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Published: 2008-03-26

Tax Allocation Agreement - Microsoft Corp. and Expedia.Inc.



                           TAX ALLOCATION AGREEMENT
                                        

     THIS AGREEMENT is entered into as of the 1st day of October, 1999, by
and between Microsoft Corporation, a Washington corporation ('MS') and Expedia
Inc. ('Expedia'), a Washington corporation.

                                  WITNESSETH:

     WHEREAS, MS is the common parent corporation of an affiliated group of
corporations (the 'MS Affiliated Group') within the meaning of section 1504(a)
of the Internal Revenue Code of 1986, as amended (the 'Code'), and Expedia is a
newly-formed corporation more than 80% owned by MS and therefore a member of the
MS Affiliated Group; and

     WHEREAS, MS and Expedia deem it appropriate to define the method by which
the federal income tax, including for all purposes of this Agreement, the
alternative minimum tax, and certain state and local tax liabilities of the MS
Affiliated Group shall be allocated between the parties and the manner in which
such allocated liability shall be paid;

     NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
     1.  Definitions
         -----------
     The following terms as used in this Agreement shall have the meanings set
forth below:

     (a) 'Additional Amount' shall mean the amount determined under Section 3
hereof.

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     (b) 'Consolidated Return' shall mean a consolidated federal income tax
return filed pursuant to section 1501 of the Code.

     (c) 'Consolidated Tax Liability' shall mean the consolidated federal income
tax liability, including for all purposes of this Agreement, alternative minimum
tax liability, of the MS Affiliated Group for any taxable year for which the MS
Affiliated Group files a Consolidated Return.

     (d) 'Inherent Bargain Element' shall have the meaning set out in paragraph
9, below.

     (e) 'IRS' shall mean the Internal Revenue Service.

     (f) 'Member' shall mean each includible member of the MS Affiliated Group.

     (g) 'MS Affiliated Group' shall mean the affiliated group of corporations
within the meaning of section 1504(a) of the Code of which MS is the common
parent.

     (h) 'Regulations' shall mean the Treasury regulations as in effect from
time to time.

     (i) 'Separate Return Tax Liability' shall mean the federal income tax
liability, including for all purposes of this Agreement, alternative minimum tax
liability, of a Member computed as if it had filed a separate federal income tax
return for the applicable taxable year with the modifications set forth in
section 1.1552-1(a)(2)(ii) of the Regulations.  In addition, for purposes of
this definition, each party's Separate Return Tax Liability shall be computed as
if MS (and not Expedia or its successor) is entitled to deduct on its Separate
Return the 'Inherent Bargain Element' in the compensatory stock 

                                       2

 
options assumed by Expedia as explained in detail in paragraph 9, below. If the
computation of a Member's Separate Return Tax Liability as provided herein does
not result in a positive amount, such Member's Separate Return Tax Liability
shall be zero.

          (j) 'Separate Tax Liability' shall mean the amount owed by a Member
under Section 2(a) hereof.

          (k) 'Tax Sharing Receivable' shall mean the amount owned to a Member
pursuant to Section 2(a) hereof.

     2.  Separate Tax Liability
         ----------------------

         (a) If a Consolidated Return is filed by the MS Affiliated Group for
any taxable year, the Separate Tax Liability of each Member for such taxable
year shall, if a positive number, be the sum of (i) the amount determined for
such Member pursuant to paragraph (b) hereof, plus or minus, as the case may be,
(ii) any increase or reduction in the Member's tentative Separate Tax Liability
required by paragraph (c) hereof. To the extent an allocation to a Member under
clause (ii) of paragraph (c) hereof reduces a Member's tentative Separate Tax
Liability to an amount less than zero, such negative amount shall be referred to
herein as a 'Tax Sharing Receivable.'

         (b) Each Member's tentative Separate Tax Liability shall be an amount
equal to that portion of the Consolidated Tax Liability for such taxable year
that the Member's Separate Return Tax Liability for such taxable year bears to
the sum of the Separate Return Tax Liabilities of all Members for such taxable
year; provided, however, that such amount shall not exceed the Consolidated Tax
      --------  -------
Liability for such taxable year.

          (c) Adjustments for  Additional Amount.  If an Additional Amount is
determined with respect to a Member for a Consolidated Return taxable year, then
(i) the 

                                       3

 
tentative Separate Tax Liability of that Member, as determined pursuant
to paragraph (b), shall be increased by such Additional Amount; and (ii) the
Separate Tax Liability of each of those Members whose tax attributes are
absorbed shall be reduced by a pro rata portion of the Additional Amount
allocated to such Member, which allocation shall be made in a manner that
reasonably reflects the absorption of the tax attributes; provided, however,
that, whenever Expedia is one of the Members entitled to a reduction in its
Separate Tax Liability as a consequence of an allocation to Expedia or all or
part of another Member's Additional Amount, 92.5% of the amount otherwise
allocable to Expedia shall be allocated to Expedia, and 7.5% to MS.  This
paragraph (c) and Section 3 hereof are intended to allocate Additional Amounts
of Separate Return Tax Liability in accordance with the percentage method of
Reg. (S)1.1502-33(d)(3) (using 100% for each Member other than Expedia and 92.5%
for Expedia) and, except for the modification in the computation of Separate
Return Tax Liability with respect to the Inherent Bargain Element, shall be
interpreted to comply in all material respects with that method.

     3.  Additional Amount
         -----------------

         An 'Additional Amount' exists with respect to a Member if, for any
Consolidated Return taxable year, that Member's Separate Return Tax Liability
exceeds the tentative Separate Tax Liability of that Member determined pursuant
to Section 2(b).

     4.  Payments
         --------

         For each taxable year with respect to which MS files, or it is
reasonably anticipated that MS will file, a Consolidated Return which includes
Expedia, payment of the Separate Tax Liability or Tax Sharing Receivable with
respect to such taxable year shall be made as follows:

                                       4

 
     (a) On or before the 15th day of the fourth month of such taxable year, MS
shall estimate the Separate Tax Liability or Tax Sharing Receivable of each
Member for such taxable year.

     (b) Expedia shall pay to MS or MS shall pay to Expedia, as the case may be,
on or before each of the due dates for MS to make payment of estimates of its
federal income taxes for such taxable year one-fourth of the amount estimated
pursuant to paragraph (a) above (the 'Estimated Amount').  If, after paying any
such installment of the Estimated Amount, MS and Expedia make a new estimate,
the amount of each remaining installment (if any) shall be the amount which
would have been payable if the new estimate had been made when the first
estimate for the taxable year was made, increased or decreased as applicable, by
the amount computed by dividing:

         (i) the difference between (A) the amount of the Estimated Amount
required to be paid before the date on which the new estimate is made, and (B)
the amount of the Estimated Amount which would have been required to be paid
before such date if the new estimated had been made when the first estimate was
made, by

         (ii) the number of installments remaining to be paid on or after the
date on which the new estimate is made.

     (c) If, after the end of each such taxable year with respect to which MS
filed, or reasonably anticipates that it will file, a Consolidated Return which
includes Expedia, it is determined that the actual Separate Tax Liability for
such taxable period exceeds the aggregate amount paid pursuant to the
subparagraph (b) above with respect to such taxable period, then such excess
shall be paid on or before the later of (i) the 15th day of the third month
after the end of such taxable period, and (ii) the date on which 

                                       5

 
such excess is finally determined, which shall be not later than sixty (60) days
after the Consolidated Return for such taxable period is filed.

     (d) If, after the end of each such taxable year with respect to which MS
filed, or reasonably anticipates that it will file, a Consolidated Return which
includes Expedia, it is determined that the amount paid pursuant to subparagraph
(b) above with respect to such taxable period exceeds the actual Separate Tax
Liability or Tax Sharing Receivable for such taxable period, then such excess
shall be paid on or before the later of (i) the 15th day of the third month
after the end of such taxable period and (ii) the date on which such excess is
finally determined, which shall be not later than sixty (60) after the
Consolidated Return for such taxable period is filed.

     5.  Carrybacks.  The provisions of this Section 5 shall be interpreted in a
         ----------                                                             
manner that does not result in the duplication of any computations required by
any other provision of this Agreement or in the duplication of any tax sharing
payment required to be made pursuant to any other provision of this Agreement.

     (a) If the MS Affiliated Group has a consolidated unused investment credit,
a consolidated unused foreign tax credit, a consolidated excess charitable
contribution, a consolidated net capital loss or a consolidated net operating
loss, as such terms are defined in the Regulations (a 'Consolidated Excess
Amount') for any taxable year, the portion of such Consolidated Excess Amount
which is attributable to a Member (the 'Separate Excess Amount') shall be
computed in accordance with the Consolidated Return Regulations, except that all
such computations shall be made by assuming that MS, not Expedia, is entitled to
all deductions attributable to the Inherent Bargain Element in the compensatory
stock options assumed by Expedia.

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     (b) If such Consolidated Excess Amount is carried back to a prior taxable
year of the MS Affiliated Group during which Expedia was a Member or was not in
existence, then the amounts due under this Agreement for such prior taxable year
shall be redetermined by taking into account such Consolidated Excess Amount and
any Separate Excess Amount allocable to such taxable year.

     (c) If such Consolidated Excess Amount is carried back to a prior taxable
year of the MS Affiliated Group during which Expedia was in existence but was
not a Member, then Expedia shall be entitled to 92.5% of any credit or refund
attributable to any Separate Excess Amount originated by Expedia which is
carried back to such prior taxable year, and the remaining 7.5% of such credit
or refund shall be retained by MS.

     (d) Payment of any amount due under this Section 5 shall be made on the
date that a credit or refund is allowed with respect to the taxable year to
which such payment related and shall include any interest attributable thereto
under section 6611 of the Code.

     6.  Subsequent Adjustments
         ----------------------

     If any adjustments (other than adjustments made pursuant to Section 5
hereof) are made to the income, gains, losses, deductions or credits of the MS
Affiliated Group for a taxable year during which Expedia is a Member, whether by
reason of the filing of an amended return or a claim for refund which respect to
such taxable year or an audit with respect to such taxable year by the IRS, the
amounts due under this Agreement for such taxable year shall be redetermined by
taking into account such adjustments.  If, as a result of such redetermination,
any amounts due under this Agreement shall differ from the amounts previously
paid, then payment of such difference shall be made (a) in the case of 

                                       7

 
an adjustment resulting in a credit or refund, on the date on which such credit
or refund is allowed with respect to such adjustment, or (b) in the case of an
adjustment resulting in the assertion of a deficiency, on the date on which such
deficiency is paid. Any amounts due under this Section 6 shall include any
interest attributable thereto under section 6601 or 6611 of the Code, as the
case may be, and any penalties or additional amounts which may be imposed.

      7.  Carrybacks from Separate Return Years
          -------------------------------------

      If, for any separate return year, as defined in section 1.1502-1 of the
Regulations, Expedia has a net operating loss, a net capital loss or is entitled
to credits against tax which, under the applicable provisions of the Code and
the Regulations, may be carried back to a taxable year during which Expedia was
a Member, MS shall pay to Expedia 92.5% of the excess, if any, of (i) the amount
of any refund or credit of Consolidated Tax Liability that MS receives as a
result of the carryback of such losses or credits, over (ii) to the extent the
carryback is attributable under the principles of Section 9 below to the
Inherent Bargain Element of compensatory stock options assumed by Expedia, the
tax benefit of that that element of the compensation deductions allowable to
Expedia.  Such payment shall be made not later than sixty (60) days after MS
receives such refund or credit and shall include any interest attributable
thereto under Section 6611 of the Code.

     8.  Foreign Tax and State and Local Tax
         -----------------------------------

         (a) Expedia agrees, on the request of MS, to join with MS, or any
direct or indirect subsidiary of MS, (i) in any combined or consolidated foreign
tax return ('Foreign Combined Return') for any taxable year for which MS or any
such direct or indirect subsidiary of MS files a Foreign Combined Return that
may include Expedia, and

                                       8

 
(ii) in any combined or consolidated state or local income or franchise tax
return ('State/Local Combined Return') for any taxable year for which MS or any
such direct or indirect subsidiary of MS files a State/Local Combined Return
that may include Expedia.

         (b) If, at any time from and after the date of this Agreement, Expedia
is included in any Foreign Combined Return or State/Local Combined Return that
includes MS or any direct or indirect subsidiary of MS, this Agreement shall be
applied in a like manner to all matters relating to such foreign taxes or state
or local income or franchise taxes.

     9.  Treatment of Special Items
         --------------------------

     The parties intend that, for federal and state tax purposes, MS will be
entitled to the economic benefit under this Agreement of all compensation
deductions attributable to the inherent 'bargain element' in any compensatory
options previously granted by MS to former MS employees that are employed by
Expedia (collectively referred to as 'assumed MS options').  The 'Inherent
Bargain Element' in each assumed MS option will be determined on the date
Expedia employs the optionee and shall be equal to the excess of (i) the fair
market value of the shares (whether shares of MS common stock or Expedia stock)
to be acquired on exercise of the option, determined as of the date the optionee
is employed by Expedia, over (ii) the exercise price of the option on the date
the optionee is employed by Expedia.  For purposes of this Agreement, all
deductions allowable to Expedia or MS, as the case may be, with respect to
assumed MS options  shall, on a first-in/first-out basis, be treated as MS
deductions for all purposes of this Agreement until the aggregate amount of
those deductions equal the aggregate amount of the Inherent Bargain Element
attributable to all assumed MS options.

                                       9

 
     10.  Determinations
          --------------

     All determinations required hereunder shall be made by the independent
public accountants regularly employed by the MS Affiliated Group at the time
that such determination is required to be made or by such other independent tax
advisor as may be selected by MS, in the exercise of its absolute discretion.
Such determinations shall be binding and conclusive upon the parties for
purposes hereof.

     11.  Procedural Matters
          ------------------

          (a) MS shall prepare and file the Consolidated Return and other
returns, documents or statements required to be filed with the IRS with respect
to the determination of federal income tax liability of the MS Affiliated Group.
In its sole discretion, MS shall have the right with respect to any Consolidated
Returns which it has filed or will file, (i) to determine the manner in which
such returns, documents or statement shall be prepared and filed, including,
without limitation, the manner in which any item of income, gain, loss,
deduction or credit shall be reported, the elections that will be made by any
Member, (ii) to contest, compromise or settle any adjustment or deficiency
proposed, asserted or assessed as a result of any audit or such returns by the
IRS, (iii) to file, prosecute, compromise or settle any claim for refund and
(iv) to determine whether any refunds, to which the MS Affiliate Group may be
entitled, shall be paid by way of refund or credited against the tax liability
of the MS Affiliated Group. Expedia hereby irrevocably appoints MS as its agent
and attorney-in-fact to take such actions (including the execution of documents)
as MS may deem appropriate to effect the foregoing.

                                       10

 
     (b) With respect to any Combined Returns in which Expedia joins with MS
pursuant to Section 8, above, MS shall prepare and file any Combined Returns and
other returns, documents or statements required to be filed with any state or
local taxing authority.  In its sole discretion, MS shall have the right with
respect to any Combined Return Consolidated Returns which it has filed or will
file, (i) to determine the manner in which such returns, documents or statement
shall be prepared and filed, including, without limitation, the manner in which
any item of income, gain, loss, deduction or credit shall be reported, the
elections that will be made by any Member, (ii) to contest, compromise or settle
any adjustment or deficiency proposed, asserted or assessed as a result of any
audit or such returns by the IRS, (iii) to file, prosecute, compromise or settle
any claim for refund and (iv) to determine whether any refunds, to which the MS
Affiliate Group may be entitled, shall be paid by way of refund or credited
against the tax liability of the MS Affiliated Group.  Expedia hereby
irrevocably appoints MS as its agent and attorney-in-fact to take such actions
(including the execution of documents) as MS may deem appropriate to effect the
foregoing.

     12.  Earnings and Profits Determinations.  For purposes of determining the
          -----------------------------------                                  
manner in which taxes are shared in calculating each Member's earnings and
profits, MS shall be entitled to use any of the methods permitted by section
1.1502-33(d) of the Regulations that MS, in the exercise of its absolute
discretion, deems necessary or appropriate.

     13.  Miscellaneous Provisions
          ------------------------

          (a) This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein. No alternation,
amendment or 

                                       11

 
modification of any of the terms of this Agreement shall be valid unless made by
an instrument signed in writing by an authorized officer of each party hereto.

          (b) This Agreement has been made in and shall be construed and
enforced in accordance with the laws of the State of Washington from time to
time obtaining.

          (c) This Agreement shall be binding upon and inure to the benefit of
each party hereto and their respective successors and assigns.

          (d) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

          (e) All notices and other communications hereunder shall be deemed to
have been duly given if delivered by hand or mailed certified or registered
mail, postage prepaid:


              (i)  Microsoft Corporation
                   One Microsoft Way
                   Redmond, Washington  98052-6399
 
                   Telephone  (425) 882-8080
                   Fax        (425) 936-7329
 
                   Attention:     Chief Financial Officer
                                  Treasurer

                   with copy to:  Law and Corporate Affairs


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             (ii)  Expedia, Inc.
                   4200 150th Ave. NE
                   Redmond, WA 98052
  
                   Telephone (425) 705-5161
                   Fax       (425) 936-7329
  
                   Attention:  President
                               Chief Financial Officer

     (f) The headings of the paragraph of this Agreement are inserted for
convenience only and shall not constitute a part hereof.

     IN  WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be affixed hereto, all on
the date and year first above written.


MICROSOFT CORPORATION                        EXPEDIA INC.
                                   
                                   
By    /s/ Gregory B. Maffei                  By     /s/ Richard N. Barton  
  ______________________________               _______________________________
  its authorized representative                 its authorized representative

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