Star Scientific tax settlement

Star Scientific to pay Va. more than $900,000 to settle tax dispute

FINAL SETTLEMENT AGREEMENT AND RELEASE OF ALL CLAIMS

This Settlement Agreement and Release (the "Agreement") is made between and among
the Virginia Department of Taxation (the "Department"), and Star Scientific, Inc. ("Star")
(collectively, the "Parties").

WHEREAS the Department conducted a sales and use tax audit of Star which covered
the period January 1, 1999 through March 31, 2002.

WHEREAS the effect of the field audit report was to deny Star the manufacturing
exemption from Virginia sales and use tax provided by Virginia Code

WHEREAS on May 30, 2002, the Department issued a retail sales and use tax
assessment to Star in the amount of $707,590.51, plus interest, for the period January 1, 1999
through March 31, 2002. The assessment imposed sales taxes and interest on Star's purchase of
tobacco curing barns.

WHEREAS on August 20, 2002, Star filed a protest with the Department seeking
correction of the Department's retail sales and use tax assessment for the period January 1, 1999
through March 31, 2002.

WHEREAS on October 7, 2004, the Department issued a determination to Star where it
deemed its sales and use tax assessment to be correct.

WHEREAS on November 5, 2004, Star requested a reconsideration of the Department's
October 7, 2004 determination.

WHEREAS on October 27, 2006, Star met with the Department to discuss the May 30,
2002 assessment and to provide the Department with additional information to facilitate its
reconsideration.

WHEREAS on December 4, 2006, Star filed a supplement submission to its request for
reconsideration with the Department.

WHEREAS on August 10, 2010, the Department reconsidered its October 7, 2004
determination and issued a revised determination to Star where it again deemed its sales and use
tax assessment to be correct.

WHEREAS on July 14, 2011, Star brought an action pursuant to Virginia Code 58.1-
1825 in the Circuit Court of Mecklenberg County to correct the Department's assessment of
Virginia retail sales and use tax on its purchase of tobacco curing barns, and to compel the
Department to abate the assessment of $707,590.51 of retail sales and use tax and associated
interest accrued.

WHEREAS pursuant to an order by the Circuit Court of Mecklenberg County, Star and
the Department participated in a Judicial Settlement Conference before the Honorable Judge
Daniel T. Balfour on November 18, 2013.

WHEREAS the parties have each had the benefit of counsel and are in agreement that
that this Agreement is an appropriate and reasonable resolution of the matter in dispute.

NOW, THEREFORE, the Parties hereby agree and represent as follows:
1. VIRGINIA SALES AND USE TAX LIABILITY

a. The Parties agree that Star shall pay $975,000.00 to the Department in total
satisfaction of the May 30, 2002 retail sales and use tax assessment for $707,590.51 for the
period January 1, 1999 through March 31, 2002, plus interest (bill number 50430). This amount
is satisfaction of tax, penalty, and interest due under bill munber 50430 for Virginia retail sales
and use tax for the period January 1, 1999 through March 31, 2002. The Department shall not
assess or otherwise try to collect any additional amount in excess of $975,000.00 from Star (or
from any and all of its respective past, present and future affiliates, parents, subsidiaries, and
current and former employees, officers, directors and attomeys) for Virginia retail sales and use
tax for the period January 1, 1999 through March 31, 2002 pursuant to bill number 50340.

b. Star shall pay $975,000.00 to the Department within ten business days of the
Effective Date. If Star does not pay $975,000.00 to the Department within ten business days of
the Effective Date, the Department shall be free to collect said sum by all means lawfully
available with respect to unpaid assessments.

c. Should Star re-enter the tobacco curing business and enter into license agreements
with farmers for their use of the tobacco curing barns, Star shall not claim the manufacturing
exemption under Virginia Code or the agricultural exemptions under Virginia
Code 58.1-609.2 on its purchase of the tobacco curing bams.

2. EFFECTIVE DATE. The Effective Date of this Agreement will be the date on which
the Circuit Court enters the order attached as Exhibit A. If the Circuit Court fails to enter the
order, this Agreement shall be null.

3. 0 ADMISSION. By entering into this Agreement, Star does not admit to any liability
for Virginia retail sales and use tax on the disputed purchases and the Department does not admit
any error in assessing Virginia retail sales and use tax on the disputed purchases. This
Agreement is made in good faith and is the compromise of the May 30, 2002 retail sales and use
tax assessment.

4. CONFIDENTIALITY. The Department shall be free to release this Agreement in
response to a request citing the Virginia Freedom of Infonnation Act (FOIA), but agrees not to
initiate any public disclosure of the terms of this Agreement. Star waives any right it would
otherwise have with respect to confidentiality of this Agreement with regard to such FOIA
request or the exemptions contained within OIA.

5. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the
Parties regarding the matters set forth and it supersedes all previous negotiations, discussions and
understandings regarding such matters.

6. MODIFICATION. This Agreement shall not be modified except by an agreement in
writing signed by the Parties.

7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to
the benefit of the Parties, their successors and assigns. No person not a Party to this Agreement
is intended to be benefited by this Agreement, except as expressly set forth.

8. FURTHER ACTS. The Parties agree to execute and deliver such fiirther documents and
do such further acts and things as may be reasonably required to carry out the intent and purpose
of this Agreement.

10. NOTICE AND DELIVERY. Any notice, or delivery of any document, to any Party
from another regarding this Agreement shall be deemed effective when hand-delivered or sent, if
sent by overnight mail or email:

As to the Department, to

Stephen D. Rosenthal, Esq.

William H. Hurd, Esq.

Troutman Sanders LLP

Troutman Sanders Building

1001 Haxall Point

Richmond, Virginia 23219

As to Star, to

Craig D. Bell, Esq.
cdbell@mcguirewoods.com

J. Christian Tennant, Esq.
ctennant@mcguirewoods.com
McGuireWoods LLP

One James Center

901 East Cary Street

Richmond, Virginia 23219-4030

IN WITNESS WHEREOF, the undersigned have executed this Settlement Agreement
and Release as of the date noted belo .

Date: November 18, 2013 Vir epmmento Taxation

Virgin: ax Commissioner

Date: November 18, 2013 Star Scientific, Inc.

Its:

I approve and recommend the terms of this Agree

JudgeQ)aniel T. Balfour

VIRGINIA
IN THE CIRCUIT COURT FOR THE COUNTY OF MECKLENBURG

STAR SCIENTIFIC, INC.
CORPORATION OF DELAWARE

Applicant,
Case No. CL11000337

COMMONWEALTH OF VIRGINIA,
DEPARTNIENT OF TAXATION

Defendant,

ORDER

THIS DAY CAME the parties, by counsel, and represented to the Court that, as a result
of court-ordered mediation, they have reached a settlement on all matters in dispute and the
parties described the terms of the settlement to the Court;

UPON CONSIDERATION WI-IEREOF, the Court finds that all parties have been
represented by competent counsel, that they have the requisite authority to settle this matter (with
the authority of the Tax Commissioner being found at Virginia Code and that the
settlement is appropriate and reasonable, it is hereby

ORDERED, ADIUDGED and DECREED that this matter is dismissed with prejudice.

Entered this 11 day of November, 2013

We ask for this:

Craig wen (VSB No. 30909)

J. William Boland (V SB No. 23548)
J. Christian Tennant (V SB No. 70323)
McGuireWoods LLP

One James Center

901 East Cary Street

Richmond, VA 23219-4030

(804) 775-1179

(804) 698-2160 (facsimile)

Counsel Star Scientzfic, Inc.

i?rflamaas?

Stevcn'D: Rosenthal (VSB No. 16167)
William H. Hurd (V SB No. 16967)
Troutman Sanders LLP

Post Office Box 1122

Richmond, VA 23218

(804) 697-1200

(804) 698-5147 (facsimile)

Counsel for the Commonwealth of Virginia, Department of Taxation

TRUE COPY TESTE

E. E. COLEMA
av: K. 4'
Deputy clerk

circuit court of Mecklenburg
Slam of Virginia