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EXHIBIT 10.25
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (this "AGREEMENT") is dated as of
March 10, 2004 by and between Danielson
Holding Corporation, a Delaware
corporation (hereinafter referred to as
"PARENT"), Covanta Energy Corp.
("COVANTA"), a Delaware corporation and,
solely for purposes of Section 6 of
this Agreement, Covanta Power International
Holdings, Inc., a Delaware
Corporation ("COVANTA INTERNATIONAL").
WITNESSETH
WHEREAS, Parent is the common parent corporation of an
"affiliated group" of corporations (as it
may be constituted from time to time,
the "AFFILIATED GROUP"), as defined in
Section 1504 of the Internal Revenue Code
of 1986, as amended (the "CODE"); and
WHEREAS, Parent will file a U.S. consolidated federal income
tax return on behalf of the Affiliated
Group for the taxable year ending
December 31, 2004, and generally will be
required to file consolidated federal
income tax returns for subsequent years,
which will, beginning on March 11,
2004, include Covanta and all of its
current and future subsidiaries that would
be treated as members of an affiliated
group of corporations, as defined in
Section 1504(a) of the Code, for which
Covanta would be the common parent
corporation if Covanta and such
subsidiaries were not members of the Affiliated
Group (each of such subsidiary and Covanta,
a "SUBGROUP MEMBER," such affiliated
group of Subgroup Members, "COVANTA
SUBGROUP" as listed in Appendix A attached
hereto);
WHEREAS, Covanta International will not be a member of the
Affiliated Group; and
WHEREAS, it is the intent and desire of Parent and Covanta to
enter into this Agreement, to provide, with
respect to federal, state and local
income taxes, for the amount and time of
payments by Covanta to Parent and for
the amount and time of payments by Parent
to Covanta.
NOW, THEREFORE, Parent and Covanta, intending to be legally
bound hereby, and in consideration of the
mutual covenants herein contained,
agree as follows:
1.
Consolidated Federal Return.
A U.S. consolidated federal income tax return and estimated
tax returns shall be prepared and filed by
Parent for the taxable year ending
December 31, 2004 (THE "2004 TAXABLE
YEAR"), and for each subsequent taxable
period in respect of which the Affiliated
Group is required or permitted to file
a consolidated federal income tax return.
With respect to such tax return
preparation, Parent shall act in good faith
with regard to any and all Subgroup
Members. All Subgroup Members shall
cooperate with Parent in the preparation and
filing of such tax return and shall provide
such assistance and documents,
without charge, as may be requested by
Parent for that purpose. Parent shall
have the right with respect to any
consolidated federal income tax returns to
determine (a) the manner in which such
returns, documents or statements
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shall be prepared and filed, including,
without limitation, the manner in which
any item of income, gain, loss, deduction
or credit shall be reported, (b)
whether any extensions should be requested,
and (c) the elections that will be
made by any Subgroup Member. In addition,
Parent shall have the sole right to
(x) contest, compromise, or settle any
adjustments or deficiency proposed,
asserted or assessed as a result of any
audit of any consolidated tax return,
(y) file, prosecute, compromise or settle
any claim for refund, and (z)
determine whether any refunds shall be
received by way of refund or credited
against tax liabilities. Each Subgroup
Member and their respective counsel shall
cooperate, to the extent reasonably
practicable, in the contest or compromise
of, or defense against any such suit,
action or proceeding described above.
Parent may, and shall cause Subgroup
Members to, execute and file such consents,
elections, and other documents as Parent
determines are required or appropriate
for the proper filing of such returns.
2.
Allocation of Federal Tax Liability
(a) Covanta
agrees to pay to Parent, for each taxable
year or portion thereof during the term of
this Agreement, as the Covanta
Subgroup's share of the tax liability of
the Affiliated Group, an amount equal
to the apportioned tax liability of the
Covanta Subgroup determined under
Regulation Section 1.1552 1(a)(1) with the
modifications provided in Section 3
of this Agreement. For purposes of this
Agreement, Covanta will be treated as
the common parent corporation of the
Covanta Subgroup. Accordingly, the Covanta
Subgroup's proportionate share of the tax
liability of the Affiliated Group
shall be determined by multiplying the
Affiliated Group's tax liability by a
fraction, the numerator of which equals
Covanta's Taxable Income (as defined
below in Section 3), and the denominator of
which equals the Affiliated Group's
consolidated taxable income computed
pursuant to Section 1552(a)(1) of the Code
and Treasury Regulations Section
1.1552-1(a)(1). For purposes of this Agreement,
tax liability shall include any liability
for alternative minimum tax ("AMT").
The Covanta Subgroup shall compute its
separate adjusted AMT in accordance with
the principles of Proposed Treasury
Regulations Sections 1.1552-1(g) and
1.1502-55(h)(6)(iv) as the excess (if any)
of the AMT of the Affiliated Group
over the AMT of the Affiliated Group as
determined by excluding the Covanta
Subgroup's income, gains, deductions and
losses (with the modifications provided
in Section 3 of this Agreement and assuming
an AMT net operating loss as of the
Closing Date of $556,399,000) and credits,
and Covanta Subgroup's proportionate
share of the AMT of the Affiliated Group
shall be determined by multiplying the
AMT of the Affiliated Group by a fraction,
the numerator of which equals Covanta
Subgroup's separate adjusted AMT and the
denominator of which equals the sum of
the separate adjusted AMT's of all members
of the Affiliated Group (determined
with the modifications provided in Section
3 of this Agreement and assuming an
AMT net operating loss as of the Closing
Date of $556,399,000); provided,
however, Covanta shall pay Parent for any
AMT liability actually incurred by
Parent if such AMT liability would not have
been incurred if in an earlier
taxable year the Covanta Subgroup had
computed its AMT liability under Section
55 et seq. of the Code (with the
modifications provided in Section 3 of this
Agreement and assuming an AMT net operating
loss as of the Closing Date of
$556,399,000) as if it had filed its own
separate return as the common parent
corporation of the Covanta Subgroup and had
not been included in the U.S.
consolidated federal income tax return
filed by Parent on behalf of the
Affiliated Group, provided further however,
that the amount of such payment
shall not exceed the excess of the
cumulative Covanta Subgroup separate adjusted
AMT (as defined in Proposed Treasury
Regulations Section 1.1502-
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55(h)(6)(iv) with the modifications
provided in Section 3 of this Agreement and
assuming an AMT net operating loss as of
the Closing Date of $556,399,000) over
the sum of (A) the cumulative AMT amount
the Covanta Subgroup has paid under
this Section 2(a) of this Agreement and (B)
any reduction in Parent's AMT
liability resulting from the inclusion of
the Covanta Subgroup in Parent's
Affiliated Group.
(b) The
Covanta Subgroup's allocable share of the U.S.
consolidated federal income tax liability
of Parent for each year beginning with
the 2004 Taxable Year, determined as
provided in Section 2(a) above, shall be
further apportioned among the Subgroup
Members, other than Covanta Warren Energy
Resources Co., LP ("WARREN"), Covanta
Equity of Stanislaus, Inc. ("STANISLAUS"),
Covanta Equity of Alexandria/Arlington,
Inc. ("ALEXANDRIA"), Covanta Tampa
Construction, Inc. ("TAMPA CONSTRUCTION"),
and Covanta Tampa Bay, Inc. ("TAMPA
BAY") (together, the "REMAINING DEBTORS")
in a manner consistent with the
allocation method provided in Section 2(a)
above. The Tax Sharing Agreement
between Covanta, Warren, Stanislaus and
Alexandria dated as of March 10, 2004,
the Tax Sharing Agreement between Covanta
and Tampa Construction dated as of
March 10, 2004 and the Tax Sharing
Agreement between Covanta and Tampa Bay
provide, with respect to federal, state and
local income taxes, for the amount
of payments by Covanta to the Remaining
Debtors and for the amount of payments
by the Remaining Debtors to Covanta.
(c) Covanta's
payment of such apportioned tax liability
shall constitute a complete settlement of
the federal income tax liability of
all Subgroup Members for such taxable year,
except as otherwise provided in
Section 9 of this Agreement. Parent shall
indemnify and hold harmless Covanta
against any liability for federal income
tax (including alternative minimum tax
and additional amounts) relating to taxable
years during the term of this
Agreement (including any liability for
taxes attributable to other corporations
for which a Subgroup Member is liable under
Regulation Section 1.1502-6) other
than such apportioned tax liability. All
computations under this Agreement shall
be made on the basis that each Subgroup
Member is a member of the Affiliated
Group and that such group files a
consolidated return.
3.
Taxable Income. For purposes of this Agreement, "Covanta's
Taxable Income" shall be Covanta's taxable
income computed in accordance with
Regulation Section 1.1552-1(a)(1)(ii) (and
shall not be negative), except that
the following modifications will apply:
(i) Covanta's Taxable Income shall
be computed in
accordance with Regulation Section 1.1552-1(a)(1)(ii), assuming
Covanta's separate taxable income is the amount that would be shown
on
the consolidated return for the Covanta Subgroup, had Covanta
filed
such return as the common parent corporation of the Covanta
Subgroup;
(ii) for purposes of applying Regulation
Section 1.1552-1(a)(1)(ii)(a), for each Taxable Year (beginning the
day
after the Closing Date), (A) the portion of the consolidated
net
operating loss deduction attributable to Covanta shall be deemed to
be
increased by the Adjustment Amount (as defined below) and (B) the
net
operating loss deduction attributable to other members of the
Affiliated Group shall be accordingly reduced;
(iii) the "ADJUSTMENT AMOUNT" shall be the lesser of (A) the
excess of Covanta's taxable income (computed as if Covanta had
filed a
separate return as the common parent
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of the Covanta Subgroup) over the portion of the consolidated
net
operating loss deduction attributable solely to the Covanta
Subgroup
and actually available to be used by the Affiliated Group and (B)
the
excess of $571,846,000 over: the sum of (i) the cumulative
Adjustment
Amount for all prior periods (beginning after the Closing Date);
(ii)
the cumulative amount of the consolidated net operating loss
deduction
utilized by affiliates of the Parent listed in Appendix B
attached
hereto for all prior periods (beginning after the Closing Date);
and
(iii) the sum of any net operating losses that (x) expired unused
for
such prior periods (except to the extent such expiration resulted
from
a current-year loss of a Parent Affiliate (other than a
Subgroup
Member) being used to offset Covanta's taxable income(computed as
if
Covanta had filed a separate return as the common parent of the
Covanta
Subgroup)) and
