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Tax Sharing and Disaffiliation Agreement

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TAX SHARING AND DISAFFILIATION AGREEMENT

Dated as of , 2000

by and between

and

TAX SHARING AND DISAFFILIATION AGREEMENT dated as of , by and between TECHNOLOGY SOLUTIONS COMPANY, a Delaware corporation ("TSC"), and eLOYALTY CORPORATION, a Delaware corporation ("eLoyalty").

RECITALS

WHEREAS, eLoyalty is a first tier Subsidiary of TSC;

WHEREAS, TSC is the common parent of an affiliated group of corporations within the meaning of Section 1504(a) of the Code, which currently files consolidated federal income Tax Returns;

WHEREAS, pursuant to the Reorganization Agreement dated as of , 1999 by and between TSC and eLoyalty, TSC has contributed to eLoyalty the Transferred Assets, and eLoyalty has assumed the Assumed Liabilities, and TSC will distribute to the holders of TSC Common Stock all of the outstanding shares of eLoyalty Common Stock owned by TSC, with cash distributed in lieu of fractional shares of eLoyalty Common Stock;

WHEREAS, TSC and eLoyalty intend that the Contribution will qualify as a reorganization within the meaning of Section 368(a)(1)(D) of the Code, and the Distribution will qualify as a distribution described in Section 355 of the Code and will not result in the recognition of any taxable gain or income to TSC or any shareholder of TSC (except to the extent of cash received in lieu of any fractional shares of eLoyalty Common Stock);

WHEREAS, after the Distribution Date, eLoyalty will cease to be a member of the TSC Affiliated Group for federal income Tax purposes;

WHEREAS, members of the eLoyalty Group and members of the TSC Group desire on behalf of themselves and their successors to set forth their rights and obligations with respect to Taxes due for periods before, on and after the Distribution Date; and

WHEREAS, capitalized terms used but not defined herein have the meanings set forth in the Reorganization 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

1.01 For the purposes of this Agreement:

"AGREEMENT" shall mean this Tax Sharing and Disaffiliation Agreement as the same may be amended from time to time.

"APPLICABLE FEDERAL RATE" shall have the meaning set forth in Section 1274(d) of the Code, compounded quarterly.

"CHANGE IN FEDERAL TAX LAW" shall mean any of the following occurring after the Distribution Date: any amendment to, or change in, the Internal Revenue Code of 1986, as amended; the issuance of any revenue ruling, revenue procedure, notice, or other pronouncement of general application by the Internal Revenue Service; or the receipt of a binding private letter ruling addressed to TSC, in each such case to the effect that no income or gain will be recognized for federal income tax purposes by the TSC Affiliated Group upon the exercise by employees of any member of such group of options with respect to eLoyalty stock.

"CLAIM" shall have the meaning set forth in Section 5.03(a) of this Agreement.

"CONTRIBUTION" shall have the same meaning set forth in the third recital.

"CONTROLLING PARTY" shall have the meaning set forth in Section 5.01 of this Agreement.

"DISTRIBUTION" shall have the meaning set forth in the third recital.

"eLOYALTY" shall have the meaning set forth in the preamble to this Agreement.

"eLOYALTY GROUP" shall mean, for any period, (i) eLoyalty, (ii) the eLoyalty Business, to the extent operated as a division of an entity other than eLoyalty and (iii) an affiliate of either of the foregoing or of TSC, excluding any entity that is principally engaged in the Retained Business.

"eLOYALTY TAINTING ACT" shall mean:

(a) any inaccuracy or breach of any representation, warranty, or covenant that is made by eLoyalty pursuant to Section 2.01 of this Agreement;

(b) any action (or failure to take any reasonably available action) by any member of the eLoyalty Group; or

(c) any acquisition or other transaction involving the capital stock of eLoyalty (other than the Contribution or Distribution).

"eLOYALTY TAXES" shall mean any Taxes (excluding Restructuring Taxes) that are attributable to the eLoyalty Business.

"FILING PARTY" shall have the meaning set forth in Section 4.01 of this Agreement.

"FINAL DETERMINATION" shall mean with respect to any issue a decision, judgment, decree or other order by any court of competent jurisdiction, a closing agreement or any other binding settlement agreement, or the completion of the highest level of administrative proceedings if a judicial contest is not or is no longer available.

"INDEMNITOR" shall have the meaning set forth in Section 5.02 of this Agreement.

"LIABLE PARTY" shall have the meaning set forth in Section 4.01 of this Agreement.

"NET OPTION DEDUCTION" shall mean, for any taxable year of the TSC Affiliated Group, the excess for such group of deductions or loss over income or gain recognized upon exercise of eLoyalty stock options.

"POST-DISTRIBUTION PERIOD" shall mean any taxable year or other taxable period beginning after the Distribution Date.

"PRE-DISTRIBUTION PERIOD" shall mean any taxable year or other taxable period that ends on or before the Distribution Date.

"REORGANIZATION AGREEMENT" shall have the meaning set forth in the third recital.

"REPRESENTATION LETTERS" shall mean the representation letters and related materials delivered or deliverable by TSC and others in connection with the issuance by the IRS of the Tax Rulings.

"RESTRUCTURING TAXES" shall mean any Taxes and other liabilities imposed as a result of a Final Determination that the Contribution or Distribution failed to qualify under the Code.

"RETAINED BUSINESS" shall have the meaning set forth in the Reorganization Agreement.

"TAX" means any federal, state, local or foreign tax, duty, fee or assessment, together with interest, penalty, addition to tax or additional amount imposed by any Governmental Authority.

"TAX BENEFITS" means benefits taken into account in computing the tax liability of a member of either the eLoyalty Group or the TSC Group.

"TAX ITEM" means any item of income, gain, loss, deduction, credit, reserve, recapture, receipt, proceeds or other item or event that increases or decreases Taxes paid or payable.

"TAX RETURN" shall mean any return, report or similar statement required to be filed with respect to any Tax.

"TAX RULINGS" shall mean the rulings by the IRS deliverable to TSC in connection with the Contribution and the Distribution.

"TRANSACTION TAXES" shall have the meaning set forth in Section 3.04(d) of this Agreement.

"TSC" shall have the meaning set forth in the preamble to this Agreement.

"TSC AFFILIATED GROUP" shall mean the corporations included in the affiliated group, as defined in Section 1504 of the Code, of which TSC is the common parent, and any successor group.

"TSC GROUP" shall mean, for any period, TSC or an affiliate of TSC engaged principally in the Retained Business.

"TSC TAINTING ACT" shall mean:

(a) any inaccuracy or breach of any representation, warranty, or covenant that is made by TSC pursuant to Section 2.02 of this Agreement;

(b) any action (or failure to take any reasonably available action) by any member of the TSC Group;

(c) any acquisition or other transaction involving the capital stock of TSC.

"TSC TAXES" shall mean any Taxes (excluding Restructuring Taxes) that are attributable to the Retained Business.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

2.01 eLOYALTY. eLoyalty hereby represents and warrants that:

(i) it has examined the Tax Rulings and the Representation Letters, and (ii) the facts set forth therein, and the representations made therein, to the extent descriptive of the eLoyalty Group or the eLoyalty Business were true, correct and complete in all material respects when the Tax Rulings were issued, and will be true, correct and complete in all material respects on the Distribution Date.

2.02 TSC. TSC hereby represents and warrants that the facts set forth in the Tax Rulings and Representation Letters to the extent descriptive of the TSC Group or the Retained Business were true, correct and complete in all material respects when the Tax Rulings were issued, and will be true, correct and complete in all material respects on the Distribution Date.

ARTICLE III

TAX RETURNS, TAX PAYMENTS AND TAX SHARING OBLIGATIONS

3.01 OBLIGATIONS TO FILE TAX RETURNS. TSC shall timely file or cause to be filed all Tax Returns with respect to the eLoyalty Group due on or before the Distribution Date or for any Pre-Distribution Period. eLoyalty shall timely file or cause to be timely filed any other Tax Return with respect to the eLoyalty Group.

3.02 OBLIGATION TO REMIT TAXES. TSC and eLoyalty shall each remit or cause to be remitted any Taxes due in respect of any Tax Return it is required to file or cause to be filed.

3.03 TAX SHARING OBLIGATIONS AND PRIOR AGREEMENTS. eLoyalty shall be liable for and pay any eLoyalty Taxes; TSC shall be liable for and pay any TSC Taxes; prior Tax sharing agreements or practices are terminated as of the Distribution Date.

3.04 RESTRUCTURING TAXES; OTHER TAXES RELATING TO THE CONTRIBUTION OR DISTRIBUTION. eLoyalty and TSC each bear liability for Restructuring Taxes under specified circumstances, and Transaction Taxes shall be filed and remitted by the parties as described herein.

3.05 PERIOD THAT INCLUDES THE DATE OF DISTRIBUTION. To the extent permitted by law, the taxable year of the eLoyalty Group shall be treated as closing at the close of the Distribution Date.

3.06 PAYMENTS IN RESPECT OF NET OPTION DEDUCTIONS. If, following the Distribution Date, eLoyalty provides an opinion of independent tax counsel concluding that a Net Option Deduction will be available to the TSC Affiliated Group, then TSC shall remit certain amounts to eLoyalty as specified.

ARTICLE IV

PAYMENTS

4.01 GENERAL TAX PAYMENTS. With respect to any Taxes for which one party is liable under Section 3.03 and that are to be remitted in connection with Tax Returns to be filed by the other party, the Liable Party shall provide necessary information and pay amounts not in dispute in accordance with the procedure described herein.

4.02 OTHER PAYMENTS. Other payments due to a party under Section 3.03 shall be due not later than twenty (20) days after receipt or crediting of a refund or notice of a Final Determination.

4.03 NOTICE. TSC and eLoyalty shall give each other prompt written notice of any payment that may be due under this Agreement.

ARTICLE V

TAX AUDITS

5.01 GENERAL. Except as otherwise provided, each party shall have sole responsibility for audits or other proceedings with respect to Tax Returns it is required to file.

5.02 INDEMNIFIED CLAIMS IN GENERAL. Each party shall notify the other of proposed adjustments that may result in liability of the other party and may permit participation in the proceeding as described herein.

5.03 CERTAIN FEDERAL INCOME TAX CLAIMS. Claims exceeding $250,000 are subject to contest procedures, settlement restrictions, and refund/loan provisions as described in the Agreement.

ARTICLE VI

COOPERATION

6.01 GENERAL. TSC and eLoyalty shall cooperate with each other in the filing of any Tax Returns and the conduct of any audit or other proceeding and shall execute and deliver documents reasonably necessary to carry out the intent of this Agreement.

6.02 COOPERATION WITH RESPECT TO TAX RETURN FILINGS, EXAMINATIONS AND TAX RELATED CONTROVERSIES. Each party shall cooperate in connection with tax return preparation, filing, inquiries, audits, examinations, disputes, and litigation involving Tax Returns required under this Agreement.

ARTICLE VII

RETENTION OF RECORDS; ACCESS

The TSC Group and the eLoyalty Group shall retain records, documents, accounting data and other information necessary for the preparation and filing of Tax Returns and shall provide reasonable access to such materials and personnel.

ARTICLE VIII

DISPUTES

If TSC and eLoyalty cannot agree on any calculation of liabilities under this Agreement, the calculation shall be made by an independent public accounting firm acceptable to both parties, whose decision shall be final and binding.

ARTICLE IX

TERMINATION OF LIABILITIES

Notwithstanding any other provision in this Agreement, any liabilities determined under this Agreement shall survive indefinitely.

ARTICLE X

MISCELLANEOUS PROVISIONS

It is acknowledged that rights, obligations and indemnification with respect to tax refund, credit or benefit, and tax liabilities, are set forth in the Reorganization Agreement and this Agreement, as applicable.

Articles XII, XIII, XIV and XV of the Reorganization Agreement shall govern this Agreement as if the Reorganization Agreement and this Agreement were a single agreement, subject to the terms of this Agreement in the event of inconsistency.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

TECHNOLOGY SOLUTIONS COMPANY

By

Name:

Title:

eLOYALTY CORPORATION

By

Name:

Title:

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What the Tax Sharing and Disaffiliation Agreement Is

The Tax Sharing and Disaffiliation Agreement is a contractual document used when an affiliated entity leaves a consolidated tax group or when related companies allocate tax liabilities and refunds among departing and continuing members. It sets formulas for sharing federal and state income tax liabilities, responsibility for prior-year adjustments, filing positions, and exchange of tax attributes. The agreement records effective disaffiliation dates, indemnities, audit cooperation obligations, and procedures for handling tax examinations, credits, and refunds. It helps avoid disputes by documenting allocations and administrative processes.

Why a Written Agreement Matters

A clear Tax Sharing and Disaffiliation Agreement reduces post-disaffiliation disputes by establishing allocation formulas, indemnities, audit cooperation, and tax return positions. It provides predictable treatment for tax liabilities and credits and clarifies responsibilities for examinations and payment obligations among former affiliates.

Why a Written Agreement Matters

Who Commonly Prepares or Signs This Agreement

Typical users include corporate tax departments, CFOs, in-house counsel, and parent company controllers managing group tax compliance and separation.

  • Corporate tax teams coordinating consolidated return allocations and post-disaffiliation reconciliations.
  • CFOs and finance leads assessing contingent liabilities and cash-flow impacts of disaffiliation.
  • Outside tax counsel reviewing indemnity language, audit defense duties, and state filing effects.

Smaller companies engaged in spin-offs or divestitures also use the agreement to document negotiated tax treatment and avoid future disputes.

Core Elements to Include in the Agreement

Primary components of a professional Tax Sharing and Disaffiliation Agreement define allocation formulas, indemnities, audit protocols, reporting responsibilities, and post-disaffiliation administrative processes.

Allocation Formula

Specifies how tax liabilities, refunds, credits, net operating losses, and adjustments are allocated between departing and continuing members, including formula inputs, look-back periods, and timing of payments or reimbursements.

Indemnity

Defines indemnification obligations for audit adjustments, penalties, interest, and allocable tax deficiencies, including caps, survival periods, subrogation rights, and procedures for asserting indemnity claims.

Audit Cooperation

Requires cooperation during IRS or state examinations, outlines roles for document production, settlement authority, cost sharing, and notification procedures for proposed adjustments affecting allocated amounts.

Filing Positions

Establishes positions for tax returns, election choices, and who controls amended returns, plus rules for allocating benefits or burdens from changes in filing positions.

Payment Mechanism

Specifies invoicing, reconciliation intervals, interest on overdue amounts, escrow arrangements where applicable, and currency or account details for intercompany transfers.

Dispute Resolution

Describes processes for resolving disagreements, including escalation steps, expert determination, mediation or arbitration clauses, and governing law for interpretation.

Essential Information to Provide in the Agreement

Entity Legal Name: Exact registered legal name.
Tax Identification Number: EIN or SSN as applicable.
Effective Date: Enter date as MM/DD/YYYY.
Disaffiliation Date: Date of separation for tax group.
Allocated Amounts: Specify dollars or percentage shares.
Authorized Signatories: Names and titles of signing officers.

Principal Penalties and Risks to Watch

Incorrect Allocation: Tax exposure and disputes.
Late Filings: IRC §6721 penalties possible.
Missing EIN: Backup withholding triggers.
Audit Costs: Allocated audit assessments and interest.
Intentional Misstatement: Higher IRC penalties.
State Variations: Different rules by state.

Common Preparation Mistakes

  • Failing to specify the exact disaffiliation date leads to disputes about which tax periods and items are subject to allocation and can complicate audits.
  • Vague indemnity language that lacks caps, survival periods, or procedures for claims increases litigation risk and may leave one party with unexpected liabilities.
  • Omitting state tax allocation rules ignores differing nexus and apportionment treatments, often producing inconsistent obligations across jurisdictions.
  • Not defining who controls amended returns or settlement authority can stall resolution of audit adjustments and delay payments or recoveries.

Step-by-Step: How to Complete the Agreement

Follow this step-by-step process to complete and execute a Tax Sharing and Disaffiliation Agreement accurately.

  • 01
    Gather Documents: Collect returns, tax attributes, and prior allocations.
  • 02
    Draft Terms: Define formulas, indemnities, and audit procedures.
  • 03
    Obtain Approvals: Secure sign-off from tax, finance, and legal.
  • 04
    Execute & File: Sign, notarize if required, and distribute copies.

Who Does What: Typical Workflow

Typical processing routes show who prepares, reviews, signs, and retains the agreement after disaffiliation occurs.

  • Preparation: Tax team drafts allocation mechanics.
  • Review: Legal reviews indemnities and dispute clauses.
  • Signing: Authorized officers execute and date the agreement.
  • Distribution: Final copies filed with tax records and counsel.

Setting Up a Digital Workflow

Set up a digital workflow to manage drafting, approvals, e-signature, and secure storage for the agreement.

Field Configuration
Template Use standard clause set and variables.
Approvals Require role-based approval in sequence.
Authentication SMS or email code for signers.
Storage Encrypt and retain signed PDF with audit trail.

Technical Requirements for eSigning and Storage

Digital execution requires an e-signature platform that supports audit trails, secure storage, and role-based authentication.

  • Formats Supported: PDF, Word DOCX, and editable formats.
  • Integrations: NetSuite, Salesforce, Microsoft 365 supported.
  • Security: TLS 1.2/1.3 and AES-256 encryption.

Deadlines and Filing Dates to Consider

Key filing and amendment deadlines interact with disaffiliation allocations and corrective filings; missing dates can trigger penalties.

W-9 — Provide when requested by payer:

No fixed deadline; furnish immediately when payer requests.

1099-NEC — Deliver by Jan 31 to recipient and IRS:

Due Jan 31 to recipient and IRS; penalties apply for late filings.

Amended returns — file promptly after allocation changes:

File amended returns as soon as allocation impacts are known.

Statute of Limitations Impact:

Disaffiliation date can affect three or six-year IRS look-back periods.

I-9 and Payroll Reconciliations:

Payroll and employment taxes require timely reconciliations to avoid DHS penalties.

Best Practices to Reduce Risk and Administrative Burden

Adopt standard clauses, maintain audit trails, and assign responsibilities to reduce disputes and simplify post-disaffiliation administration.

Use clear allocation formulas with examples
Draft formulas using concrete examples and numeric illustrations to show how allocations work across representative tax years; include rounding rules and treatment of partial periods to avoid ambiguity during audits or reconciliations.
Define indemnity scope and limits explicitly
Specify scope, financial caps, survival periods, and procedures for presenting claims, including notice requirements and settlement approvals. Clarify subrogation rights and whether insurance proceeds offset indemnity obligations to prevent duplicate recovery disputes.
Document audit cooperation and authority
State who controls audit strategy, who may settle proposed adjustments, and how costs will be shared. Require prompt notice of audits, preservation of documents, and cooperation steps to streamline responses and preserve positions on amended returns.
Centralize records and version control
Retain signed PDFs, amendment logs, and correspondence in a secure repository with versioning. Track signatory authority and incorporate board resolutions where needed; this reduces challenges during examinations and validates the agreement's procedural integrity.

Illustrative Use Cases

Examples show how different organizations use these agreements to manage separation tax risks and audit exposures.

Optica Ventures LLC

A private investment firm used a Tax Sharing Agreement during a portfolio company sale to allocate state tax liabilities among sellers and buyers.

  • Allocated prior-year NOLs and apportionment adjustments pro rata.
  • The documented formula and indemnity provisions limited post-closing disputes, provided mechanisms for handling audit adjustments, and reduced the need for protracted negotiations by setting clear payment schedules and cooperative audit procedures.

Xerox

A multinational corporate group used the agreement when removing a business line to allocate federal refund rights and coordinate amended returns across entities.

  • Set escrow for disputed amounts during audits.
  • Including explicit audit cooperation clauses and a formula for interim payments helped preserve cash management, ensured timely exchanges of amended return benefits, and reduced the administrative burden on both the departing and continuing entities during multijurisdictional examinations.

Typical Signatories and Their Roles

Jane Doe, CFO

As CFO, Jane Doe signs on behalf of the parent company, certifying that allocations reflect internal accounting and cash-flow arrangements. The CFO typically confirms funding mechanisms for any payments and approves indemnity caps and escrow terms before execution.

Alex Kim, Tax Director

As Tax Director, Alex Kim verifies tax calculations, ensures compliance with IRS and state rules, coordinates with outside counsel for audit positions, and validates TINs and filing strategy. The Tax Director provides technical support during negotiations and post-signature adjustments.

Pricing and Feature Snapshot for eSignature Vendors

Compare entry-level pricing and core features across e-signature vendors commonly used to execute Tax Sharing and Disaffiliation Agreements.

signNow DocuSign Adobe Sign PandaDoc HelloSign
Starting Price $8/user/mo $15/user/mo $14/user/mo $19/user/mo $15/user/mo
Free Trial 7-day free trial Varies by vendor Varies by vendor Varies by vendor Varies by vendor
Bulk Send Yes Yes Yes Yes No
Audit Trail Yes Yes Yes Yes Yes
HIPAA Compliant Yes Yes Yes No No
Envelope Cap No cap 100 envelopes/user/year Varies by plan Varies by plan Varies by plan

Frequently Asked Questions

Answers to common questions about drafting, executing, and enforcing Tax Sharing and Disaffiliation Agreements, including e-signature and retention concerns.


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