Contract analysis

I. Purpose and Executive Summary This memorandum analyzes the federal and state income-tax treatment of the $14.75 million settlement payment to be received by Redstone Gaming Corp. ("RGC" or the "Company") under the Settlement Agreement and Mutual Release expected to be executed on January 6, 2025 (the "Settlement Agreement"). The settlement resolves all claims asserted by RGC in Redstone Gaming Corp. v. Grizzly Pea

II. Background: The Settlement A. Litigation Overview RGC filed its initial Complaint on February 5, 2024, in the Superior Court of California, County of Los Angeles, under Case No. 24STCV-01892. The Complaint was assigned to the Honorable Margaret Soo-Kwan Chen, Department 34, Spring Street Courthouse. RGC subsequently filed a First Amended Complaint on March 18, 2024, adding a claim for negligent misrepresentation

III. Federal Income Tax Analysis A. General Rule: IRC § 61 — Gross Income The starting point for any analysis of the tax treatment of settlement proceeds is IRC § 61(a), which defines gross income broadly to include "all income from whatever source derived." The statute provides a non-exhaustive list of items included in gross income, among them "compensation for services, including fees, commissions, fringe benefits

1. Compensatory Damages Component (Lost Profits / Market-Cap Recovery). The overwhelming majority of the settlement proceeds is most naturally characterized as compensation for RGC's economic losses — specifically, the decline in market capitalization and the out-of-pocket remediation costs incurred in response to the false GPR reports. The primary damages theory presented throughout the litigation was the market-cap

2. Reputational / Goodwill Damages Component. RGC could theoretically argue that some portion of the $14.75 million compensates for damage to the Company's corporate goodwill and business reputation — assets that are generally treated as capital assets for federal income-tax purposes. Under Raytheon and its progeny, amounts received as compensation for damage to or destruction of goodwill may receive capital-gain tre

3. Injunctive / Non-Monetary Relief. The non-monetary components of the settlement — the corrective publication, social media corrective, permanent injunction against republication, and five-year trading bar — have substantial practical and reputational value to RGC but do not have an independently quantifiable monetary value for federal income-tax purposes. The IRS does not generally impute income to a taxpayer base

4. Recommended Allocation. In the absence of a contrary allocation in the Settlement Agreement, the IRS will likely treat the entire $14.75 million as ordinary income to RGC. This result is consistent with the origin-of-the-claim analysis set forth above and represents the most defensible position for RGC's federal income tax return. The Settlement Agreement as currently drafted does not allocate the $14.75 million a

IV. Deductibility of RGC's Litigation Costs A. Calderwood & Harkness Fees and Costs RGC has incurred the following fees and costs in connection with the Calderwood & Harkness engagement in this matter: • discounted Hourly Fees: Approximately $2,800,623, representing fees billed at the discounted hourly rates set forth in the December 2023 Engagement Letter (as amended), inclusive of time incurred by partners, associa

V. State Tax Considerations A. Nevada. RGC is incorporated in Nevada and maintains its principal executive offices in Las Vegas, Nevada. Nevada does not impose a corporate income tax or a personal income tax, and the settlement proceeds will therefore not be subject to a Nevada income tax. However, Nevada does impose a Commerce Tax on business entities whose Nevada gross revenue exceeds $4 million in a given fiscal y

VI. Financial Reporting Considerations The tax treatment of the settlement proceeds, while the primary focus of this memorandum, must be coordinated with the financial reporting treatment under U.S. Generally Accepted Accounting Principles ("GAAP"). Under ASC 450, Contingencies (formerly SFAS No. 5), gain contingencies — including anticipated litigation recoveries — should not be recognized in the financial statement

VII. Timing of Income Recognition The timing of income recognition for the $14.75 million settlement is an important consideration for RGC's tax planning and financial reporting. RGC reports on a calendar fiscal year (January 1 through December 31) and uses the accrual method of accounting, as required for publicly traded corporations. Under the accrual method, income is recognized in the taxable year in which "all e

VIII. Recommendations Based on the analysis set forth in this memorandum, I recommend the following action items, which should be addressed before the anticipated Effective Date of January 6, 2025, to the extent practicable:

1. Coordinate with RGC's Tax Advisors and Pinnacle Audit & Advisory LLP. Before the Effective Date, the Calderwood & Harkness team should facilitate a call or meeting among the following stakeholders to discuss the tax and financial reporting treatment of the $14.75 million settlement: • Walter Ng, CPA, engagement partner at Pinnacle Audit & Advisory LLP (RGC's independent auditor); • Priya Ramaswaran, CFO of Redston

2. Evaluate Settlement Agreement Allocation Language. The team should evaluate whether to propose the inclusion of an allocation clause in the Settlement Agreement that assigns specific portions of the $14.75 million to different damage categories (e.g., compensatory damages for lost profits, damages for reputational injury, reimbursement of out-of-pocket costs). Such an allocation would require negotiation with defe

3. Document the Basis for Deductions. RGC should ensure that all litigation costs, crisis-communications expenses, forensic audit costs, and regulatory counsel fees are properly documented and categorized as ordinary and necessary business expenses under IRC § 162. Specifically: • All invoices from Calderwood & Harkness, Crestline Equity Partners Group, Pinnacle Audit & Advisory, and Hargrove & Sato should be maintai

4. Confirm State Apportionment Treatment. RGC's multi-state operations — encompassing eleven casino-resort properties in Nevada, New Jersey, and Mississippi — require careful apportionment analysis for the settlement proceeds across all filing states. The team should work with RGC's state and local tax advisors to: • Determine whether the settlement proceeds constitute "business income" or "nonbusiness income" under

5. SEC Disclosure Coordination. The team should work with Janelle Hu (VP of Investor Relations) and Pinnacle Audit & Advisory to determine the appropriate level of disclosure in RGC's SEC filings, including: • Whether a Current Report on Form 8-K is required to disclose the settlement as a material event; • The appropriate disclosure in the "Legal Proceedings" and "Management's Discussion and Analysis" sections of RG

6. Timing. All tax and financial reporting decisions should be finalized as promptly as possible, and in any event before the escrow deposit deadline of February 5, 2025. Specifically: • The Settlement Agreement should be finalized and circulated for execution by Jan