Contract analysis

I. Executive Summary This memorandum analyzes the federal income tax treatment of the rollover equity contributions by three Pinnacle Health Services Group LLC ("Pinnacle" or the "Company") founders and executives into the post-closing acquisition structure in connection with the proposed acquisition of Pinnacle by Ardent Capital Partners III LP ("Fund III" or "Ardent"). Specifically, we compare Section 721 of the In

1. It preserves the Section 743(b) basis step-up of approximately $224.4 million in the Pinnacle assets, generating estimated annual amortization deductions of $20.04 million per year and an annual tax benefit of approximately $5.01 million.

2. It avoids gain recognition on the $59.54 million rollover amount by providing a clean nonrecognition pathway without the boot, control-test, and step-transaction complexities associated with Section 351.

3. It provides greater structural flexibility for the treatment of unvested equity as profits interests under Revenue Procedure 93-27 and Revenue Procedure 2001-43, which is critical to the economic alignment objectives of the management equity program.

4. It maintains UP-C (umbrella partnership C-corporation) IPO optionality for potential future exits, which is the market-standard approach for sponsor-backed healthcare platform companies. Cross-Reference to Companion Memoranda. This memorandum should be read in conjunction with the Preliminary Tax Structure Memorandum dated February 12, 2024, which sets forth the three-tier acquisition structure and the rationale f

II. Background and Transaction Structure A. Transaction Overview Ardent Capital Partners III LP is a Delaware limited partnership and the third flagship private equity fund managed by Ardent Capital Management LLC. Fund III is a 2022 vintage fund with total committed capital of $3.2 billion, focused on healthcare services, healthcare technology, and life sciences investments. The fund's investment strategy emphasizes

III. Legal Framework — Section 721 (Partnership Contribution) A. General Rule of Section 721(a)

Section 721(a) of the Code provides the general rule that "[n]o gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." This nonrecognition provision is one of the foundational principles of subchapter K and reflects Congress's intent to facilitate the formation of partnerships and the adm

Section 722 — Partner's Basis in Partnership Interest. Section 722 of the Code provides that the basis of a partnership interest acquired by a partner in exchange for a contribution of property to the partnership shall be equal to the amount of money and the adjusted basis of the property contributed. In other words, each rollover participant's tax basis in their Class B Units in Holdings LLC will equal the adjusted

Section 723 — Partnership's Basis in Contributed Property. Section 723 of the Code provides that the basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution. Accordingly, Holdings LLC will take a transferred (carryover) basis in the contributed Pinnacle membership interests (or the economic equivalent thereof)

Section 1223(1) of the Code provides that, in determining the period for which a taxpayer has held property received in an exchange, there shall be included the period for which the taxpayer held the property exchanged, provided the property so received has the same basis in whole or in part in the taxpayer's hands as the property exchanged, and provided the property exchanged was a capital asset or a Section 1231 as

Section 721(b) — Contributions to Investment Companies. Section 721(b) of the Code provides that Section 721(a) shall not apply to gain realized on a transfer of property to a partnership that would be treated as an "investment company" (within the meaning of Section 351(e)) if the partnership were incorporated. The investment company definition under Section 351(e)(1) and Treasury Regulations Section 1.351-1(c)(1) g

Section 754 Election and Section 743(b) Step-Up. When a partnership interest is transferred (by sale or exchange) or when a partnership distribution is made, Section 743(b) of the Code provides that the partnership may (or, if a Section 754 election is in effect, must) adjust the basis of partnership property with respect to the transferee partner. The purpose of the Section 743(b) adjustment is to align the transfer

IV. Legal Framework — Section 351 (Corporate Exchange) A. General Rule of Section 351(a)

Section 351(a) of the Code provides that "[n]o gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation." Section 351 is the corporate analog to Section 721 and serves a similar policy function: it facilit

Section 358 — Transferor's Basis in Stock Received. Section 358(a)(1) provides that the basis of stock received by the transferor in a Section 351 exchange shall be the same as the basis of the property transferred, decreased by (i) the fair market value of any other property ("boot") received, (ii) any money received, and (iii) any loss recognized on the exchange, and increased by (i) any amount treated as a dividen

Section 362 — Corporation's Basis in Contributed Property. Section 362(a) provides that, if property is acquired by a corporation in connection with a Section 351 exchange, the corporation's basis in the property shall be the same as the basis in the hands of the transferor, increased by any gain recognized to the transferor on the exchange. In a clean Section 351 exchange, this is a simple carryover basis — function

Section 351(b) of the Code provides that, if an exchange would otherwise qualify under Section 351(a) but for the fact that the transferor receives "other property or money" (i.e., "boot") in addition to stock, then gain (but not loss) shall be recognized to the transferor to the extent of the boot received. The gain recognized cannot exceed the total gain realized on the exchange. In the proposed transaction, if the

V. Comparative Analysis — Section 721 vs. Section 351 Having set forth the legal framework for each nonrecognition provision, we now compare the two approaches across eight critical factors relevant to the proposed transaction. A. Gain Recognition

Section 721 (Partnership Contribution to Holdings LLC). No gain or loss is recognized by the rollover participants on their contribution of property (Pinnacle membership interests or economic equivalent) to Holdings LLC in exchange for Class B Units. The cashed-out portion of each participant's Pinnacle interest is treated as a separate sale — a taxable transaction in which gain is recognized to the extent the cash c

Section 351 (Corporate Exchange at Intermediate Inc.). No gain or loss is recognized if the exchange is properly structured under Section 351(a) and the control test under Section 368(c) is satisfied. However, as discussed in Section IV above, there is a meaningful risk that the cashed-out portion could be treated as boot in the Section 351 exchange (rather than as a separate sale), particularly under the step transa

Section 721 (Partnership Structure at Holdings LLC). As discussed in Section III.E, the Section 721 contribution to Holdings LLC does not disrupt the Section 743(b) basis step-up at the Pinnacle level. The Section 754 election by Pinnacle generates a Section 743(b) step-up of approximately $224.4 million, which is allocated among Pinnacle's assets and amortized over their respective useful lives. The step-up flows th

Section 351 (Corporate Structure at Intermediate Inc.). If the rollover participants contribute their retained Pinnacle interests directly to Intermediate Inc. under Section 351, Intermediate Inc. takes a transferred (carryover) basis in the contributed interests under Section 362. This means that Intermediate Inc.'s basis in the contributed portion of the Pinnacle interests would equal the rollover participants' his

Section 721 / Partnership. Holdings LLC, as a partnership, is eligible to grant profits interests to its members. Revenue Procedure 93-27 provides a safe harbor under which the receipt of a profits interest (as distinguished from a capital interest) in exchange for services is generally not treated as a taxable event. Revenue Procedure 2001-43 extends this safe harbor to substantially nonvested profits interests, pro

Section 351 / Corporation. If the rollover were structured at the Intermediate Inc. level, the unvested stock issued to the rollover participants would be subject to Section 83 of the Code. There is no analog to the profits interest safe harbor for corporate equity. Under Section 83, the receipt of property (stock) subject to a substantial risk of forfeiture and no Section 83(b) election is generally not taxable at g

Section 721 (Partnership at Holdings LLC). Operating Holdings LLC as a partnership requires the maintenance of capital accounts under the Section 704(b) regulations, compliance with the partnership allocation rules (including substantial economic effect, the minimum gain chargeback, and qualified income offset provisions), the creation and maintenance of Section 704(c) layers for contributed property with built-in ga

Section 351 (Corporate at Intermediate Inc.). Operating Intermediate Inc. as a C-corporation is simpler from an ongoing compliance perspective. Intermediate Inc. would file a single Form 1120 (corporate income tax return), and distributions to shareholders would be reported on Form 1099-DIV. There are no capital account maintenance requirements, no partnership allocation rules, and no Schedule K-1s at the corporate l

VI. Recommended Structure and Implementation Steps A. Recommended Approach Based on the analysis set forth in this memorandum, we recommend that the rollover be structured as follows: • The three rollover participants (Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth) will contribute their retained Pinnacle membership interests (or the economic equivalent thereof through the merger mechanics described below) to Ardent