Contract analysis

From: Garrett Simmons <g.simmons@calderwoodharkness.com> To: Robert Jansen <r.jansen@calderwoodharkness.com> Date: Tue, 10 Jun 2025 03:47:00 -0000 Subject: Re: § 752 Liability Allocation Modeling — Updated Spreadsheet and Tiered Partnership Issues

Matter: 20250527-SDILP-PLR (Solara Digital Infrastructure LP — PLR Request)

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Hope your week is off to a good start. I've completed the updated § 752 liability allocation modeling spreadsheet and am attaching it here for your review. As discussed, the spreadsheet reflects the $1.34 billion in aggregate liabilities across the four legacy offshore vehicles — Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux — that will be assumed by the Consolidated Master Fund LP as part of Ste

I want to flag a few issues I ran into during the modeling that I think we need to discuss before I go further, and a couple of items I think may warrant additional representations in the PLR request.

- **Pre-reorganization allocations** of liabilities at each Legacy Offshore Vehicle level among their respective partners/LPs. - **Post-reorganization allocations** at the Consolidated Master Fund LP level, incorporating the new tiered structure (the two Cayman feeder LPs investing into the Master Fund). - **Deemed contributions under § 752(a)** (increases in a partner's share of liabilities) and **deemed distributio

A few housekeeping notes on assumptions and inputs:

- I used the EUR/USD exchange rate of **1.08** uniformly for converting Luxembourg vehicle liabilities from euros to dollars, consistent with the engagement-wide convention. - The aggregate liabilities break down across the four vehicles as follows (fund sizes for reference): - Fund IV-A Cayman — fund size $1.85 billion - Fund IV-B Lux — fund size €1.15 billion / ~$1.24 billion - Fund V-A Cayman — fund size $2.45 bil

The liability-level detail for each vehicle is broken out in Tab 2 of the spreadsheet; the partner-level allocations are in Tabs 3–6 (one per vehicle), and the post-reorganization Master Fund allocations are in Tab 7.

**2. Preliminary Netting Analysis Results**

Based on the initial modeling, the netting under Treas. Reg. § 1.752-1(f) **appears to work** — meaning that for most partners, the net effect of the liability shifts does not produce a deemed distribution that would exceed outside basis and trigger § 731 gain. This is obviously the result we want, but I want to stress it's preliminary.

This result holds for the major investor categories I was able to model:

- **U.S. tax-exempt investors** (e.g., Pinnacle State Employees' Retirement System and Grandview University Endowment) rolling into the Solara Tax-Exempt Feeder (Cayman) LP. - **Non-U.S. investors** (e.g., Nordhaven Sovereign Wealth Fund, which has $380M and $500M commitments across the Fund IV and Fund V vehicles, respectively, and Kestrel Pacific Insurance Group, with €200M and €275M commitments) rolling into the S

**Important caveat:** The analysis is sensitive to assumptions about **recourse vs. nonrecourse characterization** of the underlying portfolio-level debt. The model currently assumes all $1.34 billion is nonrecourse, meaning liabilities are allocated based on profit-sharing ratios under Treas. Reg. § 1.752-3. If any portion is recharacterized as recourse (allocated under § 1.752-2 based on economic risk of loss), the

This is where it gets complicated, and I want to flag this for your attention because I think it has implications for the PLR request drafting as well.

After the reorganization, the two new Cayman feeder LPs — Solara International Feeder (Cayman) LP and Solara Tax-Exempt Feeder (Cayman) LP — will hold limited partnership interests in the Consolidated Master Fund LP, creating a **two-tier partnership structure**. Under the tiered partnership rules in Treas. Reg. § 1.752-4(a), a partner's share of liabilities of the upper-tier partnership (the Master Fund) must be det

The look-through analysis becomes complex for several reasons:

- The feeder LPs are themselves treated as **partnerships for U.S. federal tax purposes** (per the Form 8832 elections), so each partner's share of Master Fund liabilities must be traced through two levels. This is mechanically intensive but doable — the issue is making sure the profit-sharing ratios at both levels are properly cascaded. - The allocation methodology for **nonrecourse liabilities at the Master Fund le

I've modeled a **simplified version** of the tiered look-through in Tab 8 of the spreadsheet, but the full analysis will require additional data from Clarendon Fund Services (Rachel Okonkwo) regarding the LP composition of each feeder entity and their respective profit-sharing percentages. I don't think we have that yet in final form.

**4. Specific Issue — Interaction Between Step 5 Distributions and § 752 Shifts**

One additional concern I want to raise relates to the **sequencing of Step 5** (dissolution of the Legacy Offshore Vehicles and distribution of Master Fund LP interests to the LPs on December 1, 2025).

When a Legacy Offshore Vehicle dissolves and distributes its Master Fund LP interest to its partners, those partners' shares of liabilities shift — from the Legacy Vehicle level to the Master Fund level (indirectly, through the feeder). The question is whether this shift occurs **simultaneously** with the § 731 distribution analysis or **sequentially**. The ordering matters: if a partner is treated as first losing it

I think this is a real issue, not just a technical one, because the § 1.752-1(f) netting rule applies to "increases and decreases . . . resulting from a single transaction," and there's an argument that the dissolution of the Legacy Vehicle and the assumption of the feeder interest are separate steps even within the integrated plan. I'd suggest we consider requesting an **additional representation** in the PLR reques

**5. Suggested Additional Representations for PLR Request**

Based on the modeling and the issues identified above, I'd suggest we consider the following additional representations for inclusion in the PLR request, or at minimum discuss them with Leonard and Sylvia before the July 1 draft circulation:

1. **Nonrecourse characterization representation:** A representation that all portfolio-level liabilities assumed by the Master Fund are nonrecourse liabilities within the meaning of Treas. Reg. § 1.752-1(a)(2) — or, alternatively, a detailed breakdown of recourse vs. nonrecourse characterization with supporting analysis.

2. **Integrated netting representation:** A representation that the liability shifts occurring in Steps 2–5 are treated as part of a single integrated plan and that the netting rule of Treas. Reg. § 1.752-1(f) applies to the aggregate of all shifts occurring in connection with the reorganization.

3. **Step 5 ordering representation:** A representation regarding the ordering of events in Step 5 — specifically, that the dissolution distributions and the resulting liability reallocations occur as part of a single transaction for purposes of §§ 752(a), 752(b), and 731.

These should obviously be reviewed by you first and then elevated to Leonard for his consideration before we incorporate them into the PLR draft.

To finalize the § 752 analysis, I still need the following:

- **Recourse vs. nonrecourse characterization** of each liability component within the $1.34 billion aggregate — from Caldwell Pierce (Helen Okamoto). I know this ties to your pending follow-up. - **LP-by-LP profit-sharing percentages** for each Legacy Offshore Vehicle — from Clarendon Fund Services (Rachel Okonkwo) or from Solara's in-house team (Stefan Dalmqvist). - **Outside basis calculations** for each LP at the

Could you take a look at the attached spreadsheet and let me know if the approach and assumptions are directionally correct? I don't want to spend significant additional time on the full tiered look-through analysis if we need to adjust the framework or wait for the recourse/nonrecourse confirmation first.

Once the outstanding data items come in, I'll begin drafting the relevant portion of the § 752 tax memorandum (Tax Memorandum — IRC § 752 Liability Shifting Analysis) and the corresponding section of PLR Exhibit E (Schedule of Liabilities and § 752 Analysis).

Happy to set up a call to walk through the spreadsheet and discuss the tiered partnership issues — and if you think it would be useful to loop Leonard in at this stage, I'm glad to coordinate schedules.

Thanks, Robert. Appreciate the guidance on this.

**Attachment:** 752 Liability Allocation Model — Solara Reorganization (Updated).xlsx

Garrett Simmons Associate, Tax Calderwood & Harkness LLP 600 Lexington Avenue, 38th Floor New York, NY 10022 D: +1 (212) 546-7283 E: g.simmons@calderwoodharkness.com

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