Contract analysis

I. EXECUTIVE SUMMARY This memorandum analyzes the novel interaction between Section 6418 of the Internal Revenue Code of 1986, as amended (the "Code"), which was added by the Inflation Reduction Act of 2022 (Pub. L. No. 117-169, 136 Stat. 1818) (the "IRA"), and the traditional partnership-flip tax-equity structure being utilized for the financing of the Solstice Portfolio. This analysis is being prepared in advance o

1. The Section 6418 transfer election should be made at the partnership level by Solstice Holdings, LLC, on its 2023 Form 1065. The seven project-company SPEs are disregarded entities whose assets are treated as owned by the Partnership for federal income tax purposes. Accordingly, the Partnership is the "eligible taxpayer" under Section 6418.

2. The transferred credits ($64,800,000 in total, of which $60,000,000 are sold to Pinehurst and $4,800,000 are retained by CBR for its own use) should be segregated from the credits allocated through the partnership flip ($89,040,000 allocated to the partners, of which 99%, or $88,149,600, is allocated to Ridgeline). The proposed regulations support a partial-election approach under which specified credits are elect

3. The basis reduction under Section 50(c) applies to all ITCs determined with respect to the energy property, including those transferred under Section 6418. Accordingly, the full $153,840,000 in ITCs triggers a basis reduction of $76,920,000 (50% of $153,840,000), yielding a post-ITC depreciable basis for MACRS purposes of $307,680,000. This result obtains regardless of the bifurcation between the partnership-alloc

4. The dual-tranche structure is permissible under the statute and proposed regulations, but requires careful documentation in the LLCA, TCPA, and related agreements to ensure proper ordering, avoid double-counting, and protect the expectations of both Ridgeline and Pinehurst.

5. Because the proposed regulations have not yet been finalized, and because the IRS has acknowledged the novelty of the interaction between Section 6418 and partnership-flip structures, the transaction documents should include appropriate regulatory-change provisions, renegotiation rights, and indemnification mechanics. Each of these conclusions is discussed in detail in the analysis that follows.

II. FACTUAL BACKGROUND A. The Solstice Portfolio The Solstice Portfolio comprises seven utility-scale solar PV projects with an aggregate nameplate capacity of 420 MW(dc), located in Texas and New Mexico. Each project is held by a separate Delaware limited liability company that is currently treated as a disregarded entity for federal income tax purposes, with CBR as the sole regarded owner. The following table summa

Section 6418 Credit Transfer. Simultaneously with the partnership-flip tax-equity investment, CBR (acting through the Partnership) elects to transfer $64,800,000 in face-value ITCs under Section 6418. Of this amount, $60,000,000 in credits are sold to Pinehurst Insurance Group, Inc. (EIN 06-1938274), a Connecticut corporation, at a price of $0.92 per $1.00 of credit face value, generating cash proceeds of $55,200,000

1. Which entity is the "eligible taxpayer" that makes the Section 6418 transfer election — the individual project companies (currently disregarded entities) or Solstice Holdings, LLC (the partnership)?

2. How does a Section 6418 transfer election interact with the partnership-level allocation of ITCs under Sections 704(b) and 46 of the Code?

3. Does the transfer of credits under Section 6418 reduce the Partnership's depreciable basis under Section 50(c)?

4. Can a single portfolio of projects generate ITCs that are partially allocated through a partnership-flip structure and partially transferred under Section 6418, and if so, what structural and documentation mechanics are required to effectuate such a dual-tranche approach?

5. What IRS guidance (proposed regulations, notices, revenue procedures) is available as of September 2023 to support this analysis, and what are the risks associated with reliance on proposed regulations that have not yet been finalized?

III. APPLICABLE LEGAL FRAMEWORK A. Section 48 Investment Tax Credit — Overview

Section 48(a) of the Code provides an investment tax credit for "energy property," which includes solar energy property as defined in Section 48(a)(3)(A)(i). The ITC is determined for the taxable year in which the energy property is "placed in service," a term that generally means the date on which the property is placed in a condition or state of readiness and availability for a specifically assigned function. See T

Section 6418 was added to the Code by Section 13801(a) of the IRA, effective for taxable years beginning after December 31, 2022. It represents a fundamental innovation in the monetization of federal tax credits by permitting, for the first time, the direct transfer of specified tax credits for cash consideration outside of the traditional partnership or sale-leaseback structures that have historically dominated the

Section 6418(a) — Elective Transfer. Section 6418(a) provides that an "eligible taxpayer" may, with respect to any "applicable credit" determined with respect to such taxpayer, elect to transfer all or any portion of such credit to an unrelated "transferee taxpayer" in exchange for cash consideration. The transferee taxpayer is then treated as the taxpayer that originally determined the credit for all purposes of the

Section 6418(b) — Treatment of Cash Consideration. Under Section 6418(b), cash consideration paid by the transferee taxpayer for the transferred credit is not includible in the gross income of the eligible taxpayer and is not deductible by the transferee taxpayer. This symmetrical treatment ensures that the credit transfer is, in effect, tax-neutral — the eligible taxpayer receives cash without an income inclusion, a

Section 6418(c) — Applicable Credits. The term "applicable credit" includes, among others, the energy credit determined under Section 48(a), which is the credit at issue in the Solstice Portfolio transaction.

Section 6418(d) — Related-Party Limitation. Section 6418(d) prohibits the transfer of credits between the eligible taxpayer and a transferee taxpayer that are "related" within the meaning of Section 267(b) or Section 707(b)(1). This limitation is designed to prevent artificial credit transfers within commonly controlled groups.

Section 6418(g) — Special Rules. Section 6418(g) provides additional rules, including: (1) a pre-filing registration requirement, under which the eligible taxpayer must complete a registration process with the IRS and obtain a registration number before making the transfer election; (2) rules addressing "excessive credit transfers," including penalties and the transferee's good-faith reliance protections; and (3) the

Section 704(c) is also relevant to the extent that energy property is contributed by CBR to the Partnership with built-in differences between tax basis and fair market value. The Section 704(c) allocation rules require that the contributing partner (CBR) be allocated any built-in gain or loss with respect to contributed property, which may affect the allocation of depreciation deductions but does not directly affect

Section 50(c)(1) of the Code provides that the basis of any property for which an ITC is determined under Section 46 shall be reduced by 50% of the amount of the credit determined. This basis reduction is mandatory and applies regardless of which taxpayer ultimately claims or receives the credit. The purpose of the basis reduction is to prevent a double benefit — the taxpayer should not receive both a full ITC and fu

Section 50(a) of the Code provides for the recapture of ITCs if, during the five-year period beginning on the date the energy property is placed in service, any of the following recapture events occurs: (i) the property is disposed of or otherwise ceases to be energy property; (ii) there is a change in the use of the property such that it no longer qualifies for the ITC; or (iii) the taxpayer undergoes certain owners

IV. ANALYSIS A. Which Entity Makes the Section 6418 Transfer Election?

1. Statutory Text and Proposed Regulations The threshold question for the Solstice Portfolio transaction is the identity of the "eligible taxpayer" authorized to make the Section 6418 transfer election. This question is central to the structural mechanics of the dual-tranche approach, because the answer determines which entity files the election, which entity's tax return reflects the transfer, and which entity bears

Section 6418(a) provides that an "eligible taxpayer" may elect to transfer applicable credits. The statute defines "eligible taxpayer" by reference to the taxpayer that "determines" the applicable credit. For the Section 48 ITC, the credit is "determined" by the taxpayer that places the energy property in service and has the benefits and burdens of ownership. For energy property owned through a disregarded entity, th

2. Application to the Solstice Portfolio Structure Applying these rules to the Solstice Portfolio, the analysis is straightforward: • The seven project companies (Pecos Sun Solar, LLC; Red Mesa Solar, LLC; Coyote Flats Solar, LLC; Llano Verde Solar, LLC; Cimarron Solar, LLC; Sandoval Ridge Solar, LLC; and Amistad Solar, LLC) are all Delaware limited liability companies classified as disregarded entities for federal i

3. Structural Consideration — Bifurcating Credits A critical feature of the proposed regulations is the confirmation that a partnership may elect to transfer only a portion of its total applicable credits under Section 6418, retaining the balance for allocation to its partners under the normal partnership allocation rules. Prop. Reg. § 1.6418-2(a)(3): The eligible taxpayer may specify the amount of each applicable cr

Section 6418(g)(1) imposes a pre-filing registration requirement as a condition to making the transfer election. Both the eligible taxpayer (Solstice Holdings) and the transferee taxpayer (Pinehurst) must complete a registration process with the IRS and obtain registration numbers before the election can be made. The IRS issued guidance on this registration process in Notice 2023-44, published on June 14, 2023, which

1. Interaction Between Section 6418 and Section 46 Allocations Having established that Solstice Holdings is the eligible taxpayer and may make a partial Section 6418 election, the next question is how the transfer election interacts with the partnership-level allocation of ITCs to the partners under Section 46(d). Under the normal partnership allocation rules, the total ITCs determined at the partnership level are al

2. Cash Proceeds from Credit Sale The $55,200,000 in cash consideration received from Pinehurst for the $60,000,000 in transferred credits raises a separate partnership allocation question: How should this cash be characterized and allocated for purposes of the partnership's capital accounts and the partners' tax consequences? Under Section 6418(b), the cash consideration received by the eligible taxpayer for the tra

3. Ridgeline's Protections Ridgeline, as the tax-equity investor, has a significant economic interest in ensuring that the Section 6418 election does not impair its expected ITC allocation. Ridgeline's financial model and target after-tax IRR of 7.25% are premised on receiving its 99% share of the partnership-allocated ITCs ($88,149,600), together with its share of MACRS depreciation on the $307,680,000 post-reductio

Section 50(c)(1) provides, in pertinent part, that "the basis of any property for which a credit is determined under [Section 46] shall be reduced by the amount of the current year credit determined with respect to such property." For purposes of Section 50(c), the "current year credit" is defined as 50% of the ITC determined under Section 48(a). See IRC § 50(c)(3)(A)(i). The basis reduction is mandatory and applies

2. Application to Transferred Credits The proposed regulations under Section 6418 directly address the interaction between the transfer election and the Section 50(c) basis reduction: Prop. Reg. § 1.6418-3(c): The basis reduction under Section 50(c) applies to the eligible taxpayer (i.e., the partnership or the owner of the energy property) with respect to all credits determined, including those transferred under Sec

3. Impact on Partnership Economics The full basis reduction is an important input to Ridgeline's financial model. To the extent that Ridgeline's advisors at Whitfield & Ayers LLP have modeled only a partial basis reduction — for example, reducing basis only by 50% of the $89,040,000 in partnership-allocated credits ($44,520,000), rather than by 50% of the full $153,840,000 ($76,920,000) — the financial model is incor

1. Structural Permissibility Based on our analysis of the statutory text and the proposed regulations, the answer is yes: a single portfolio of energy property may generate ITCs that are partially allocated to partners through a partnership-flip structure and partially transferred to a third party under Section 6418. Neither the statute nor the proposed regulations prohibit or restrict this dual-tranche approach. The

2. Structural Mechanics Required While the dual-tranche structure is permissible, it requires careful documentation and coordination to ensure proper implementation. The following structural mechanics are required: LLCA Provisions. The Amended and Restated Limited Liability Company Agreement of Solstice Holdings must include an ITC allocation waterfall that clearly delineates the two tranches. Specifically, the LLCA

3. Credit Allocation by Project The $64,800,000 in Section 6418 credits and $89,040,000 in partnership-allocated credits should be allocated among the seven projects on a reasonable and consistent basis. We recommend a pro rata allocation based on each project's EPC cost (eligible basis), which is the most straightforward and defensible methodology. The following table sets forth the proposed allocation: *Note: Amoun

1. Placed-in-Service Requirement The Section 48 ITC is determined for the taxable year in which the energy property is placed in service. All seven projects must achieve COD and be placed in service during the 2023 taxable year of Solstice Holdings. The Partnership uses a calendar taxable year, so the placed-in-service requirement is met if COD occurs on or before December 31, 2023. Based on the current project sched

2. Signing vs. Closing The current transaction timeline contemplates that the transaction documents will be signed on September 21, 2023, with closing scheduled for November 30, 2023 (subject to a possible extension to December 8, 2023 due to Amistad Solar's interconnection timeline). The gap between signing and closing is designed to accommodate the achievement of COD for all seven projects and the satisfaction of v

3. Second Tranche Timing Ridgeline's second tranche capital contribution of $24,000,000 is due within sixty (60) days following the achievement of final COD (Amistad Solar, target November 18, 2023), with an outside date of February 6, 2024. The second tranche funding occurs after the placed-in-service date and after the ITC is determined, but before the Partnership's tax return is filed. The Section 6418 election an

V. REVIEW OF AVAILABLE IRS GUIDANCE (AS OF SEPTEMBER 2023) A. Proposed Treasury Regulations — REG-101610-23 (June 14, 2023) The principal source of guidance on the Section 6418 transfer election, and the most directly relevant authority for the Solstice Portfolio transaction, is the notice of proposed rulemaking published by the Treasury Department and IRS on June 14, 2023, as REG-101610-23 (88 Fed. Reg. 40,496). The