1006-00008 · Crestline Packaging Solutions LLC · Diligence/Tax

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 31st Floor New York, NY 10017

MEMORANDUM

TO: James Prentice, Esq. (M&A Practice Group, Calderwood & Harkness LLP) Patricia Hsu, Chief Financial Officer, Crestline Packaging Solutions LLC

FROM: Sylvia Hartwell, Esq. (Tax Practice Group, Calderwood & Harkness LLP)

DATE: May 29, 2025 (Draft)

RE: Tax Structure Analysis — Crestline Packaging Solutions LLC Acquisition of Substantially All Assets of Lakewood Regional Health Partners, LLC

Matter No.: 1006-00008

THIS MEMORANDUM IS A PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION AND CONSTITUTES ATTORNEY WORK PRODUCT PREPARED IN ANTICIPATION OF LITIGATION AND/OR IN CONNECTION WITH THE RENDITION OF LEGAL ADVICE. THIS MEMORANDUM IS NOT INTENDED FOR DISTRIBUTION TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT OF CALDERWOOD & HARKNESS LLP. THE INFORMATION AND ANALYSIS CONTAINED HEREIN ARE BASED ON FACTS PROVIDED TO DATE AND ARE SUBJECT TO REVISION UPON COMPLETION OF DUE DILIGENCE.

I. Executive Summary

This memorandum analyzes the federal, New York State, and Pennsylvania tax consequences of the proposed acquisition by Crestline Packaging Solutions LLC ("Crestline" or "CPS") of substantially all of the assets of Lakewood Regional Health Partners, LLC ("Lakewood" or "LRHP") for a fixed purchase price of One Hundred Forty Million Dollars ($140,000,000), structured as an asset purchase (the "Transaction"). The parties anticipate execution of the Asset Purchase Agreement (the "APA") on or about June 16, 2025, with an estimated Closing Date of August 15, 2025.

This memorandum addresses the following principal tax considerations arising from the Transaction:

(a) the federal income tax entity classification of both the Buyer (Crestline) and the Seller (Lakewood), including the consequences of Crestline's status as a disregarded entity and Lakewood's classification as a partnership;

(b) the inapplicability of an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and the reasons why the asset purchase structure is both appropriate and optimal for the parties;

(c) the purchase price allocation methodology required under IRC §1060 and the applicable Treasury Regulations, including a preliminary allocation of the $140,000,000 purchase price among the seven regulatory asset classes and the resulting tax consequences to both Buyer and Seller;

(d) state-level real property transfer taxes applicable to the conveyance of owned real properties in New York;

(e) bulk sale tax clearance requirements under New York Tax Law §1141(c) and analogous Pennsylvania requirements;

(f) the sales tax exemption analysis under the casual or isolated sale doctrine in both New York and Pennsylvania; and

(g) additional federal tax considerations, including assumed liabilities, transaction cost deductibility and capitalization, the pending Office of Inspector General ("OIG") inquiry at the Syracuse facility, and employee benefit plan transition matters.

The analysis set forth in this memorandum is based on facts and documents provided by the M&A deal team, Crestline management, and preliminary diligence materials. This memorandum is subject to revision and supplementation upon completion of tax due diligence, receipt of independent appraisals, and finalization of APA schedules and ancillary agreements. We have not independently verified the financial data or factual representations referenced herein, and we have relied on the accuracy and completeness of the information provided to us.

II. Relevant Facts and Transaction Structure

A. The Buyer — Crestline Packaging Solutions LLC

Crestline Packaging Solutions LLC is a Delaware limited liability company (EIN: 83-2947561), headquartered at 8400 Scioto Darby Road, Suite 300, Columbus, Ohio 43228. Crestline is a wholly owned subsidiary of CPS Holdings, Inc. (EIN: 83-2940187), a Delaware C-corporation. CPS Holdings, Inc. is the sole member of Crestline.

Because Crestline is a domestic limited liability company with a single owner that is a corporation, and because Crestline has not filed an election to be treated as an association taxable as a corporation, Crestline is classified as a "disregarded entity" for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(ii). As a disregarded entity, Crestline's activities — including the acquisition of Lakewood's assets — are treated for all federal income tax purposes as the activities of its sole owner, CPS Holdings, Inc. All references in this memorandum to the federal tax consequences to the "Buyer" therefore refer to CPS Holdings, Inc. as the taxpayer of record, unless otherwise noted.

The indirect equity owner of CPS Holdings, Inc. is Pinnacle River Capital Partners, LP (EIN: 36-7829415), a private equity fund organized as a Delaware limited partnership. Pinnacle River GP IV, LLC serves as the general partner of Pinnacle River Capital Partners, LP. Pinnacle River originally acquired Crestline on September 17, 2021, in a leveraged buyout transaction valued at approximately $310,000,000. Since the original acquisition, Crestline has expanded both organically and through a series of bolt-on acquisitions, including the establishment and growth of a dedicated Healthcare Division. For the fiscal year ended December 31, 2024, Crestline reported consolidated revenue of approximately $412,000,000, of which approximately $87,000,000 was attributable to the Healthcare Division. The Lakewood acquisition represents a significant expansion of the Healthcare Division's footprint in the Northeast corridor.

B. The Seller — Lakewood Regional Health Partners, LLC

Lakewood Regional Health Partners, LLC is a New York limited liability company (EIN: 46-5183294), formed in 2014 under the New York Limited Liability Company Law. Lakewood is headquartered at 450 East Ridge Road, Rochester, New York 14621. Lakewood is a multi-specialty healthcare services provider operating eleven (11) clinic locations across two states: eight (8) facilities in New York and three (3) facilities in Pennsylvania.

Lakewood has two members:

• Dr. Raymond Alcott, holding a sixty percent (60%) membership interest; and

• Dr. Nadia Petrosian, holding a forty percent (40%) membership interest.

Based on our review of the Certificate of Formation and the Amended and Restated Operating Agreement of Lakewood, dated as of March 15, 2017 (the "Lakewood Operating Agreement"), Lakewood has not filed an election under Treasury Regulation §301.7701-3(a) to be treated as an association taxable as a corporation. Accordingly, as a domestic eligible entity with two or more members that has not elected corporate classification, Lakewood is classified as a partnership for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(i). Lakewood files IRS Form 1065 (U.S. Return of Partnership Income) and issues Schedules K-1 to Dr. Alcott and Dr. Petrosian reflecting their respective distributive shares of partnership income, gain, loss, deduction, and credit.

As of March 31, 2025, Lakewood reported trailing twelve-month ("TTM") net revenue of approximately $78,400,000 and TTM Adjusted EBITDA of approximately $16,100,000. Lakewood employs approximately 410 full-time equivalent employees ("FTEs"), including 38 physicians and 24 nurse practitioners and physician assistants ("NPs/PAs"). The three Pennsylvania facilities are located in Scranton, Wilkes-Barre, and Towanda; these facilities are leased, not owned.

C. Transaction Overview

The Transaction is structured as an asset purchase pursuant to the APA, and not as a purchase of the membership interests of Lakewood. This structural choice is significant for the tax analysis that follows. Under the APA, Crestline will acquire substantially all of the assets used in or related to the conduct of Lakewood's healthcare services business (the "Acquired Assets"), and will assume certain specifically identified liabilities (the "Assumed Liabilities"), in exchange for total fixed purchase price consideration of $140,000,000.

The consideration structure is as follows:

(i) Closing Cash Consideration: $119,000,000, payable at Closing by wire transfer of immediately available funds to an account designated by the Seller. The Closing Cash Consideration will be funded from two sources: (A) $84,000,000 from an incremental term loan to be extended by Ironclad National Bank under the existing credit facility of CPS Holdings, Inc. (the "Ironclad Term Loan"); and (B) $35,000,000 from an equity contribution by Pinnacle River Capital Partners, LP (the "Pinnacle River Equity Commitment"), to be contributed through CPS Holdings, Inc. to Crestline.

(ii) Indemnification Escrow: $17,500,000 deposited at Closing into an escrow account maintained by Apex Title & Escrow Services, LLC (the "Escrow Agent"), pursuant to an Indemnification Escrow Agreement among Buyer, Seller, and the Escrow Agent, to secure the Seller's post-Closing indemnification obligations under the APA.

(iii) Purchase Price Adjustment Escrow: $3,500,000 deposited at Closing into a separate escrow account maintained by the Escrow Agent, to secure post-Closing adjustments to the purchase price pursuant to the working capital adjustment mechanism set forth in the APA.

The working capital target established in the APA is $6,200,000 (the "Target Working Capital"), with a collar of plus or minus $500,000 (i.e., no adjustment is made if Closing Working Capital, as finally determined, falls within the range of $5,700,000 to $6,700,000). The working capital true-up is expected to be finalized by approximately November 13, 2025, or 90 days following Closing.

For the avoidance of doubt, the aggregate purchase price for purposes of the IRC §1060 allocation analysis is $140,000,000, subject to adjustment as described above and subject to the treatment of Assumed Liabilities discussed in Section VII.A below.

III. Entity Classification Analysis

A. Lakewood as a Partnership (Seller)

As noted in Section II.B above, Lakewood is classified as a partnership for federal income tax purposes under Subchapter K of the Code (IRC §§701–761). This classification follows from the application of the "check-the-box" entity classification regulations. Specifically, under Treasury Regulation §301.7701-3(b)(1)(i), the default classification for a domestic eligible entity that has two or more members is partnership. Lakewood has two members — Dr. Raymond Alcott (60%) and Dr. Nadia Petrosian (40%) — and has not filed a Form 8832 (Entity Classification Election) electing to be treated as an association taxable as a corporation. We have confirmed this with Seller's counsel, Whitfield, Ames & Greer LLP, and have reviewed the relevant portions of the Lakewood Operating Agreement.

The partnership classification of Lakewood has several critical implications for the tax treatment of the Transaction:

Pass-Through Taxation. As a partnership, Lakewood is not itself subject to federal income tax. Rather, under IRC §701, each partner is taxable on the partner's distributive share of the partnership's income, gain, loss, deduction, and credit, regardless of whether such amounts are actually distributed. Accordingly, the gain or loss recognized by Lakewood upon the sale of its assets will not be taxed at the entity level but will instead flow through to Dr. Alcott and Dr. Petrosian in accordance with their respective membership interests and the allocation provisions of the Lakewood Operating Agreement. Under the Operating Agreement, as provided to us in diligence, allocations of income, gain, loss, and deduction generally follow the members' respective percentage interests — 60% to Dr. Alcott and 40% to Dr. Petrosian — subject to any special allocation provisions that may apply.

Character of Gain — Mixed Ordinary and Capital. The character of the gain flowing through to the members will depend on the character of the underlying assets sold. Not all of the gain will be treated as long-term capital gain. In particular:

(a) Accounts Receivable — IRC §751(a) "Hot Assets." To the extent any accounts receivable of Lakewood are included in the Acquired Assets (or, if excluded, are constructively treated as sold under the APA), amounts received attributable to unrealized receivables as defined in IRC §751(c) will generate ordinary income to the members. Under IRC §751(a), the amount of money or the fair market value of property received by a selling partner in exchange for all or a part of the partner's interest in the partnership attributable to "unrealized receivables" or "inventory items" (collectively, "hot assets") is treated as an amount realized from the sale or exchange of property other than a capital asset — i.e., ordinary income. In the context of an asset sale by the partnership itself, the analogous provision is that gain attributable to these categories of assets at the partnership level retains its ordinary character when allocated to the partners.

(b) Depreciation Recapture — IRC §§1245 and 1250. Gain attributable to the sale of tangible personal property (medical and diagnostic equipment, furniture, fixtures, IT hardware) is subject to depreciation recapture under IRC §1245 to the extent of depreciation previously claimed. Under §1245(a)(1), gain recognized on the disposition of "section 1245 property" is treated as ordinary income to the extent of prior depreciation deductions. Similarly, gain on the sale of real property that is "section 1250 property" (the Rochester Main and Syracuse facilities) is subject to recapture under IRC §1250 to the extent of "additional depreciation" (i.e., depreciation in excess of straight-line) claimed after December 31, 1975. In practice, because nonresidential real property placed in service after 1986 is depreciated using the straight-line method under MACRS, §1250 recapture is unlikely to be significant, but unrecaptured §1250 gain (taxed at a maximum rate of 25% for individual taxpayers under IRC §1(h)(1)(E)) will apply to the extent of prior straight-line depreciation.

(c) IRC §1231 Gain. Gain on the sale of real property and depreciable property used in a trade or business held for more than one year, to the extent not recharacterized as ordinary income under §§1245 or 1250, is "section 1231 gain." Net section 1231 gain is treated as long-term capital gain, subject to the §1231(c) lookback rule (which recharacterizes net §1231 gains as ordinary income to the extent of unrecaptured net §1231 losses in the prior five years).

(d) Goodwill and Intangible Assets. Gain allocated to goodwill (Class VII) and intangible assets (Class VI) — to the extent such assets constitute capital assets or IRC §1231 property in the hands of the partnership — will generally be treated as long-term capital gain under IRC §741 when allocated to the members, provided the assets have been held for more than one year (which they have, as Lakewood has been operating since 2014). For individual taxpayers, long-term capital gain is currently taxed at a maximum federal rate of 20%, plus the 3.8% net investment income tax under IRC §1411, for a combined maximum rate of 23.8%.

We recommend that Seller's counsel, Catherine Greer of Whitfield, Ames & Greer LLP, coordinate closely with the Sellers' individual tax advisors on member-level tax planning in connection with the Transaction, including estimated tax payment planning and potential installment sale analysis (though the Transaction as currently structured does not contemplate installment payments, the escrow arrangements could, in certain circumstances, implicate the installment sale rules under IRC §453).

B. Crestline as a Disregarded Entity (Buyer)

As discussed in Section II.A above, Crestline is classified as a disregarded entity for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(ii) because it is a domestic limited liability company with a single member that is a corporation (CPS Holdings, Inc.). Under the disregarded entity rules, the acquisition of Lakewood's assets is treated for federal income tax purposes as an acquisition by CPS Holdings, Inc. directly.

CPS Holdings, Inc. is a Delaware C-corporation subject to federal corporate income tax under IRC §11 at the current rate of twenty-one percent (21%). CPS Holdings files a consolidated federal income tax return (Form 1120) that includes all of its domestic subsidiaries that are themselves C-corporations; Crestline, as a disregarded entity, is not a separate taxpayer but is instead fully reflected in the consolidated return of CPS Holdings.

The principal tax implications for the Buyer arising from the Transaction structure are as follows:

(a) Stepped-Up Basis. CPS Holdings, through its disregarded subsidiary Crestline, will receive a cost basis in the Acquired Assets equal to the purchase price allocated to each asset under the IRC §1060 methodology described in Section V below. This cost basis "step-up" is the fundamental tax benefit of an asset purchase structure, as it permits the Buyer to depreciate and amortize the Acquired Assets based on their fair market values as of the Closing Date, rather than the Seller's historical tax basis (which, in many cases, may have been substantially depreciated or amortized).

(b) Depreciation and Amortization Deductions. CPS Holdings will be entitled to depreciation deductions on acquired tangible personal property under IRC §167 and §168 (MACRS), depreciation on acquired real property under IRC §168(c), and amortization of acquired intangible assets (including goodwill) under IRC §197 over a 15-year period. These deductions will offset CPS Holdings' consolidated taxable income, generating a significant "tax shield" that reduces the effective after-tax cost of the acquisition. The estimated annual tax benefits are quantified in Section V.C below.

(c) No Double Tax at Seller Level. Because Lakewood is a partnership (not a C-corporation), the asset sale does not trigger a "double tax" at the entity level — Lakewood itself owes no federal income tax, and the members are taxed only once on the gain flowing through to them. This eliminates one of the primary disadvantages of asset purchases involving C-corporation sellers, where the corporation recognizes gain on the asset sale and the shareholders recognize additional gain on the liquidating distribution.

IV. Inapplicability of IRC §338(h)(10) Election

Section 338(h)(10) of the Code permits a purchasing corporation and a selling consolidated group (or selling affiliate, or S corporation shareholders) to jointly elect to treat a "qualified stock purchase" of the stock of a target as a deemed sale of the target's assets. The §338(h)(10) election is a powerful planning tool in the context of acquisitions of C-corporation targets from consolidated groups or of S-corporation targets, because it allows the parties to achieve the tax benefits of an asset purchase (stepped-up basis for the buyer) without requiring the legal form of an asset transfer.

However, the §338(h)(10) election is unavailable in the present Transaction for three independent and dispositive reasons:

(a) Lakewood Is Not a Corporation. Section 338(h)(10) applies only to "qualified stock purchases" of a "target." Under IRC §338(d)(1), the term "target" means any corporation with respect to which a qualified stock purchase is made. Lakewood is a limited liability company classified as a partnership for federal tax purposes — it is not a corporation (whether C or S) within the meaning of the Code. Accordingly, Lakewood cannot be a "target" for purposes of §338.

(b) The Transaction Is an Actual Asset Purchase. The Transaction is structured as an actual purchase of substantially all assets of Lakewood, not as a purchase of membership interests. Section 338(h)(10) is relevant only where the legal form of the transaction is a stock (or membership interest) purchase and the parties wish to elect deemed asset sale treatment. Here, the legal form already is an asset sale; the election is unnecessary because the parties are achieving directly what §338(h)(10) would only achieve constructively.

(c) No "Qualified Stock Purchase." Even if Lakewood were a corporation and the Transaction were structured as an interest purchase, the requirements of IRC §338(d)(3) define a "qualified stock purchase" as the acquisition by one corporation of stock of another corporation meeting the requirements of IRC §1504(a)(2) — i.e., at least 80% of the total voting power and at least 80% of the total value of the stock — by purchase (within the meaning of IRC §338(h)(3)) during a 12-month acquisition period. No "stock" within the meaning of §338 is being acquired in this Transaction; membership interests in a partnership are not "stock."

Conclusion: IRC §338(h)(10) is inapplicable and unnecessary. The asset purchase structure already achieves the primary tax benefit that a §338(h)(10) election is designed to provide — namely, a stepped-up, fair market value cost basis in the acquired assets in the hands of the Buyer. From the Buyer's perspective, the asset purchase is the optimal structure, as it maximizes future depreciation and amortization deductions.

From the Sellers' perspective, Lakewood's partnership classification means that the members cannot achieve single-level corporate tax treatment regardless of how the Transaction is structured. The sale of assets by a partnership results in a flow-through of gain to the individual members, who are taxed at their respective individual rates. Unlike a sale of stock of a C-corporation (which might produce a single level of tax at preferential capital gains rates to the shareholders), the asset sale by a partnership produces a mix of ordinary income (to the extent of hot assets, depreciation recapture, and other ordinary income items) and long-term capital gain (to the extent of gain on goodwill, intangibles, and §1231 property). The members are, however, entitled to the benefit of the preferential long-term capital gains rates (currently a maximum of 20%, plus the 3.8% net investment income tax) on the capital gain component. On balance, the asset purchase structure is acceptable to both sides, as the Buyer achieves the desired basis step-up and the Sellers are not materially disadvantaged relative to any alternative structure.

V. IRC §1060 Purchase Price Allocation

A. Statutory and Regulatory Framework

Section 1060 of the Code governs the allocation of consideration in connection with any "applicable asset acquisition." An applicable asset acquisition is defined under IRC §1060(c) as any transfer (whether direct or indirect) of assets constituting a trade or business and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. The proposed Lakewood Transaction clearly constitutes an applicable asset acquisition: Crestline is acquiring assets that constitute a trade or business (the healthcare services operations of Lakewood), and Crestline's basis in the Acquired Assets will be determined wholly by reference to the consideration paid (i.e., the $140,000,000 purchase price, as adjusted).

Under IRC §1060(a), the consideration paid in an applicable asset acquisition must be allocated among the acquired assets using the "residual method" prescribed by IRC §338(b)(5). The residual method is further elaborated in Treasury Regulation §1.1060-1(c), which incorporates by reference the asset classification and allocation rules of Treasury Regulation §1.338-6(b). Under this methodology, the total consideration is allocated first to Class I assets, then to Class II, and so on through the seven asset classes, with any residual amount allocated to Class VII (goodwill and going concern value).

Both the Buyer and the Seller are required to use the residual method to allocate the purchase price, and both are required to report their respective allocations on IRS Form 8594 (Asset Acquisition Statement Under Section 1060), which must be attached to the parties' respective federal income tax returns for the taxable year in which the Transaction closes. The Form 8594 must include the total consideration paid, the allocation among the seven asset classes, and certain identifying information regarding the Transaction and the parties.

The seven asset classes under Treasury Regulation §1.338-6(b) are as follows:

Class I: Cash and general deposit accounts (including checking and savings accounts, but not certificates of deposit).

Class II: Actively traded personal property within the meaning of IRC §1092(d)(1), certificates of deposit, and foreign currency.

Class III: Accounts receivable, mortgages, and credit card receivables.

Class IV: Stock in trade (inventory) or property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.

Class V: All assets not described in Classes I through IV, VI, or VII, including tangible personal property, real property, and other assets not otherwise classified.

Class VI: All IRC §197 intangibles other than goodwill and going concern value, including but not limited to covenants not to compete, workforce in place, customer-based intangibles (patient lists and referral networks), government licenses and permits, franchise rights, trade names, and contract rights.

Class VII: Goodwill and going concern value.

It is imperative that Buyer and Seller agree on a single, consistent allocation and memorialize that agreement in a schedule to the APA. As discussed further in Section VIII, both parties must file consistent Forms 8594, and any inconsistency may trigger IRS scrutiny and potential adjustment.

B. Preliminary Allocation

Based on preliminary diligence data, management estimates, and comparable transaction benchmarks, we propose the following preliminary allocation of the $140,000,000 purchase price:

Notes to Preliminary Allocation:

Classes I through IV. Cash and cash equivalents, actively traded personal property, accounts receivable, and inventory are excluded from the Acquired Assets or are subject to the working capital adjustment mechanism. Working capital items (principally cash, accounts receivable, prepaid expenses, and current liabilities) are addressed through the working capital true-up provisions of the APA and are not part of the fixed $140,000,000 purchase price allocation. De minimis medical supplies inventory is expected to be captured within the working capital adjustment rather than allocated separately.

Class V — Tangible Personal Property ($12,400,000). This allocation reflects the estimated fair market value of medical and diagnostic equipment (including imaging equipment, laboratory instruments, patient monitoring systems, and examination room equipment), office furniture and fixtures, information technology hardware (servers, workstations, networking equipment), and leasehold improvements at the eleven clinic locations. This amount is preliminary and subject to a formal appraisal by a qualified independent appraiser to be commissioned prior to Closing.

Class V — Real Property ($11,800,000). This allocation reflects the appraised fair market values of the two owned real properties: (i) the Rochester Main facility at 450 East Ridge Road, Rochester, New York 14621 (appraised at $6,900,000), and (ii) the Syracuse facility (appraised at $4,900,000). The remaining nine facilities (six additional New York locations and three Pennsylvania locations in Scranton, Wilkes-Barre, and Towanda) are leased. Leasehold interests in those facilities are addressed as assumed contracts and, to the extent they have identifiable fair market value in excess of contractual obligation, are included in the Class VI intangible asset allocation.

Class VI — Intangible Assets ($42,300,000). This allocation encompasses all identifiable intangible assets other than goodwill and going concern value. A detailed breakdown is provided in Exhibit A and summarized as follows:

• Assembled workforce (approximately 410 FTEs, 38 physicians, 24 NPs/PAs)

• Patient lists and referral relationships

• Non-compete covenants from Dr. Raymond Alcott (3-year, 75-mile radius) and Dr. Nadia Petrosian (3-year, 75-mile radius)

• Managed care contract value (including the Meridian Shield contract, which represents approximately $17,248,000 in annual revenue and is a material concentration risk)

• CMS certifications for all eleven (11) facilities

• New York Article 28 Operating Certificates for the eight (8) New York facilities

• Pennsylvania facility licenses for the three (3) Pennsylvania facilities

• Trade name "Lakewood Regional Health Partners"

Class VII — Goodwill and Going Concern Value ($73,500,000). This amount is the residual — i.e., the difference between the total purchase price of $140,000,000 and the aggregate amount allocated to Classes I through VI ($66,500,000). The substantial goodwill component is consistent with the Transaction economics: the $140,000,000 purchase price implies a multiple of approximately 8.7x TTM Adjusted EBITDA ($16,100,000), and the excess of purchase price over identifiable tangible and intangible asset values reflects the value of Lakewood as a going concern, including its established market position, patient volume, brand reputation, and growth potential.

Consulting Agreements — Separately Stated Consideration. The Consulting Agreements to be entered into with Dr. Alcott ($450,000 per year for two years, totaling $900,000) and Dr. Petrosian ($375,000 per year for two years, totaling $750,000) constitute separately stated consideration and are not included in the $140,000,000 purchase price allocation. These payments will be deductible by Crestline/CPS Holdings as ordinary and necessary business expenses under IRC §162 when paid or incurred (depending on the taxpayer's method of accounting). The consulting fees will be reported as ordinary income by the recipients (Dr. Alcott and Dr. Petrosian) and will be subject to self-employment tax under IRC §1401. We recommend that the consulting arrangements be supported by a contemporaneous fair market value analysis of the services to be rendered, to mitigate the risk that the IRS could seek to recharacterize a portion of the consulting compensation as additional purchase price (which would be allocable to goodwill or other asset classes and would alter the tax consequences to both parties).

C. Tax Implications of Allocation — Buyer

The allocation of the purchase price among the asset classes determines the Buyer's depreciable and amortizable basis in the Acquired Assets, which in turn generates annual tax deductions that reduce CPS Holdings' federal income tax liability over the applicable recovery periods. The following summarizes the expected depreciation and amortization benefits:

Goodwill ($73,500,000) — IRC §197 Amortization. Goodwill acquired in a transaction constituting an applicable asset acquisition is an "amortizable section 197 intangible" under IRC §197(d)(1)(A). Section 197 intangibles are amortized ratably over a 15-year period beginning with the month in which the intangible is acquired. IRC §197(a). Assuming a Closing Date of August 15, 2025, the 15-year amortization period commences in August 2025. The annual amortization deduction for goodwill will be approximately $4,900,000 ($73,500,000 ÷ 15 years), with a pro-rated deduction in the first and last taxable years.

Intangible Assets ($42,300,000) — IRC §197 Amortization. The identifiable intangible assets allocated to Class VI — including patient lists and referral networks, non-compete covenants, assembled workforce, managed care contract value, trade name, and government licenses — are also amortizable section 197 intangibles. IRC §197(d)(1)(C) (customer-based intangibles), §197(d)(1)(E) (covenants not to compete), §197(d)(1)(B) (workforce in place), §197(d)(1)(D) (government licenses and permits), §197(d)(1)(F) (franchise, trademark, or trade name). The annual amortization deduction for Class VI intangible assets will be approximately $2,820,000 ($42,300,000 ÷ 15 years).

Real Property ($11,800,000) — MACRS Depreciation. Nonresidential real property is depreciable under IRC §168(c) using the straight-line method over a 39-year recovery period. IRC §168(b)(3)(A); §168(c)(1). Accordingly, the annual depreciation deduction for the two owned real properties will be approximately $302,564 ($11,800,000 ÷ 39 years), assuming the full allocated amount is depreciable. Important caveat: The land component of each property must be excluded from the depreciable basis, as land is not depreciable. IRC §167(a) (depreciation applies only to property used in a trade or business or held for the production of income and which has a determinable useful life). We anticipate that the independent appraisals will separately value the land and improvements for each property. If, for example, land constitutes 20% of the Rochester Main facility value ($1,380,000) and 15% of the Syracuse facility value ($735,000), the aggregate depreciable basis would be reduced to approximately $9,685,000, yielding an annual depreciation deduction of approximately $248,333.

Tangible Personal Property ($12,400,000) — Bonus Depreciation and MACRS. Tangible personal property is eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System ("MACRS"). Medical and diagnostic equipment generally falls within the 5-year recovery period class (Asset Class 57.0 — Distributive Trades and Services), while office furniture and fixtures generally fall within the 7-year recovery period class (Asset Class 00.11). Additionally, tangible personal property placed in service in 2025 may be eligible for first-year bonus depreciation under IRC §168(k). However, under the phase-down schedule enacted by the Tax Cuts and Jobs Act of 2017 ("TCJA"), the bonus depreciation percentage for property placed in service in calendar year 2025 is 40% (reduced from 60% in 2024 and 80% in 2023). IRC §168(k)(6)(A).

Assuming a hypothetical allocation of $8,000,000 to 5-year property (medical equipment) and $4,400,000 to 7-year property (furniture, fixtures, and IT equipment), and applying 40% bonus depreciation:

• 5-year property: 40% bonus depreciation on $8,000,000 = $3,200,000 first-year bonus. Remaining basis of $4,800,000 depreciated under MACRS 200% declining balance method; first-year regular MACRS deduction of approximately $960,000 (20% of $4,800,000). Total first-year deduction: approximately $4,160,000.

• 7-year property: 40% bonus depreciation on $4,400,000 = $1,760,000 first-year bonus. Remaining basis of $2,640,000 depreciated under MACRS 200% declining balance method; first-year regular MACRS deduction of approximately $377,143 (14.29% of $2,640,000). Total first-year deduction: approximately $2,137,143.

• Aggregate first-year depreciation on tangible personal property: approximately $6,297,143.

In addition, CPS Holdings may elect to expense a portion of the cost of qualifying property under IRC §179, subject to the annual dollar limitation ($1,220,000 for 2025, as adjusted for inflation) and the investment limitation (phase-out begins when total qualifying property placed in service during the taxable year exceeds $3,050,000). Given the size of CPS Holdings' overall capital expenditures, the §179 investment limitation may apply; this should be evaluated in the context of CPS Holdings' consolidated tax position.

Summary of Estimated Annual Tax Shield. The aggregate annual depreciation and amortization deductions from the Acquired Assets, once fully phased in (i.e., after the first year), are estimated as follows:

At the current federal corporate income tax rate of 21%, these deductions generate an annual federal income tax shield of approximately $1,988,350 to $2,104,738, exclusive of any state income tax benefit. Over the 15-year amortization period for goodwill and intangible assets, the cumulative federal tax savings from amortization alone (on the $115,800,000 of combined Class VI and VII assets) would be approximately $24,318,000 ($115,800,000 × 21%), significantly reducing the effective after-tax cost of the acquisition. The present value of these tax benefits, discounted at CPS Holdings' weighted average cost of capital, should be considered in evaluating the overall economics of the Transaction.

D. Tax Implications of Allocation — Seller

At the Lakewood partnership level, the sale of assets will result in the recognition of gain equal to the difference between the amount realized (the $140,000,000 purchase price, as allocated among the asset classes, plus any liabilities assumed by the Buyer that are treated as additional consideration) and Lakewood's adjusted tax basis in each asset sold. The character of the gain recognized on each asset class depends on the nature of the asset in the hands of the Seller:

Ordinary Income Components:

(a) Accounts Receivable — IRC §751(a) "Hot Assets." Although accounts receivable are generally excluded from the Acquired Assets and addressed through the working capital adjustment, to the extent any receivables are transferred (including unbilled receivables or receivables for services performed prior to Closing but billed thereafter), the gain attributable to such receivables constitutes "unrealized receivables" under IRC §751(c) and is treated as ordinary income. In an asset sale by a partnership (as opposed to a sale of partnership interests), the hot asset rules of §751(a) do not technically apply directly — §751(a) governs the sale of a partnership interest, while §751(b) governs distributions. However, the character of gain at the partnership level flows through to the partners, and amounts received for accounts receivable in excess of their adjusted basis are ordinary income at the partnership level in any event.

(b) Depreciation Recapture — IRC §1245. Gain on the sale of Class V tangible personal property (medical equipment, furniture, fixtures, IT hardware) is treated as ordinary income under IRC §1245(a)(1) to the extent of depreciation previously deducted with respect to such property. Based on preliminary review of Lakewood's depreciation schedules, substantial depreciation has been claimed on equipment and fixtures acquired since 2014, and we expect the §1245 recapture to be significant relative to the $12,400,000 allocation.

(c) Depreciation Recapture — IRC §1250. Gain on the sale of Class V real property is treated as ordinary income under IRC §1250(a) to the extent of "additional depreciation" (depreciation in excess of straight-line). As noted above, because the Rochester Main and Syracuse facilities are nonresidential real property depreciated under MACRS using the straight-line method, §1250 recapture should be minimal. However, "unrecaptured section 1250 gain" (the excess of gain over the amount treated as ordinary income under §1250, but not exceeding the total depreciation claimed) is taxed at a maximum rate of 25% for individual taxpayers under IRC §1(h)(1)(E), rather than the standard long-term capital gains rate of 20%.

Capital Gain Components:

(d) IRC §1231 Gain on Real Property. Gain on the sale of the Rochester Main and Syracuse facilities, to the extent not treated as ordinary income under §1250 or as unrecaptured §1250 gain, constitutes §1231 gain. If net §1231 gains for the taxable year exceed net §1231 losses, the net §1231 gain is treated as long-term capital gain (subject to the five-year lookback rule of §1231(c)).

(e) Goodwill and Intangible Assets. Gain allocated to Class VII (goodwill) and Class VI (intangible assets) generally constitutes long-term capital gain under IRC §741, as these assets are capital assets or §1231 property in the hands of Lakewood and have been held for more than one year. This will be the largest component of gain flowing through to the members and will be taxed at the preferential long-term capital gains rate (maximum 20% plus 3.8% net investment income tax, for a combined maximum rate of 23.8%).

Flow-Through to Members. The gain recognized by Lakewood at the partnership level will be allocated between Dr. Alcott (60%) and Dr. Petrosian (40%) in accordance with the Lakewood Operating Agreement. Each member's distributive share of the gain will be reported on their individual Schedule K-1 (Form 1065) and will be included in their individual federal income tax returns for the taxable year of the sale. We estimate that the approximate gross gain to Lakewood on the Transaction will be substantial, given that Lakewood's aggregate adjusted tax basis in its assets is likely significantly below the $140,000,000 purchase price. A precise calculation requires access to Lakewood's full depreciation schedules and asset basis records, which are being obtained as part of tax due diligence.

We recommend that the APA include a mutual agreement on the Form 8594 purchase price allocation and a covenant by both parties to file consistent allocations on their respective tax returns, to avoid the IRS adjustment risk that arises when the buyer and seller report different allocations. We further recommend that Seller's counsel, Catherine Greer of Whitfield, Ames & Greer LLP, coordinate with the individual tax advisors of Dr. Alcott and Dr. Petrosian to ensure proper reporting and estimated tax payment planning, particularly with respect to the ordinary income components and the estimated federal and state tax liability arising from the Transaction.

VI. State and Local Tax Considerations

A. New York and Pennsylvania Real Property Transfer Taxes

The Transaction involves the conveyance of two owned real properties, both of which are located in New York State:

(i) Rochester Main Facility: 450 East Ridge Road, Rochester, New York 14621 (Monroe County). Appraised value: $6,900,000.

(ii) Syracuse Facility: Address per diligence (Onondaga County). Appraised value: $4,900,000.

The remaining nine facilities (six additional New York locations and three Pennsylvania locations in Scranton, Wilkes-Barre, and Towanda) are leased and do not involve a conveyance of fee simple real property interests. Accordingly, real property transfer tax applies only to the two owned properties identified above.

New York State Real Estate Transfer Tax (NY Tax Law §1402). New York imposes a real estate transfer tax on each conveyance of real property or interest therein where the consideration exceeds $500. The base rate under NY Tax Law §1402(a) is $2.00 for each $500 of consideration, or fractional part thereof, which equates to a rate of 0.4%. In addition, under NY Tax Law §1402-a, an "additional tax" is imposed on conveyances of real property (other than residential real property) where the consideration for the entire conveyance is $2,000,000 or more. The additional tax rate is 0.65% of the consideration attributable to the commercial real property conveyed.

Application to the Rochester Main facility ($6,900,000):

• Base transfer tax (0.4%): $6,900,000 × 0.004 = $27,600

• Additional tax (0.65% on full consideration, as consideration exceeds $2,000,000): $6,900,000 × 0.0065 = $44,850

• Total Rochester transfer tax: $72,450

Application to the Syracuse facility ($4,900,000):

• Base transfer tax (0.4%): $4,900,000 × 0.004 = $19,600

• Additional tax (0.65%): $4,900,000 × 0.0065 = $31,850

• Total Syracuse transfer tax: $51,450

The New York City real property transfer tax (NYC Admin. Code §11-2102) is inapplicable, as both properties are located upstate (Monroe County and Onondaga County, respectively). The New York "mansion tax" imposed under NY Tax Law §1402-b is also inapplicable, as it applies only to conveyances of residential real property with consideration of $1,000,000 or more.

Estimated Aggregate New York Transfer Taxes:

Note: Our original estimate of $118,000 was based on preliminary figures and has been refined. The revised aggregate estimate is approximately $123,900, subject to final determination based on the actual consideration allocated to each property at Closing.

Pennsylvania Realty Transfer Tax. The Pennsylvania Realty Transfer Tax (72 P.S. §8102-C.3) imposes a state transfer tax of 1% on the value of real estate transferred, in addition to local transfer taxes that vary by municipality (typically 1%, for an aggregate rate of 2% in most jurisdictions). However, as noted above, all three Pennsylvania facilities (Scranton, Wilkes-Barre, and Towanda) are leased — Lakewood does not own the underlying real property. Accordingly, no Pennsylvania realty transfer tax applies to the conveyance of fee simple real property in connection with the Transaction.

We note that Pennsylvania does have provisions addressing the transfer of leasehold interests. Under 72 P.S. §8101-C, a "document" subject to the realty transfer tax includes a lease for a term of thirty (30) years or more (including renewal periods). We should confirm during diligence that the lease terms (including any renewal options) for the Scranton, Wilkes-Barre, and Towanda facilities do not exceed the 30-year threshold. If any lease, including renewals, has a term of 30 years or more and the leasehold interest is being transferred as part of the Transaction, a Pennsylvania realty transfer tax would apply to the value of the leasehold interest transferred.

Allocation of Transfer Taxes. The APA provides for the equal splitting of all real property transfer taxes between Buyer and Seller. Based on the revised estimated aggregate of $123,900, each party's share would be approximately $61,950.

B. Bulk Sale Tax Clearance — New York

New York Tax Law §1141(c) imposes significant obligations on purchasers in bulk sale transactions. Section 1141(c) provides that whenever a person required to collect sales tax (a "vendor") makes a sale, transfer, or assignment in bulk of any part or the whole of the vendor's business assets (other than in the ordinary course of business), the purchaser shall, at least ten (10) days before taking possession of such assets or paying therefor, notify the Commissioner of Taxation and Finance of the proposed sale by filing Form AU-196.10 (Notification of Sale, Transfer or Assignment in Bulk and of Abandonment).

The consequences of non-compliance are severe: if the purchaser fails to give the required notification, or if the purchaser fails to withhold a sufficient portion of the purchase price to cover any sales taxes, use taxes, or prepaid sales tax on motor fuel owed by the vendor, the purchaser becomes personally liable for the payment of all such taxes owed by the vendor to the extent of the purchase price. NY Tax Law §1141(c).

Recommended Course of Action:

1. File Form AU-196.10 promptly after APA execution. The APA is targeted for execution on June 16, 2025. We recommend that Form AU-196.10 be prepared and filed with the New York Department of Taxation and Finance no later than June 26, 2025 — which is ten (10) business days following APA execution and well in advance of the estimated Closing Date of August 15, 2025. The notification must include the name and address of the seller, the name and address of the purchaser, the date of the proposed transfer, and the purchase price.

2. Obtain Bulk Sale Tax Clearance Certificate (Form AU-197). The Seller should apply for and obtain a Clearance of Lien certificate (Form AU-197) from the New York Department of Taxation and Finance, confirming that Lakewood has no outstanding sales tax liabilities or that all such liabilities have been satisfied. We recommend that the issuance of a satisfactory Form AU-197 be included as a condition to Closing in the APA. The NYS Department of Taxation and Finance generally processes clearance requests within 30 to 45 days, though expedited processing may be available.

3. Escrow or holdback for unpaid taxes. If a clearance certificate cannot be obtained prior to Closing, the parties should consider establishing an escrow holdback from the purchase price in an amount sufficient to cover any potential sales tax liabilities of the Seller, to be released upon receipt of the clearance certificate.

Pennsylvania Tax Clearance. Although Pennsylvania does not have an identical "bulk sale" notification statute, Pennsylvania law does provide for tax clearance certificates in connection with business asset transfers. Under 72 P.S. §7240, a purchaser of business assets may be held liable for unpaid Pennsylvania taxes of the seller unless the purchaser obtains a tax clearance certificate from the Pennsylvania Department of Revenue. The application is submitted on Form REV-181 (Application for Tax Clearance). Given that Lakewood operates three facilities in Pennsylvania (Scranton, Wilkes-Barre, and Towanda) with associated revenue, employees, and Pennsylvania tax obligations, we recommend that Crestline require Lakewood to obtain a Pennsylvania tax clearance certificate (REV-181) as a condition to Closing, in addition to the New York clearance certificate. The Pennsylvania Department of Revenue typically processes clearance requests within 30 to 60 days.

C. Sales Tax Exemption — Casual or Isolated Sale

An important threshold question is whether the transfer of tangible personal property (medical equipment, furniture, fixtures, IT hardware) in connection with the Transaction is subject to New York State and local sales tax.

New York Analysis. New York Tax Law §1105 imposes sales tax on the retail sale of tangible personal property. However, the tax applies only to sales by "vendors" as defined in NY Tax Law §1101(b)(8). Under NY Tax Law §1101(b)(5)(vi), the definition of a "sale" (and, correspondingly, the obligation to collect sales tax) generally applies only to sales made by persons regularly engaged in the business of selling the types of tangible personal property being transferred. A person making "isolated or occasional sales" of tangible personal property is not considered a "vendor" for sales tax purposes, provided such sales are not part of the person's regular course of business.

Lakewood is a healthcare services provider. It is not regularly engaged in the business of selling medical equipment, furniture, fixtures, or information technology hardware to third parties. The transfer of these items in connection with the bulk sale of Lakewood's business assets is a one-time transaction that does not constitute a "sale" in the ordinary course of Lakewood's business. Accordingly, the transfer of tangible personal property incident to the Transaction should qualify as a casual or isolated sale and should be exempt from New York sales and use tax.

We note that the casual sale exemption analysis is fact-specific, and there is limited formal guidance from the New York Department of Taxation and Finance on the application of the exemption in the context of bulk asset acquisitions of healthcare practices. However, the weight of authority — including Tax Appeals Tribunal precedent and advisory opinions — supports the position that the bulk transfer of business assets in a one-time transaction by a seller that is not in the business of selling such assets constitutes a casual or isolated sale and is not subject to sales tax.

It is important to emphasize that the casual sale exemption and the bulk sale notification requirement (discussed in Section VI.B above) are independent obligations. Compliance with the Form AU-196.10 filing and the Form AU-197 clearance certificate process does not create or negate the casual sale exemption, and vice versa. Both procedures should be followed.

Pennsylvania Analysis. Pennsylvania similarly provides a casual sale exemption under its Sales and Use Tax Act. Under 72 P.S. §7201(c), the definition of a "sale at retail" subject to sales tax excludes an "isolated transaction" involving tangible personal property or services by a person who is not regularly engaged in such sales. The transfer of tangible personal property in connection with the sale of Lakewood's Pennsylvania operations (the Scranton, Wilkes-Barre, and Towanda facilities) should qualify as an isolated transaction exempt from Pennsylvania sales and use tax. We note that the Pennsylvania regulation at 61 Pa. Code §31.22 provides additional guidance on the casual sale exemption, and we will confirm applicability during diligence.

Conclusion. The transfer of tangible personal property in the Transaction should be exempt from both New York and Pennsylvania sales and use tax under the casual or isolated sale exemption. No sales tax collection or remittance obligation should arise in connection with the transfer of equipment, furniture, fixtures, and other tangible personal property included in the Acquired Assets.

VII. Additional Federal Tax Considerations

A. Assumed Liabilities

Under general tax principles, liabilities assumed by the Buyer in connection with an asset acquisition are treated as additional consideration paid by the Buyer for the acquired assets. See, e.g., Treas. Reg. §1.1001-2 (relief from liabilities treated as an amount realized); Commissioner v. Tufts, 461 U.S. 300 (1983). In the context of an IRC §1060 allocation, assumed liabilities increase the total consideration allocable among the seven asset classes. See Treas. Reg. §1.1060-1(c)(1).

The principal Assumed Liabilities identified in the APA include:

(i) Accrued Paid Time Off (PTO): Approximately $1,340,000 in accrued but unused PTO for the approximately 410 Lakewood employees who will be offered employment by Crestline. This liability represents an obligation to provide compensated absences to continuing employees after Closing.

(ii) Imaging Equipment Lease Obligations: The outstanding lease balance on three imaging equipment leases with Marlowe Asset Management Medical Equipment Finance ("Marlowe Asset Management MEF") — Lease Nos. VML-2023-1140, VML-2023-1141, and VML-2024-0219 — in the aggregate amount of approximately $2,870,000. These leases cover MRI, CT, and digital radiography equipment at the Rochester Main and Syracuse facilities.

(iii) Assumed Contracts: The APA provides for the assumption of certain executory contracts, including:

• Clearpath EHR License Agreement No. CP-ENT-2022-0487 (annual license fee: $840,000)

• Redstone Diagnostics reference laboratory services agreement (annual spend: approximately $1,600,000)

• Managed care contracts, including the Meridian Shield agreement (approximately $17,248,000 in annual revenue)

• Facility leases for the nine leased locations

• Various other vendor, service, and employment agreements identified in the APA schedules

Tax Treatment. The accrued PTO liability ($1,340,000) and the imaging equipment lease balance ($2,870,000) increase the total consideration for purposes of the §1060 allocation by $4,210,000, bringing the total allocable consideration to approximately $144,210,000 (before working capital adjustments and other purchase price modifications). However, the treatment of assumed liabilities in the §1060 context depends on their character:

• Accrued PTO: The assumption of the accrued PTO obligation effectively represents additional consideration paid to the Seller (because the Seller is relieved of the liability). The $1,340,000 is allocable under §1060 in the same manner as cash consideration. When Crestline subsequently pays the accrued PTO to employees, the payments will be deductible as compensation expense under IRC §162, but only to the extent the accrued PTO was not already reflected in the purchase price allocation. Under the "economic performance" rules of IRC §461(h), the deduction for the assumed PTO liability is generally allowable when the PTO is actually used by the employees (i.e., when economic performance occurs).

• Equipment Lease Obligations: The treatment of assumed lease obligations depends on whether the leases are characterized as true leases or as conditional sales (capital leases) for federal income tax purposes. If the Marlowe Asset Management MEF leases are true leases, the assumption transfers the lessee's rights and obligations under the lease, and future lease payments are deductible by Crestline as rental expense under IRC §162. If any lease is recharacterized as a conditional sale, the assumed balance is treated as a purchase price for the equipment, and the equipment's basis includes the assumed debt. We recommend that the lease terms be reviewed to determine proper characterization.

• Assumed Executory Contracts: The assumption of executory contracts (where both parties have ongoing performance obligations) generally does not give rise to additional consideration for §1060 purposes to the extent the contract is at market terms (i.e., the present value of future obligations approximately equals the present value of future benefits). To the extent any assumed contract has above-market or below-market terms, the difference may be treated as an intangible asset (favorable contract) or assumed liability (unfavorable contract) and allocated to Class VI.

We will refine the treatment of assumed liabilities in the §1060 allocation upon completion of diligence and finalization of the APA schedules.

B. Transaction Costs — Deductibility vs. Capitalization

IRC §263 and Treasury Regulation §1.263(a)-5 govern the treatment of amounts paid to facilitate the acquisition of a trade or business. Under Treas. Reg. §1.263(a)-5(a), a taxpayer must capitalize amounts paid to "facilitate" certain transactions, including the acquisition of assets constituting a trade or business. "Facilitate" is broadly defined to include amounts paid in the process of investigating or pursuing a transaction, including fees for legal, accounting, financial advisory, and other professional services.

The total estimated transaction expenses for the Transaction are approximately $10,438,000, composed of the following:

Capitalization vs. Current Deduction Analysis:

(a) Capitalizable Costs. Under Treas. Reg. §1.263(a)-5(e), amounts paid to facilitate an acquisition of a trade or business must be capitalized. This includes the financial advisory fee (Ridgepoint, $2,100,000), the R&W insurance premium (Keystone Mutual, $980,000), and portions of legal and accounting fees directly attributable to the consummation of the Transaction (as opposed to due diligence or general investigation). Capitalizable costs are added to the Buyer's basis in the Acquired Assets and are recovered through depreciation and amortization over the applicable recovery periods. To the extent capitalizable costs are allocable to goodwill or intangible assets, they are amortized over 15 years under IRC §197; to the extent allocable to tangible assets, they are depreciated under MACRS.

(b) Potentially Deductible Costs. Under Treas. Reg. §1.263(a)-5(e)(2), amounts paid for "employee compensation" and "overhead" are not required to be capitalized, even if related to the acquisition. Additionally, under Treas. Reg. §1.263(a)-5(d)(1), amounts paid in the process of "investigating" a transaction (as opposed to "pursuing" or "consummating" it) may be currently deductible, although the distinction between investigation and pursuit is fact-intensive and often litigated. Portions of the legal and accounting fees attributable to pre-LOI due diligence (i.e., before the issuance of a binding letter of intent or the commencement of negotiations toward a binding agreement) may be currently deductible under the "bright-line date" rule of Treas. Reg. §1.263(a)-5(e)(1).

(c) Financing Costs. The $1,260,000 in fees payable to Ironclad National Bank (Kenneth Boateng) for the incremental term loan are not costs of acquiring the Lakewood assets but rather costs of obtaining financing. These costs are generally deductible over the term of the credit facility under IRC §461 and Treas. Reg. §1.446-5. Original issue discount ("OID

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 31st Floor New York, NY 10017
MEMORANDUM
TO: James Prentice, Esq. (M&A Practice Group, Calderwood & Harkness LLP) Patricia Hsu, Chief Financial Officer, Crestline Packaging Solutions LLC
FROM: Sylvia Hartwell, Esq. (Tax Practice Group, Calderwood & Harkness LLP)
DATE: May 29, 2025 (Draft)
RE: Tax Structure Analysis — Crestline Packaging Solutions LLC Acquisition of Substantially All Assets of Lakewood Regional Health Partners, LLC
Matter No.: 1006-00008
THIS MEMORANDUM IS A PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION AND CONSTITUTES ATTORNEY WORK PRODUCT PREPARED IN ANTICIPATION OF LITIGATION AND/OR IN CONNECTION WITH THE RENDITION OF LEGAL ADVICE. THIS MEMORANDUM IS NOT INTENDED FOR DISTRIBUTION TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT OF CALDERWOOD & HARKNESS LLP. THE INFORMATION AND ANALYSIS CONTAINED HEREIN ARE BASED ON FACTS PROVIDED TO DATE AND ARE SUBJECT TO REVISION UPON COMPLETION OF DUE DILIGENCE.
I. Executive Summary
This memorandum analyzes the federal, New York State, and Pennsylvania tax consequences of the proposed acquisition by Crestline Packaging Solutions LLC ("Crestline" or "CPS") of substantially all of the assets of Lakewood Regional Health Partners, LLC ("Lakewood" or "LRHP") for a fixed purchase price of One Hundred Forty Million Dollars ($140,000,000), structured as an asset purchase (the "Transaction"). The parties anticipate execution of the Asset Purchase Agreement (the "APA") on or about June 16, 2025, with an estimated Closing Date of August 15, 2025.
This memorandum addresses the following principal tax considerations arising from the Transaction:
(a) the federal income tax entity classification of both the Buyer (Crestline) and the Seller (Lakewood), including the consequences of Crestline's status as a disregarded entity and Lakewood's classification as a partnership;
(b) the inapplicability of an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and the reasons why the asset purchase structure is both appropriate and optimal for the parties;
(c) the purchase price allocation methodology required under IRC §1060 and the applicable Treasury Regulations, including a preliminary allocation of the $140,000,000 purchase price among the seven regulatory asset classes and the resulting tax consequences to both Buyer and Seller;
(d) state-level real property transfer taxes applicable to the conveyance of owned real properties in New York;
(e) bulk sale tax clearance requirements under New York Tax Law §1141(c) and analogous Pennsylvania requirements;
(f) the sales tax exemption analysis under the casual or isolated sale doctrine in both New York and Pennsylvania; and
(g) additional federal tax considerations, including assumed liabilities, transaction cost deductibility and capitalization, the pending Office of Inspector General ("OIG") inquiry at the Syracuse facility, and employee benefit plan transition matters.
The analysis set forth in this memorandum is based on facts and documents provided by the M&A deal team, Crestline management, and preliminary diligence materials. This memorandum is subject to revision and supplementation upon completion of tax due diligence, receipt of independent appraisals, and finalization of APA schedules and ancillary agreements. We have not independently verified the financial data or factual representations referenced herein, and we have relied on the accuracy and completeness of the information provided to us.
II. Relevant Facts and Transaction Structure
A. The Buyer — Crestline Packaging Solutions LLC
Crestline Packaging Solutions LLC is a Delaware limited liability company (EIN: 83-2947561), headquartered at 8400 Scioto Darby Road, Suite 300, Columbus, Ohio 43228. Crestline is a wholly owned subsidiary of CPS Holdings, Inc. (EIN: 83-2940187), a Delaware C-corporation. CPS Holdings, Inc. is the sole member of Crestline.
Because Crestline is a domestic limited liability company with a single owner that is a corporation, and because Crestline has not filed an election to be treated as an association taxable as a corporation, Crestline is classified as a "disregarded entity" for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(ii). As a disregarded entity, Crestline's activities — including the acquisition of Lakewood's assets — are treated for all federal income tax purposes as the activities of its sole owner, CPS Holdings, Inc. All references in this memorandum to the federal tax consequences to the "Buyer" therefore refer to CPS Holdings, Inc. as the taxpayer of record, unless otherwise noted.
The indirect equity owner of CPS Holdings, Inc. is Pinnacle River Capital Partners, LP (EIN: 36-7829415), a private equity fund organized as a Delaware limited partnership. Pinnacle River GP IV, LLC serves as the general partner of Pinnacle River Capital Partners, LP. Pinnacle River originally acquired Crestline on September 17, 2021, in a leveraged buyout transaction valued at approximately $310,000,000. Since the original acquisition, Crestline has expanded both organically and through a series of bolt-on acquisitions, including the establishment and growth of a dedicated Healthcare Division. For the fiscal year ended December 31, 2024, Crestline reported consolidated revenue of approximately $412,000,000, of which approximately $87,000,000 was attributable to the Healthcare Division. The Lakewood acquisition represents a significant expansion of the Healthcare Division's footprint in the Northeast corridor.
B. The Seller — Lakewood Regional Health Partners, LLC
Lakewood Regional Health Partners, LLC is a New York limited liability company (EIN: 46-5183294), formed in 2014 under the New York Limited Liability Company Law. Lakewood is headquartered at 450 East Ridge Road, Rochester, New York 14621. Lakewood is a multi-specialty healthcare services provider operating eleven (11) clinic locations across two states: eight (8) facilities in New York and three (3) facilities in Pennsylvania.
Lakewood has two members:
• Dr. Raymond Alcott, holding a sixty percent (60%) membership interest; and
• Dr. Nadia Petrosian, holding a forty percent (40%) membership interest.
Based on our review of the Certificate of Formation and the Amended and Restated Operating Agreement of Lakewood, dated as of March 15, 2017 (the "Lakewood Operating Agreement"), Lakewood has not filed an election under Treasury Regulation §301.7701-3(a) to be treated as an association taxable as a corporation. Accordingly, as a domestic eligible entity with two or more members that has not elected corporate classification, Lakewood is classified as a partnership for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(i). Lakewood files IRS Form 1065 (U.S. Return of Partnership Income) and issues Schedules K-1 to Dr. Alcott and Dr. Petrosian reflecting their respective distributive shares of partnership income, gain, loss, deduction, and credit.
As of March 31, 2025, Lakewood reported trailing twelve-month ("TTM") net revenue of approximately $78,400,000 and TTM Adjusted EBITDA of approximately $16,100,000. Lakewood employs approximately 410 full-time equivalent employees ("FTEs"), including 38 physicians and 24 nurse practitioners and physician assistants ("NPs/PAs"). The three Pennsylvania facilities are located in Scranton, Wilkes-Barre, and Towanda; these facilities are leased, not owned.
C. Transaction Overview
The Transaction is structured as an asset purchase pursuant to the APA, and not as a purchase of the membership interests of Lakewood. This structural choice is significant for the tax analysis that follows. Under the APA, Crestline will acquire substantially all of the assets used in or related to the conduct of Lakewood's healthcare services business (the "Acquired Assets"), and will assume certain specifically identified liabilities (the "Assumed Liabilities"), in exchange for total fixed purchase price consideration of $140,000,000.
The consideration structure is as follows:
(i) Closing Cash Consideration: $119,000,000, payable at Closing by wire transfer of immediately available funds to an account designated by the Seller. The Closing Cash Consideration will be funded from two sources: (A) $84,000,000 from an incremental term loan to be extended by Ironclad National Bank under the existing credit facility of CPS Holdings, Inc. (the "Ironclad Term Loan"); and (B) $35,000,000 from an equity contribution by Pinnacle River Capital Partners, LP (the "Pinnacle River Equity Commitment"), to be contributed through CPS Holdings, Inc. to Crestline.
(ii) Indemnification Escrow: $17,500,000 deposited at Closing into an escrow account maintained by Apex Title & Escrow Services, LLC (the "Escrow Agent"), pursuant to an Indemnification Escrow Agreement among Buyer, Seller, and the Escrow Agent, to secure the Seller's post-Closing indemnification obligations under the APA.
(iii) Purchase Price Adjustment Escrow: $3,500,000 deposited at Closing into a separate escrow account maintained by the Escrow Agent, to secure post-Closing adjustments to the purchase price pursuant to the working capital adjustment mechanism set forth in the APA.
The working capital target established in the APA is $6,200,000 (the "Target Working Capital"), with a collar of plus or minus $500,000 (i.e., no adjustment is made if Closing Working Capital, as finally determined, falls within the range of $5,700,000 to $6,700,000). The working capital true-up is expected to be finalized by approximately November 13, 2025, or 90 days following Closing.
For the avoidance of doubt, the aggregate purchase price for purposes of the IRC §1060 allocation analysis is $140,000,000, subject to adjustment as described above and subject to the treatment of Assumed Liabilities discussed in Section VII.A below.
III. Entity Classification Analysis
A. Lakewood as a Partnership (Seller)
As noted in Section II.B above, Lakewood is classified as a partnership for federal income tax purposes under Subchapter K of the Code (IRC §§701–761). This classification follows from the application of the "check-the-box" entity classification regulations. Specifically, under Treasury Regulation §301.7701-3(b)(1)(i), the default classification for a domestic eligible entity that has two or more members is partnership. Lakewood has two members — Dr. Raymond Alcott (60%) and Dr. Nadia Petrosian (40%) — and has not filed a Form 8832 (Entity Classification Election) electing to be treated as an association taxable as a corporation. We have confirmed this with Seller's counsel, Whitfield, Ames & Greer LLP, and have reviewed the relevant portions of the Lakewood Operating Agreement.
The partnership classification of Lakewood has several critical implications for the tax treatment of the Transaction:
Pass-Through Taxation. As a partnership, Lakewood is not itself subject to federal income tax. Rather, under IRC §701, each partner is taxable on the partner's distributive share of the partnership's income, gain, loss, deduction, and credit, regardless of whether such amounts are actually distributed. Accordingly, the gain or loss recognized by Lakewood upon the sale of its assets will not be taxed at the entity level but will instead flow through to Dr. Alcott and Dr. Petrosian in accordance with their respective membership interests and the allocation provisions of the Lakewood Operating Agreement. Under the Operating Agreement, as provided to us in diligence, allocations of income, gain, loss, and deduction generally follow the members' respective percentage interests — 60% to Dr. Alcott and 40% to Dr. Petrosian — subject to any special allocation provisions that may apply.
Character of Gain — Mixed Ordinary and Capital. The character of the gain flowing through to the members will depend on the character of the underlying assets sold. Not all of the gain will be treated as long-term capital gain. In particular:
(a) Accounts Receivable — IRC §751(a) "Hot Assets." To the extent any accounts receivable of Lakewood are included in the Acquired Assets (or, if excluded, are constructively treated as sold under the APA), amounts received attributable to unrealized receivables as defined in IRC §751(c) will generate ordinary income to the members. Under IRC §751(a), the amount of money or the fair market value of property received by a selling partner in exchange for all or a part of the partner's interest in the partnership attributable to "unrealized receivables" or "inventory items" (collectively, "hot assets") is treated as an amount realized from the sale or exchange of property other than a capital asset — i.e., ordinary income. In the context of an asset sale by the partnership itself, the analogous provision is that gain attributable to these categories of assets at the partnership level retains its ordinary character when allocated to the partners.
(b) Depreciation Recapture — IRC §§1245 and 1250. Gain attributable to the sale of tangible personal property (medical and diagnostic equipment, furniture, fixtures, IT hardware) is subject to depreciation recapture under IRC §1245 to the extent of depreciation previously claimed. Under §1245(a)(1), gain recognized on the disposition of "section 1245 property" is treated as ordinary income to the extent of prior depreciation deductions. Similarly, gain on the sale of real property that is "section 1250 property" (the Rochester Main and Syracuse facilities) is subject to recapture under IRC §1250 to the extent of "additional depreciation" (i.e., depreciation in excess of straight-line) claimed after December 31, 1975. In practice, because nonresidential real property placed in service after 1986 is depreciated using the straight-line method under MACRS, §1250 recapture is unlikely to be significant, but unrecaptured §1250 gain (taxed at a maximum rate of 25% for individual taxpayers under IRC §1(h)(1)(E)) will apply to the extent of prior straight-line depreciation.
(c) IRC §1231 Gain. Gain on the sale of real property and depreciable property used in a trade or business held for more than one year, to the extent not recharacterized as ordinary income under §§1245 or 1250, is "section 1231 gain." Net section 1231 gain is treated as long-term capital gain, subject to the §1231(c) lookback rule (which recharacterizes net §1231 gains as ordinary income to the extent of unrecaptured net §1231 losses in the prior five years).
(d) Goodwill and Intangible Assets. Gain allocated to goodwill (Class VII) and intangible assets (Class VI) — to the extent such assets constitute capital assets or IRC §1231 property in the hands of the partnership — will generally be treated as long-term capital gain under IRC §741 when allocated to the members, provided the assets have been held for more than one year (which they have, as Lakewood has been operating since 2014). For individual taxpayers, long-term capital gain is currently taxed at a maximum federal rate of 20%, plus the 3.8% net investment income tax under IRC §1411, for a combined maximum rate of 23.8%.
We recommend that Seller's counsel, Catherine Greer of Whitfield, Ames & Greer LLP, coordinate closely with the Sellers' individual tax advisors on member-level tax planning in connection with the Transaction, including estimated tax payment planning and potential installment sale analysis (though the Transaction as currently structured does not contemplate installment payments, the escrow arrangements could, in certain circumstances, implicate the installment sale rules under IRC §453).
B. Crestline as a Disregarded Entity (Buyer)
As discussed in Section II.A above, Crestline is classified as a disregarded entity for federal income tax purposes under Treasury Regulation §301.7701-3(b)(1)(ii) because it is a domestic limited liability company with a single member that is a corporation (CPS Holdings, Inc.). Under the disregarded entity rules, the acquisition of Lakewood's assets is treated for federal income tax purposes as an acquisition by CPS Holdings, Inc. directly.
CPS Holdings, Inc. is a Delaware C-corporation subject to federal corporate income tax under IRC §11 at the current rate of twenty-one percent (21%). CPS Holdings files a consolidated federal income tax return (Form 1120) that includes all of its domestic subsidiaries that are themselves C-corporations; Crestline, as a disregarded entity, is not a separate taxpayer but is instead fully reflected in the consolidated return of CPS Holdings.
The principal tax implications for the Buyer arising from the Transaction structure are as follows:
(a) Stepped-Up Basis. CPS Holdings, through its disregarded subsidiary Crestline, will receive a cost basis in the Acquired Assets equal to the purchase price allocated to each asset under the IRC §1060 methodology described in Section V below. This cost basis "step-up" is the fundamental tax benefit of an asset purchase structure, as it permits the Buyer to depreciate and amortize the Acquired Assets based on their fair market values as of the Closing Date, rather than the Seller's historical tax basis (which, in many cases, may have been substantially depreciated or amortized).
(b) Depreciation and Amortization Deductions. CPS Holdings will be entitled to depreciation deductions on acquired tangible personal property under IRC §167 and §168 (MACRS), depreciation on acquired real property under IRC §168(c), and amortization of acquired intangible assets (including goodwill) under IRC §197 over a 15-year period. These deductions will offset CPS Holdings' consolidated taxable income, generating a significant "tax shield" that reduces the effective after-tax cost of the acquisition. The estimated annual tax benefits are quantified in Section V.C below.
(c) No Double Tax at Seller Level. Because Lakewood is a partnership (not a C-corporation), the asset sale does not trigger a "double tax" at the entity level — Lakewood itself owes no federal income tax, and the members are taxed only once on the gain flowing through to them. This eliminates one of the primary disadvantages of asset purchases involving C-corporation sellers, where the corporation recognizes gain on the asset sale and the shareholders recognize additional gain on the liquidating distribution.
IV. Inapplicability of IRC §338(h)(10) Election
Section 338(h)(10) of the Code permits a purchasing corporation and a selling consolidated group (or selling affiliate, or S corporation shareholders) to jointly elect to treat a "qualified stock purchase" of the stock of a target as a deemed sale of the target's assets. The §338(h)(10) election is a powerful planning tool in the context of acquisitions of C-corporation targets from consolidated groups or of S-corporation targets, because it allows the parties to achieve the tax benefits of an asset purchase (stepped-up basis for the buyer) without requiring the legal form of an asset transfer.
However, the §338(h)(10) election is unavailable in the present Transaction for three independent and dispositive reasons:
(a) Lakewood Is Not a Corporation. Section 338(h)(10) applies only to "qualified stock purchases" of a "target." Under IRC §338(d)(1), the term "target" means any corporation with respect to which a qualified stock purchase is made. Lakewood is a limited liability company classified as a partnership for federal tax purposes — it is not a corporation (whether C or S) within the meaning of the Code. Accordingly, Lakewood cannot be a "target" for purposes of §338.
(b) The Transaction Is an Actual Asset Purchase. The Transaction is structured as an actual purchase of substantially all assets of Lakewood, not as a purchase of membership interests. Section 338(h)(10) is relevant only where the legal form of the transaction is a stock (or membership interest) purchase and the parties wish to elect deemed asset sale treatment. Here, the legal form already is an asset sale; the election is unnecessary because the parties are achieving directly what §338(h)(10) would only achieve constructively.
(c) No "Qualified Stock Purchase." Even if Lakewood were a corporation and the Transaction were structured as an interest purchase, the requirements of IRC §338(d)(3) define a "qualified stock purchase" as the acquisition by one corporation of stock of another corporation meeting the requirements of IRC §1504(a)(2) — i.e., at least 80% of the total voting power and at least 80% of the total value of the stock — by purchase (within the meaning of IRC §338(h)(3)) during a 12-month acquisition period. No "stock" within the meaning of §338 is being acquired in this Transaction; membership interests in a partnership are not "stock."
Conclusion: IRC §338(h)(10) is inapplicable and unnecessary. The asset purchase structure already achieves the primary tax benefit that a §338(h)(10) election is designed to provide — namely, a stepped-up, fair market value cost basis in the acquired assets in the hands of the Buyer. From the Buyer's perspective, the asset purchase is the optimal structure, as it maximizes future depreciation and amortization deductions.
From the Sellers' perspective, Lakewood's partnership classification means that the members cannot achieve single-level corporate tax treatment regardless of how the Transaction is structured. The sale of assets by a partnership results in a flow-through of gain to the individual members, who are taxed at their respective individual rates. Unlike a sale of stock of a C-corporation (which might produce a single level of tax at preferential capital gains rates to the shareholders), the asset sale by a partnership produces a mix of ordinary income (to the extent of hot assets, depreciation recapture, and other ordinary income items) and long-term capital gain (to the extent of gain on goodwill, intangibles, and §1231 property). The members are, however, entitled to the benefit of the preferential long-term capital gains rates (currently a maximum of 20%, plus the 3.8% net investment income tax) on the capital gain component. On balance, the asset purchase structure is acceptable to both sides, as the Buyer achieves the desired basis step-up and the Sellers are not materially disadvantaged relative to any alternative structure.
V. IRC §1060 Purchase Price Allocation
A. Statutory and Regulatory Framework
Section 1060 of the Code governs the allocation of consideration in connection with any "applicable asset acquisition." An applicable asset acquisition is defined under IRC §1060(c) as any transfer (whether direct or indirect) of assets constituting a trade or business and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. The proposed Lakewood Transaction clearly constitutes an applicable asset acquisition: Crestline is acquiring assets that constitute a trade or business (the healthcare services operations of Lakewood), and Crestline's basis in the Acquired Assets will be determined wholly by reference to the consideration paid (i.e., the $140,000,000 purchase price, as adjusted).
Under IRC §1060(a), the consideration paid in an applicable asset acquisition must be allocated among the acquired assets using the "residual method" prescribed by IRC §338(b)(5). The residual method is further elaborated in Treasury Regulation §1.1060-1(c), which incorporates by reference the asset classification and allocation rules of Treasury Regulation §1.338-6(b). Under this methodology, the total consideration is allocated first to Class I assets, then to Class II, and so on through the seven asset classes, with any residual amount allocated to Class VII (goodwill and going concern value).
Both the Buyer and the Seller are required to use the residual method to allocate the purchase price, and both are required to report their respective allocations on IRS Form 8594 (Asset Acquisition Statement Under Section 1060), which must be attached to the parties' respective federal income tax returns for the taxable year in which the Transaction closes. The Form 8594 must include the total consideration paid, the allocation among the seven asset classes, and certain identifying information regarding the Transaction and the parties.
The seven asset classes under Treasury Regulation §1.338-6(b) are as follows:
Class I: Cash and general deposit accounts (including checking and savings accounts, but not certificates of deposit).
Class II: Actively traded personal property within the meaning of IRC §1092(d)(1), certificates of deposit, and foreign currency.
Class III: Accounts receivable, mortgages, and credit card receivables.
Class IV: Stock in trade (inventory) or property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.
Class V: All assets not described in Classes I through IV, VI, or VII, including tangible personal property, real property, and other assets not otherwise classified.
Class VI: All IRC §197 intangibles other than goodwill and going concern value, including but not limited to covenants not to compete, workforce in place, customer-based intangibles (patient lists and referral networks), government licenses and permits, franchise rights, trade names, and contract rights.
Class VII: Goodwill and going concern value.
It is imperative that Buyer and Seller agree on a single, consistent allocation and memorialize that agreement in a schedule to the APA. As discussed further in Section VIII, both parties must file consistent Forms 8594, and any inconsistency may trigger IRS scrutiny and potential adjustment.
B. Preliminary Allocation
Based on preliminary diligence data, management estimates, and comparable transaction benchmarks, we propose the following preliminary allocation of the $140,000,000 purchase price:
Notes to Preliminary Allocation:
Classes I through IV. Cash and cash equivalents, actively traded personal property, accounts receivable, and inventory are excluded from the Acquired Assets or are subject to the working capital adjustment mechanism. Working capital items (principally cash, accounts receivable, prepaid expenses, and current liabilities) are addressed through the working capital true-up provisions of the APA and are not part of the fixed $140,000,000 purchase price allocation. De minimis medical supplies inventory is expected to be captured within the working capital adjustment rather than allocated separately.
Class V — Tangible Personal Property ($12,400,000). This allocation reflects the estimated fair market value of medical and diagnostic equipment (including imaging equipment, laboratory instruments, patient monitoring systems, and examination room equipment), office furniture and fixtures, information technology hardware (servers, workstations, networking equipment), and leasehold improvements at the eleven clinic locations. This amount is preliminary and subject to a formal appraisal by a qualified independent appraiser to be commissioned prior to Closing.
Class V — Real Property ($11,800,000). This allocation reflects the appraised fair market values of the two owned real properties: (i) the Rochester Main facility at 450 East Ridge Road, Rochester, New York 14621 (appraised at $6,900,000), and (ii) the Syracuse facility (appraised at $4,900,000). The remaining nine facilities (six additional New York locations and three Pennsylvania locations in Scranton, Wilkes-Barre, and Towanda) are leased. Leasehold interests in those facilities are addressed as assumed contracts and, to the extent they have identifiable fair market value in excess of contractual obligation, are included in the Class VI intangible asset allocation.
Class VI — Intangible Assets ($42,300,000). This allocation encompasses all identifiable intangible assets other than goodwill and going concern value. A detailed breakdown is provided in Exhibit A and summarized as follows:
• Assembled workforce (approximately 410 FTEs, 38 physicians, 24 NPs/PAs)
• Patient lists and referral relationships
• Non-compete covenants from Dr. Raymond Alcott (3-year, 75-mile radius) and Dr. Nadia Petrosian (3-year, 75-mile radius)
• Managed care contract value (including the Meridian Shield contract, which represents approximately $17,248,000 in annual revenue and is a material concentration risk)
• CMS certifications for all eleven (11) facilities
• New York Article 28 Operating Certificates for the eight (8) New York facilities
• Pennsylvania facility licenses for the three (3) Pennsylvania facilities
• Trade name "Lakewood Regional Health Partners"
Class VII — Goodwill and Going Concern Value ($73,500,000). This amount is the residual — i.e., the difference between the total purchase price of $140,000,000 and the aggregate amount allocated to Classes I through VI ($66,500,000). The substantial goodwill component is consistent with the Transaction economics: the $140,000,000 purchase price implies a multiple of approximately 8.7x TTM Adjusted EBITDA ($16,100,000), and the excess of purchase price over identifiable tangible and intangible asset values reflects the value of Lakewood as a going concern, including its established market position, patient volume, brand reputation, and growth potential.
Consulting Agreements — Separately Stated Consideration. The Consulting Agreements to be entered into with Dr. Alcott ($450,000 per year for two years, totaling $900,000) and Dr. Petrosian ($375,000 per year for two years, totaling $750,000) constitute separately stated consideration and are not included in the $140,000,000 purchase price allocation. These payments will be deductible by Crestline/CPS Holdings as ordinary and necessary business expenses under IRC §162 when paid or incurred (depending on the taxpayer's method of accounting). The consulting fees will be reported as ordinary income by the recipients (Dr. Alcott and Dr. Petrosian) and will be subject to self-employment tax under IRC §1401. We recommend that the consulting arrangements be supported by a contemporaneous fair market value analysis of the services to be rendered, to mitigate the risk that the IRS could seek to recharacterize a portion of the consulting compensation as additional purchase price (which would be allocable to goodwill or other asset classes and would alter the tax consequences to both parties).
C. Tax Implications of Allocation — Buyer
The allocation of the purchase price among the asset classes determines the Buyer's depreciable and amortizable basis in the Acquired Assets, which in turn generates annual tax deductions that reduce CPS Holdings' federal income tax liability over the applicable recovery periods. The following summarizes the expected depreciation and amortization benefits:
Goodwill ($73,500,000) — IRC §197 Amortization. Goodwill acquired in a transaction constituting an applicable asset acquisition is an "amortizable section 197 intangible" under IRC §197(d)(1)(A). Section 197 intangibles are amortized ratably over a 15-year period beginning with the month in which the intangible is acquired. IRC §197(a). Assuming a Closing Date of August 15, 2025, the 15-year amortization period commences in August 2025. The annual amortization deduction for goodwill will be approximately $4,900,000 ($73,500,000 ÷ 15 years), with a pro-rated deduction in the first and last taxable years.
Intangible Assets ($42,300,000) — IRC §197 Amortization. The identifiable intangible assets allocated to Class VI — including patient lists and referral networks, non-compete covenants, assembled workforce, managed care contract value, trade name, and government licenses — are also amortizable section 197 intangibles. IRC §197(d)(1)(C) (customer-based intangibles), §197(d)(1)(E) (covenants not to compete), §197(d)(1)(B) (workforce in place), §197(d)(1)(D) (government licenses and permits), §197(d)(1)(F) (franchise, trademark, or trade name). The annual amortization deduction for Class VI intangible assets will be approximately $2,820,000 ($42,300,000 ÷ 15 years).
Real Property ($11,800,000) — MACRS Depreciation. Nonresidential real property is depreciable under IRC §168(c) using the straight-line method over a 39-year recovery period. IRC §168(b)(3)(A); §168(c)(1). Accordingly, the annual depreciation deduction for the two owned real properties will be approximately $302,564 ($11,800,000 ÷ 39 years), assuming the full allocated amount is depreciable. Important caveat: The land component of each property must be excluded from the depreciable basis, as land is not depreciable. IRC §167(a) (depreciation applies only to property used in a trade or business or held for the production of income and which has a determinable useful life). We anticipate that the independent appraisals will separately value the land and improvements for each property. If, for example, land constitutes 20% of the Rochester Main facility value ($1,380,000) and 15% of the Syracuse facility value ($735,000), the aggregate depreciable basis would be reduced to approximately $9,685,000, yielding an annual depreciation deduction of approximately $248,333.
Tangible Personal Property ($12,400,000) — Bonus Depreciation and MACRS. Tangible personal property is eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System ("MACRS"). Medical and diagnostic equipment generally falls within the 5-year recovery period class (Asset Class 57.0 — Distributive Trades and Services), while office furniture and fixtures generally fall within the 7-year recovery period class (Asset Class 00.11). Additionally, tangible personal property placed in service in 2025 may be eligible for first-year bonus depreciation under IRC §168(k). However, under the phase-down schedule enacted by the Tax Cuts and Jobs Act of 2017 ("TCJA"), the bonus depreciation percentage for property placed in service in calendar year 2025 is 40% (reduced from 60% in 2024 and 80% in 2023). IRC §168(k)(6)(A).
Assuming a hypothetical allocation of $8,000,000 to 5-year property (medical equipment) and $4,400,000 to 7-year property (furniture, fixtures, and IT equipment), and applying 40% bonus depreciation:
• 5-year property: 40% bonus depreciation on $8,000,000 = $3,200,000 first-year bonus. Remaining basis of $4,800,000 depreciated under MACRS 200% declining balance method; first-year regular MACRS deduction of approximately $960,000 (20% of $4,800,000). Total first-year deduction: approximately $4,160,000.
• 7-year property: 40% bonus depreciation on $4,400,000 = $1,760,000 first-year bonus. Remaining basis of $2,640,000 depreciated under MACRS 200% declining balance method; first-year regular MACRS deduction of approximately $377,143 (14.29% of $2,640,000). Total first-year deduction: approximately $2,137,143.
• Aggregate first-year depreciation on tangible personal property: approximately $6,297,143.
In addition, CPS Holdings may elect to expense a portion of the cost of qualifying property under IRC §179, subject to the annual dollar limitation ($1,220,000 for 2025, as adjusted for inflation) and the investment limitation (phase-out begins when total qualifying property placed in service during the taxable year exceeds $3,050,000). Given the size of CPS Holdings' overall capital expenditures, the §179 investment limitation may apply; this should be evaluated in the context of CPS Holdings' consolidated tax position.
Summary of Estimated Annual Tax Shield. The aggregate annual depreciation and amortization deductions from the Acquired Assets, once fully phased in (i.e., after the first year), are estimated as follows:
At the current federal corporate income tax rate of 21%, these deductions generate an annual federal income tax shield of approximately $1,988,350 to $2,104,738, exclusive of any state income tax benefit. Over the 15-year amortization period for goodwill and intangible assets, the cumulative federal tax savings from amortization alone (on the $115,800,000 of combined Class VI and VII assets) would be approximately $24,318,000 ($115,800,000 × 21%), significantly reducing the effective after-tax cost of the acquisition. The present value of these tax benefits, discounted at CPS Holdings' weighted average cost of capital, should be considered in evaluating the overall economics of the Transaction.
D. Tax Implications of Allocation — Seller
At the Lakewood partnership level, the sale of assets will result in the recognition of gain equal to the difference between the amount realized (the $140,000,000 purchase price, as allocated among the asset classes, plus any liabilities assumed by the Buyer that are treated as additional consideration) and Lakewood's adjusted tax basis in each asset sold. The character of the gain recognized on each asset class depends on the nature of the asset in the hands of the Seller:
Ordinary Income Components:
(a) Accounts Receivable — IRC §751(a) "Hot Assets." Although accounts receivable are generally excluded from the Acquired Assets and addressed through the working capital adjustment, to the extent any receivables are transferred (including unbilled receivables or receivables for services performed prior to Closing but billed thereafter), the gain attributable to such receivables constitutes "unrealized receivables" under IRC §751(c) and is treated as ordinary income. In an asset sale by a partnership (as opposed to a sale of partnership interests), the hot asset rules of §751(a) do not technically apply directly — §751(a) governs the sale of a partnership interest, while §751(b) governs distributions. However, the character of gain at the partnership level flows through to the partners, and amounts received for accounts receivable in excess of their adjusted basis are ordinary income at the partnership level in any event.
(b) Depreciation Recapture — IRC §1245. Gain on the sale of Class V tangible personal property (medical equipment, furniture, fixtures, IT hardware) is treated as ordinary income under IRC §1245(a)(1) to the extent of depreciation previously deducted with respect to such property. Based on preliminary review of Lakewood's depreciation schedules, substantial depreciation has been claimed on equipment and fixtures acquired since 2014, and we expect the §1245 recapture to be significant relative to the $12,400,000 allocation.
(c) Depreciation Recapture — IRC §1250. Gain on the sale of Class V real property is treated as ordinary income under IRC §1250(a) to the extent of "additional depreciation" (depreciation in excess of straight-line). As noted above, because the Rochester Main and Syracuse facilities are nonresidential real property depreciated under MACRS using the straight-line method, §1250 recapture should be minimal. However, "unrecaptured section 1250 gain" (the excess of gain over the amount treated as ordinary income under §1250, but not exceeding the total depreciation claimed) is taxed at a maximum rate of 25% for individual taxpayers under IRC §1(h)(1)(E), rather than the standard long-term capital gains rate of 20%.
Capital Gain Components:
(d) IRC §1231 Gain on Real Property. Gain on the sale of the Rochester Main and Syracuse facilities, to the extent not treated as ordinary income under §1250 or as unrecaptured §1250 gain, constitutes §1231 gain. If net §1231 gains for the taxable year exceed net §1231 losses, the net §1231 gain is treated as long-term capital gain (subject to the five-year lookback rule of §1231(c)).
(e) Goodwill and Intangible Assets. Gain allocated to Class VII (goodwill) and Class VI (intangible assets) generally constitutes long-term capital gain under IRC §741, as these assets are capital assets or §1231 property in the hands of Lakewood and have been held for more than one year. This will be the largest component of gain flowing through to the members and will be taxed at the preferential long-term capital gains rate (maximum 20% plus 3.8% net investment income tax, for a combined maximum rate of 23.8%).
Flow-Through to Members. The gain recognized by Lakewood at the partnership level will be allocated between Dr. Alcott (60%) and Dr. Petrosian (40%) in accordance with the Lakewood Operating Agreement. Each member's distributive share of the gain will be reported on their individual Schedule K-1 (Form 1065) and will be included in their individual federal income tax returns for the taxable year of the sale. We estimate that the approximate gross gain to Lakewood on the Transaction will be substantial, given that Lakewood's aggregate adjusted tax basis in its assets is likely significantly below the $140,000,000 purchase price. A precise calculation requires access to Lakewood's full depreciation schedules and asset basis records, which are being obtained as part of tax due diligence.
We recommend that the APA include a mutual agreement on the Form 8594 purchase price allocation and a covenant by both parties to file consistent allocations on their respective tax returns, to avoid the IRS adjustment risk that arises when the buyer and seller report different allocations. We further recommend that Seller's counsel, Catherine Greer of Whitfield, Ames & Greer LLP, coordinate with the individual tax advisors of Dr. Alcott and Dr. Petrosian to ensure proper reporting and estimated tax payment planning, particularly with respect to the ordinary income components and the estimated federal and state tax liability arising from the Transaction.
VI. State and Local Tax Considerations
A. New York and Pennsylvania Real Property Transfer Taxes
The Transaction involves the conveyance of two owned real properties, both of which are located in New York State:
(i) Rochester Main Facility: 450 East Ridge Road, Rochester, New York 14621 (Monroe County). Appraised value: $6,900,000.
(ii) Syracuse Facility: Address per diligence (Onondaga County). Appraised value: $4,900,000.
The remaining nine facilities (six additional New York locations and three Pennsylvania locations in Scranton, Wilkes-Barre, and Towanda) are leased and do not involve a conveyance of fee simple real property interests. Accordingly, real property transfer tax applies only to the two owned properties identified above.
New York State Real Estate Transfer Tax (NY Tax Law §1402). New York imposes a real estate transfer tax on each conveyance of real property or interest therein where the consideration exceeds $500. The base rate under NY Tax Law §1402(a) is $2.00 for each $500 of consideration, or fractional part thereof, which equates to a rate of 0.4%. In addition, under NY Tax Law §1402-a, an "additional tax" is imposed on conveyances of real property (other than residential real property) where the consideration for the entire conveyance is $2,000,000 or more. The additional tax rate is 0.65% of the consideration attributable to the commercial real property conveyed.
Application to the Rochester Main facility ($6,900,000):
• Base transfer tax (0.4%): $6,900,000 × 0.004 = $27,600
• Additional tax (0.65% on full consideration, as consideration exceeds $2,000,000): $6,900,000 × 0.0065 = $44,850
• Total Rochester transfer tax: $72,450
Application to the Syracuse facility ($4,900,000):
• Base transfer tax (0.4%): $4,900,000 × 0.004 = $19,600
• Additional tax (0.65%): $4,900,000 × 0.0065 = $31,850
• Total Syracuse transfer tax: $51,450
The New York City real property transfer tax (NYC Admin. Code §11-2102) is inapplicable, as both properties are located upstate (Monroe County and Onondaga County, respectively). The New York "mansion tax" imposed under NY Tax Law §1402-b is also inapplicable, as it applies only to conveyances of residential real property with consideration of $1,000,000 or more.
Estimated Aggregate New York Transfer Taxes:
Note: Our original estimate of $118,000 was based on preliminary figures and has been refined. The revised aggregate estimate is approximately $123,900, subject to final determination based on the actual consideration allocated to each property at Closing.
Pennsylvania Realty Transfer Tax. The Pennsylvania Realty Transfer Tax (72 P.S. §8102-C.3) imposes a state transfer tax of 1% on the value of real estate transferred, in addition to local transfer taxes that vary by municipality (typically 1%, for an aggregate rate of 2% in most jurisdictions). However, as noted above, all three Pennsylvania facilities (Scranton, Wilkes-Barre, and Towanda) are leased — Lakewood does not own the underlying real property. Accordingly, no Pennsylvania realty transfer tax applies to the conveyance of fee simple real property in connection with the Transaction.
We note that Pennsylvania does have provisions addressing the transfer of leasehold interests. Under 72 P.S. §8101-C, a "document" subject to the realty transfer tax includes a lease for a term of thirty (30) years or more (including renewal periods). We should confirm during diligence that the lease terms (including any renewal options) for the Scranton, Wilkes-Barre, and Towanda facilities do not exceed the 30-year threshold. If any lease, including renewals, has a term of 30 years or more and the leasehold interest is being transferred as part of the Transaction, a Pennsylvania realty transfer tax would apply to the value of the leasehold interest transferred.
Allocation of Transfer Taxes. The APA provides for the equal splitting of all real property transfer taxes between Buyer and Seller. Based on the revised estimated aggregate of $123,900, each party's share would be approximately $61,950.
B. Bulk Sale Tax Clearance — New York
New York Tax Law §1141(c) imposes significant obligations on purchasers in bulk sale transactions. Section 1141(c) provides that whenever a person required to collect sales tax (a "vendor") makes a sale, transfer, or assignment in bulk of any part or the whole of the vendor's business assets (other than in the ordinary course of business), the purchaser shall, at least ten (10) days before taking possession of such assets or paying therefor, notify the Commissioner of Taxation and Finance of the proposed sale by filing Form AU-196.10 (Notification of Sale, Transfer or Assignment in Bulk and of Abandonment).
The consequences of non-compliance are severe: if the purchaser fails to give the required notification, or if the purchaser fails to withhold a sufficient portion of the purchase price to cover any sales taxes, use taxes, or prepaid sales tax on motor fuel owed by the vendor, the purchaser becomes personally liable for the payment of all such taxes owed by the vendor to the extent of the purchase price. NY Tax Law §1141(c).
Recommended Course of Action:
1. File Form AU-196.10 promptly after APA execution. The APA is targeted for execution on June 16, 2025. We recommend that Form AU-196.10 be prepared and filed with the New York Department of Taxation and Finance no later than June 26, 2025 — which is ten (10) business days following APA execution and well in advance of the estimated Closing Date of August 15, 2025. The notification must include the name and address of the seller, the name and address of the purchaser, the date of the proposed transfer, and the purchase price.
2. Obtain Bulk Sale Tax Clearance Certificate (Form AU-197). The Seller should apply for and obtain a Clearance of Lien certificate (Form AU-197) from the New York Department of Taxation and Finance, confirming that Lakewood has no outstanding sales tax liabilities or that all such liabilities have been satisfied. We recommend that the issuance of a satisfactory Form AU-197 be included as a condition to Closing in the APA. The NYS Department of Taxation and Finance generally processes clearance requests within 30 to 45 days, though expedited processing may be available.
3. Escrow or holdback for unpaid taxes. If a clearance certificate cannot be obtained prior to Closing, the parties should consider establishing an escrow holdback from the purchase price in an amount sufficient to cover any potential sales tax liabilities of the Seller, to be released upon receipt of the clearance certificate.
Pennsylvania Tax Clearance. Although Pennsylvania does not have an identical "bulk sale" notification statute, Pennsylvania law does provide for tax clearance certificates in connection with business asset transfers. Under 72 P.S. §7240, a purchaser of business assets may be held liable for unpaid Pennsylvania taxes of the seller unless the purchaser obtains a tax clearance certificate from the Pennsylvania Department of Revenue. The application is submitted on Form REV-181 (Application for Tax Clearance). Given that Lakewood operates three facilities in Pennsylvania (Scranton, Wilkes-Barre, and Towanda) with associated revenue, employees, and Pennsylvania tax obligations, we recommend that Crestline require Lakewood to obtain a Pennsylvania tax clearance certificate (REV-181) as a condition to Closing, in addition to the New York clearance certificate. The Pennsylvania Department of Revenue typically processes clearance requests within 30 to 60 days.
C. Sales Tax Exemption — Casual or Isolated Sale
An important threshold question is whether the transfer of tangible personal property (medical equipment, furniture, fixtures, IT hardware) in connection with the Transaction is subject to New York State and local sales tax.
New York Analysis. New York Tax Law §1105 imposes sales tax on the retail sale of tangible personal property. However, the tax applies only to sales by "vendors" as defined in NY Tax Law §1101(b)(8). Under NY Tax Law §1101(b)(5)(vi), the definition of a "sale" (and, correspondingly, the obligation to collect sales tax) generally applies only to sales made by persons regularly engaged in the business of selling the types of tangible personal property being transferred. A person making "isolated or occasional sales" of tangible personal property is not considered a "vendor" for sales tax purposes, provided such sales are not part of the person's regular course of business.
Lakewood is a healthcare services provider. It is not regularly engaged in the business of selling medical equipment, furniture, fixtures, or information technology hardware to third parties. The transfer of these items in connection with the bulk sale of Lakewood's business assets is a one-time transaction that does not constitute a "sale" in the ordinary course of Lakewood's business. Accordingly, the transfer of tangible personal property incident to the Transaction should qualify as a casual or isolated sale and should be exempt from New York sales and use tax.
We note that the casual sale exemption analysis is fact-specific, and there is limited formal guidance from the New York Department of Taxation and Finance on the application of the exemption in the context of bulk asset acquisitions of healthcare practices. However, the weight of authority — including Tax Appeals Tribunal precedent and advisory opinions — supports the position that the bulk transfer of business assets in a one-time transaction by a seller that is not in the business of selling such assets constitutes a casual or isolated sale and is not subject to sales tax.
It is important to emphasize that the casual sale exemption and the bulk sale notification requirement (discussed in Section VI.B above) are independent obligations. Compliance with the Form AU-196.10 filing and the Form AU-197 clearance certificate process does not create or negate the casual sale exemption, and vice versa. Both procedures should be followed.
Pennsylvania Analysis. Pennsylvania similarly provides a casual sale exemption under its Sales and Use Tax Act. Under 72 P.S. §7201(c), the definition of a "sale at retail" subject to sales tax excludes an "isolated transaction" involving tangible personal property or services by a person who is not regularly engaged in such sales. The transfer of tangible personal property in connection with the sale of Lakewood's Pennsylvania operations (the Scranton, Wilkes-Barre, and Towanda facilities) should qualify as an isolated transaction exempt from Pennsylvania sales and use tax. We note that the Pennsylvania regulation at 61 Pa. Code §31.22 provides additional guidance on the casual sale exemption, and we will confirm applicability during diligence.
Conclusion. The transfer of tangible personal property in the Transaction should be exempt from both New York and Pennsylvania sales and use tax under the casual or isolated sale exemption. No sales tax collection or remittance obligation should arise in connection with the transfer of equipment, furniture, fixtures, and other tangible personal property included in the Acquired Assets.
VII. Additional Federal Tax Considerations
A. Assumed Liabilities
Under general tax principles, liabilities assumed by the Buyer in connection with an asset acquisition are treated as additional consideration paid by the Buyer for the acquired assets. See, e.g., Treas. Reg. §1.1001-2 (relief from liabilities treated as an amount realized); Commissioner v. Tufts, 461 U.S. 300 (1983). In the context of an IRC §1060 allocation, assumed liabilities increase the total consideration allocable among the seven asset classes. See Treas. Reg. §1.1060-1(c)(1).
The principal Assumed Liabilities identified in the APA include:
(i) Accrued Paid Time Off (PTO): Approximately $1,340,000 in accrued but unused PTO for the approximately 410 Lakewood employees who will be offered employment by Crestline. This liability represents an obligation to provide compensated absences to continuing employees after Closing.
(ii) Imaging Equipment Lease Obligations: The outstanding lease balance on three imaging equipment leases with Marlowe Asset Management Medical Equipment Finance ("Marlowe Asset Management MEF") — Lease Nos. VML-2023-1140, VML-2023-1141, and VML-2024-0219 — in the aggregate amount of approximately $2,870,000. These leases cover MRI, CT, and digital radiography equipment at the Rochester Main and Syracuse facilities.
(iii) Assumed Contracts: The APA provides for the assumption of certain executory contracts, including:
• Clearpath EHR License Agreement No. CP-ENT-2022-0487 (annual license fee: $840,000)
• Redstone Diagnostics reference laboratory services agreement (annual spend: approximately $1,600,000)
• Managed care contracts, including the Meridian Shield agreement (approximately $17,248,000 in annual revenue)
• Facility leases for the nine leased locations
• Various other vendor, service, and employment agreements identified in the APA schedules
Tax Treatment. The accrued PTO liability ($1,340,000) and the imaging equipment lease balance ($2,870,000) increase the total consideration for purposes of the §1060 allocation by $4,210,000, bringing the total allocable consideration to approximately $144,210,000 (before working capital adjustments and other purchase price modifications). However, the treatment of assumed liabilities in the §1060 context depends on their character:
• Accrued PTO: The assumption of the accrued PTO obligation effectively represents additional consideration paid to the Seller (because the Seller is relieved of the liability). The $1,340,000 is allocable under §1060 in the same manner as cash consideration. When Crestline subsequently pays the accrued PTO to employees, the payments will be deductible as compensation expense under IRC §162, but only to the extent the accrued PTO was not already reflected in the purchase price allocation. Under the "economic performance" rules of IRC §461(h), the deduction for the assumed PTO liability is generally allowable when the PTO is actually used by the employees (i.e., when economic performance occurs).
• Equipment Lease Obligations: The treatment of assumed lease obligations depends on whether the leases are characterized as true leases or as conditional sales (capital leases) for federal income tax purposes. If the Marlowe Asset Management MEF leases are true leases, the assumption transfers the lessee's rights and obligations under the lease, and future lease payments are deductible by Crestline as rental expense under IRC §162. If any lease is recharacterized as a conditional sale, the assumed balance is treated as a purchase price for the equipment, and the equipment's basis includes the assumed debt. We recommend that the lease terms be reviewed to determine proper characterization.
• Assumed Executory Contracts: The assumption of executory contracts (where both parties have ongoing performance obligations) generally does not give rise to additional consideration for §1060 purposes to the extent the contract is at market terms (i.e., the present value of future obligations approximately equals the present value of future benefits). To the extent any assumed contract has above-market or below-market terms, the difference may be treated as an intangible asset (favorable contract) or assumed liability (unfavorable contract) and allocated to Class VI.
We will refine the treatment of assumed liabilities in the §1060 allocation upon completion of diligence and finalization of the APA schedules.
B. Transaction Costs — Deductibility vs. Capitalization
IRC §263 and Treasury Regulation §1.263(a)-5 govern the treatment of amounts paid to facilitate the acquisition of a trade or business. Under Treas. Reg. §1.263(a)-5(a), a taxpayer must capitalize amounts paid to "facilitate" certain transactions, including the acquisition of assets constituting a trade or business. "Facilitate" is broadly defined to include amounts paid in the process of investigating or pursuing a transaction, including fees for legal, accounting, financial advisory, and other professional services.
The total estimated transaction expenses for the Transaction are approximately $10,438,000, composed of the following:
Capitalization vs. Current Deduction Analysis:
(a) Capitalizable Costs. Under Treas. Reg. §1.263(a)-5(e), amounts paid to facilitate an acquisition of a trade or business must be capitalized. This includes the financial advisory fee (Ridgepoint, $2,100,000), the R&W insurance premium (Keystone Mutual, $980,000), and portions of legal and accounting fees directly attributable to the consummation of the Transaction (as opposed to due diligence or general investigation). Capitalizable costs are added to the Buyer's basis in the Acquired Assets and are recovered through depreciation and amortization over the applicable recovery periods. To the extent capitalizable costs are allocable to goodwill or intangible assets, they are amortized over 15 years under IRC §197; to the extent allocable to tangible assets, they are depreciated under MACRS.
(b) Potentially Deductible Costs. Under Treas. Reg. §1.263(a)-5(e)(2), amounts paid for "employee compensation" and "overhead" are not required to be capitalized, even if related to the acquisition. Additionally, under Treas. Reg. §1.263(a)-5(d)(1), amounts paid in the process of "investigating" a transaction (as opposed to "pursuing" or "consummating" it) may be currently deductible, although the distinction between investigation and pursuit is fact-intensive and often litigated. Portions of the legal and accounting fees attributable to pre-LOI due diligence (i.e., before the issuance of a binding letter of intent or the commencement of negotiations toward a binding agreement) may be currently deductible under the "bright-line date" rule of Treas. Reg. §1.263(a)-5(e)(1).
(c) Financing Costs. The $1,260,000 in fees payable to Ironclad National Bank (Kenneth Boateng) for the incremental term loan are not costs of acquiring the Lakewood assets but rather costs of obtaining financing. These costs are generally deductible over the term of the credit facility under IRC §461 and Treas. Reg. §1.446-5. Original issue discount ("OID

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