exh10_42.htm


    Exhibit
10.42

    


    MAXXAM
INC.

    TAX
ALLOCATION AGREEMENT WITH

    MAXXAM
GROUP INC.

    THE
PACIFIC LUMBER COMPANY and

    BRITT
LUMBER CO., INC.

    OF
FEBRURAY 9, 2004

    


    This Agreement is made as of February
9, 2004, between MAXXAM Inc. ("Parent"), a Delaware corporation, MAXXAM Group
Inc. ("MGI"), a Delaware corporation, The Pacific Lumber Company ("Pacific
Lumber"), a Delaware corporation and Britt Lumber Co., Inc. ("Britt"), a
California corporation.

    


    WHEREAS, Pacific Lumber and Britt are
currently members, for federal income tax purposes, of the affiliated group
within the meaning of Section 1504(a) of The Internal Revenue Code of 1986, as
amended (the "Code") of which Parent is the common parent corporation (the
"Group"); and

    


    WHEREAS, Pacific Lumber and Britt are
currently members of a combined unitary reporting group for Arizona and
California income tax purposes of which MGI is the common parent corporation
(the "Forest Products Group"); and

    


    WHEREAS, pursuant to a tax allocation
agreement dated as of May 21, 1988 (the "May 88 Agreement"), Parent and 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, the May 88
Agreement was amended as between Parent and Pacific Lumber to establish a Tax
Allocation Method for Pacific Lumber that included Scotia Pacific Holding
Company ("Scotia") and Salmon Creek Corporation ("Salmon Creek"), then-existing
subsidiaries of Pacific Lumber (the "March 93 Agreement"); and

    


    WHEREAS, Scotia, which was a wholly
owned subsidiary of Pacific Lumber, ceased to be a member of the Group as a
result of being merged into a newly formed wholly owned subsidiary of Pacific
Lumber, Scotia Pacific Company LLC ("Scotia LLC") on July 20, 1998;
and

    


    WHEREAS, Salmon Creek, which was a
wholly owned subsidiary of Pacific Lumber, ceased to be a member of the Group as
a result of being converted into a newly formed wholly owned subsidiary of
Pacific Lumber, Salmon Creek LLC ("Salmon Creek LLC") on December 7, 1999;
and

    


    WHEREAS, Scotia LLC and Salmon Creek
LLC are not members of the Group since each entity is a single member limited
liability company which has not elected to be treated as an association taxable
as a corporation and, therefore, is treated as a division of Pacific Lumber
pursuant to Treasury Regulation ss.301.7707-3(b)(1); and

    


    WHEREAS, on December 31, 2001, the
March 93 Agreement was further amended (the "Amended March 93 Agreement") as
between Parent and Pacific Lumber to clarify the treatment of Scotia LLC and
Salmon Creek LLC as members of the PL Subgroup, as that term is defined in the
Amended March 93 Agreement; and


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    


    WHEREAS, pursuant to a Tax Allocation
Agreement dated July 3, 1990 (the "July 90 Agreement"), Parent and Britt
established a Tax Allocation Method; and

    


    WHEREAS, as of even date herewith, the
stock of Britt was acquired by Pacific Lumber; and

    


    WHEREAS, Parent and Pacific Lumber
recognize that the May 88 and Amended March 93 Agreements are no longer
reflective of Pacific Lumber and its subsidiaries' relationship with Parent;
and

    


    WHEREAS, Parent and Britt recognize
that the July 90 Agreement is no longer reflective of Britt's relationship with
Parent; and

    


    WHEREAS, Parent and Pacific Lumber
desire to establish a Tax Allocation Method which includes Britt and any other
Pacific Lumber subsidiary in the computation of Pacific Lumber's income tax
liability to Parent; and

    


    WHEREAS, Pacific Lumber and Britt
desire to establish a Tax Allocation Method which reflects Britt's subsidiary
relationship to Pacific Lumber.

    


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

    


    1.           Parent
and Pacific Lumber agree to terminate the May 88 Agreement, as it pertains to
their relationship, and the Amended March 93 Agreement with respect to taxable
periods beginning on and after January 1, 2004.

    


    2.           Parent
and Britt agree to terminate the July 90 Agreement with respect to taxable
periods beginning on or after January 1, 2004.

    


    3.           Pacific
Lumber and its subsidiaries, either as of the date of this Agreement or at the
time that the subsidiary becomes eligible to become a member of the group, agree
to be included in, and Parent agrees to file a consolidated Federal income tax
return for all taxable years in which Parent and Pacific Lumber are eligible to
file consolidated returns as an affiliated group of corporations as such term is
defined in Section 1504 of the Code.

    


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

    


    5.           Except
with respect to any payments to Parent that are required under this Agreement,
the May 88 Agreement, the Amended March 93 Agreement, or the July 90 Agreement,
or any payment that Britt is required to make to Pacific Lumber under this
Agreement, Parent shall indemnify Pacific Lumber and each Pacific Lumber
Subgroup Subsidiary (as hereinafter defined) and hold them harmless against all
Federal income tax liabilities relating to taxable years of Pacific Lumber and
each Pacific Lumber Subgroup Subsidiary during which Pacific Lumber and each
Pacific Lumber Subgroup Subsidiary is or was a member of the
Group.


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    


    
      	
              6.

            	
              (a)

            	
               

            	
              There
      shall be computed a Federal income tax liability for Pacific Lumber for
      any taxable period covered by this Agreement (the "Applicable Period") as
      if (i) Pacific Lumber and all lower (with respect to Pacific Lumber) tier
      entities, including newly-formed subsidiaries and Britt, (individually and
      collectively referred to as "Pacific Lumber Subgroup subsidiary" or
      "Pacific Lumber Subgroup Subsidiaries") in which Pacific Lumber has direct
      or indirect ownership are treated as an affiliated group of corporations
      (the "Pacific Lumber Subgroup"), the common parent of which is Pacific
      Lumber, provided, however, that the Pacific Lumber Subgroup shall only
      include any Pacific Lumber Subgroup Subsidiary to the extent that such
      Pacific Lumber Subgroup Subsidiary meets the test of affiliation under
      Section 1504 of the Code as it would apply to the Pacific Lumber Subgroup.
      Pacific Lumber and each Pacific Lumber Subgroup Subsidiary shall sometimes
      be referred to as "Pacific Lumber Subgroup
  Members".

            


    

    


    
      	
               
      

            	
              (b)

            	
              The
      computation of the Federal income tax liability of Pacific Lumber shall
      take into account the taxable income, loss, credits and other tax
      attributes of each Pacific Lumber Subgroup Subsidiary as if Pacific Lumber
      filed a consolidated return including each Pacific Lumber Subgroup
      Subsidiary (taking into account all applicable limitations under the Code)
      ("Pacific Lumber's Tax Liability"). In calculating such liability, all
      intercompany transactions between Pacific Lumber Subgroup Members shall be
      treated consistent with the consolidated return Treasury
      Regulations.

            


    

    


    
      	
               
      

            	
              (c)

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

            


    

    


    
      	
               
      

            	
              (d)

            	
              For
      purposes of Section 6.(b) of this Agreement, any net operating loss
      carryforwards or other tax attributes (e.g., minimum tax credits or
      charitable contributions carryovers) available to the Pacific Lumber
      Subgroup as of December 31, 2003 under the May 88 and Amended March 93
      Agreements shall be available to offset income of the Pacific Lumber
      Subgroup in the same manner as under the May 88 and the Amended March 93
      Agreements.

            


    

    


    
      	
               
      

            	
              (e)

            	
              If
      the calculation of Pacific Lumber's Tax Liability in Section 6.(b) results
      in a net operating loss that can be carried back to a prior taxable period
      or periods with respect to which Pacific Lumber made payments to Parent
      under this Agreement, then, in that event, Parent shall pay Pacific Lumber
      an amount equal to the tax refund to which Pacific Lumber would have been
      entitled consistent with this Section
4.

            


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    


    
      	
               
      

            	
              (f)

            	
              If
      the calculation of Pacific Lumber's Tax Liability in Section 6.(b) results
      in a net operating loss that cannot be carried back pursuant to the
      preceding subsection (e), then, in that event, such net operating loss
      shall be a net operating loss carryover to be used by the Pacific Lumber
      Subgroup in computing its Federal income tax liability pursuant to
      preceding subsection (b) for future taxable periods, under the law
      applicable to net operating loss carryovers in
  general.

            


    

    


    
      	
              7.

            	
              (a)

            	
               

            	
              There
      shall be computed a Federal income tax liability for Britt for any taxable
      period covered by this Agreement (the "Applicable Period") as if Britt had
      filed a separate return for such period and all prior Applicable Periods
      (taking into account all applicable limitations under the Code) ("Britt's
      Tax Liability"). In calculating such liability, the separate return shall
      be prepared by taking into account all intercompany transactions,
      including those eliminated or deferred by reason of the consolidated
      return Treasury Regulations.

            


    

    


    
      	
               
      

            	
              (b)

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

            


    

    


    
      	
               
      

            	
              (c)

            	
              For
      purposes of Section 7.(b) of this Agreement, any net operating loss
      carryforwards or other tax attributes (e.g., minimum tax credits or
      charitable contributions carryovers) available to the Pacific Lumber
      Subgroup as of December 31, 2003 under the May 88 and Amended March 93
      Agreements shall not be available to offset income of Britt for any period
      prior to the effective date of this
Agreement.

            


    

    


    
      	
               
      

            	
              (d)

            	
              If
      the calculation of Britt's Tax Liability in Section 7.(b) results in a net
      operating loss that may be carried back to a prior taxable period or
      periods with respect to which Britt made payments to Pacific Lumber under
      this Agreement or to Parent under the July 90 Agreement, then, in that
      event, Pacific Lumber or Parent, as the case may be, shall pay Britt an
      amount equal to the tax refund to which Britt would have been entitled
      consistent with this Section 7.

            


    

    


    
      	
               
      

            	
              (e)

            	
              If
      the calculation of Britt's Tax Liability in Section 7.(b) results in a net
      operating loss that cannot be carried back pursuant to the preceding
      subsection (d), then, in that event, such net operating loss shall be a
      net operating loss carryover to be used by Britt in computing its Federal
      income tax liability pursuant to preceding subsection (b) for future
      taxable periods, under the law applicable to net operating loss carryovers
      in general.

            


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    
      	
              8.

            	
              The
      foregoing principles shall apply in similar fashion to any consolidated
      state or other local income tax return which the Group or the Forest
      Products Group may elect or be required to file. For state or other local
      income tax returns where the Forest Products Group is the reporting group,
      payments pursuant to this Agreement shall be made to
  MGI.

            


    

    


    
      	
              9.

            	
              This
      Agreement shall be effective for the Group's 2004 taxable period and all
      subsequent taxable periods until the earliest date on which (i) Pacific
      Lumber ceases to be a member of the Group, (ii) the Group no longer
      remains in existence within the meaning of Treasury
      Regulationss.1.1502-75, (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, or (iv) Britt ceases to be a member of the
      Pacific Lumber Subgroup. 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 Pacific Lumber ceased to be a member of
      the Group, the reason that the Group is no longer in existence, the reason
      that Parent and/or Pacific Lumber can no longer join in the same
      consolidated return or the manner in which Britt ceased to be a member of
      the Pacific Lumber Subgroup.

            


    

    


    
      	
              10.

            	
              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 each Pacific Lumber Subgroup Member 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.

            


    

    


    
      	
              11.

            	
              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, MGI,
Pacific Lumber, and Britt have executed this Agreement by authorized officers
thereof as of the date first above written.

    


    
      	
              MAXXAM
      Inc.

            	 
      	
              The
      Pacific Lumber Company

            
	 
      	 
      	 
      
	
              By:

            	
              /s/
      Elizabeth D. Brumley

            	 
      	
              By:

            	
              /s/
      Robert E. Manne

            
	
              Name:

            	
              Elizabeth
      D. Brumley

            	 
      	
              Name:

            	
              Robert
      E. Manne

            
	
              Title:

            	
              Vice
      President and Controller

            	 
      	
              Title:

            	
              President
      and Chief Executive Officer

            
	 
      	 
      	 
      
	
              MAXXAM
      Group Inc.

            	 
      	
              Britt
      Lumber Co., Inc.

            
	 
      	 
      	 
      
	
              By:

            	
              /s/
      Bernard L. Birkel

            	 
      	
              By:

            	
              /s/
      Gary L. Clark

            
	
              Name:

            	
              Bernard
      L. Birkel

            	 
      	
              Name:

            	
              Gary
      L. Clark

            
	
              Title:

            	
              Secretary

            	 
      	
              Title:

            	
              Vice
      President – Finance and
Administration