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BUDGET CONSTRUCTION CO., INe. AND BUDGET HOLDINGS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS Years Ended December 31, 2008 and 2007 NOTE 16 - Contingent liabilities (Continued): On August 19,2008, a certain customer was awarded damages in the amount of$184,418 in a counterclaim for uncompleted work by The Company. At December 31, 2008, The Company paid $72,853 and is appealing the remaining $111,565. The Company secured the remaining balance of the judgement award and issued an irrevocable standby letter of credit for the same amount plus court costs and interest. In addition, The Company settled a lawsuit against a subcontractor for allegations of breach of contract and other legal actions arising in the ordinary course of business. The subcontractor was awarded $275,000 plus interest, costs and attorney fees. NOTE 17 - Income taxes: The Company recognizes income from long-term contracts on the percentage-of-completion method for both financial statements reporting purposes and tax reporting purposes. The Affiliate is treated as a partnership for federal and state income tax purposes. Consequently, federal and state income taxes are not payable by, or provided for, The Affiliate. Members are taxed individually on their shares of The Affiliate's earnings. The Affiliate's profit (loss) is allocated among the members in accordance with their corresponding ownership allocation. The Company's stockholders have elected for the corporation to be taxed as a subchapter S-Corporation effective on May 23, 1991. As an S-Corporation, The Company passes through items of income and deductions to the stockholders each year as earned, and thus pays no federal corporate income tax itself. At December 31, 2008, current federal income tax liabilities passed through to the stockholders, using an estimated effective rate of 30%, are summarized as follows: Estimated taxable income pass through to stockholders Estimated effective tax rate Estimated stockholders current tax liability Less: estimated tax deposits and credits Net estimated stockholders' current federal tax liability $ 324,676 30% 97,403 (80,000) $ 17,403 Although not accrued in the accompanying financial statements, current and deferred federal income taxes liability pass through to the stockholders at December 31, 2008 are summarized as follows: Current Long-term $ 560,734 $ 560,734 Total $ 560,734 $ 560,734 Difference in depreciation methods $ Net deferred federal income tax liability pass-through $ Management intends to disburse approximately $17,403 to the stockholders subsequent to year-end to pay income taxes. 16 Benitez & Company, CPA's