exh10_40.htm


    Exhibit
10.40

    


    MAXXAM
INC.

    TAX ALLOCATION AGREEMENT
WITH

    THE PACIFIC LUMBER
COMPANY,

    SCOTIA PACIFIC HOLDING
COMPANY AND

    SALMON CREEK
CORPORATION

    OF MARCH 23,
1993

    


    This Agreement is made as of March 23,
1993, between MAXXAM Inc. (“Parent”), a Delaware corporation, The Pacific Lumber
Company (“Pacific Lumber”), a Delaware corporation, Scotia Pacific Holding
Company (“Scotia”), a Delaware corporation and Salmon Creek Corporation (“Salmon
Creek”), a Delaware corporation.

    


    WHEREAS, Pacific Lumber is currently a
member of the affiliated group within the meaning of Section 1504(a) of The
Internal Revenue Code of 1986 (the “Code”)of which Parent is the common parent
corporation (the “Group”); and

    


    WHEREAS, pursuant to a tax allocation
agreement dated as of May 21, 1988 (the “May 88 Agreement”), Parent and certain
of its then existing subsidiaries including Pacific Lumber established a Tax
Allocation Method, as hereinafter defined. As used herein, the term “Tax
Allocation Method” shall mean a method for allocating the consolidated tax
liability of a group among its members and for reimbursing the group's parent
for the payment of such liability; and

    


    WHEREAS, on March 23, 1993, Scotia
issued its capital stock to Pacific Lumber (the “Scotia Incorporation”) and on
March 23, 1993, Salmon Creek issued its capital stock to Pacific Lumber (the
“Salmon Creek Incorporation”); and

    


    WHEREAS, as of March 23, 1993, as a
consequence of the Scotia Incorporation, Scotia became a member of the Group and
as of March 23, 1993, as a consequence of the Salmon Creek
Incorporation,

    Salmon
Creek became a member of the Group; and

    


    WHEREAS, from time to time, Pacific
Lumber may incorporate a Restricted Subsidiary (as hereinafter defined) which
may become a member of the Group; and

    


    WHEREAS, Parent, Pacific Lumber, Scotia
and Salmon Creek desire to establish a Tax Allocation Method which includes
Scotia, Salmon Creek and any Restricted Subsidiary (in the case of a Restricted
Subsidiary, as of the time that it becomes a member of the
Group).


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    NOW, THEREFORE, in consideration of the
promises and of the mutual agreements and covenants contained herein, Parent,
Pacific Lumber, Scotia and Salmon Creek hereby agree as follows:

    


    
      	
              1.

            	
              (a)

            	
               

            	
              Scotia
      and Salmon Creek agree to be included in, and Parent agrees to file, a
      consolidated Federal income tax return for all taxable years in which
      Parent, Scotia and Salmon Creek are eligible to file consolidated returns
      as part of an affiliated group of corporations as such term is defined in
      section 1504 of the Code.

            


    

    


    
      	
               
      

            	
              (b)

            	
              Pacific
      Lumber shall cause any Restricted Subsidiary to become a party to this
      Agreement at the time that it becomes a member of the Group. Restricted
      Subsidiary shall mean a Restricted Subsidiary as defined in the indenture
      dated as of March 23, 1993 by and between Pacific Lumber and the First
      National Bank of Boston, as Trustee, for Pacific Lumber's $235 million
      senior Notes due 2003 (the “Indenture”). Pacific Lumber shall cause any
      such Restricted Subsidiary to agree to be included in Parent's
      consolidated Federal income tax return for all taxable years during which
      such Restricted Subsidiary is eligible to be included in Parent's
      consolidated Federal income tax
return.

            


    

    


    2.           
All elections relating to the filing of a consolidated Federal income tax return
which are required or are available and the computation of the consolidated
Federal income tax liability of the Group shall be made by Parent. Scotia and
Salmon creek shall execute, and Pacific Lumber shall cause any Restricted
Subsidiary which becomes a party to this Agreement to execute, such consents and
other documents as are necessary in connection therewith.

    


    
      	
              3.

            	
              (a)

            	
               

            	
              Parent,
      as the common parent and agent of the Group, shall be responsible for, and
      shall pay, any consolidated Federal income tax liability of the Group, and
      has the sole right to any refunds from the Internal Revenue
      Service.

            


    

    


    
      	
               
      

            	
              (b)

            	
              Except
      with respect to any payment to Parent that Salmon Creek or Pacific Lumber
      is required to make under this Agreement or the May 88 Agreement, or any
      payment to Scotia that Pacific Lumber is required to make under this
      Agreement, Parent shall indemnify Salmon Creek, Pacific Lumber and each PL
      Subgroup Subsidiary (as hereinafter defined) and hold them harmless
      against all Federal income tax liabilities relating to taxable years of
      Salmon Creek, Pacific Lumber and each PL Subgroup Subsidiary during which
      Salmon Creek, Pacific Lumber and each
      PL Subgroup Subsidiary is or was a member of the
Group.

               

            


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    


    
      	
              4.

            	
              (a)

            	
               

            	
              For
      purposes of making the computations described herein, Scotia and any
      Restricted Subsidiary which becomes a member of the Group (each a “PL
      Subgroup Subsidiary”) shall, together with Pacific Lumber, be treated as
      an affiliated group of corporations (the “PL Subgroup”), the common parent
      of which is Pacific Lumber, provided, however, that the PL Subgroup shall
      only include any subsidiary to the extent that such subsidiary meets the
      test of affiliation under Section 1504 of the Code as it would apply to
      the PL Subgroup.

            


    

    


    
      	
               
      

            	
              (b)

            	
              The
      computation of the Federal income tax liability of Pacific Lumber under
      Section 5 of the May 88 Agreement shall be amended effective March 23,
      1993 to take into account the taxable income, loss, credits and other
      tax attributes of each PL Subgroup Subsidiary for taxable periods of such
      PL Subgroup Subsidiary which are covered by Section 7 of
      this Agreement, as if Pacific Lumber filed a consolidated return solely
      with each PL Subgroup Subsidiary for such periods (taking into account all
      applicable limitations under the Code).  In calculating such
      liability, all intercompany transactions between PL Subgroup members shall
      be treated consistent with the consolidated return Treasury
      Regulations.

            


    

    


    
      	
               
      

            	
              (c)

            	
              There
      shall be no Federal income tax liability or refund for Scotia for any
      taxable period covered by Section 7 of this
  Agreement.

            


    

    


    
      	
               
      

            	
              (d)

            	
              Pacific
      Lumber shall indemnify Scotia and hold it harmless against all Federal
      income tax liabilities and shall have the sole right to any refunds from
      the Internal Revenue Service with respect to taxable periods of Scotia
      which are not covered by Section 7 of this Agreement. The foregoing
      indemnity is being given solely by Pacific Lumber and neither Parent nor
      any of the affiliates of Parent, other than Pacific Lumber, shall have any
      liability or other obligation whatsoever in respect of such indemnity or
      such Federal income taxes.

            


    

    


    
      	
              5.
      

            	
              (a)

            	
               

            	
              There
      shall be computed a Federal income tax liability for Salmon Creek for any
      taxable period of Salmon Creek covered by Section 7 of this Agreement (the
      “Applicable Period”) as if (i) Salmon Creek had filed a separate return
      for such period and all prior Applicable Periods (taking into account all
      limitations which would be applicable
      to Salmon Creek) and (ii) Salmon Creek was never a member of the Group. In
      calculating such liability, the separate returns shall be prepared
      by taking into account all intercompany transactions, including those
      eliminated by reason of the consolidated return Treasury
      Regulations.

            


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    

    


    
      	
               
      

            	
              (b)

            	
              If
      the foregoing calculation results in a Federal income tax liability for
      Salmon Creek with respect to the Applicable Period, then, in that event,
      Salmon Creek shall pay such computed income tax liability to Parent in
      such amounts and at such times as Salmon Creek would have been required to
      pay to the Internal Revenue Service if it were an unaffiliated corporation
      making separate estimated payments of tax and filing a separate tax
      return.

            


    

    


    
      	
               
      

            	
              (c)

            	
              If
      the foregoing calculation with respect to the Applicable Period results in
      a net operating loss that can be carried back to a prior taxable period or
      periods of Salmon Creek with respect to which Salmon Creek previously made
      payments to Parent pursuant to the preceding paragraph (b), then, in that
      event, Parent shall pay Salmon Creek an amount equal to the tax refund to
      which Salmon Creek would have been entitled if it were an unaffiliated
      corporation that filed separate income tax returns in respect of all the
      relevant taxable periods.

            


    

    


    
      	
               
      

            	
              (d)

            	
              If
      the foregoing calculation with respect to the Applicable Period results in
      a net operating loss that cannot be carried back to a prior taxable period
      or periods of Salmon Creek which respect to which Salmon Creek previously
      made payments to Parent pursuant to the preceding paragraph (b), then, in
      that event, such net operating loss shall be a net operating loss
      carryover to be used by Salmon Creek in computing its Federal income tax
      liability pursuant to the preceding paragraph (a) for future taxable
      periods, under the law applicable to net operating loss carryovers in
      general.

            


    

    


    
      	
               
      

            	
              (e)

            	
              Any
      adjustments other than a net operating loss carryback described in
      paragraph (c) above, for whatever reason (including, without limitation,
      audits or amended returns), to any item affecting a calculation of tax
      liabilities under paragraph (a), (b), (c) or (d) above, shall be given
      effect by redetermining the amount payable by or due to Salmon Creek
      pursuant to this Agreement as if such adjustment was part of the original
      determination hereunder
      and including any interest due to or from the Internal Revenue Service as
      a result of such
adjustment.

            


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    

    


    6.            
The foregoing principles shall apply in similar fashion to any. consolidated
state or other local income tax return which the Group may elect or be required
to file.

    


    7.            
Except with respect to Section 4(d), with respect to Salmon Creek and each PL
Subgroup Subsidiary, this Agreement shall be effective for the Group's 1993
taxable period and all subsequent taxable periods (excluding any period of time
prior to the date upon which Salmon Creek or such PL Subgroup Subsidiary joined
the Group) until the date on which (i) Salmon Creek or such PL Subgroup
Subsidiary ceases to be a member of the Group, (ii) the Group no

    longer
remains in existence within the meaning of Treasury Regulation §1.1502-75(a), or
(iii) the Group is no longer eligible to file, or is no longer eligible to join
in the filing of, a consolidated return for Federal income tax purposes. Prior
to or upon termination of this Agreement, the parties may enter into a new
agreement, consistent with the provisions of this Agreement, taking into
account, among other things, to the extent applicable, the manner in which
Salmon Creek or such PL Subgroup Subsidiary ceased to be a member of the Group,
the reason that the Group is no longer in existence, or the reason that Parent
and Salmon Creek or such PL Subgroup Subsidiary can no longer join in the same
consolidated return.

    


    8.            
This Agreement is entered into by the parties solely in recognition of the
mutual benefits resulting from filing a Federal (or state or other local)
consolidated or combined tax return. The respective amounts of tax liability
allocated to Salmon Creek and each PL Subgroup Subsidiary for purposes of
computing such corporation's earnings and profits for Federal (or any other)
income tax purposes may differ from those determined in accordance with this
Agreement. Furthermore, any amount treated for Federal (or state or other local)
income tax purposes, on account of such a difference, as a contribution to
capital or a distribution with respect to stock, or a combination thereof, as
the case may be, shall be treated as a contribution to capital, a distribution
with respect to stock, or a combination thereof, solely for Federal (or state or
other local) income tax purposes.

    


    9.            
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.

    



    
      
         


      

      
         


        
          

        

      

      
         


      

    


    IN WITNESS WHEREOF, Parent, Pacific
Lumber, Scotia and Salmon Creek have executed this Agreement by authorized
officers thereof as of the date first above written.

    


    
      	
              MAXXAM
      Inc.

            	 
      	 
      
	 
      	 
      	 
      
	
              By

            	
              /s/
      Ronald L. Reman

            	 
      	 
      	 
      
	 
      
	
              THE
      PACIFIC LUMBER COMPANY

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
              By

            	
              /s/
      Byron L. Wade

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
              SCOTIA
      PACIFIC HOLDING COMPANY

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
              By

            	
              /s/
      Paul N. Schwartz

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
              SALMON
      CREEK CORPORATION

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
              By

            	
              /s/
      Jacques C. Lazard