Exhibit 10.2


 


INCOME TAX ALLOCATION AGREEMENT


 


THIS INCOME TAX ALLOCATION AGREEMENT (this “Agreement”)
dated as of May 26, 2006 is made and entered into by Walter Industries, Inc.,
a Delaware corporation (“Walter”) and the Walter Affiliates (as defined below),
and Mueller Water Products, Inc., a Delaware corporation (“Mueller”) and
the Mueller Affiliates (as defined below).


 


RECITALS


 


WHEREAS, Walter is the common parent
corporation of an “affiliated group” of corporations within the meaning of Section 1504(a) of
the Internal Revenue Code of 1986, as amended (the “Code”) and of certain
combined groups as defined under similar laws of other jurisdictions and
Mueller and the Mueller Affiliates are, as of the date hereof, and have been
members of such groups;


 


WHEREAS, the groups of which Walter is the
common parent and Mueller and the Mueller Affiliates are members file or intend
to file Consolidated Returns and Combined Returns (each as defined below);


 


WHEREAS, Mueller intends to effect the
initial public offering by Mueller of Mueller common stock that will reduce
Walter’s ownership of Mueller, on a fully diluted basis, to less than eighty
percent (80%) of the value of Mueller’s common stock (the “IPO”);


 


WHEREAS, as a result of the reduction in
Walter’s ownership, Mueller and the Mueller Affiliates will cease to be members
of the Consolidated Group and may cease to be members of one or more
Combined Groups (each as defined below);


 


WHEREAS, Walter intends to make a
distribution of the issued and outstanding shares of Mueller stock pro rata to
the holders of Walter capital stock in a transaction that is intended to
qualify as a tax-free distribution under Section 355 of the Code; and


 


WHEREAS, Walter and Mueller desire to set
forth their agreement regarding the allocation of taxes, the filing of tax
returns, the administration of tax contests and other related matters and to
replace in its entirety the Income Tax Allocation Agreement, dated as of October 3,
2005, between Walter and Mueller setting forth their agreement with respect to
certain tax matters (the “Original Income Tax Allocation Agreement”) with the
terms of this Agreement.


 


NOW, THEREFORE, in consideration of the
mutual covenants and promises contained herein, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:


 


SECTION 1.                                DEFINITIONS


 


1.1                                 “AUDIT” includes any
audit, assessment of Taxes, other examination by any Tax Authority, proceeding,
or appeal of such proceeding relating to Taxes, whether administrative or judicial.


 

















 


1.2                                 “COMBINED GROUP” means
a group of corporations or other entities that files a Combined Return.


 


1.3                                 “COMBINED RETURN”
means any Tax Return with respect to Non-Federal Taxes filed on a consolidated,
combined (including nexus combination, worldwide combination, domestic
combination, line of business combination or any other form of
combination) or unitary basis wherein one or more members of the Mueller Group
join in the filing of a Tax Return with Walter or a Walter Affiliate that is
not also a member of the Mueller Group.


 


1.4                                 “CONSOLIDATED GROUP”
means the affiliated group of corporations within the meaning of Section 1504(a) of
the Code of which Walter is the common parent and which includes the Mueller
Group.


 


1.5                                 “CONSOLIDATED RETURN”
means any Tax Return with respect to Federal Income Taxes filed by the
Consolidated Group pursuant to Section 1501 of the Code.


 


1.6                                 “DECONSOLIDATION”
means any event pursuant to which Mueller and the Mueller Group cease to be
includible in either the Consolidated Group or any Combined Group, as the
context requires.


 


1.7                                 “DECONSOLIDATION DATE”
means the close of business on the day on which a Deconsolidation occurs.
Unless otherwise required by the relevant Tax Authority or a court of competent
jurisdiction, Walter and Mueller, for itself and the Mueller Group, agree to
file all Tax Returns, and to take all other actions, relating to Federal Income
Taxes or Non-Federal Combined Taxes in a manner consistent with the position
that Mueller and the Mueller Group are includible in the Consolidated Group and
any applicable Combined Group for all days from the date hereof through and
including a Deconsolidation Date.


 


1.8                                 “DISTRIBUTION” means
any distribution by Walter of the issued and outstanding shares of Mueller
stock that Walter holds at such time in a transaction intended to qualify as a
tax-free distribution under Section 355 of the Code.


 


1.9                                 “DISTRIBUTION TAXES”
means any (i) Taxes imposed on, or increase in Taxes incurred by, Walter
or any Walter Affiliate and (ii) any Taxes of a Walter shareholder (or
former Walter shareholder) that are required to be paid or reimbursed by Walter
or any Walter Affiliate pursuant to a legal determination, resulting from, or
arising in connection with, the failure of a Distribution to qualify as a
tax-free transaction under Section 355 of the Code (including, without
limitation, any Tax resulting from the application of Section 355(d) or
Section 355(e) of the Code to a Distribution) or corresponding
provisions of the laws of any other jurisdictions. Any Tax referred to in the
immediately preceding sentence shall be determined using the highest applicable
statutory Tax rate for the relevant taxable period (or portion thereof).


 


1.10                           “ESTIMATED TAX INSTALLMENT
DATE” means the installment due dates prescribed in Section 6655(c) of
the Code (presently April 15, June 15, September 15 and December 15).


 


1.11                           “FEDERAL INCOME TAX” or “FEDERAL
INCOME TAXES” means any tax imposed under Subtitle A of the Code (including the
taxes imposed by Sections 11, 55, 59A, and 1201(a) of the Code), including
any interest, additions to Tax, or penalties 


 


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applicable thereto, and any other income based United States Federal
Tax which is hereinafter imposed upon corporations.


 


1.12                           “FEDERAL TAX” means any Tax
imposed under the Code or otherwise under United States federal Tax law.


 


1.13                           “FINAL DETERMINATION” means (a) the
final resolution of any Tax (or other matter) for a taxable period, including
any related interest or penalties, that, under applicable law, is not subject
to further appeal, review or modification through proceedings or otherwise,
including (1) by the expiration of a statute of limitations (giving effect
to any extension, waiver or mitigation thereof) or a period for the filing of
claims for refunds, amended returns, appeals from adverse determinations, or
recovering any refund (including by offset), (2) by a decision, judgment,
decree, or other order by a court of competent jurisdiction, which has become
final and unappealable, (3) by a closing agreement or an accepted offer in
compromise under Section 7121 or 7122 of the Code, or comparable
agreements under laws of other jurisdictions, (4) by execution of an IRS Form 870-AD,
or by a comparable form under the laws of other jurisdictions (excluding,
however, any such form that reserves (whether by its terms or by operation
of law) the right of the taxpayer to file a claim for refund and/or the right
of the Tax Authority to assert a further deficiency), or (5) by any
allowance of a refund or credit, but only after the expiration of all periods
during which such refund or credit may be recovered (including by way of
offset) or (b) the payment of Tax by any member of the Consolidated Group
or Combined Group with respect to any item disallowed or adjusted by a Tax
Authority provided that Walter determines that no action should be taken to
recoup such payment.


 


1.14                           “IRS” means the Internal
Revenue Service.


 


1.15                           “MARKET VALUATION” means as
of the first business day immediately following the date on which the
Distribution is effected (i) with respect to Mueller, the fair market
value of all of its issued and outstanding stock (measured using the mean of
the high and low of the public trading price as published in The Wall Street
Journal) as of such date, or (ii) with respect to Walter, the fair market
value of all of its issued and outstanding stock (measured using the mean of
the high and low of the public trading price as published in The Wall Street
Journal) as of such date.


 


1.16                           “MUELLER AFFILIATE” means
any corporation or other entity, including any entity that is a disregarded
entity for federal income tax purposes, directly or indirectly “controlled” by
Mueller where “control” means the ownership of fifty percent (50%) or more of
the ownership interests of such corporation or other entity (by vote or value)
or the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such corporation or other entity.


 


1.17                           “MUELLER BUSINESS” means the
business and operations conducted by Mueller and its Affiliates as such
business and operations will continue after the date of the IPO.


 


1.18                           “MUELLER GROUP” means the
affiliated group of corporations, including any entity that is a disregarded
entity for federal income tax purposes, as defined in Section 1504(a) of
the Code, or similar group of entities as defined under similar laws of other
jurisdictions, of which Mueller would be the common parent if it were not a
subsidiary of Walter, and any corporation or other entity, including any entity
that is a disregarded entity 


 


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for federal income tax purposes, which may be or become a member
of such group from time to time.


 


1.19                           “MUELLER GROUP COMBINED TAX
LIABILITY” means, with respect to any taxable year, the Mueller Group’s
liability for Non-Federal Combined Taxes as determined under Section 3.6
of this Agreement.


 


1.20                           “MUELLER GROUP FEDERAL
INCOME TAX LIABILITY” means, with respect to any taxable year, the Mueller
Group’s liability for Federal Income Taxes as determined under Section 3.5
of this Agreement.


 


1.21                           “NON-FEDERAL COMBINED TAXES”
means any Non-Federal Taxes with respect to which a Combined Return is filed.


 


1.22                           “NON-FEDERAL SEPARATE TAXES”
means any Non-Federal Taxes that are not Non-Federal Combined Taxes.


 


1.23                           “NON-FEDERAL TAXES” means
any Tax other than a Federal Tax.


 


1.24                           “OFFICER’S CERTIFICATE” means
a letter executed by an officer of Walter or Mueller and provided to Tax
Counsel as a condition for the completion of a Tax Opinion or Supplemental Tax
Opinion.


 


1.25                           “POST-DECONSOLIDATION PERIOD”
means a taxable period beginning after the applicable Deconsolidation Date.


 


1.26                           “PRE-DECONSOLIDATION PERIOD”
means any taxable period beginning on or prior to the applicable
Deconsolidation Date.


 


1.27                           “PRO FORMA MUELLER GROUP
COMBINED RETURN” means a pro forma non-federal combined tax return or other schedule prepared
pursuant to Section 3.6 of this Agreement.


 


1.28                           “PRO FORMA MUELLER GROUP
CONSOLIDATED RETURN” means a pro forma consolidated federal income tax return
prepared pursuant to Section 3.5(b) of this Agreement.


 


1.29                           “REDETERMINATION AMOUNT”
means, with respect to any taxable year, the amount determined under Section 3.10
of this Agreement.


 


1.30                           “RULING” means (i) any
private letter ruling issued by the IRS in connection with a Distribution in
response to a request for such a private letter ruling filed by Walter (or any
Walter Affiliate) prior to the date of a Distribution, and (ii) any
similar ruling issued by any other Tax Authority addressing the application of
a provision of the laws of another jurisdiction to a Distribution.


 


1.31                           “RULING DOCUMENTS” means (i) the
request for a Ruling filed with the IRS, together with any supplemental filings
or other materials subsequently submitted on behalf of Walter, its Affiliates
and shareholders to the IRS, or on behalf of Mueller, its Affiliates and
shareholders to the IRS the appendices and exhibits thereto, and any Ruling
issued by the IRS to Walter (or any Walter Affiliate) or Mueller (or any
Mueller Affiliate) in 


 


4

















 


connection with a Distribution and (ii) any similar filings
submitted to, or rulings issued by, any other Tax Authority in connection with
a Distribution.


 


1.32                           “SUPPLEMENTAL RULING” means (i) any
ruling (other than the Ruling) issued by the IRS in connection with a
Distribution, and (ii) any similar ruling issued by any other Tax
Authority addressing the application of a provision of the laws of another
jurisdiction to a Distribution.


 


1.33                           “SUPPLEMENTAL RULING
DOCUMENTS” means (i) the request for a Supplemental Ruling, together with
any supplemental filings or other materials subsequently submitted, the
appendices and exhibits thereto, and any Supplemental Rulings issued by the IRS
in connection with a Distribution and (ii) any similar filings submitted
to, or rulings issued by, any other Tax Authority in connection with a Distribution.


 


1.34                           “SUPPLEMENTAL TAX OPINION”
has the meaning set forth in Section 4.2(c) of this Agreement.


 


1.35                           “TAX ASSET” means any net
operating loss, net capital loss, investment tax credit, foreign tax credit,
charitable deduction or any other deduction, credit or tax attribute which
could reduce Taxes (including without limitation deductions and credits related
to alternative minimum taxes).


 


1.36                           “TAX AUTHORITY” includes the
IRS and any state, local, or other governmental authority responsible for the
administration of any Taxes.


 


1.37                           “TAX COUNSEL” means a
nationally recognized law firm or accounting firm selected by Walter to provide
a Tax Opinion or a Supplemental Tax Opinion.


 


1.38                           “TAX” or “TAXES” means any
charges, fees, levies, imposts, duties, or other assessments of a similar
nature, including without limitation, income, alternative or add-on minimum,
gross receipts, excise, employment, sales, use, transfer, license, payroll,
franchise, severance, stamp, occupation, windfall profits, withholding, Social
Security, unemployment, disability, ad valorem, estimated, highway use,
commercial rent, capital stock, paid up capital, recording, registration,
property, real property gains, value added, business license, custom duties, or
other tax or governmental fee of any kind whatsoever, imposed or required to be
withheld by any Tax Authority including any interest, additions to Tax, or
penalties applicable thereto.


 


1.39                           “TAX RETURN” OR “TAX RETURNS”
means any return, declaration, statement, report, schedule, certificate, form,
information return or any other document (and any related or supporting
information) including an amended tax return required to be supplied to, or
filed with, a Tax Authority with respect to Taxes.


 


1.40                           “TAX OPINION” means an opinion
issued by Tax Counsel as one of the conditions to completing a Distribution
addressing certain United States federal income tax consequences of a
Distribution under Section 355 of the Code.


 


1.41                           “WALTER AFFILIATE” means any
corporation or other entity, including any entity that is disregarded for
federal income tax purposes, directly or indirectly “controlled” by Walter
where “control” means the ownership of fifty percent (50%) or more of the
ownership interests of such corporation or other entity (by vote or value) or
the possession, 


 


5

















 


directly or indirectly, of the power to direct or cause the direction
of the management or policies of such corporation or other entity, but at all
times excluding Mueller or any Mueller Affiliate.


 


1.42                           “WALTER BUSINESS” means all
of the businesses and operations conducted by Walter and its Affiliates,
excluding the Mueller Business, at any time, whether prior to, or after the
date of the IPO.


 


SECTION 2.                                PREPARATION
AND FILING OF TAX RETURNS


 


2.1                                 IN GENERAL. (a) 
Walter shall have the sole and exclusive responsibility for the preparation and
filing of any Consolidated Return or Combined Return.


 


(b) Mueller shall, subject to Section 2.2
of this Agreement, be responsible for preparing and filing all Tax Returns of
Mueller and the Mueller Affiliates other than those described in Section 2.1(a) of
this Agreement.


 


2.2                                 PREPARATION AND FILING
OF RETURNS. (a) All Tax Returns filed after the date of this Agreement by
Walter, any Walter Affiliate, Mueller, or any Mueller Affiliate shall (1) be
prepared in a manner that is consistent with Section 4 of this Agreement and the Code, and (2) filed
on a timely basis (taking into account applicable extensions) by the party
responsible for such filing under Section 2.1 of this Agreement.


 


(b)                                 In its sole
discretion, Walter shall have the exclusive right with respect to any
Consolidated Return or Combined Return (a) to determine (1) the
manner in which such Tax Return shall be prepared and filed, including, without
limitation, the manner in which any item of income, gain, loss, deduction or
credit shall be reported, (2) whether any extensions may be
requested, (3) the elections that will be made by any member of the
Consolidated Group or applicable Combined Group, and (4) whether any
amended Tax Returns should be filed, (b) to control, contest, and
represent the interests of the Consolidated Group and any Combined Group in any
Audit and to resolve, settle, or agree to any adjustment or deficiency
proposed, asserted or assessed as a result of any Audit, (c) to file,
prosecute, compromise or settle any claim for refund, and (d) to determine
whether any refunds, to which the Consolidated Group or applicable Combined
Group may be entitled, shall be paid by way of refund or credited against
the Tax liability of the Consolidated Group or applicable Combined Group.
Mueller, for itself and its subsidiaries, hereby irrevocably appoints Walter as
its agent and attorney-in-fact to take such action (including the execution of
documents) as Walter may deem appropriate to effect the foregoing.


 


2.3                                 FURNISHING INFORMATION.
Mueller (or the applicable Mueller Affiliate) shall (a) furnish to Walter
in a timely manner such information and documents as Walter may reasonably
request for purposes of (1) preparing any original or amended Consolidated
Return or Combined Return, (2) contesting or defending any Audit relating
to a Consolidated Return or a Combined Return, and (3) making any
determination or computation necessary or appropriate under this Agreement, (b) cooperate
in any Audit of any Consolidated Return or Combined Return, (c) retain and
provide on demand books, records, documentation or other information relating
to any tax return until the later of (1) the expiration of the applicable
statute of limitations (giving effect to any extension, waiver, or mitigation
thereof) and (2) in the event any claim is made under this Agreement for
which such information is relevant, until a Final Determination with respect to
such claim, and (d) take such action as Walter may deem appropriate
in connection therewith. Walter shall provide Mueller (or the 


 


6

















 


applicable Mueller Affiliate) any assistance reasonably required in
providing any information requested pursuant to this Section 2.3.


 


2.4                                 EXPENSES. Mueller
shall reimburse Walter for any outside legal and accounting expenses incurred
by Walter in the course of the conduct of any Audit regarding the Tax liability
of the Consolidated Group or any Combined Group, and for any other expense
incurred by Walter in the course of any litigation relating thereto, to the
extent such costs are reasonably attributable to Mueller or any Mueller
Affiliate and provided Walter has conferred with Mueller as to the portion of
the Audit relating to Mueller or the Mueller Affiliate. Notwithstanding the
foregoing, Walter shall have the sole discretion to control, contest,
represent, file, prosecute, challenge or settle any Audit pursuant to Section 2.2
of this Agreement.


 


SECTION 3.                                PAYMENT
OF TAXES AND TAX SHARING AMOUNTS


 


3.1                                 FEDERAL INCOME TAXES.
Walter shall pay (or cause to be paid) to the IRS all Federal Income Taxes, if
any, of the Consolidated Group.


 


3.2                                 NON-FEDERAL COMBINED
TAXES. Walter shall pay (or cause to be paid) to the appropriate Tax
Authorities all Non-Federal Combined Taxes, if any, of any Combined Group.


 


3.3                                 NON-FEDERAL SEPARATE
TAXES AND OTHER TAXES. Mueller shall pay to the appropriate Tax Authorities all
Non-Federal Separate Taxes and any other Taxes (other than those described in Section 3.1
and Section 3.2 of this Agreement), if any, of Mueller and the Mueller
Affiliates.


 


3.4                                 MUELLER LIABILITY FOR
FEDERAL INCOME TAXES AND NON-FEDERAL COMBINED TAXES. For each taxable year (or
portion thereof ending on the applicable Deconsolidation Date) during a
Pre-Deconsolidation Period, Mueller shall pay to Walter an amount equal to the
sum of the Mueller Group Federal Income Tax Liability and the Mueller Group
Combined Tax Liability for such period.


 


3.5                                 MUELLER GROUP FEDERAL
INCOME TAX LIABILITY. (a)  IN GENERAL. The Mueller Group Federal Income
Tax Liability for each taxable year (or portion thereof ending on the
applicable Deconsolidation Date) shall be the Mueller Group’s liability for
Federal Income Taxes as determined on a Pro Forma Mueller Group Consolidated
Return prepared in accordance with Section 3.5(b) of this Agreement.


 


(b)                                 PRO FORMA FEDERAL
RETURN. For each taxable year (or portion thereof ending on the applicable
Deconsolidation Date) during a Pre-Deconsolidation Period, Walter shall prepare
or cause to be prepared (and, as requested by Walter, Mueller shall cooperate
in preparing) a Pro Forma Mueller Group Consolidated Return as if the Mueller
Group were not and never were part of the Consolidated Group, but rather
were a separate affiliated group of corporations of which Mueller were the
common parent filing a consolidated federal income tax return pursuant to Section 1501
of the Code. For purposes of this Section 3.5(b), the Mueller Group’s
Federal Income Tax Liability shall not be reduced by the Mueller Group’s
carrybacks and carryovers of federal Tax Assets from other taxable years (such
items being addressed by Section 3.5(c) herein).


 


7

















 


(c)                                  FEDERAL TAX ASSETS. Walter
shall pay to the Mueller Group, not later than 15 business days after Walter
makes a payment to, or receives a payment, credit or offset from any Tax
Authority pursuant to this Section 3, the amount, if any, by which one or
more federal Tax Assets of the Mueller Group reduced the Federal Income Tax
liability of the Consolidated Group for any taxable year. For purposes of
computing the amount of the payment described in this Section 3.5(c), one
or more federal Tax Assets of the Mueller Group shall be considered to have
reduced the Consolidated Group’s Federal Income Tax liability in a given year
by an amount equal to the difference, if any, between (i) the amount of
the Consolidated Group’s Federal Income Tax liability for the year computed
without regard to such Tax Asset or Tax Assets and (ii) the amount of the
Consolidated Group’s Federal Income Tax liability for the year computed with
regard to such Tax Asset or Tax Assets.


 


3.6                                 MUELLER GROUP COMBINED
TAX LIABILITY. (a) IN GENERAL. The Mueller Group Combined Tax Liability
for each taxable year (or portion thereof ending on the applicable
Deconsolidation Date) shall be the sum for such taxable period of the Mueller
Group’s liability for each Non-Federal Combined Tax, as determined on Pro Forma
Mueller Group Combined Returns prepared in a manner consistent with the
principles and procedures set forth in Section 3.5 hereof.


 


(b)                                 STATE TAX ASSETS. Walter
shall pay to the Mueller Group, not later than 15 business days after Walter
makes a payment to, or receives a payment, credit or offset from any Tax
Authority pursuant to this Section 3, the amount, if any, by which one or
more state or local Tax Assets of Mueller and the Mueller Affiliates reduced
the Combined Tax liability of the applicable Combined Group for any taxable
year. For purposes of computing the amount of the payment described in this Section 3.6(b),
one or more state or local Tax Assets of Mueller and the Mueller Affiliates
shall be considered to have reduced the Combined Group’s Tax liability in a
given year by an amount equal to the difference, if any, between (i) the
amount of the Combined Group’s Tax liability for the year computed without
regard to such Tax Asset or Tax Assets and (ii) the amount of the Combined
Group’s Tax liability for the year computed with regard to such Tax Asset or
Tax Assets.


 


3.7                                 FOREIGN TAX ASSETS. Any
other Tax Assets (other than Tax Assets described in Sections 3.5(c) and
3.6(b)) will be reimbursed at the time of use by Walter or Walter Affiliates in
accordance with principles set forth in Sections 3.5(c) and 3.6(b).


 


3.8                                 TAX SHARING
INSTALLMENT PAYMENTS. (a)  FEDERAL INCOME TAXES. Not later than five
business days prior to each Estimated Tax Installment Date with respect to any
Pre-Deconsolidation Period, Walter shall determine under Section 6655 of
the Code the estimated amount of the related installment of the Mueller Group
Federal Income Tax Liability. Mueller shall then pay to Walter, not later than
such Estimated Tax Installment Date, the amount thus determined.


 


(b)                                 NON-FEDERAL COMBINED
TAXES. Not later than five business days prior to any estimated tax installment
date with respect to Non-Federal Combined Taxes for any Pre-Deconsolidation
Period, Walter shall determine the estimated amount of the related installment
of the Mueller Group Combined Tax Liability for the taxable year. Mueller shall
pay to Walter, not later than the due date for such installment, the amount
thus determined.


 


3.9                                 TAX SHARING TRUE-UP
PAYMENTS. (a)  FEDERAL INCOME TAXES. Not later than 15 business days after
the Consolidated Return is filed with respect 


 


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to any Pre-Deconsolidation Period, Walter shall deliver to Mueller a
Pro Forma Mueller Group Consolidated Return or other comparable schedule reflecting
the Mueller Group Federal Income Tax Liability for such taxable year (or
portion thereof ending on the applicable Deconsolidation Date). Not later than
10 business days after the date such Pro Forma Mueller Group Consolidated
Return or other schedule is delivered, Mueller shall pay to Walter, or
Walter shall pay to Mueller, as appropriate, an amount equal to the difference,
if any, between the Mueller Group Federal Income Tax Liability for such taxable
year (or portion thereof ending on the applicable Deconsolidation Date) and the
aggregate amount paid by Mueller with respect to such taxable year (or portion
thereof ending on the applicable Deconsolidation Date) under Section 3.8(a) of
this Agreement.


 


(b)                                 NON-FEDERAL COMBINED
TAXES. Not later than 15 business days after the Combined Return is filed with
respect to any period that includes any Pre-Deconsolidation Period, Walter
shall deliver to Mueller a Pro Forma Mueller Group Combined Return or other
comparable schedule reflecting the Mueller Group Combined Tax Liability
for such taxable year (or portion thereof ending on the applicable
Deconsolidation Date). Not later than 10 business days following delivery of
such Pro Forma Mueller Group Combined Return or other schedule, Mueller shall
pay to Walter, or Walter shall pay to Mueller, as appropriate, an amount equal
to the difference, if any, between the Mueller Group Combined Tax Liability for
such taxable year (or portion thereof ending on the applicable Deconsolidation
Date) and the amount paid by Mueller with respect to such taxable year (or
portion thereof ending on the applicable Deconsolidation Date) under Section 3.8(b) of
this Agreement.


 


3.10                           REDETERMINATION AMOUNT. (a) 
IN GENERAL. In the event of any redetermination of any item of income, gain,
loss, deduction or credit of any member of the Consolidated Group or any
Combined Group as a result of a Final Determination or any settlement or
compromise with any Tax Authority (including any amended Tax Return or claim
for refund filed by Walter), Mueller shall pay Walter or Walter shall pay
Mueller, as the case may be, the Redetermination Amount.


 


(b)                                 COMPUTATION. The
Redetermination Amount shall be the difference, if any, between all amounts
previously determined under Section 3 of this Agreement and all amounts
that would have been determined under Section 3 of this Agreement taking
such redetermination into account (including any additions to Tax or penalties
applicable thereto), together with interest for each day calculated (1) with
respect to redeterminations affecting Federal Income Taxes, at the rate
determined, in the case of payment by Mueller to Walter, under Section 6621(a)(2) of
the Code and, in the case of payment by Walter to Mueller, under Section 6621(a)(1) of
the Code, and (2) with respect to redeterminations affecting Non-Federal
Combined Taxes, under similar laws, if any, of other jurisdictions.


 


(c)                                  PAYMENT. Walter shall
deliver to Mueller a schedule reflecting the computation of any
Redetermination Amount with respect to any taxable year. Not later than 5
business days after the date such schedule is delivered, Mueller shall pay
Walter, or Walter shall pay Mueller, such Redetermination Amount.


 


3.11.                        INTEREST. Payments under this Section 3
that are not made within the prescribed period shall thereafter bear interest
at the Federal short-term rate established pursuant to Section 6621 of the
Code.


 


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3.12.                        CARRYBACKS. (a) In the
event any Tax Asset of the Mueller Group for any Post-Deconsolidation Period is
eligible to be carried back to a Pre-Deconsolidation Period, Mueller shall, to
the extent permitted by applicable law, elect to carry such amounts forward to
any Post-Deconsolidation Period. If Mueller is required by law to carry back
any such Tax Asset to a taxable Pre-Deconsolidation Period, Walter agrees to
make a payment to Mueller to the extent that such a payment would be required
under the terms of Section 3.5(c), Section 3.6(b) or Section 3.7
of this Agreement, net of any expenses incurred by Walter or Walter Affiliates.
If subsequent to the payment by Walter to Mueller of any such amount, there
shall be (a) a Final Determination which results in a disallowance or a reduction
of the Tax Asset so carried back or (b) a reduction in the amount of the
benefit realized by the Walter Group for any reason, Mueller shall repay to
Walter, within 30 business days of such event any amount which would not have
been payable to Mueller pursuant to this Section 3.12 had the amount of
the benefit been determined in light of these events. Mueller shall hold Walter
harmless for any penalty, addition to Tax or interest payable by any member of
the Walter Group as a result of any such event. Any such amount shall be paid
by Mueller to Walter within 30 business days of the payment by Walter or any
member of the Consolidated Group or Combined Group of any such penalty,
addition to Tax, or interest.


 


SECTION 4.                                DECONSOLIDATION
AND DISTRIBUTION TAXES


 


4.1                                 CONTINUING COVENANTS. Mueller,
for itself and the Mueller Affiliates, covenants that on or after a
Deconsolidation it will not (nor will it cause or permit any member of the
Mueller Group ), in respect of any Pre-Deconsolidation Period, (i) make or
change any tax election, (ii) change any accounting method, (iii) amend
any Tax Return or take any Tax position on any Tax Return that is inconsistent
with any Tax position on any Tax Return of the Walter Group, or (iv) take
any action, omit to take any action or enter into any transaction that results
in any increased Tax liability or reduction of any Tax Asset of the Walter
Group.


 


4.2                                 ADDITIONAL CONTINUING
COVENANTS. (a)  MUELLER RESTRICTIONS. Mueller agrees that, until such time
as the stock of Mueller owned by Walter and Walter Affiliates constitutes fifty
percent (50%) or less of the total combined voting power of all of the
outstanding stock of Mueller, Mueller (1) will not knowingly take or fail
to take, or permit any Mueller Affiliate to knowingly take or fail to take, any
action that could reasonably be expected to preclude Walter’s ability to
effectuate a Distribution, and (2) will not issue any stock of Mueller (or
any instrument that is convertible, exercisable or exchangeable into any such stock)
in an acquisition or public or private offering if, immediately after such
issuance, Walter would, or would reasonably be expected to, not own stock of
Mueller that, on a fully diluted basis, constitutes “control” (within the
meaning of Section 368(c) of the Code) of Mueller. In the event of a
Distribution, Mueller agrees that (1) it will take, and cause each Mueller
Affiliate to take, any action reasonably requested by Walter in order to enable
Walter to effectuate a Distribution (including, without limitation, any
internal restructuring necessary to satisfy the active trade or business
requirement of Section 355(b) of the Code) and (2) it will not
take or fail to take, or permit any Mueller Affiliate to take or fail to take,
any action where such action or failure to act would be inconsistent with any
written representations of an officer of Mueller pursuant to Section 4.2(e) of
this Agreement with respect to any material, information, covenant or
representation that relates to facts or matters related to Mueller, any Mueller
Affiliate, or the Mueller Business in an Officer’s Certificate, Tax Opinion,
Supplemental Tax Opinion, Ruling Documents, Supplemental Ruling Documents,
Ruling, or Supplemental Ruling other than as 


 


10

















 


permitted by Section 4.2(c) of this Agreement. For this
purpose an action is considered inconsistent with a representation if the
representation states that there is no plan or intention to take such action. In
the event of a Distribution, Mueller agrees that it will not take (and it will
cause the Mueller Affiliates to refrain from taking) any position on a Tax
Return that is inconsistent with the treatment of a Distribution as a tax-free
transaction under Section 355 of the Code.


 


(b)                                 WALTER RESTRICTIONS. In
the event of a Distribution, Walter agrees that it will not take or fail to
take, or permit any Walter Affiliate to take or fail to take, any action where
such action or failure to act would be inconsistent with any material, information,
covenant or representation that relates to facts or matters related to Walter
(or any Walter Affiliate) or within the control of Walter and is contained in
an Officer’s Certificate, Tax Opinion, Supplemental Tax Opinion, Ruling
Documents, Supplemental Ruling Documents, Ruling, or Supplemental Ruling. For
this purpose an action is considered inconsistent with a representation if the
representation states that there is no plan or intention to take such action. In
the event of a Distribution, Walter agrees that it will not take (and it will
cause the Walter Affiliates to refrain from taking) any position on a Tax
Return that is inconsistent with the treatment of a Distribution as a tax-free
transaction under Section 355 of the Code.


 


(c)                                  CERTAIN MUELLER
ACTIONS FOLLOWING A DISTRIBUTION. In the event of a Distribution, Mueller
agrees that, during the 2-year period following a Distribution, without first
obtaining, at Mueller’s own expense, either a supplemental opinion from Tax
Counsel that such action will not result in Distribution Taxes (a “Supplemental
Tax Opinion”) or a Supplemental Ruling that such action will not result in
Distribution Taxes, unless in any such case Walter and Mueller agree otherwise,
Mueller shall not (1) sell all or substantially all of the assets of
Mueller or any Mueller Affiliate, (2) merge Mueller or any Mueller
Affiliate with another entity, without regard to which party is the surviving
entity, (3) transfer any assets of Mueller in a transaction described in Section 351
(other than a transfer to a corporation which files a consolidated return with
Mueller and which is wholly-owned, directly or indirectly, by Mueller) or
subparagraph (C) or (D) of Section 368(a)(1) of the Code, (4) issue
stock of Mueller or any Mueller Affiliate (or any instrument that is
convertible or exchangeable into any such stock) in an acquisition or public or
private offering, or (5) facilitate or otherwise participate in any
acquisition of stock in Mueller that would result in any shareholder owning five
percent (5%) or more of the outstanding stock of Mueller. Mueller or any
Mueller Affiliate shall only undertake any of such actions after Walter’s
receipt of such Supplemental Tax Opinion or Supplemental Ruling and pursuant to
the terms and conditions of any such Supplemental Tax Opinion or Supplemental
Ruling or as otherwise consented to in writing in advance by Walter. The
parties hereby agree that they will act in good faith to take all reasonable
steps necessary to amend this Section 4.2(c), from time to time, by mutual
agreement, to (i) add certain actions to the list contained herein, or (ii) remove
certain actions from the list contained herein, in either case, in order to
reflect any relevant change in law, regulation or administrative interpretation
occurring after the date of this Agreement.


 


(d)                                 NOTICE OF SPECIFIED
TRANSACTIONS. Not later than 30 days prior to entering into any oral or written
contract or agreement, and not later than 5 days after it first becomes aware
of any negotiations, plan or intention (regardless of whether it is a party to
such negotiations, plan or intention), regarding any of the transactions
described in Section 4.2(c) of this Agreement, Mueller shall provide
written notice of its intent to consummate 


 


11

















 


such transaction or the negotiations, plan or intention of which it
becomes aware, as the case may be, to Walter.


 


(e)                                  MUELLER COOPERATION. Mueller
agrees that, at the request of Walter, Mueller shall cooperate fully with
Walter to take any action necessary or reasonably helpful to effectuate a
Distribution, including seeking to obtain, as expeditiously as possible, a Tax
Opinion, Supplemental Tax Opinion, Ruling, and/or Supplemental Ruling. Such
cooperation shall include the execution of any documents that may be
necessary or reasonably helpful in connection with obtaining any Tax Opinion,
Supplemental Tax Opinion, Ruling, and/or Supplemental Ruling (including,
without limitation, any (i) power of attorney, (ii) Officer’s
Certificate, (iii) Ruling Documents, (iv) Supplemental Rulings
Documents, and/or (v) reasonably requested written representations
confirming that (a) Mueller has read the Officer’s Certificate, Ruling
Documents, and/or Supplemental Ruling Documents and (b) all information
and representations, if any, relating to Mueller, any Mueller Affiliate, or the
Mueller Business contained in the Officer’s Certificate, Ruling Documents,
and/or Supplemental Ruling Documents are true, correct and complete in all
material respects).


 


4.3                                 DISTRIBUTION TAXES. The
parties have set forth how certain Tax matters with respect to a Distribution
would be handled in the event that a Distribution is pursued at some future
time.


 


(a)                                  WALTER’S LIABILITY
FOR DISTRIBUTION TAXES. In the event of a Distribution, notwithstanding Section 3
of this Agreement, Walter and each Walter Affiliate shall be jointly and
severally liable for any Distribution Taxes, to the extent that such
Distribution Taxes are attributable to, caused by, or result from, one or more
of the following:


 


(1)                                  any action or
omission by Walter (or any Walter Affiliate) inconsistent with any material,
information, covenant or representation related to Walter, any Walter
Affiliate, or the Walter Business in an Officer’s Certificate, Tax Opinion,
Supplemental Tax Opinion, Ruling Documents, Supplemental Ruling Documents,
Ruling, or Supplemental Ruling (for the avoidance of doubt, disclosure of any
action or fact that is inconsistent with any material, information, covenant or
representation submitted to Tax Counsel, the IRS, or other Tax Authority, as
applicable, in connection with an Officer’s Certificate, Tax Opinion,
Supplemental Tax Opinion, Ruling Documents, Supplemental Ruling Documents,
Ruling, or Supplemental Ruling shall not relieve Walter (or any Walter
Affiliate) of liability under this Agreement);


 


(2)                                  any action or
omission by Walter (or any Walter Affiliate), including a cessation, transfer
to affiliates, or disposition of its active trades or businesses, or an issuance
of stock, stock buyback or payment of an extraordinary dividend by Walter (or
any Walter Affiliate) following a Distribution;


 


(3)                                  any acquisition of
any stock or assets of Walter (or any Walter Affiliate) by one or more other
persons (other than Mueller or a Mueller Affiliate) prior to or following a
Distribution; or


 


(4)                                  any issuance of stock
by Walter (or any Walter Affiliate).


 


(b)                                 MUELLER’S LIABILITY
FOR DISTRIBUTION TAXES. In the event of a Distribution, notwithstanding Section 3
of this Agreement, Mueller and each Mueller Affiliate shall be jointly and
severally liable for any Distribution Taxes, to the extent that 


 


12

















 


such Distribution Taxes are attributable to, caused by, or result from,
one or more of the following:


 


(1)                                  any action or
omission by Mueller (or any Mueller Affiliate) after a Distribution at any
time, that is inconsistent with any written representations of an officer of
Mueller pursuant to Section 4.2(e) of this Agreement with respect to
any material, information, covenant or representation related to Mueller, any
Mueller Affiliate, or the Mueller Business in an Officer’s Certificate, Tax
Opinion, Supplemental Tax Opinion, Ruling Documents, Supplemental Ruling
Documents, Ruling, or Supplemental Ruling (for the avoidance of doubt,
disclosure by Mueller (or any Mueller Affiliate) to Walter (or any Walter
Affiliate) of any action or fact that is inconsistent with any material,
information, covenant or representation submitted to Tax Counsel, the IRS, or
other Tax Authority, as applicable, in connection with an Officer’s
Certificate, Tax Opinion, Supplemental Tax Opinion, Ruling Documents,
Supplemental Ruling Documents, Ruling, or Supplemental Ruling shall not relieve
Mueller (or any Mueller Affiliate) of liability under this Agreement);


 


(2)                                  any action or
omission by Mueller (or any Mueller Affiliate) after the date of a Distribution
(including any act or omission that is in furtherance of, connected to, or part of
a plan or series of related transactions (within the meaning of Section 355(e) of
the Code) occurring on or prior to the date of a Distribution) including a
cessation, transfer to affiliates or disposition of the active trades or
businesses of Mueller (or any Mueller Affiliate), stock buyback or payment of
an extraordinary dividend;


 


(3)                                  any acquisition of
any stock or assets of Mueller (or any Mueller Affiliate) by one or more other
persons (other than Walter or any Walter Affiliate) prior to or following a
Distribution; or


 


(4)                                  any issuance of stock
by Mueller (or any Mueller Affiliate) after a Distribution, including any
issuance pursuant to the exercise of employee stock options or other employment
related arrangements or the exercise of warrants.


 


(c)                                  JOINT LIABILITY FOR
REMAINING DISTRIBUTION TAXES. Walter and each Walter Affiliate shall be liable
for a percentage of any Distribution Taxes (not otherwise allocated by Sections
4.3(a) or (b) of this Agreement) equal to the quotient of (i) Walter’s
Market Valuation, divided by (ii) the sum of (x) Walter’s Market
Valuation, and (y) Mueller’s Market Valuation. Mueller and each Mueller
Affiliate shall be jointly and severally liable for a percentage of any
Distribution Taxes (not otherwise allocated by Sections 4.3(a) or (b) of
this Agreement) equal to the quotient of (i) Mueller’s Market Valuation,
divided by (ii) the sum of (x) Walter’s Market Valuation, and (y) Mueller’s
Market Valuation.


 


SECTION 5.                                MISCELLANEOUS


 


5.1                                 TERM. All rights and
obligations arising hereunder shall survive until they are fully effectuated or
performed provided that, notwithstanding anything in this Agreement to the
contrary, this Agreement shall remain in effect and its provisions shall
survive for the full period of all applicable statutes of limitation (giving
effect to any extension, waiver or mitigation thereof).


 


5.2                                 ALLOCATIONS. (a) 
IN GENERAL. All computations with respect to any Pre-Deconsolidation Period
shall be made pursuant to the principles of Treasury Regulations 


 


13

















 


Section 1.1502-76(b), taking into account such elections
thereunder as Walter, in its sole discretion, shall make.


 


(b)                                 TAX ASSETS. Walter
shall advise Mueller in writing within 90 days after the filing of the
Consolidated Return for the taxable year that includes the Deconsolidation Date
of the allocation of any Tax Assets among Walter, each Walter Affiliate,
Mueller, and each Mueller Affiliate. The parties hereby agree that, for
purposes of determining such allocation, Walter shall be free to use any
legally permissible method of allocation in its sole discretion.


 


5.3                                 CHANGES IN LAW. Any
reference to a provision of the Code or a similar law of another jurisdiction
shall include a reference to any successor provision to such provision.


 


5.4                                 CONFIDENTIALITY. Each
party shall hold and cause its advisors and consultants to hold in strict
confidence, unless compelled to disclose by judicial or administrative process
or, in the opinion of its counsel, by other requirements of law, all information
(other than any such information relating solely to the business or affairs of
such party) concerning the other parties hereto furnished it by such other
party or its representatives pursuant to this Agreement (except to the extent
that such information can be shown to have been (a) previously known by
the party to which it was furnished, (b) in the public domain through no
fault of such party, or (c) later lawfully acquired from other sources not
under a duty of confidentiality by the party to which it was furnished), and
each party shall not release or disclose such information to any other person,
except its auditors, attorneys, financial advisors, bankers and other
consultants who shall be advised of and agree to be bound by the provisions of
this Section 5.4. Each party shall be deemed to have satisfied its
obligation to hold confidential information concerning or supplied by the other
party if it exercises the same care as it takes to preserve confidentiality for
its own similar information.


 


5.5                                 SUCCESSORS. This
Agreement shall be binding on and inure to the benefit of any successor, by
merger, acquisition of assets or otherwise, to any of the parties hereto
(including any successor of Walter and Mueller succeeding to the tax attributes
of such party under Section 381 of the Code), to the same extent as if
such successor had been an original party.


 


5.6                                 AUTHORIZATION, ETC. Each
of the parties hereto hereby represents and warrants that it has the power and
authority to execute, deliver and perform this Agreement, that this
Agreement has been duly authorized by all necessary corporate action on the part of
such party, that this Agreement constitutes a legal, valid and binding
obligation of each such party and that the execution, delivery and performance
of this Agreement by such party does not contravene or conflict with any
provision of law or of its charter or bylaws or any agreement, instrument or
order binding on such party.


 


5.7                                 ENTIRE AGREEMENT. This
Agreement contains the entire agreement among the parties hereto with respect
to the subject matter hereof and supersedes all prior agreements.


 


5.8                                 SECTION CAPTIONS.
Section captions used in this Agreement are for convenience and reference
only and shall not affect the construction of this Agreement.


 


14

















 


5.9                                 GOVERNING LAW. This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York without giving effect to laws and principles relating to
conflicts of law.


 


5.10                           COUNTERPARTS. This Agreement
may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
Agreement.


 


5.11                           WAIVERS AND AMENDMENTS. This
Agreement shall not be waived, amended or otherwise modified except in writing,
duly executed by all of the parties hereto.


 


5.12                           SEVERABILITY. In case any
one or more of the provisions in this Agreement should be invalid, illegal or
unenforceable, the enforceability of the remaining provisions hereof will not
in any way be effected or impaired thereby.


 


5.13                           NO THIRD PARTY BENEFICIARIES.
This Agreement is solely for the benefit of the parties to this Agreement and
each Walter Affiliate and Mueller Affiliate and should not be deemed to confer
upon third parties any remedy, claim, liability, reimbursement, claim of action
or other rights in excess of those existing without this Agreement.


 


5.14                           OTHER REMEDIES. Mueller
recognizes that any failure by it or any Mueller Affiliate to comply with its
obligations under Section 4 of this Agreement would, in the event of a
Distribution, result in Distribution Taxes that would cause irreparable harm to
Walter, Walter Affiliates, and their stockholders. Accordingly, Walter shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement, this
being in addition to any other remedy to which Walter is entitled at law or in
equity.


 


15

















 


IN WITNESS WHEREOF, each of the parties
hereto has caused this Agreement to be executed by a duly authorized officer as
of the date first above written.


 


	
   

  
	
   

  	
  WALTER INDUSTRIES, INC.

  
	
   

  	
  on behalf of itself and the Walter
  Affiliates

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William
  F. Ohrt

  	
   

  
	
   

  	
  Name:

  	
  William F. Ohrt

  
	
   

  	
  Title:

  	
  Executive Vice President and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MUELLER WATER PRODUCTS, INC.

  
	
   

  	
  on behalf of itself and the Mueller
  Affiliates

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Victor
  P. Patrick

  	
   

  
	
   

  	
  Name:

  	
  Victor P. Patrick

  
	
   

  	
  Title:

  	
  Vice President and Secretary