant to Section I.B.2., above, as a
Carry Forward Item, Linsco shall reimburse LNC for such amounts as described in
Section I.B.2.c., above, within five days of the quarter in which it may use
the Carry Forward Item.
b. Within five days following the last date for filing a request
for an extension to file the annual federal income tax return, an adjusting
payment shall be made between LNC and Linsco which is equal to the difference
between the quarterly payments made pursuant to paragraph a. above, and the
estimated annual Separate Tax Liability of Linsco.
c. Within 45 days after the filing of the annual federal income
tax return of the LNC Consolidated Group, adjusting payments shall be made
between LNC and Linsco to the extent of any difference between the payments made
pursuant to paragraph a. or b. above, and the annual Separate Tax Liability of
Linsco. In the event that LNC cannot use an Excess Tax Item to offset the
federal income tax liability of the LNC Consolidated Group for the current Tax
Year, but Linsco can use such an item as a Carry Back Item, then the
reimbursement by LNC to Linsco contemplated in Section I.B.1.g., above, shall
also be made within 45 days after the filing of the annual federal income tax
return of the LNC Consolidated Group.
d. Within 45 days of a settlement of any IRS audit dispute,
adjusting payments shall be made between LNC and Linsco as necessary as a result
of such settlement.
e. LNC shall be responsible for making all required federal
income tax payments for the LNC Consolidated Group.
6. Information. If any information relevant to making any
calculation covered by this Agreement is particularly within the knowledge or
possession of Linsco or any subsidiary of Linsco, Linsco shall promptly provide
such information to LNC and shall also provide any supporting schedules, data or
details which LNC may reasonably request.
7. State Taxes. To the extent that any state tax system permits or
requires that the tax liability of affiliated corporations be computed on a
consolidated, affiliated, unitary or combined basis ("Combined Return Basis")
and Linsco files on a Combined Return Basis with one or more other corporations
in the LNC Consolidated Group, Linsco's state tax liability shall be calculated
and allocated in a manner comparable to that provided in Section I. of this
Agreement.
159
6
SECTION II. LINSCO NOT CONSOLIDATED
A. Responsibility for Tax Returns and Tax Payments. For any period in
which LNC owns any stock of Linsco, but Linsco is not included in the LNC
Consolidated Group, Linsco shall be responsible for filing all federal, state,
local, and foreign tax returns relevant to it and shall also be responsible for
paying any such taxes payable by it. Furthermore, any federal, state, local,
or foreign tax liabilities which are not calculated on a consolidated basis
with part or all of the LNC Consolidated Group shall be the responsibility of
the entity incurring such liability even if Linsco is filing as part of the LNC
Consolidated Group for federal income tax purposes.
B. Management of Tax Disputes and Tax Computations. For any Tax Year or
portion of a Tax Year in which LNC owns sufficient Linsco stock to result in
LNC and Linsco being treated as a consolidated group for financial statement
reporting purposes, LNC shall be consulted prior to determining the strategy
for handling audits and disputes with taxing authorities, including, but not
limited to, whether or not to appeal or litigate one or more issues and any
proposed settlements of issues.
C. Carry Over Attributes from Consolidated Periods.
1. General Carry Over Provisions. To the extent that Linsco carries
forward tax attributes for which it has already received compensation from LNC
pursuant to the terms of Section I. above, Linsco shall reimburse LNC for the
previous payment by LNC to Linsco, at the time of the deconsolidation of LNC and
Linsco. To the extent that Linsco has paid LNC for a Separate Tax Liability for
which it remains liable after leaving the LNC Consolidated Group, LNC shall
reimburse Linsco for the previous payment by Linsco to LNC at the time of the
deconsolidation of LNC and Linsco. Similarly, to the extent that the ultimate
amount of tax paid differs from the amount of tax liability initially calculated
for any given Tax Year in which Linsco was included in the LNC Consolidated
Group, LNC or Linsco, as the case may be, shall be required to pay and entitled
to receive amounts sufficient to compensate for this difference.
2. AMT Credits. In the event that Linsco leaves the LNC Consolidated
Group, the amount of AMT credit which it shall be allowed to carry over without
any obligation to reimburse LNC shall not exceed the amount allocated pursuant
to Section I.B.3, above. LNC shall be reimbursed by Linsco to the extent that
any AMT credit actually carried over exceeds the amounts calculated in Section
I.B.3., at the time of the
160
7
deconsolidation. Also, Linsco shall be reimbursed by LNC to the extent that it
is permitted to carry over less than the amount calculated in Section I.B.3.
3. Prior Consolidation Impacts. Neither LNC nor any member of the
LNC Consolidated Group shall be liable for any payment to Linsco should the
amount of tax that Linsco pays in any such later year on a separate return basis
or as a member of another consolidated group be increased as a result of Linsco
having been a member of the LNC Consolidated Group.
4. Elections Impacting Prior Consolidated Periods. In the event that
Linsco wishes to make an election for tax purposes which may adversely affect
tax positions taken by the LNC Consolidated Group during Tax Years when it was a
member of the LNC Consolidated Group, Linsco shall submit to LNC a written
request for permission to make such an election. LNC shall not unreasonably
withhold such written permission to make a tax election which may be beneficial
to Linsco after it leaves the LNC Consolidated Group. Linsco shall, as a
condition of receiving written permission to make the tax election, reimburse
LNC for any and all additional tax costs incurred by the LNC Consolidated Group
in connection with permitting such an election to be made.
SECTION III. GENERAL ITEMS
A. Interaction with Prior Tax Periods.
1. Tax Payments for Prior Periods. To the extent that the tax
liability initially allocated to Linsco for a prior tax period is subsequently
redetermined, as a result of filing an amended return, the outcome of an IRS
examination, the retroactive application of a new tax law or tax regulation, or
other similar modifying action or item, Linsco shall pay LNC for any such
increases to Linsco's tax liability and is also entitled to receive a payment
from LNC for any decreases in tax liability attributable to Linsco.
161
8
2. Prior Tax Payments. To the extent that Linsco paid to LNC an
amount for its share of the LNC Consolidated Group's federal income tax
liability or to the extent that it pays an amount pursuant to paragraph 1.
above, Linsco shall be entitled to consider the amount of such prior payments
when determining whether or not Carry Back Items may be used to offset tax
payments for prior years.
3. Interest and Penalties for Prior Periods. Any interest and
penalties payable by any member of the LNC Consolidated Group relating to Tax
Years prior to this Agreement shall be subject to the terms of Section I.B.4 to
the extent that they become payable after the effective date of this Agreement.
B. Filing Relevant Items. Linsco agrees to file any elections, consents,
and other documents and take any other actions which may be necessary or
appropriate to carry out the purposes of this Agreement.
C. Inclusion of Linsco Subsidiaries. If Linsco owns, acquires or creates
any subsidiary corporation which is an includible corporation as that term is
defined in IRC section 1504, such subsidiary corporation shall be subject to
this Agreement. In such a case, Linsco shall be treated as the common parent
of an affiliated group that files a consolidated federal income tax return
including all of its subsidiaries which are included in the LNC Consolidated
Group ("Linsco Group"), and all separate tax calculations shall be made for the
entire Linsco Group rather than for each member of the Linsco Group separately.
Linsco shall treat each such subsidiary corporation as if Linsco has an
identical tax sharing Agreement to this Agreement between itself and the
subsidiary corporation, unless Linsco and such subsidiary have entered into a
separate tax sharing Agreement which has been approved in writing by LNC.
D. Applicability to Succeeding Entities. This Agreement shall be binding
on any successor of the parties to this Agreement, including but not limited to
any successor of LNC or Linsco, to the same extent as if the successor had been
an original party to this Agreement.
E. Provision of Items to Defend Tax Positions. Both LNC and Linsco agree
to cooperate in supplying information reasonably requested by the other party
in order to make any computations required under this Agreement and for the
purpose of defending tax examinations, including appeals and litigation.
162
9
F. Maintenance of Books and Records. LNC and Linsco agree to maintain
internal accounting books and records for themselves and each of their
subsidiaries in a manner consistent with U.S. generally accepted accounting
principles and Indiana statutory accounting principles. Furthermore, LNC and
Linsco agree to account for any intercompany transactions entered into by them
or any of their subsidiaries and to make such information available to the
other party for tax purposes both when such transactions are entered into and
when such intercompany transactions become currently taxable.
G. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Indiana and no state court other than
the courts of the State of Indiana shall have jurisdiction over disputes
between the parties concerning the validity, performance, interpretation or
construction of this Agreement.
LINCOLN NATIONAL CORPORATION
Date: 8-29-96 By /s/ Richard C. Vaughan
-------------------------------
Richard C. Vaughan
Executive Vice President and
Chief Financial Officer
LINSCO REINSURANCE COMPANY
Date: 9/23/96 By /s/ Todd R. Stephenson
--------------------------------
Todd R. Stephenson
Vice President and Treasurer
163