Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze the federal and state income tax implications of the proposed $140,000,000 asset purchase of the OncuPath™ companion diagnostics assay line (the "OncuPath Business") by Meridian Precision Diagnostics, Inc. ("Buyer" or "Meridian") from Genome Dx Therapeutics Inc. ("Seller" or "GDT"). This memorandum is intended to provide the deal team with a comprehens

II. Transaction Overview A. Parties. Seller. Genome Dx Therapeutics Inc. is a Delaware corporation headquartered at 10250 Science Center Drive, Suite 600, San Diego, California 92121 (EIN 47-3892061). GDT is a C corporation for federal income tax purposes and files its federal income tax returns on a calendar-year basis. GDT operates in the precision diagnostics and genomic therapeutics markets, with its two principa

III. Federal Income Tax Analysis — Seller's Gain Recognition A. Asset Sale Treatment GDT is organized as a C corporation under the laws of the State of Delaware and is taxable as a C corporation for federal income tax purposes under Subchapter C of the Internal Revenue Code. The proposed transaction is structured as a sale of individual assets constituting the OncuPath Business — it is not a sale of stock, a statutor

IV. Purchase Price Allocation Under IRC § 1060 A. Legal Framework IRC § 1060 governs the allocation of consideration in an "applicable asset acquisition" — defined as any transfer of assets constituting a trade or business in which the transferee's basis in the transferred assets is determined wholly by reference to the consideration paid for the assets. The proposed acquisition of the OncuPath Business by Meridian q

Article II, Section 2.5 of the APA requires the Seller and Buyer to agree upon a purchase price allocation within 120 days following the closing date, which, based on an August 8, 2023 closing, establishes a deadline of December 6, 2023. The APA further provides that, if the parties agree on the allocation, both parties shall report the transaction on their respective tax returns in a manner consistent with the agree

V. Earnout Payments — Installment Sale Analysis A. IRC § 453 Installment Method The earnout component of the purchase price — up to $14,000,000 in clinical-milestone payments — constitutes "contingent consideration" for purposes of the installment sale provisions of IRC § 453. Milestone 1 ($8,000,000) is contingent on FDA clearance or approval of the OncuPath-HER3™ assay by August 8, 2025, and Milestone 2 ($6,000,000

Section 1274 applies to "debt instruments" issued in exchange for property, requiring the instrument to carry adequate stated interest. If the stated interest is less than the applicable federal rate ("AFR"), interest is imputed at the AFR. However, § 1274 generally applies to fixed obligations — i.e., debt instruments with a stated principal amount and fixed payment schedule. Contingent earnout payments that are not

Section 483, by contrast, applies to "payments on account of the sale or exchange of property" where some or all of the payments are due more than one year after the sale, and where the total payments do not carry adequate stated interest. Section 483 operates to recharacterize a portion of each deferred payment as "unstated interest," which is treated as ordinary interest income to the seller (and as deductible inte

VI. California State Tax Implications A. California Franchise Tax — Corporate Level GDT is headquartered in San Diego, California and conducts the entirety of the OncuPath Business from California facilities — the primary laboratory and office space at 4820 Towne Centre Drive, Suite 200, San Diego, and the secondary manufacturing and storage facility at 925 Industrial Court, Carlsbad. GDT is subject to the California

VII. Impact on Pinnacle Biosciences Partners Fund III, L.P. Distributions A. Corporate-Level Tax First Because GDT is a C corporation, gain on the sale of the OncuPath Business assets is recognized and taxed first at the GDT corporate level. GDT will pay federal corporate income tax at 21% and California franchise tax at 8.84% (on the portion of gain apportioned to California) on its gain from the sale. The net after