Short Years. If a Consolidated or Combined Return is filed with respect to a Tax Year, and if TODCO and its eligible Subsidiaries are not included in such Consolidated or Combined Return for that entire Tax Year, then for purposes of determining the Income Taxes attributable to or imposed on the TODCO Tax Group for the resulting short Consolidated or Combined Year and the short Separate Return Year, all calculations shall be made by (x) closing the books of the TODCO Tax Group at the end of the month preceding the month in which the first short year ends, (y) closing the books of TODCO Tax Group again at the end of the month in which the first short year ends, and (z) apportioning Tax Items accruing in the month in which the first short year ends to each short year pro rata in proportion to the number of days in such month that are within each short year. Notwithstanding clause (z) of the immediately preceding sentence, all Tax Items that are extraordinary items within the meaning of Treasury Regulations Section 1.1502-76(b)(2)(ii)(C) shall be allocated to the short year in which they accrue; provided, however, that the principles of Treasury Regulations Section 1.1502-76(b)(1)(ii)(B) (Next Day Rule) shall apply in determining the proper allocation of extraordinary items accruing on the last day of the earlier short Tax Year.
