Contract analysis

I. Executive Summary This memorandum has been prepared at the request of the Calderwood & Harkness M&A practice group, on behalf of our client Ardent Capital Partners III LP ("Ardent Capital" or the "Sponsor"), to analyze the federal and state tax implications of the proposed acquisition by Ardent Healthcare Acquisition Corp. (the "Purchaser" or "Acquisition Sub"), a newly formed Delaware corporation wholly owned by

1. Step-Up in Basis. The asset purchase structure provides Purchaser with a full stepped-up tax basis in all acquired assets under IRC § 1060. This stepped-up basis will enable Purchaser to claim depreciation and amortization deductions on the full purchase price allocated to depreciable and amortizable assets, including tangible personal property, leasehold improvements, IRC § 197 intangible assets, goodwill, and go

2. Purchase Price Allocation. The total consideration for the acquisition (including the base purchase price, assumed liabilities, contingent earnout consideration, and any working capital adjustments) must be allocated among seven asset classes (Classes I through VII) under IRC § 1060, utilizing the residual method prescribed by Treasury Regulations §§ 1.338-6 and 1.338-7. Both Buyer and Seller are required to file

3. Treatment of Earnout. The contingent earnout payments, when paid, will be treated as additional purchase price and allocated among the acquired assets under the § 1060 residual method. Amended Forms 8594 will be required upon payment of each earnout tranche (or upon expiration of the earnout without payment). The fair market value of the contingent right should be estimated and included in the initial § 1060 alloc

4. Double Taxation of Seller. CPI, as a C-corporation, will recognize gain on the deemed sale of its assets at the corporate level, subject to federal corporate income tax at the current rate of 21%, plus applicable state income and franchise taxes. Upon liquidation and distribution of the after-tax proceeds to CPI's shareholders, each shareholder will recognize additional gain at the shareholder level — long-term ca

5. Unavailability of § 338(h)(10) Election. Because CPI is a standalone C-corporation (not a member of a consolidated group and not an S corporation), a joint election under IRC § 338(h)(10) is not available. A "regular" § 338 election would be economically inferior to a direct asset purchase. The asset purchase structure is therefore confirmed as the preferred and optimal approach.

6. State Tax Implications. The asset sale will give rise to state income and franchise tax obligations for CPI in each of the seven Operating States, subject to each state's applicable tax rates and apportionment rules. In addition, the transfer of tangible personal property may be subject to state sales and use tax in certain states, although bulk sale, occasional sale, or isolated sale exemptions should be availabl

7. Recommendation. We recommend that the Ardent Capital deal team proceed with the asset purchase structure as proposed. The M&A practice group should coordinate with us on the drafting of tax-related provisions of the APA, including the purchase price allocation schedule, tax representations and warranties, pre-closing tax covenants, straddle period allocation methodology, tax indemnification, and cooperation provis

II. Transaction Overview This Section provides a detailed description of the parties, structure, and economic terms of the proposed acquisition, as relevant to the tax analysis set forth in this memorandum. The factual summary is based on the draft Letter of Intent dated January 8, 2024, the confidential information memorandum prepared by Graystone Partners LLC (the Seller's financial advisor), and discussions with t

I. Anticipated Timeline The parties anticipate executing the Asset Purchase Agreement on or about April 2, 2024. Closing is expected to occur on or about June 30, 2024, subject to satisfaction of customary closing conditions, including HSR Act clearance (if applicable), third-party consents, and regulatory approvals.

III. Federal Income Tax Analysis — Asset Purchase Structure A. Characterization of the Transaction The proposed transaction is structured as a direct asset purchase, in which Purchaser acquires specified assets of CPI and assumes specified liabilities of CPI, in exchange for cash consideration. The transaction is not structured as a stock acquisition, a statutory merger, or a reorganization within the meaning of IRC

1. Corporate-Level Tax (CPI) As a C-corporation, CPI will recognize taxable gain on the sale of each acquired asset in an amount equal to the excess of the portion of the total consideration allocated to that asset (under IRC § 1060) over CPI's adjusted tax basis in the asset. The character of the gain — ordinary income or capital gain — will depend on the nature of the asset sold. Gain on the sale of depreciable pro

2. Shareholder-Level Tax After CPI pays its corporate-level income tax liabilities and distributes the remaining after-tax proceeds to its shareholders in connection with its wind-down and dissolution, each shareholder will recognize gain or loss at the shareholder level on the liquidating distribution. The amount of gain recognized by each shareholder will equal the excess of the liquidating distribution received (p

3. Double Taxation The asset purchase structure results in a double layer of federal (and state) income tax on the sale proceeds: first at the corporate level (CPI pays corporate income tax on the gain from the asset sale) and then at the shareholder level (the shareholders pay capital gains tax on the liquidating distribution). This double taxation is the principal disadvantage of the asset purchase structure from t

1. Statutory Framework Under IRC § 1060, in an "applicable asset acquisition" — defined as any transfer (whether direct or indirect) of assets that constitute a trade or business and in which the transferee's basis in the transferred assets is determined wholly by reference to the consideration paid — both the Buyer and the Seller are required to allocate the total consideration among the acquired assets using the "r

2. Determination of Total Consideration For purposes of the § 1060 allocation, the "total consideration" includes the following components: (a) The base purchase price of $620,000,000; (b) Assumed liabilities — the aggregate amount of liabilities assumed by Purchaser, including trade payables, accrued PTO obligations for transferred employees, and post-closing obligations under assigned leases and contracts (to be de

3. Seven Asset Classes The total consideration is allocated among the following seven asset classes, in order of priority: Class I: Cash and Cash Equivalents. Cash and cash equivalents are an excluded asset in this transaction. CPI will retain all cash and cash equivalents. Accordingly, no consideration is allocated to Class I. Class II: Actively Traded Personal Property, Certificates of Deposit, and Similar Items. T

4. Buyer-Seller Agreement on Allocation We strongly recommend that the APA include a provision requiring Buyer and Seller to (i) agree on the allocation of the total consideration among the seven asset classes, (ii) memorialize the agreed allocation in a binding schedule attached as an exhibit to the APA, and (iii) file consistent IRS Forms 8594 reflecting the agreed allocation with their respective federal income ta

5. Preliminary Allocation Ranges A detailed purchase price allocation will be set forth in a separate Section 338 / Asset Allocation Memorandum, which we anticipate completing by March 18, 2024. Pending finalization of the independent appraisal and completion of the Ashford & Creighton financial due diligence workstream, we provide the following preliminary directional estimates: These are preliminary ranges only, ba

IV. Treatment of Contingent Earnout Consideration A. General Principles The earnout of up to $45,000,000 in the aggregate ($22,500,000 for Tranche 1 and $22,500,000 for Tranche 2) constitutes contingent consideration — that is, consideration that is not fixed at the time of closing but is contingent upon the occurrence of specified future events (the achievement of Adjusted EBITDA targets during the respective Earnou

V. Comparison to Alternative Structures A. Stock Purchase (Without § 338(h)(10) Election) As an alternative to the asset purchase, the transaction could have been structured as a stock purchase, in which Purchaser (or the Fund) would acquire the shares of CPI directly from CPI's shareholders (Dr. Whitfield, Whitfield-Torres, Ridgeline Growth Equity Fund II LP, and the management shareholders). No Step-Up in Basis. In

VI. State Tax Considerations A. Overview CPI conducts business through 37 outpatient rehabilitation and behavioral health clinics located in seven states: Tennessee (14 clinics), Georgia (8 clinics), North Carolina (5 clinics), South Carolina (4 clinics), Alabama (3 clinics), Virginia (2 clinics), and Kentucky (1 clinic). CPI has nexus for state income and franchise tax purposes in each of these states and is qualifi