Contract analysis

I. Executive Summary You have asked us to analyze the federal income tax reporting alternatives available to the sellers of membership interests in Pinnacle Health Services Group LLC ("Pinnacle" or the "Company") in connection with the contingent earnout consideration payable under the Agreement and Plan of Merger (the "Merger Agreement") by and among Ardent Healthcare Merger Sub LLC, Ardent Healthcare Intermediate I

1. Closed Transaction / Fair Market Value Method under Section 1001 of the Internal Revenue Code of 1986, as amended (the "Code"), which would require sellers to include the fair market value of the earnout right in the amount realized in the year of closing;

2. Open Transaction Method under Burnet v. Logan, 283 U.S. 404 (1931), which would permit sellers to defer gain recognition on the earnout until payments are received and basis is fully recovered; and

3. Installment Method under Section 453 of the Code, which would permit sellers to recognize gain ratably as earnout payments are received, based on a gross profit ratio derived from the maximum selling price. Recommendation. For the reasons discussed at length below, we recommend that individual sellers report the earnout under the installment method provided by Section 453 of the Code. The installment method is the

II. Background and Transaction Facts A. The Sellers and Their Interests Pinnacle Health Services Group LLC is a Delaware limited liability company (EIN 82-1947632) classified as a partnership for federal income tax purposes. The Company is headquartered at 2200 Renaissance Boulevard, Suite 400, King of Prussia, Pennsylvania 19406. Pinnacle was founded in 2016 by Dr. Raymond Carvallo and Dr. Nadia Ostrowski and has gr

Section 483 Imputed Interest. The earnout payments under the Merger Agreement do not provide for stated interest. Because certain earnout payments may be received more than one year after the closing date, Section 483 of the Code applies to re-characterize a portion of each such deferred payment as imputed interest taxable as ordinary income. The applicable federal rates ("AFRs") at the anticipated signing date (Marc

III. Legal Framework — Overview of Reporting Methods for Contingent Consideration When a sale of property involves contingent consideration — such as an earnout — the seller must determine the appropriate method for reporting gain or loss. The Internal Revenue Code and Treasury Regulations provide three potential frameworks, each of which carries distinct consequences for the timing and character of gain recognition.

Section 453 of the Code provides that, as a general rule, income from an installment sale shall be reported under the "installment method." An installment sale is defined as a disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. Section 453(a). The installment method is the default reporting method for qualifying sales — it applies a

IV. Application to the Pinnacle Transaction A. Does the Earnout Have an Ascertainable Fair Market Value? The threshold question in determining the appropriate reporting method for the Pinnacle earnout is whether the earnout right has an ascertainable fair market value at the time of closing. If it does, the closed transaction method under Section 1001 would apply, and the sellers would be required to include that fai

V. Election Out of the Installment Method A. Section 453(d) Election

Section 453(d) of the Code permits any taxpayer to elect out of the installment method with respect to any sale. If a Pinnacle seller elects out, the seller would report the entire gain on the sale — including gain attributable to the contingent earnout — on the seller's federal income tax return for the year of the disposition (taxable year 2024). The mechanics of the election are straightforward: the seller simply

VI. Interaction with Section 483 Imputed Interest A. Overview of Section 483

Section 483 of the Code applies to payments made under a contract for the sale or exchange of property where some or all of the payments are due more than one year after the date of the sale or exchange and the contract does not provide for adequate stated interest. When applicable, Section 483 re-characterizes a portion of each deferred payment as "unstated interest," which is treated as interest income to the selle

1. Determine the total payment received. For each earnout period in which a payment is made, the total payment amount is the gross earnout payment (e.g., $5.73M for Period 1 or $7.64M for Period 2, in the case of Dr. Carvallo).

2. Separate the imputed interest component. The imputed interest portion is computed by discounting the gross payment to its present value at the applicable AFR as of the closing date. The difference between the gross payment and the present value is the imputed interest, which is taxable as ordinary income to the seller in the year of receipt.

3. Apply the installment method gross profit ratio to the principal component. The principal component (gross payment minus imputed interest) is then multiplied by the gross profit ratio to determine the capital gain recognized in the year of receipt. The remainder of the principal component is a return of basis. The result is that each earnout payment is bifurcated for tax purposes: • Imputed interest portion → Ordi

VII. Section 751(a) "Hot Assets" Consideration The sale of a partnership interest is treated for federal income tax purposes as the sale of a single capital asset. See Section 741. However, Section 751(a) of the Code provides an important exception: to the extent the amount realized on the sale of a partnership interest is attributable to the seller's share of the partnership's "unrealized receivables" (as defined in

1. Each seller's total gain on the sale of their Pinnacle membership interest is bifurcated into (a) an ordinary income component attributable to the seller's share of Section 751(a) hot assets and (b) a capital gain component attributable to all other assets.

2. The ordinary income component is recognized in full in 2024, regardless of whether the seller uses the installment method.

3. The capital gain component is reported under the installment method, with the gross profit ratio applied only to the capital gain portion.

4. The ordinary income and capital gain components of the earnout payments are determined by allocating the total Section 751(a) ordinary income pro rata across all payments (closing cash and earnout), consistent with the allocation methodology of Treasury Regulation § 15a.453-1(c). Recommendation. We recommend that the deal team coordinate with Brewer Stanfield & Associates LLP (Pinnacle's accounting firm) and North

VIII. Reporting Obligations and Practical Considerations A. Form 8308 Pinnacle Health Services Group LLC is required to file Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) with its federal partnership income tax return (Form 1065) for the taxable year that includes the closing date. Because the anticipated closing date is May 31, 2024, Form 8308 will be filed with Pinnacle's 2024 Form 1065