Tax Allocation And Indemnity Agreement

TAX ALLOCATION AND INDEMNITY AGREEMENT


THIS TAX ALLOCATION AND INDEMNITY AGREEMENT (the "Agreement"), dated as of December 31, 1998, is by and between GRAND CASINOS, INC., a Minnesota corporation ("Company"); and LAKES GAMING, INC., a Minnesota corporation and wholly owned subsidiary of Company ("Lakes").


RECITALS AND CERTAIN DEFINITIONS


WHEREAS, Company and its subsidiaries currently are members of an Affiliated Group (as defined below), of which Company is the common parent corporation; and such Affiliated Group includes without limitation three subsidiary corporations incorporated outside the United States;


WHEREAS, Company, directly and through certain wholly-owned subsidiaries, (a) owns, operates and develops certain gaming and resort facilities located in the State of Mississippi (as more specifically defined in the Distribution Agreement referred to below, as the "Mississippi Business"); and (b) manages and develops certain gaming and resort facilities located outside the State of Mississippi (as more specifically defined in the same Distribution Agreement, as the "Non-Mississippi Business");


WHEREAS, subject to Company shareholder ratification and certain other conditions, the Board of Directors of Company has determined that it is in the best interests of Company and the shareholders of Company to separate the Non-Mississippi Business from the Mississippi Business through a pro rata distribution (the "Distribution") to the holders of the common stock of the Company of all of the outstanding shares of the common stock, par value $.01 per share, of Lakes;


WHEREAS, as set forth in the written Distribution Agreement between the parties, dated as of December 31, 1998 (the "Distribution Agreement"), and subject to the terms and conditions thereof, Company will contribute to Lakes, prior to the Distribution, all the operations, assets and liabilities of the Non-Mississippi Business and such other assets, liabilities and operations as are described in the Distribution Agreement (the "Lakes Business and Assets");


WHEREAS, as set forth in the Distribution Agreement, and subject to the terms and conditions thereof, Company will retain, immediately after the Distribution, all the operations, assets and liabilities of the Mississippi Business other than certain of such assets, liabilities and operations contributed to Lakes prior to the Distribution as described in the Distribution Agreement (the "Mississippi Business and Assets"); and


WHEREAS, in contemplation of the Distribution, pursuant to which Lakes and its subsidiaries will cease to be members of the Affiliated Group (as defined below) now including Company, the parties hereto have determined to enter into this Agreement setting forth their agreement with respect to certain tax matters;


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NOW THEREFORE, in consideration of the foregoing premises, which are an integral part of this Agreement, and the respective covenants, terms and conditions set forth below, the parties hereto agree as follows:


AGREEMENT


Section 1. General Definitions. For purposes of this Agreement, the following terms shall have meanings set forth below:


"Affiliated Group" shall mean either (a) an affiliated group of corporations within the meaning of Code section 1504(a) (but without regard to the exclusions contained in Code section 1504(b)) for the Taxable Period; or (b) for purposes of any state, province, local or foreign Income Tax matters, any consolidated, combined or unitary group of corporations within the meaning of the corresponding provisions of Tax law for the applicable jurisdiction.


"Base Stratosphere Loss" shall have the meaning set forth in Section 3(d)(ii).


"Code" shall mean the Internal Revenue Code of 1986, as amended.


"Distribution" shall mean the Distribution described in the Recitals.


"Distribution Date" shall mean the effective date of the Distribution.


"Final Determination" shall mean the final resolution of any Tax matter. A Final Determination shall result from the first to occur of:


(i) either (A) the expiration of 30 days after the IRS' acceptance of a waiver of restrictions on assessment and collection of deficiency in a federal Tax and acceptance of overassessment on Treasury Form 870, 870-AD or any successor comparable form (the "Waiver"), except as to reserved matters specified therein; or (B) the expiration of 30 days after acceptance by any other taxing authority of a comparable agreement or form under the laws of any other jurisdiction, including state, province, local or foreign jurisdictions; unless, within such 30-day period, the taxpayer gives notice to the other party to this Agreement of the taxpayer's intention to attempt to recover all or part of any amount paid pursuant to the Waiver by the filing of a timely claim for refund;


(ii) a decision, judgment, decree or other order by a court of competent jurisdiction that is not subject to further judicial review (by appeal or otherwise) and has become final;


(iii) the execution of (A) a closing agreement under Code section 7121, or the acceptance by the IRS of an offer in compromise under Code section 7122; or (B) any comparable agreement under the laws of any other jurisdiction, including state, province, local or foreign jurisdictions, except as to reserved matters specified therein;


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(iv) the expiration of the time for filing a claim for refund or for instituting suit in respect of a claim for refund that was disallowed in whole or part by the IRS or any other taxing authority;


(v) the expiration of the applicable statute of limitations; or


(vi) an agreement by the parties hereto that a Final Determination has been made.


"Income Tax Benefit" shall mean a reduction in the Income Tax Liability of a taxpayer (or of the Affiliated Group of which it is a member) for any Taxable Period. Except as otherwise provided in this Agreement, an Income Tax Benefit shall be deemed to have been realized or received from an Income Tax Item in a Taxable Period, only if and to the extent that the Income Tax Liability of the taxpayer (or the Affiliated Group of which it is a member) for such Taxable Period, after taking into account the effect of the Income Tax Item on the Income Tax Liability of such taxpayer in all prior Taxable Periods, is less than it would have been if such Income Tax Liability were determined without regard to such Income Tax Item. If any Income Tax Benefit of an Income Tax Item is limited for a Taxable Period in a way that creates an Income Tax Benefit in any other Taxable Period, the latter Income Tax Benefit shall be treated as caused by the original Income Tax Item.


"Income Tax Detriment" shall mean an increase in the Income Tax Liability of a taxpayer (or of the Affiliated Group of which it is a member) for any Taxable Period. Except as otherwise provided in this Agreement, an Income Tax Detriment shall be deemed to have been realized or suffered from an Income Tax Item in a Taxable Period, only if and to the extent that the Income Tax Liability of the taxpayer (or the Affiliated Group of which it is a member) for such Taxable Period, after taking into account the effect of the Income Tax Item on the Income Tax Liability of such taxpayer in all prior Taxable Periods, is greater than it would have been if such Income Tax Liability were determined without regard to such Income Tax Item. If any Income Tax Detriment of an Income Tax Item is limited for a Taxable Period in a way that creates an Income Tax Detriment in any other Taxable Period, the latter Income Tax Detriment shall be treated as caused by the original Income Tax Item.


"Income Tax Item" shall mean any item of income, gain, loss, deduction, credit, recapture of credit, or any other item that may have the effect of increasing or decreasing Income Taxes paid or payable.


"Income Tax Liability" shall mean the net amount of Income Taxes due and paid or payable for any Taxable Period, determined after applying all income tax credits and all applicable carrybacks or carryovers permitted hereunder for net operating losses, net capital losses, unused general business tax credits, or any other Income Tax Items arising from a prior or subsequent Taxable Period, and all other relevant adjustments; and shall include without limitation the net amount due and paid or payable for alternative minimum tax imposed under Code section 55 or similar alternative or add-on minimum taxes.


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"Income Taxes" shall mean all federal, state, province, local and foreign Taxes imposed upon, or measured by, net income, including without limitation, alternative or add-on minimum taxes (including the alternative minimum tax imposed under Code section 55); together with all related interest, penalties and additions to tax.


"Indemnifying Party" shall mean any party that is required to pay or reimburse any other party pursuant to the terms and conditions of this Agreement.


"Indemnified Party" shall mean any party that is entitled to receive payment or reimbursement from an Indemnifying Party pursuant to the terms and conditions of this Agreement.


"IRS" shall mean the United States Internal Revenue Service or any successor thereto, including but not limited to its agents, representatives and attorneys.


"Lakes Business and Assets" shall have the meaning set forth in the Recitals.


"Lakes Group" shall mean Lakes and each other corporation that was a Pre-Distribution Member and, immediately after the Distribution, will be a member of the Affiliated Group in which Lakes is the common parent.


"Lakes Business and Assets" shall have the meaning set forth in the Recitals.


"Lakes Member" shall mean a corporation that is a member of the Lakes Group.


"Mississippi Business and Assets" shall have the meaning set forth in the Recitals.


"Other Taxes" shall mean any and all Taxes other than Income Taxes, together with all related interest, penalties and additions to tax.


"Other Tax Item" shall mean any item of sales, other revenues, purchases, services, other transactions, property valuation, assets, liabilities, securities, payroll, other compensation, income, gain, loss, deduction, credit, recapture of credit, or any other item that may have the effect of increasing or decreasing Other Taxes paid or payable.


"Post-Distribution Company Group" shall mean Company and each other corporation that was a Pre-Distribution Member and, immediately after the Distribution, will be a member of the Affiliated Group in which Company is the common parent. To the extent applicable to any state Income Tax matters, the Post-Distribution Company Group shall include all such corporations joining in the filing of a consolidated, unitary or combined Tax Return for the state in question.


"Post-Distribution Company Member" shall mean any corporation that is a member of the Post-Distribution Company Group.


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"Post-Distribution Straddle Period" shall mean, with respect to any Straddle Period, the portion thereof beginning on the day after the Distribution Date and ending on the last day of such Straddle Period.


"Post-Distribution Taxable Period" shall mean a Taxable Year that begins after the Distribution Date.


"Pre-Distribution Group" shall mean Company, Lakes and each other corporation that was a member of the Affiliated Group in which Company was the common parent during any Pre-Distribution Taxable Period or Pre-Distribution Straddle Period. For purposes of this Agreement, the Pre-Distribution Group shall terminate on the Distribution Date. To the extent applicable to any state Income Tax matters, the Pre-Distribution Group shall include all such corporations joining in the filing of a consolidated, combined or unitary Income Tax Return for the state in question.


"Pre-Distribution Member" shall mean a corporation that was a member of the Pre-Distribution Group.


"Pre-Distribution Straddle Period" shall mean, with respect to any Straddle Period, the portion beginning on the first day of such Straddle Period and ending on the Distribution Date.


"Pre-Distribution Taxable Period" shall mean a Taxable Year that ends on or before the Distribution Date.


"Representative" means, with respect to any person or entity, any of such person's or entity's directors, officers, employees, agents, consultants, accountants, attorneys and other advisors.


"Section 355 Tax Liability" means any Income Tax Liability that is incurred by Company or any other Post-Distribution Company Member solely because the Distribution is not tax-free with respect to Company under Code section 355.


"Straddle Period" shall mean any Taxable Year beginning before and ending after the close of business on the Distribution Date.


"Stratosphere Losses" shall mean any losses or Income Tax deductions occurring at any time and attributable to the ownership (at any time before the Distribution) by any Pre-Distribution Member of any asset that is a form of investment in Stratosphere Corporation, a Delaware corporation, Stratosphere Gaming Corp., a Nevada corporation, or any of their respective subsidiaries ("Stratosphere") or any amount receivable from Stratosphere; including without limitation any capital stock, notes receivable, cash advances and other debts such as accounts receivable arising from the delivery of goods or services to Stratosphere or from intercompany expense allocations to Stratosphere; and also including any expenses relating thereto and incurred by a Pre-Distribution Member before the Distribution, but excluding any such asset that did not exist before the Distribution.


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"Stratosphere Tax Benefits" shall mean all Income Tax Benefits that are realized or received at any time by the Pre-Distribution Group, the Lakes Group or the Post-Distribution Company Group from Stratosphere Losses.


"Tax" (or "Taxes") shall mean all actual (and estimated payments of) taxes, charges, fees, imposts, levies, gaming or other governmental assessments, including, all net income, gross receipts, gross income, capital, sales, use, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, premium, property, ad valorem, custom duties, fees, assessments and charges of any kind whatsoever; together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) with respect to Taxes; and including any transferee liability in respect of Taxes.


"Tax Item" shall mean, generically, any item that is either an Income Tax Item or an Other Tax Item, or both.


"Tax Practices" shall mean the most recently applied policies, procedures and practices employed by the Pre-Distribution Group in the preparation and filing of, and positions taken on, any Tax Returns of Company or any Pre-Distribution Member for any Pre-Distribution Taxable Period.


"Tax Returns" shall mean all reports, estimates, declarations of estimated Tax, information statements, and returns (including without limitation any amendments thereto) relating to, or required to be filed in connection with any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties.


"Taxable Period" shall mean a Pre-Distribution Taxable Period, a Straddle Period or a Post-Distribution Taxable Period.


"Taxable Year" shall mean a taxable year (which may be shorter than a full calendar or fiscal year), year of assessment or similar period with respect to which any Tax may be imposed.


"Transaction Taxes" shall include only those Taxes described in Section 6.05 of the Distribution Agreement.


Section 2. Filing of Tax Returns. Tax Returns shall be filed by the parties as follows:


(a) By Company. Company shall prepare and timely file, or cause to be prepared and timely filed:


(i) all Tax Returns with respect to Taxes (other than Transaction Taxes) of, or with respect to, the Pre-Distribution Group and each Pre-Distribution Member for all Pre-Distribution Taxable Periods, except for Tax Returns that relate solely to any Lakes Member or group of Lakes Members and are not required to be filed on or before the Distribution


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Date;


(ii) all Tax Returns with respect to Taxes (other than Transaction Taxes) of, or with respect to, the Post-Distribution Company Group and each Post-Distribution Company Member for all Straddle Periods and Post-Distribution Taxable Periods, including without limitation any Tax Returns that are required to be filed on a consolidated, combined or unitary basis that includes any Lakes Member and any Post-Distribution Company Member for a Straddle Period.


(b) By Lakes. Lakes shall prepare and timely file, or cause to be prepared and timely filed:


(i) all Tax Returns with respect to Taxes (other than Transaction Taxes) that relate solely to any Lakes Member or group of Lakes Members for all Pre-Distribution Taxable Periods that are not required to be filed on or before the Distribution Date; and


(ii) all Tax Returns with respect to Taxes (other than Transaction Taxes) of the Lakes Group or any Lakes Member for all Straddle Periods and Post-Distribution Taxable Periods, other than any Tax Returns that are required to be filed on a consolidated, combined or unitary basis that includes any Lakes Member and any Post-Distribution Company Member for a Straddle Period.


(c) Transaction Taxes. The provisions of Section 6.05 of the Distribution Agreement and Section 3(e) of this Agreement shall govern (i) the preparation and filing of all Tax Returns with respect to any Transaction Taxes and (ii) the payment of such Transaction Taxes.


(d) Taxable Year. Lakes and Company agree that, to the extent permitted by applicable law, (i) the Taxable Year of each Lakes Member included in the Tax Return filed for consolidated federal Income Tax purposes of the Pre-Distribution Group for the Pre-Distribution Taxable Period (or, if applicable, the Straddle Period) that includes the Distribution Date (and all Tax Returns for the corresponding consolidated, combined or unitary state, province, local or foreign Income Taxes of the Pre-Distribution Group) shall end on the Distribution Date; and (ii) the Lakes Group and each Lakes Member shall begin a new Taxable Year for purposes of such federal, state, province, local and foreign Income Taxes on the day after the Distribution Date. The parties further agree that, to the extent permitted by applicable law, all federal, state, province, local and foreign Tax Returns shall be filed consistently with this position.


(e) Past Tax Practices. Each of Company (including its Representatives) and Lakes (including its Representatives) shall prepare all Tax Returns required to be filed by it pursuant to this Section 2 (i) for all Taxable Years ended on or before December 31, 1999, in a manner consistent with Company's past Tax Practices, except as otherwise expressly required hereunder, by changes in applicable law or material underlying facts or as the parties hereto may otherwise agree in writing; and (ii) in a manner consistent with the IRS Ruling required by the


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Distribution Agreement.


(f) Cooperation and Provision of Filing Information. Lakes (or Company, as the case may be) shall cooperate (as provided in Section 9) and assist Company (or Lakes) in the preparation and filing of all Tax Returns subject to this Section 2 and submit to Company (or Lakes): (i) all necessary filing information in a manner consistent with past Tax Practices and (ii) all other information reasonably requested by Company (or Lakes) in connection with the preparation of such Tax Returns promptly after such request. It is expressly understood and agreed that Company's (or Lakes') ability to discharge its Tax Return preparation and filing responsibilities is contingent upon Lakes (or Company) providing Company (or Lakes) with all such cooperation, assistance and information reasonably necessary or requested for the filing of such Income Tax Returns and that Lakes (or Company) shall indemnify Company (or Lakes), if, and to the extent that, Taxes are increased as a result of material inaccuracies in such information or failures to provide such cooperation, information and assistance on a timely basis.


(g) Advance Review and Approval of Tax Returns. To facilitate the rights and obligations of the parties under this Section 2, at least forty-five (45) days prior to the filing of any Tax Return including Tax Items to be reported under the following paragraph, and at least thirty (30) days prior to the filing of any other Tax Return that includes one or more Lakes Members, Company shall provide Lakes with a copy of such Tax Return. Lakes, its Representatives and any accountant appointed under the following provisions of this Section 2(g) shall have the right to review all related work papers at any reasonable time after such copy is furnished.


Promptly following the receipt by Lakes of an advance copy of a Tax Return to be filed by Company, Company and Lakes shall first consult with each other regarding the comments of Lakes and its Representatives with respect to such Tax Returns and each of them shall in good faith (i) attempt to resolve any differences with respect to the preparation and accuracy of such Tax Returns and their consistency with past Tax Practices and (ii) consider the other's recommendations for alternative positions having a "reasonable basis" (as defined in Code section 6662) with respect to Income Tax Items or other information to be reflected on such Tax Return, and alternative positions for reporting Other Tax Items having reasonable basis under the Tax law governing Other Taxes. Notwithstanding the preceding sentence, to the extent any such Tax Items are reasonably anticipated to affect (i) any Tax liability allocated to the Lakes Group or one or more Lakes Members under Section 3, (ii) any Section 355 Tax Liability, (iii) any Stratosphere Tax Benefits or (iv) any utilization of Stratosphere Losses by Company or any other Post-Distribution Company Member or by Lakes or any Lakes Member (except to the extent any Stratosphere Tax Benefits derived from the Stratosphere Losses are to be allocated equally under Section 3(d)(iii), which Tax Item shall remain under the control of Company), and following such consultation, Company (and its Representatives) shall in good faith accept the recommendation of Lakes and its Representatives with respect to the Tax Return reporting of such Tax Items to be reported on such Tax Return; provided, however, that to the extent such recommendations relate to the Base Stratosphere Loss defined in Section 3(d)(ii), such recommendations shall have a reasonable basis (as described above) and, to the extent such recommendations relate to any other Income Tax Items, such recommendations are supported by "substantial authority" as defined in Code section 6662.


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If the parties are unable to agree whether any recommended position on a Tax Item to be determined under the preceding sentence has such a reasonable basis or is supported. by substantial authority, as the case may be, each of them shall (no later than thirty (30) days before the affected Tax Return is due, including all allowable extensions of time to file such Tax Return) appoint a certified public accountant who is a tax partner of one of the six largest public accounting firms in the United States (other than any firm used by either of the parties as its primary public accounting firm for Tax consulting matters) as its representative to determine such matter and, if such accountants are unable to agree on the matter within ten (10) business days following such appointments, such accountants shall mutually appoint a third certified public accountant, who is a tax partner of a neutral accounting firm from among such remaining firms, who shall finally determine such matter. Such appointed accountants shall diligently attempt resolve such matter. The fees and expenses of such accountants shall be allocated between the parties in the same manner as Transaction Taxes, unless such amounts are otherwise equitably allocated between the parties by the accountants or accountant making the final determination, taking into account the relative benefits and detriments of such determination.


Any Tax Return reporting position determined under this Section 2(g) shall be supported in good faith by Company and Lakes until the position is affirmed or modified by a Final Determination in which Company (and, if applicable, Lakes) exerted its reasonable best efforts to support the position.


Section 3. Payment and Allocation of Tax Liabilities.


(a) Tax Liabilities of Company. Company shall, except as otherwise expressly allocated under the subsequent provisions of this Section 3 or otherwise under this Agreement:


(i) be liable for and pay, or cause to be paid, and shall indemnify and hold harmless Lakes and each other Lakes Member against all Taxes (other than Transaction Taxes) that relate to all Tax Returns that Company is required to prepare and file, or cause to be prepared and filed, pursuant to Section 2 of this Agreement; and


(ii) be entitled to all refunds of Taxes related thereto.


(b) Tax Liabilities of Lakes. Lakes shall, except as otherwise expressly allocated under the subsequent provisions of this Section 3 or otherwise under this Agreement:


(i) be liable for and pay, or cause to be paid, and shall indemnify and hold harmless Company and each other Post-Distribution Company Member against all Taxes (other than Transaction Taxes) that relate to all Tax Returns that Lakes is required to prepare and file, or cause to be prepared and filed, pursuant to Section 2 of this Agreement; and


(ii) be entitled to all refunds of Taxes related thereto.


(c) Special Allocation of Company Tax Liabilities for Certain Taxable Periods.


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The economic cost of the following Taxes (other than Transaction Taxes) related to any Tax Returns required to be filed by Company under Section 2(a) and otherwise payable under Section 3(a) shall be allocated among the parties and their respective subsidiaries in the following manner:


(i) Pre-Distribution Taxable Periods. If any Tax Return of any Pre-Distribution Member for any Pre-Distribution Taxable Period has not been filed on or before the Distribution Date, the economic cost of all liabilities for Taxes related to such Tax Return shall be allocated in the manner set forth in Section 3(c)(ii); and any refunds of Taxes related thereto shall be allocated in the same manner.


To the extent that any Tax liabilities related to any Tax Return filed by any Pre-Distribution Member on or before the Distribution Date for any Pre-Distribution Taxable Period are changed by a Final Determination or as a result of an amended Tax Return filed after the Distribution Date, and (A) any portion of such change is derived solely from any Tax Items reasonably and equitably related to any of the Lakes Business and Assets, determined by computing such change with and without such Tax Items, then the economic cost of such portion shall be allocated to the Lakes Group and Lakes shall indemnify and hold harmless Company and each other Post-Distribution Company Member against such cost; or (B) any portion of such change is derived solely from any Tax Item reasonably and equitably related to any of the Mississippi Business and Assets, determined by computing such change with and withou ...