1001-00006 · Ardent Capital Partners · Rollover Equity

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

From: Leonard Cross, Partner, and Robert Jansen, Senior Associate Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006

To: Marcus Pellegrino, Partner, Healthcare Ardent Capital Partners III LP 600 Lexington Avenue, 38th Floor New York, NY 10022

CC: Claire Ashworth, Co-Founder & Managing Partner, Ardent Capital Partners III LP Thomas Kundra, Harcourt Shaw & DeVries LLP (buyer's M&A counsel)

Date: March 8, 2024

Re: Tax Treatment of Unvested Rollover Equity — Profits Interest Analysis and Section 83(b) Election Guidance; Acquisition of Pinnacle Health Services Group LLC

Engagement Number: 1001-00006

Matter Number: 1001-00006

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I. Executive Summary

This memorandum analyzes the federal income tax treatment of unvested Class B Units of Ardent Healthcare Holdings LLC ("Holdings LLC") to be received by the three rollover participants — Dr. Raymond Carvallo (Co-Founder and Chief Executive Officer of Pinnacle Health Services Group LLC ("Pinnacle")), Dr. Nadia Ostrowski (Co-Founder and Chief Medical Officer of Pinnacle), and Jonathan Farnsworth (Chief Financial Officer of Pinnacle) — in connection with Ardent Capital Partners III LP's ("Fund III") acquisition of Pinnacle at an enterprise value of approximately $412 million (the "Transaction").

The rollover equity will be structured as Class B Units of Holdings LLC, a Delaware limited liability company that has elected, and will maintain, classification as a partnership for federal income tax purposes. Holdings LLC will serve as the primary equity aggregator vehicle in the post-closing capital structure, holding Fund III's committed equity, the rollover equity contributed by the three participants, and a reserved pool for management incentive equity.

The total rollover equity is $59.54 million, allocated as follows: $32.41 million to Dr. Carvallo, $24.18 million to Dr. Ostrowski, and $2.95 million to Mr. Farnsworth. Of the aggregate rollover amount, fifty percent (50%) vests immediately upon closing of the Transaction, and the remaining fifty percent (50%), or $29.77 million in the aggregate, vests ratably over a 36-month period following the closing date, subject to continued employment of each participant with Pinnacle or its successor entity as a condition to vesting. The unvested component is allocated as follows: $16.21 million to Dr. Carvallo, $12.09 million to Dr. Ostrowski, and $1.48 million to Mr. Farnsworth.

Based on our analysis of the applicable federal income tax authorities, including Sections 83 and 721 of the Internal Revenue Code of 1986, as amended (the "Code"), Revenue Procedure 93-27, Revenue Procedure 2001-43, and relevant case law and administrative guidance, we recommend the following:

1. The unvested Class B Units should be structured as "profits interests" within the meaning of Revenue Procedure 93-27 and Revenue Procedure 2001-43, with a participation threshold equal to the aggregate fair market value of Holdings LLC as of the closing date, such that the Class B Units have a liquidation value of zero at grant.

2. Each rollover participant should file a protective election under Section 83(b) of the Code within thirty (30) days of the closing date of the Transaction.

3. Holdings LLC should treat each Class B holder as a partner from the date of grant (i.e., the closing date), allocating distributive share items of partnership income, gain, loss, deduction, and credit to each such holder during the vesting period, consistent with the requirements of Revenue Procedure 2001-43.

The anticipated closing date of the Transaction is May 31, 2024. Accordingly, the deadline for filing the Section 83(b) election is June 30, 2024. As discussed in further detail in Section V below, this deadline is statutory, mandatory, and cannot be extended under any circumstances.

II. Background and Transaction Summary

A. Transaction Structure

Ardent Capital Partners III LP, a Delaware limited partnership with a $3.2 billion fund size (vintage 2022), managed by Ardent Capital Management LLC, is acquiring 100% of the outstanding membership interests in Pinnacle Health Services Group LLC through a reverse merger transaction. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), signed March 15, 2024, Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and indirect wholly owned subsidiary of Holdings LLC, will merge with and into Pinnacle, with Pinnacle surviving as a wholly owned subsidiary of Holdings LLC (through an intermediate entity). This reverse merger structure preserves Pinnacle's existing contracts, licenses, Medicare and Medicaid provider agreements, and state regulatory approvals, which is critical in the healthcare services context.

The post-closing organizational structure consists of a three-tier acquisition architecture:

(i) Ardent Healthcare Holdings LLC (EIN 93-2187445), a Delaware limited liability company classified as a partnership for federal income tax purposes, which serves as the top-level equity aggregator vehicle;

(ii) Ardent Healthcare Intermediate Inc. (EIN 93-2187512), a Delaware corporation organized as a C-corporation "Blocker" entity, which is a wholly owned subsidiary of Holdings LLC and which serves to accommodate any tax-exempt or foreign investors in Fund III that require blocker protection from unrelated business taxable income or effectively connected income; and

(iii) Pinnacle Health Services Group LLC (EIN 82-1947632), the surviving entity in the reverse merger, which will be a wholly owned subsidiary of Intermediate Inc. and will continue to operate the healthcare services business.

Holdings LLC serves as the equity aggregator for three categories of equity: (a) Fund III's committed equity investment of $198.5 million; (b) the rollover equity contributed by Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth in the aggregate amount of $59.54 million; and (c) a reserved pool for management incentive equity to be granted to key Pinnacle employees and future hires, the terms of which are beyond the scope of this memorandum. The remaining Transaction consideration is funded by a combination of first lien term loan debt ($150 million, arranged by Dunmore Savings Bank and Halcyon National Bank) and mezzanine debt ($45 million, provided by Cascadia Mezzanine Fund IV LP, with associated warrants for 2.5% of fully diluted equity in Holdings LLC).

The Merger Agreement was executed on March 15, 2024, and the Transaction is subject to customary closing conditions, including receipt of Hart-Scott-Rodino clearance (filing made February 28, 2024), state regulatory approvals in Pennsylvania, New Jersey, and Maryland, and the absence of a material adverse effect. The anticipated closing date is May 31, 2024.

B. Rollover Participants and Amounts

The three rollover participants are each existing members of Pinnacle who will contribute a portion of their Pinnacle membership interests to Holdings LLC in exchange for Class B Units. The rollover amounts are determined by reference to the equity value of Pinnacle implied by the $412 million enterprise value, less approximately $72.6 million in net debt and transaction expenses, yielding an equity value of approximately $339.4 million. The rollover percentage and corresponding amounts for each participant are set forth below:

Dr. Raymond Carvallo — Dr. Carvallo holds 38.2% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $129.65 million (38.2% × $339.4 million). Dr. Carvallo has agreed to roll over 25% of his gross equity proceeds, or $32.41 million, into Class B Units of Holdings LLC. The remaining 75%, or $97.24 million, will be received in cash at closing.

Dr. Nadia Ostrowski — Dr. Ostrowski holds 28.5% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $96.73 million (28.5% × $339.4 million). Dr. Ostrowski has agreed to roll over 25% of her gross equity proceeds, or $24.18 million, into Class B Units of Holdings LLC. The remaining 75%, or $72.55 million, will be received in cash at closing.

Jonathan Farnsworth — Mr. Farnsworth holds 5.8% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $19.69 million (5.8% × $339.4 million). Mr. Farnsworth has agreed to roll over 15% of his gross equity proceeds, or $2.95 million, into Class B Units of Holdings LLC. The remaining 85%, or $16.74 million, will be received in cash at closing.

The total rollover equity is $59.54 million, representing approximately 23.08% of post-closing equity on a pre-dilution basis ($59.54 million divided by $258.04 million in total equity, consisting of Fund III's $198.5 million plus the $59.54 million rollover), and approximately 22.50% of post-closing equity on a fully diluted basis after giving effect to the 2.5% equity warrants issued to Cascadia Mezzanine Fund IV LP in connection with the mezzanine financing. The remaining membership interests in Pinnacle (27.5%, held by minority physician partners and passive investors) will be fully cashed out at closing and are not subject to rollover.

C. Vesting Terms

The Class B Units issued to each rollover participant will be subject to the following vesting terms, as set forth in the Holdings LLC Amended and Restated Limited Liability Company Operating Agreement (the "LLC Agreement"), which is currently in draft form and under negotiation among the parties:

(a) Immediate Vesting at Closing. Fifty percent (50%) of each participant's Class B Units will vest immediately upon the closing of the Transaction. This vested component represents the portion of the rollover that is not subject to any service-based or time-based conditions and is treated as a fully vested equity interest from the closing date.

(b) Time-Based Vesting of Remaining Units. The remaining fifty percent (50%) of each participant's Class B Units will vest ratably over a 36-month period following the closing date, with 1/36th of the unvested units vesting on each monthly anniversary of the closing date. The first vesting date will be June 30, 2024, and full vesting will occur on May 31, 2027, assuming continued compliance with the applicable vesting conditions.

(c) Continued Employment Condition. For each of Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth, the vesting of the unvested Class B Units is conditioned upon the participant's continued employment with Pinnacle (or its successor) through the applicable vesting date. For purposes of the vesting condition, "employment" is defined broadly to include service in any executive officer capacity with Pinnacle or any of its subsidiaries, as well as service on the board of managers of Holdings LLC.

(d) Forfeiture. Upon the termination of a participant's employment for any reason (other than as described below with respect to accelerated vesting), any unvested Class B Units held by such participant as of the date of termination will be forfeited and will revert to Holdings LLC for redistribution to the management incentive equity pool or cancellation, as determined by the board of managers of Holdings LLC in its discretion.

(e) Accelerated Vesting. Accelerated vesting provisions may apply upon the occurrence of certain specified events, including (i) a change of control of Holdings LLC (as defined in the LLC Agreement), (ii) termination of the participant's employment without "cause" (as defined), (iii) resignation by the participant for "good reason" (as defined), or (iv) the death or disability of the participant. The specific terms of the accelerated vesting provisions are currently under negotiation and will be finalized in the LLC Agreement. A cross-reference to the LLC Agreement tax provisions markup prepared by Calderwood & Harkness, dated March 10, 2024, is appropriate here, and we note that the accelerated vesting terms must be reviewed for consistency with the profits interest analysis set forth in this memorandum.

The unvested component for each participant is as follows: Dr. Carvallo — $16.21 million; Dr. Ostrowski — $12.09 million; and Mr. Farnsworth — $1.48 million. The aggregate unvested component is $29.77 million.

D. Class B Unit Economics

The economic terms of the Class B Units are specifically designed to satisfy the requirements for treatment as "profits interests" under Revenue Procedure 93-27 and Revenue Procedure 2001-43. The key structural features are as follows:

Participation Threshold. The Class B Units participate in distributions from Holdings LLC only to the extent that the aggregate value of Holdings LLC exceeds a specified threshold (the "participation threshold"). The participation threshold is set equal to the aggregate fair market value of Holdings LLC as of the closing date, as determined by reference to the Transaction enterprise value, the capital account waterfall, and any independent valuation obtained as of the closing date. By setting the participation threshold at the closing-date fair market value, the Class B Units are entitled to share only in the appreciation in value of Holdings LLC that accrues after the closing date.

Sharing in Appreciation. Above the participation threshold, the Class B Units share in distributions on a pro rata basis with the Class A Units, in accordance with the distribution waterfall set forth in the LLC Agreement. The precise sharing percentages and waterfall mechanics (including any carried interest hurdle rates or preferred return provisions applicable to Fund III's Class A Units) are set forth in the LLC Agreement and are not material to the profits interest analysis.

Class A Unit Treatment. The Class A Units held by Fund III, and the Class A Units received by the rollover participants in respect of the vested portion of their rollover (described below), participate in distributions from dollar one — that is, without regard to any participation threshold. The Class A Units represent the "capital interests" in Holdings LLC.

Distinction Between Vested and Unvested Rollover. It is important to clarify the structural distinction between the vested and unvested components of each participant's rollover. The vested portion of the rollover (50% vesting at closing) will be exchanged for a combination of Class A Units and Class B Units — with the Class A component reflecting the participant's share of the closing-date fair market value of Holdings LLC, and the Class B component reflecting the participant's right to share in post-closing appreciation. The unvested portion of the rollover (50%, subject to time-based vesting) will be structured entirely as Class B profits interests, with a liquidation value of zero at grant. This distinction is critical: the unvested 50% is specifically designed to have no value in a hypothetical liquidation of Holdings LLC at closing-date fair market value, thereby satisfying the "profits interest" definition. The capital account of each participant attributable to the unvested Class B Units will be zero at grant, and all economic value will accrue only to the extent of post-closing appreciation above the participation threshold.

This structure ensures that the unvested rollover equity is treated as a profits interest for federal income tax purposes, while the vested rollover equity is treated as a capital contribution under Section 721 of the Code, as discussed in Section VIII below.

III. Federal Income Tax Framework — Section 83 and Partnership Profits Interests

A. Section 83 Generally

Section 83(a) of the Internal Revenue Code provides the general rule governing the taxation of property transferred in connection with the performance of services. Specifically, Section 83(a) provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of (i) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (ii) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are either (x) transferable or (y) not subject to a substantial risk of forfeiture, whichever is applicable.

In the context of unvested Class B Units issued to the rollover participants, the relevant application of Section 83(a) is as follows. The Class B Units constitute "property" within the meaning of Section 83. The transfer of the Class B Units is made "in connection with the performance of services" because the vesting of the unvested component is conditioned upon continued employment with Pinnacle — a service-based condition. The "substantial risk of forfeiture" is the time-based vesting condition: namely, the requirement that each participant continue to provide services to Pinnacle (or its successor) over the 36-month vesting period. Under Treasury Regulation Section 1.83-3(c), property is subject to a substantial risk of forfeiture if the individual's rights to full enjoyment of the property are conditioned upon the future performance of substantial services.

Absent a Section 83(b) election, the tax consequences of the unvested Class B Units under Section 83(a) would be as follows: no income would be recognized at the time of grant (the closing date), because the Class B Units are subject to a substantial risk of forfeiture and are not transferable. Instead, income would be recognized at each subsequent vesting date (i.e., at each monthly vesting event over the 36-month period), in an amount equal to the then-fair market value of the vesting units minus any amount paid by the participant. Critically, the income recognized at each vesting event would be characterized as ordinary compensation income — not capital gain — regardless of the underlying nature of the appreciation in value of Holdings LLC's assets. This result would be highly unfavorable, as it would convert what should be capital appreciation into ordinary income, potentially taxable at the highest marginal rate (currently 37% for federal income tax purposes, plus the 3.8% net investment income tax and applicable state and local taxes).

The risk of ordinary income recognition at vesting is the primary tax concern addressed by this memorandum, and the principal reason we recommend the filing of a protective Section 83(b) election, as discussed in Section V below.

B. Partnership Profits Interests — Definition and Safe Harbor

1. Revenue Procedure 93-27. Revenue Procedure 93-27, 1993-2 C.B. 343, establishes the IRS's position on the tax treatment of partnership profits interests received in connection with the performance of services. The revenue procedure defines a "profits interest" as a partnership interest other than a "capital interest." A "capital interest" is defined as an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and then the proceeds were distributed in a complete liquidation of the partnership. In other words, a capital interest is one that has a positive liquidation value at the time of receipt — the holder would receive a distribution even if the partnership were liquidated immediately after the grant. A profits interest, by contrast, is an interest that has zero liquidation value at the time of receipt — the holder would receive nothing if the partnership were liquidated at fair market value immediately after the grant, because the interest participates only in future profits and appreciation above the fair market value at grant.

Under Revenue Procedure 93-27, the IRS announced that it will not treat the receipt of a profits interest for services as a taxable event, provided that the following conditions are met:

(i) The profits interest is not a "capital interest" — that is, it would not give the holder a right to share in the proceeds if the partnership's assets were sold at fair market value and the partnership were liquidated immediately after the grant of the interest;

(ii) The profits interest does not relate to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease;

(iii) The partner does not dispose of the profits interest within two years of receipt; and

(iv) The profits interest is not an interest in a publicly traded partnership within the meaning of Section 7704 of the Code.

Application to the Class B Units. The Class B Units of Holdings LLC are structured with a participation threshold equal to the closing-date fair market value of Holdings LLC. In a hypothetical liquidation of Holdings LLC at fair market value on the closing date, all proceeds would be distributed to the Class A unitholders (Fund III and the vested rollover participants), and the Class B holders would receive nothing. Accordingly, the Class B Units have a liquidation value of zero at grant and qualify as "profits interests" rather than "capital interests." This satisfies the first condition of Revenue Procedure 93-27.

The remaining conditions are analyzed in detail in Section IV below, and we conclude that all four conditions are satisfied.

2. Revenue Procedure 2001-43. Revenue Procedure 2001-43, 2001-2 C.B. 191, supplements Revenue Procedure 93-27 by addressing the specific treatment of unvested profits interests — that is, profits interests that are subject to a substantial risk of forfeiture at the time of grant. The revenue procedure provides that the IRS will not treat the grant of an unvested profits interest for services as a taxable event if both of the following conditions are met:

(i) The partnership and the service provider treat the service provider as the owner of the profits interest from the date of grant, and the service provider takes into account the distributive share of partnership income, gain, loss, deduction, and credit associated with the interest; and

(ii) Neither the partnership nor any partner deducts any amount (as wages, compensation, or otherwise) for the fair market value of the interest either at the time of grant or at the time the interest becomes substantially vested.

Revenue Procedure 2001-43 is particularly important in the present context because the unvested Class B Units are, by definition, subject to a substantial risk of forfeiture (the 36-month time-based vesting condition). Without the guidance of Revenue Procedure 2001-43, there would be significant uncertainty regarding whether Revenue Procedure 93-27's safe harbor applies to unvested profits interests at all — since the original revenue procedure was silent on the question of vesting.

Key Requirement — Treatment as Partner from Grant Date. The most important operational requirement of Revenue Procedure 2001-43 is that the service provider must be treated as a partner from the grant date — not from the vesting date. This means that Holdings LLC must allocate distributive share items of partnership income, gain, loss, deduction, and credit to the Class B holders from the closing date (May 31, 2024), even though the unvested Class B Units remain subject to forfeiture. The Holdings LLC operating agreement must include the necessary allocation provisions, and the partnership's annual Schedule K-1 filings must reflect these allocations. As discussed in Section VII below, we have incorporated the required allocation provisions into our markup of the LLC Agreement tax provisions (dated March 10, 2024).

No Deduction Requirement. In addition, neither Holdings LLC nor any of its partners (including Fund III) may deduct any amount for the fair market value of the unvested Class B Units at grant or at vesting. This requirement ensures that the non-recognition treatment of the profits interest grant is matched by a corresponding denial of any compensation deduction — the economics are treated as a partnership interest grant, not as a compensation payment.

C. Interaction Between Section 83 and Profits Interest Safe Harbors

The interaction between Section 83 of the Code and the partnership profits interest safe harbors established by Revenue Procedure 93-27 and Revenue Procedure 2001-43 is an area of significant doctrinal uncertainty. The fundamental question is whether Section 83 applies to the receipt of a partnership interest — including a profits interest — in connection with the performance of services, and if so, how Section 83 interacts with the partnership tax provisions of Subchapter K of the Code.

The IRS and Treasury Department have attempted to address this question through proposed regulations, but have not issued final guidance. In 2005, the IRS published proposed Treasury Regulations under Section 83 (Prop. Treas. Reg. § 1.83-3(l), REG-105346-03, 70 Fed. Reg. 29675 (May 24, 2005)) that would have provided, in relevant part, that Section 83 applies to the transfer of a partnership interest in connection with the performance of services. However, the proposed regulations also included an elective safe harbor (the "safe harbor election") under which the partnership and the service provider could elect to treat the interest as having a fair market value equal to the liquidation value of the interest at the time of grant. For a profits interest with zero liquidation value at grant, this safe harbor election would result in zero income recognition — essentially codifying the result of Revenue Procedure 93-27 within the Section 83 framework.

Importantly, the 2005 proposed regulations were never finalized. They were withdrawn from the IRS's priority guidance plan on multiple occasions, and as of the date of this memorandum, there is no indication that final regulations are forthcoming. In the absence of final regulations, the practitioner community has generally relied on the following approach, which we recommend here:

(a) Structure the unvested profits interest to satisfy all conditions of Revenue Procedure 93-27 and Revenue Procedure 2001-43;

(b) Treat the service provider as a partner from the date of grant, with full allocations of distributive share items;

(c) File a protective Section 83(b) election within 30 days of the grant date, reporting zero income inclusion (on the basis that the fair market value of the profits interest at grant is zero); and

(d) Maintain documentation supporting the zero liquidation value of the profits interest at grant (including the capital account waterfall and, ideally, a contemporaneous valuation or valuation analysis).

This "belt-and-suspenders" approach — combining the revenue procedure safe harbors with a protective Section 83(b) election — is widely recognized as best practice in the private equity, venture capital, and partnership tax communities. It is endorsed by the American Bar Association Section of Taxation and is consistent with the prevailing market practice in sponsor-backed acquisition transactions. We discuss the Section 83(b) election in detail in Section V below.

IV. Analysis: Qualification of Class B Units as Profits Interests

Having set forth the applicable legal framework, we now analyze whether the unvested Class B Units of Holdings LLC satisfy each of the four conditions of Revenue Procedure 93-27 for treatment as profits interests.

A. Liquidation Value Test

The threshold requirement for profits interest treatment is that the interest must have a liquidation value of zero at the time of grant. The test is a hypothetical one: if the partnership's assets were sold at fair market value on the grant date and the proceeds were distributed in a complete liquidation of the partnership, would the holder of the interest receive any distribution?

At the anticipated closing date of May 31, 2024, a hypothetical liquidation of Holdings LLC at fair market value would proceed as follows under the distribution waterfall set forth in the LLC Agreement:

Step 1: Holdings LLC would sell all of its assets (i.e., its indirect interest in Pinnacle through Intermediate Inc.) at fair market value, which, at the closing date, would equal the Transaction enterprise value of $412 million less net debt.

Step 2: After repayment of all partnership liabilities (including the first lien term loan and mezzanine debt), the net proceeds would equal the equity value of approximately $339.4 million (adjusted for transaction expenses funded through the capital structure).

Step 3: The net proceeds would be distributed in accordance with the LLC Agreement waterfall. Class A unitholders — consisting of Fund III ($198.5 million of committed equity) and the rollover participants (on their vested Class A Units) — would receive distributions equal to their respective capital account balances. Because the participation threshold for the Class B Units is set equal to the aggregate fair market value of Holdings LLC at closing, and because the hypothetical liquidation produces proceeds equal to (not exceeding) that aggregate fair market value, the Class B Units would be entitled to zero distributions.

Step 4: After distributions to Class A unitholders, no remaining proceeds would be available for distribution to Class B unitholders. The Class B unitholders would receive nothing.

Conclusion: The Class B Units have a liquidation value of zero at the time of grant (the closing date). This satisfies the "profits interest" definition under Revenue Procedure 93-27 and the first condition of the safe harbor.

We note that this conclusion depends on the participation threshold being properly set in the LLC Agreement at the closing-date fair market value of Holdings LLC. We recommend that the participation threshold be confirmed by reference to a capital account waterfall analysis prepared as of the closing date, and ideally supported by a contemporaneous independent valuation or a letter from the Transaction financial advisor confirming the fair market value. This recommendation is discussed further in Section X below.

B. No Substantially Certain and Predictable Income Stream

The second condition of Revenue Procedure 93-27 requires that the profits interest not relate to a substantially certain and predictable stream of income from partnership assets. This condition is aimed at interests in partnerships that hold passive, high-quality income-producing assets — such as investment-grade debt securities or triple-net leased real estate — where the income stream is so predictable that the profits interest effectively functions as a guaranteed payment or deferred compensation arrangement.

Pinnacle operates a diversified healthcare services business with reported revenue of $287.4 million in fiscal year 2023 and Adjusted EBITDA of $51.8 million. The business is subject to substantial operational, regulatory, and reimbursement risk, including:

• Dependence on Medicare, Medicaid, and commercial payor reimbursement rates, which are subject to annual adjustment and legislative reform;

• Regulatory risk associated with state licensure, Certificate of Need requirements, and federal fraud and abuse laws (Anti-Kickback Statute, Stark Law);

• Operational risk associated with clinical staffing shortages, patient volume fluctuations, and competition from hospital systems and other post-acute care providers;

• The general macroeconomic environment, interest rate conditions, and their impact on healthcare utilization and capital markets; and

• The Transaction itself includes an earnout structure with two measurement periods (Period 1 target EBITDA of $58.0 million and Period 2 target EBITDA of $65.0 million), the very existence of which evidences meaningful performance uncertainty — if the income stream were substantially certain and predictable, an earnout would be unnecessary.

Conclusion: The income from Pinnacle's healthcare services operations is not a "substantially certain and predictable stream of income" within the meaning of Revenue Procedure 93-27. This condition is satisfied.

C. Two-Year Holding Period

The third condition of Revenue Procedure 93-27 requires that the partner not dispose of the profits interest within two years of receipt. The closing date is May 31, 2024, and accordingly, the earliest permissible disposition date is May 31, 2026.

Several structural features of the Transaction ensure compliance with this requirement:

• The vesting schedule itself provides a significant structural safeguard: the unvested Class B Units vest ratably over 36 months, meaning that the last unvested tranche does not fully vest until May 31, 2027 — well beyond the two-year holding period.

• The LLC Agreement contains customary transfer restrictions that prohibit the transfer, sale, pledge, or other disposition of Class B Units without the prior written consent of the board of managers of Holdings LLC (which is controlled by Fund III). These transfer restrictions are expected to remain in place for the duration of Fund III's investment in Holdings LLC.

• The LLC Agreement also contains a right of first refusal, tag-along, and drag-along provisions that further restrict the transferability of Class B Units.

• Earnout Period 2 ends on May 31, 2026, which coincides with the two-year holding period. We have reviewed the earnout provisions of the Merger Agreement and do not believe that the earnout payments, if any, constitute a "disposition" of the profits interest within the meaning of Revenue Procedure 93-27. The earnout payments are contingent consideration payable to the sellers of Pinnacle and are structurally separate from the rollover equity.

Conclusion: The structural features of the Transaction, including the vesting schedule and transfer restrictions, provide robust compliance with the two-year holding period requirement. No issues have been identified.

D. Not a Publicly Traded Partnership

The fourth and final condition of Revenue Procedure 93-27 requires that the profits interest not be an interest in a publicly traded partnership within the meaning of Section 7704 of the Code. A partnership is treated as publicly traded if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof).

Holdings LLC is a private Delaware limited liability company. Its membership interests are not listed, traded, or quoted on any established securities market, and there is no secondary market or trading platform through which membership interests in Holdings LLC may be bought, sold, or exchanged. The LLC Agreement prohibits transfers of membership interests except in compliance with stringent transfer restrictions and subject to the consent of the board of managers. Holdings LLC is not, and is not expected to become, a publicly traded partnership.

Conclusion: Holdings LLC is not a publicly traded partnership. This condition is satisfied.

E. Conclusion on Profits Interest Qualification

Based on the foregoing analysis, all four conditions of Revenue Procedure 93-27 are met with respect to the unvested Class B Units to be received by Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth. Additionally, the requirements of Revenue Procedure 2001-43 — specifically, the treatment of each Class B holder as a partner from the grant date and the prohibition on deducting the value of the interest — will be satisfied through the appropriate provisions in the Holdings LLC operating agreement, as described in Section VII below.

Accordingly, the grant of unvested Class B Units to the three rollover participants should not be treated as a taxable event for federal income tax purposes at the time of grant, and the IRS should not assert that the receipt of such interests gives rise to gross income under Section 61 or Section 83 of the Code.

This conclusion is subject to the caveats and limitations described in Section XII of this memorandum, including the absence of final Treasury Regulations definitively resolving the interaction between Section 83 and partnership profits interests, and the importance of filing a protective Section 83(b) election as a safeguard.

V. Section 83(b) Election — Protective Filing

A. Purpose and Mechanics

Section 83(b) of the Code permits a service provider who receives property that is subject to a substantial risk of forfeiture to make an affirmative election to include in gross income, in the taxable year in which the property is transferred, the excess of the fair market value of the property at the time of transfer over the amount (if any) paid for the property. By making this election, the service provider accelerates the recognition of income to the date of transfer, rather than deferring recognition until the property vests (i.e., until the substantial risk of forfeiture lapses).

In the typical case — for example, an employee who receives restricted stock — the Section 83(b) election requires the service provider to recognize ordinary income at the time of grant equal to the spread between the fair market value of the stock and the price paid. The advantage of the election is that any subsequent appreciation in the stock is taxed as capital gain (rather than ordinary income) when the stock is eventually sold, and no additional income is recognized at each vesting date.

In the context of partnership profits interests, the Section 83(b) election has a uniquely powerful effect. Because the profits interest has a liquidation value of zero at the time of grant (as established by the analysis in Section IV.A above), the Section 83(b) election results in an income inclusion of zero — the "excess" of the fair market value (zero) over the amount paid (zero) is zero. The election thus has no current tax cost to the participant. However, the election provides the critical benefit of locking in the grant-date value and preventing ordinary income recognition at each subsequent vesting date.

Without the Section 83(b) election, the tax consequences would be dramatically different. At each monthly vesting event over the 36-month vesting period, the participant would recognize ordinary compensation income equal to the then-fair market value of the vesting Class B Units minus any amount paid. If Holdings LLC (and, by extension, Pinnacle) appreciates in value between the closing date and each vesting date — as is expected, given the management team's growth plan and the earnout targets — the ordinary income exposure could be substantial. For example, if the value of Pinnacle's equity increases by 25% over the first 18 months of the vesting period, Dr. Carvallo could face ordinary income recognition in the millions of dollars on the Class B Units vesting during that period, with no corresponding cash distribution to fund the tax liability.

The protective Section 83(b) election eliminates this risk entirely. With the election in place, the participant recognizes zero income at grant, and each subsequent vesting event is a non-event for federal income tax purposes. All appreciation in the Class B Units is deferred until a taxable disposition (such as a sale of the units in a future exit transaction), at which point it would be taxed as capital gain — which, under current law, is taxed at significantly lower rates than ordinary income (20% maximum federal rate for long-term capital gain, versus 37% maximum federal rate for ordinary income, plus the 3.8% net investment income tax in each case).

B. Filing Requirements

The Section 83(b) election is subject to strict procedural requirements that must be scrupulously observed. Failure to comply with any of these requirements can result in the election being treated as invalid, with potentially catastrophic tax consequences. The filing requirements are as follows:

1. Timing. The election must be filed with the Internal Revenue Service within 30 days after the date on which the property is transferred to the service provider. In this case, the "transfer" occurs at the closing of the Transaction, which is anticipated to be May 31, 2024. Accordingly, the deadline for filing the Section 83(b) election is June 30, 2024 (30 calendar days after May 31, 2024). This deadline is absolute and cannot be extended for any reason — there is no provision for late filing, no procedure for requesting an extension, and no relief available under Section 9100 of the Code or any other provision. If the closing date changes, the 30-day deadline will adjust accordingly, and we will update this guidance.

2. Filing Location. The election must be filed with the IRS Service Center at which the participant files his or her individual federal income tax return. For participants residing in Pennsylvania (as we understand is the case for Dr. Carvallo and Dr. Ostrowski), the appropriate IRS Service Center is currently the Internal Revenue Service Center, Kansas City, MO 64999 (though this may be confirmed at the time of filing). We recommend filing via certified mail, return receipt requested, to establish proof of timely filing in the event of any subsequent dispute with the IRS.

3. Copy to Transferor. A copy of the filed election must be provided to the transferor — in this case, Ardent Healthcare Holdings LLC (c/o Ardent Capital Partners III LP, 600 Lexington Avenue, 38th Floor, New York, NY 10022). We recommend that each participant provide this copy promptly after filing, and that Holdings LLC acknowledge receipt in writing.

4. Attachment to Tax Return. A copy of the election must be attached to the participant's federal income tax return for the taxable year in which the property was transferred — in this case, the participant's 2024 federal income tax return (due April 15, 2025, or as extended). Although failure to attach the election to the tax return does not, by itself, invalidate the election (under Treasury Regulation Section 1.83-2(c)), we strongly recommend compliance with this requirement as a matter of best practice and to avoid any potential issues.

5. Content of Election. The election must contain the following information, as specified by Treasury Regulation Section 1.83-2(e): (i) the name, address, and taxpayer identification number of the person making the election; (ii) a description of each property with respect to which the election is being made; (iii) the date on which the property was transferred and the taxable year for which the election is made; (iv) the nature of the restriction(s) to which the property is subject; (v) the fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction that by its terms will never lapse); (vi) the amount (if any) paid for the property; and (vii) a statement that copies have been furnished as required.

Calderwood & Harkness will prepare the Section 83(b) election forms for each of Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth, together with transmittal letters and instructions for filing. The election forms and transmittal letters are expected to be delivered by May 28, 2024 — three days prior to the anticipated closing date — to allow for review and execution at or promptly after closing. Separate election forms are required for each participant.

C. Consequences of Failure to File

The consequences of failing to timely file the Section 83(b) election are severe and irreversible. If the election is not filed within the 30-day statutory period, the following consequences ensue:

(a) Each monthly vesting event over the 36-month vesting period would be treated as a separate taxable event under Section 83(a).

(b) At each vesting date, the participant would recognize ordinary compensation income equal to the then-fair market value of the Class B Units vesting on that date, minus any amount paid for such units.

(c) The income would be characterized as ordinary compensation income — not capital gain — regardless of the nature of the underlying appreciation in Holdings LLC's assets.

(d) Holdings LLC would be entitled to a corresponding compensation deduction under Section 83(h) at each vesting date, which would flow through to the other partners — but this deduction benefit to Holdings LLC's other partners does not offset the harm to the individual participant.

(e) The participant would owe income tax on the vesting income even if no cash distribution is made from Holdings LLC to fund the tax liability, potentially creating a cash shortfall. While the LLC Agreement provides for tax distributions (see Section VII.B below), those distributions are based on allocated partnership income — not Section 83(a) income inclusions — and may not fully cover the participant's incremental tax liability from vesting events.

To illustrate the potential magnitude of the risk, consider the following simplified example for Dr. Carvallo. His unvested Class B Units have a notional value of $16.21 million at closing. If the value of Holdings LLC increases by 25% over the first 18 months (a reasonable projection given Pinnacle's growth trajectory and the earnout targets), the units vesting during that period would have an aggregate fair market value significantly higher than their closing-date value. The incremental ordinary income exposure — the difference between the fair market value at each vesting date and the closing-date value — could easily reach several million dollars, taxable at the highest combined federal and state marginal rate (approximately 45% for a Pennsylvania resident, considering the 37% federal rate, the 3.8% net investment income tax, and Pennsylvania state income tax). This exposure would be entirely avoidable with a timely Section 83(b) election.

Failure to file is irrevocable. There is no late-filing relief for Section 83(b) elections. The IRS has consistently taken the position that the 30-day filing deadline is jurisdictional and cannot be extended. The Tax Court has upheld this position in numerous cases, and no court has granted relief for a late-filed Section 83(b) election. Accordingly, we cannot overemphasize the importance of timely filing.

D. Risk of Forfeiture

One potential downside of the Section 83(b) election should be noted for completeness. If a participant files a Section 83(b) election and subsequently forfeits the unvested Class B Units — for example, due to termination of employment during the vesting period — the participant cannot claim a deduction for the forfeited amount. Under Section 83(b)(1) (flush language), if property with respect to which a Section 83(b) election was made is subsequently forfeited, no deduction is allowed to the person who performed the services.

In the present context, however, this risk is mitigated by the fact that the Section 83(b) election results in zero income inclusion at grant. Because the participant recognized no income at the time of the election, there is no "phantom" income against which a deduction would be needed. The economic loss from forfeiture is simply the loss of the unvested units and the associated right to share in future appreciation — a loss that is economic in nature but does not create an unfavorable tax result beyond the loss of the benefit of the units themselves.

Accordingly, the risk of forfeiture does not alter our recommendation to file the Section 83(b) election. The downside risk (no deduction for forfeited units on which zero income was recognized) is modest and is far outweighed by the upside benefit (avoidance of ordinary income recognition at each vesting event).

E. Protective Nature of the Election

As discussed in Section III.C above, there is doctrinal uncertainty regarding whether Section 83 applies to partnership profits interests at all. Some commentators have argued that a profits interest — which has zero value at grant and which entitles the holder only to a share of future profits — is not "property" within the meaning of Section 83, or that the receipt of a profits interest is not a "transfer" of property "in connection with the performance of services." Under this view, Section 83 would simply not apply to the grant of a profits interest, and no election under Section 83(b) would be necessary.

However, the IRS has not adopted this view, and the proposed (but never finalized) 2005 regulations strongly suggest that the IRS considers Section 83 to be applicable to partnership interests, including profits interests. In this environment of uncertainty, the protective Section 83(b) election serves as a critically important safeguard. If the IRS were to assert that Section 83 applies to the grant of the Class B Units and that, absent a Section 83(b) election, income is recognized at each vesting date, the protective election would provide a complete defense — the participant would point to the timely filed election and the zero income inclusion at grant as evidence that all Section 83 requirements have been satisfied.

Conversely, if the IRS were to agree that Section 83 does not apply to profits interests at all (consistent with the revenue procedure safe harbors), the protective election would simply be a nullity — it would have no effect, positive or negative. The filing of the election in this scenario is harmless.

This "belt-and-suspenders" approach — combining compliance with the revenue procedure safe harbors and a protective Section 83(b) election — is the universally recommended approach among tax practitioners, is endorsed by the American Bar Association Tax Section, and is consistent with market practice in virtually all private equity-sponsored transactions involving management rollover or profits interest grants. We strongly recommend that each of the three rollover participants file the protective election.

VI. Unvested Component Allocation by Participant

A. Summary Table

The following table summarizes the rollover equity, vesting allocation, and unvested profits interest component for each of the three rollover participants:

B. Notes on Vesting Mechanics

The vesting of the unvested Class B Units operates as follows:

Monthly Ratable Vesting. One thirty-sixth (1/36th) of each participant's unvested Class B Units will vest on each monthly anniversary of the closing date. For purposes of calculating the number of units vesting at each monthly date, any fractional units resulting from the division will be rounded to the nearest whole unit, with any rounding adjustment applied to the final vesting tranche.

Vesting Commencement. The vesting period commences on June 1, 2024, the day following the closing date. The first monthly vesting date is June 30, 2024. For clarity, the closing date itself is not a vesting date for the unvested units — the 50% vesting at closing applies to the vested tranche, which vests as a single block upon the occurrence of the closing.

Full Vesting. Assuming continued compliance with the employment condition, the final vesting tranche will vest on May 31, 2027, which is 36 months after the closing date. At that point, all of the participant's Class B Units will be fully vested.

Accelerated Vesting Triggers. As noted in Section II.C above, the LLC Agreement is expected to include accelerated vesting provisions in connection with certain specified events. The terms under active negotiation include the following acceleration triggers:

(i) Change of Control. Upon a change of control of Holdings LLC (defined to include a sale of all or substantially all of the equity or assets of Holdings LLC or Pinnacle to an unaffiliated third party, or an initial public offering), all unvested Class B Units held by the rollover participants will vest in full immediately prior to the consummation of the change of control.

(ii) Termination Without Cause. Upon the termination of a participant's employment by Pinnacle (or its successor) without "cause" (as defined in the LLC Agreement), a negotiated portion of the participant's unvested Class B Units will accelerate and vest as of the date of termination. The precise acceleration formula (e.g., pro rata acceleration, cliff acceleration, or full acceleration) is under negotiation.

(iii) Resignation for Good Reason. Upon the resignation of a participant for "good reason" (as defined in the LLC Agreement), the same accelerated vesting provisions applicable to a termination without cause will apply.

(iv) Death or Disability. Upon the death or disability (as defined) of a participant, all unvested Class B Units held by such participant will vest in full as of the date of death or disability.

The specific definitions and mechanics of these accelerated vesting triggers will be set forth in the LLC Agreement, which is currently in markup between Calderwood & Harkness, Harcourt Shaw & DeVries LLP (buyer's M&A counsel), and Whitford & Gaines LLP (sellers' counsel). We will review the final accelerated vesting provisions for consistency with the profits interest analysis and Section 83(b) election guidance set forth in this memorandum.

VII. Partnership Tax Treatment of Class B Holders During Vesting Period

A. Allocation of Income and Loss

As discussed in Section III.B.2 above, Revenue Procedure 2001-43 requires that Holdings LLC treat each Class B holder as a partner from the grant date (the closing date, May 31, 2024) and allocate distributive share items of partnership income, gain, loss, deduction, and credit to each such holder during the entire vesting period. This requirement applies regardless of whether the Class B Units are vested or unvested — the holder is treated as a partner for all purposes of Subchapter K of the Code from the moment the units are issued.

The Holdings LLC operating agreement must include provisions that implement this requirement. Specifically, the LLC Agreement must provide for:

(a) The allocation of distributive share items to Class B holders in accordance with their respective interests in Holdings LLC, as determined under the economic terms of the Class B Units (including the participation threshold and sharing percentages);

(b) Maintenance of Section 704(b) capital accounts for each Class B holder, reflecting all allocations of income, gain, loss, deduction, and credit, as well as all contributions and distributions;

(c) Compliance with the "substantial economic effect" safe harbor of Treasury Regulation Section 1.704-1(b)(2), including the maintenance of capital accounts in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv), the requirement of capital account deficit restoration obligations or a qualified income offset, and minimum gain chargeback provisions under Treasury Regulation Sections 1.704-2(f) and 1.704-2(i);

(d) Allocation of items in a manner consistent with the partners' interests in the partnership under Section 704(b), taking into account the economic arrangement reflected in the participation threshold and distribution waterfall.

We have incorporated these provisions into our markup of the tax provisions of the LLC Agreement, dated March 10, 2024. The markup includes detailed allocation provisions, capital account maintenance rules, minimum gain chargeback provisions, and a qualified income offset. The markup is currently under review by Harcourt Shaw & DeVries LLP (on behalf of Ardent Capital) and Whitford & Gaines LLP (on behalf of the sellers and rollover participants). We recommend that all parties focus particular attention on the allocation provisions during the markup process, as the failure to properly allocate items to Class B holders from the grant date could jeopardize the safe harbor treatment under Revenue Procedure 2001-43.

B. Tax Distributions

During the vesting period (and thereafter), Class B holders will be allocated their distributive share of Holdings LLC's taxable income. Because Holdings LLC is a pass-through entity classified as a partnership for federal income tax purposes, each partner — including each Class B holder — is required to include its share of partnership income on its individual federal income tax return, regardless of whether any cash distribution is made.

To prevent the situation in which a Class B holder owes income tax on allocated partnership income but has not received a corresponding cash distribution, the LLC Agreement is expected to include a "tax distribution" provision. Under this provision, Holdings LLC will make quarterly estimated tax distributions to each partner (including each Class B holder) in an amount sufficient to cover the partner's estimated federal and state income tax liability arising from allocated partnership income. The tax distribution amount will be calculated based on an assumed highest combined marginal tax rate (federal plus state) applicable to individual members, which for Pennsylvania residents is currently approximately 40.8% (37% federal + 3.8% net investment income tax) for ordinary income (before considering the Pennsylvania state income tax of 3.07%, which does not conform to federal rates for all categories of income). The precise tax distribution formula will be set forth in the LLC Agreement.

Tax distributions are typically treated as advances against or offsets to future distributions under the distribution waterfall, ensuring that partners who receive tax distributions are not "double-dipped" when regular distributions are subsequently made.

C. Section 704(c) Considerations

The contribution of rollover equity into Holdings LLC — whether in the form of Class A Units (for the vested rollover) or Class B Units (for the unvested rollover) — involves the contribution of property (Pinnacle membership interests) to a partnership (Holdings LLC) in exchange for partnership interests. Under Section 704(c) of the Code, when property is contributed to a partnership, allocations of income, gain, loss, and deduction with respect to the contributed property must take into account any difference between the adjusted tax basis and the fair market value of the property at the time of contribution (the "built-in gain" or "built-in loss").

The purpose of Section 704(c) is to prevent the shifting of tax consequences among partners. For example, if a rollover participant contributes Pinnacle membership interests with a tax basis significantly lower than their fair market value (as is likely the case, given the substantial appreciation in Pinnacle's value since its founding), Section 704(c) ensures that the built-in gain is allocated back to the contributing partner when the property is sold or depreciated, rather than being shared among all partners.

Treasury Regulation Section 1.704-3 provides three methods for making Section 704(c) allocations: the traditional method (Section 1.704-3(b)), the traditional method with curative allocations (Section 1.704-3(c)), and the remedial allocation method (Section 1.704-3(d)). In our markup of the LLC Agreement tax provisions (dated March 10, 2024), Calderwood & Harkness has recommended the remedial allocation method under Treasury Regulation Section 1.704-3(d). The remedial allocation method provides the most complete elimination of ceiling rule distortions and is the method most commonly used in private equity-sponsored acquisition transactions. Under this method, Holdings LLC would create "remedial" allocations of tax items to eliminate any book-tax disparities created by the ceiling rule, ensuring that non-contributing partners are not adversely affected by the built-in gain inherent in the contributed property.

We note that the Section 704(c) analysis is somewhat simplified by the fact that the contributed property (Pinnacle membership interests) will, in most cases, have a fair market value at contribution that is consistent with the Transaction ent

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
From: Leonard Cross, Partner, and Robert Jansen, Senior Associate Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006
To: Marcus Pellegrino, Partner, Healthcare Ardent Capital Partners III LP 600 Lexington Avenue, 38th Floor New York, NY 10022
CC: Claire Ashworth, Co-Founder & Managing Partner, Ardent Capital Partners III LP Thomas Kundra, Harcourt Shaw & DeVries LLP (buyer's M&A counsel)
Date: March 8, 2024
Re: Tax Treatment of Unvested Rollover Equity — Profits Interest Analysis and Section 83(b) Election Guidance; Acquisition of Pinnacle Health Services Group LLC
Engagement Number: 1001-00006
Matter Number: 1001-00006
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I. Executive Summary
This memorandum analyzes the federal income tax treatment of unvested Class B Units of Ardent Healthcare Holdings LLC ("Holdings LLC") to be received by the three rollover participants — Dr. Raymond Carvallo (Co-Founder and Chief Executive Officer of Pinnacle Health Services Group LLC ("Pinnacle")), Dr. Nadia Ostrowski (Co-Founder and Chief Medical Officer of Pinnacle), and Jonathan Farnsworth (Chief Financial Officer of Pinnacle) — in connection with Ardent Capital Partners III LP's ("Fund III") acquisition of Pinnacle at an enterprise value of approximately $412 million (the "Transaction").
The rollover equity will be structured as Class B Units of Holdings LLC, a Delaware limited liability company that has elected, and will maintain, classification as a partnership for federal income tax purposes. Holdings LLC will serve as the primary equity aggregator vehicle in the post-closing capital structure, holding Fund III's committed equity, the rollover equity contributed by the three participants, and a reserved pool for management incentive equity.
The total rollover equity is $59.54 million, allocated as follows: $32.41 million to Dr. Carvallo, $24.18 million to Dr. Ostrowski, and $2.95 million to Mr. Farnsworth. Of the aggregate rollover amount, fifty percent (50%) vests immediately upon closing of the Transaction, and the remaining fifty percent (50%), or $29.77 million in the aggregate, vests ratably over a 36-month period following the closing date, subject to continued employment of each participant with Pinnacle or its successor entity as a condition to vesting. The unvested component is allocated as follows: $16.21 million to Dr. Carvallo, $12.09 million to Dr. Ostrowski, and $1.48 million to Mr. Farnsworth.
Based on our analysis of the applicable federal income tax authorities, including Sections 83 and 721 of the Internal Revenue Code of 1986, as amended (the "Code"), Revenue Procedure 93-27, Revenue Procedure 2001-43, and relevant case law and administrative guidance, we recommend the following:
1.  The unvested Class B Units should be structured as "profits interests" within the meaning of Revenue Procedure 93-27 and Revenue Procedure 2001-43, with a participation threshold equal to the aggregate fair market value of Holdings LLC as of the closing date, such that the Class B Units have a liquidation value of zero at grant.
2.  Each rollover participant should file a protective election under Section 83(b) of the Code within thirty (30) days of the closing date of the Transaction.
3.  Holdings LLC should treat each Class B holder as a partner from the date of grant (i.e., the closing date), allocating distributive share items of partnership income, gain, loss, deduction, and credit to each such holder during the vesting period, consistent with the requirements of Revenue Procedure 2001-43.
The anticipated closing date of the Transaction is May 31, 2024. Accordingly, the deadline for filing the Section 83(b) election is June 30, 2024. As discussed in further detail in Section V below, this deadline is statutory, mandatory, and cannot be extended under any circumstances.
II. Background and Transaction Summary
A. Transaction Structure
Ardent Capital Partners III LP, a Delaware limited partnership with a $3.2 billion fund size (vintage 2022), managed by Ardent Capital Management LLC, is acquiring 100% of the outstanding membership interests in Pinnacle Health Services Group LLC through a reverse merger transaction. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), signed March 15, 2024, Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and indirect wholly owned subsidiary of Holdings LLC, will merge with and into Pinnacle, with Pinnacle surviving as a wholly owned subsidiary of Holdings LLC (through an intermediate entity). This reverse merger structure preserves Pinnacle's existing contracts, licenses, Medicare and Medicaid provider agreements, and state regulatory approvals, which is critical in the healthcare services context.
The post-closing organizational structure consists of a three-tier acquisition architecture:
(i) Ardent Healthcare Holdings LLC (EIN 93-2187445), a Delaware limited liability company classified as a partnership for federal income tax purposes, which serves as the top-level equity aggregator vehicle;
(ii) Ardent Healthcare Intermediate Inc. (EIN 93-2187512), a Delaware corporation organized as a C-corporation "Blocker" entity, which is a wholly owned subsidiary of Holdings LLC and which serves to accommodate any tax-exempt or foreign investors in Fund III that require blocker protection from unrelated business taxable income or effectively connected income; and
(iii) Pinnacle Health Services Group LLC (EIN 82-1947632), the surviving entity in the reverse merger, which will be a wholly owned subsidiary of Intermediate Inc. and will continue to operate the healthcare services business.
Holdings LLC serves as the equity aggregator for three categories of equity: (a) Fund III's committed equity investment of $198.5 million; (b) the rollover equity contributed by Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth in the aggregate amount of $59.54 million; and (c) a reserved pool for management incentive equity to be granted to key Pinnacle employees and future hires, the terms of which are beyond the scope of this memorandum. The remaining Transaction consideration is funded by a combination of first lien term loan debt ($150 million, arranged by Dunmore Savings Bank and Halcyon National Bank) and mezzanine debt ($45 million, provided by Cascadia Mezzanine Fund IV LP, with associated warrants for 2.5% of fully diluted equity in Holdings LLC).
The Merger Agreement was executed on March 15, 2024, and the Transaction is subject to customary closing conditions, including receipt of Hart-Scott-Rodino clearance (filing made February 28, 2024), state regulatory approvals in Pennsylvania, New Jersey, and Maryland, and the absence of a material adverse effect. The anticipated closing date is May 31, 2024.
B. Rollover Participants and Amounts
The three rollover participants are each existing members of Pinnacle who will contribute a portion of their Pinnacle membership interests to Holdings LLC in exchange for Class B Units. The rollover amounts are determined by reference to the equity value of Pinnacle implied by the $412 million enterprise value, less approximately $72.6 million in net debt and transaction expenses, yielding an equity value of approximately $339.4 million. The rollover percentage and corresponding amounts for each participant are set forth below:
Dr. Raymond Carvallo — Dr. Carvallo holds 38.2% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $129.65 million (38.2% × $339.4 million). Dr. Carvallo has agreed to roll over 25% of his gross equity proceeds, or $32.41 million, into Class B Units of Holdings LLC. The remaining 75%, or $97.24 million, will be received in cash at closing.
Dr. Nadia Ostrowski — Dr. Ostrowski holds 28.5% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $96.73 million (28.5% × $339.4 million). Dr. Ostrowski has agreed to roll over 25% of her gross equity proceeds, or $24.18 million, into Class B Units of Holdings LLC. The remaining 75%, or $72.55 million, will be received in cash at closing.
Jonathan Farnsworth — Mr. Farnsworth holds 5.8% of the outstanding membership interests in Pinnacle, yielding gross equity proceeds of $19.69 million (5.8% × $339.4 million). Mr. Farnsworth has agreed to roll over 15% of his gross equity proceeds, or $2.95 million, into Class B Units of Holdings LLC. The remaining 85%, or $16.74 million, will be received in cash at closing.
The total rollover equity is $59.54 million, representing approximately 23.08% of post-closing equity on a pre-dilution basis ($59.54 million divided by $258.04 million in total equity, consisting of Fund III's $198.5 million plus the $59.54 million rollover), and approximately 22.50% of post-closing equity on a fully diluted basis after giving effect to the 2.5% equity warrants issued to Cascadia Mezzanine Fund IV LP in connection with the mezzanine financing. The remaining membership interests in Pinnacle (27.5%, held by minority physician partners and passive investors) will be fully cashed out at closing and are not subject to rollover.
C. Vesting Terms
The Class B Units issued to each rollover participant will be subject to the following vesting terms, as set forth in the Holdings LLC Amended and Restated Limited Liability Company Operating Agreement (the "LLC Agreement"), which is currently in draft form and under negotiation among the parties:
(a) Immediate Vesting at Closing. Fifty percent (50%) of each participant's Class B Units will vest immediately upon the closing of the Transaction. This vested component represents the portion of the rollover that is not subject to any service-based or time-based conditions and is treated as a fully vested equity interest from the closing date.
(b) Time-Based Vesting of Remaining Units. The remaining fifty percent (50%) of each participant's Class B Units will vest ratably over a 36-month period following the closing date, with 1/36th of the unvested units vesting on each monthly anniversary of the closing date. The first vesting date will be June 30, 2024, and full vesting will occur on May 31, 2027, assuming continued compliance with the applicable vesting conditions.
(c) Continued Employment Condition. For each of Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth, the vesting of the unvested Class B Units is conditioned upon the participant's continued employment with Pinnacle (or its successor) through the applicable vesting date. For purposes of the vesting condition, "employment" is defined broadly to include service in any executive officer capacity with Pinnacle or any of its subsidiaries, as well as service on the board of managers of Holdings LLC.
(d) Forfeiture. Upon the termination of a participant's employment for any reason (other than as described below with respect to accelerated vesting), any unvested Class B Units held by such participant as of the date of termination will be forfeited and will revert to Holdings LLC for redistribution to the management incentive equity pool or cancellation, as determined by the board of managers of Holdings LLC in its discretion.
(e) Accelerated Vesting. Accelerated vesting provisions may apply upon the occurrence of certain specified events, including (i) a change of control of Holdings LLC (as defined in the LLC Agreement), (ii) termination of the participant's employment without "cause" (as defined), (iii) resignation by the participant for "good reason" (as defined), or (iv) the death or disability of the participant. The specific terms of the accelerated vesting provisions are currently under negotiation and will be finalized in the LLC Agreement. A cross-reference to the LLC Agreement tax provisions markup prepared by Calderwood & Harkness, dated March 10, 2024, is appropriate here, and we note that the accelerated vesting terms must be reviewed for consistency with the profits interest analysis set forth in this memorandum.
The unvested component for each participant is as follows: Dr. Carvallo — $16.21 million; Dr. Ostrowski — $12.09 million; and Mr. Farnsworth — $1.48 million. The aggregate unvested component is $29.77 million.
D. Class B Unit Economics
The economic terms of the Class B Units are specifically designed to satisfy the requirements for treatment as "profits interests" under Revenue Procedure 93-27 and Revenue Procedure 2001-43. The key structural features are as follows:
Participation Threshold. The Class B Units participate in distributions from Holdings LLC only to the extent that the aggregate value of Holdings LLC exceeds a specified threshold (the "participation threshold"). The participation threshold is set equal to the aggregate fair market value of Holdings LLC as of the closing date, as determined by reference to the Transaction enterprise value, the capital account waterfall, and any independent valuation obtained as of the closing date. By setting the participation threshold at the closing-date fair market value, the Class B Units are entitled to share only in the appreciation in value of Holdings LLC that accrues after the closing date.
Sharing in Appreciation. Above the participation threshold, the Class B Units share in distributions on a pro rata basis with the Class A Units, in accordance with the distribution waterfall set forth in the LLC Agreement. The precise sharing percentages and waterfall mechanics (including any carried interest hurdle rates or preferred return provisions applicable to Fund III's Class A Units) are set forth in the LLC Agreement and are not material to the profits interest analysis.
Class A Unit Treatment. The Class A Units held by Fund III, and the Class A Units received by the rollover participants in respect of the vested portion of their rollover (described below), participate in distributions from dollar one — that is, without regard to any participation threshold. The Class A Units represent the "capital interests" in Holdings LLC.
Distinction Between Vested and Unvested Rollover. It is important to clarify the structural distinction between the vested and unvested components of each participant's rollover. The vested portion of the rollover (50% vesting at closing) will be exchanged for a combination of Class A Units and Class B Units — with the Class A component reflecting the participant's share of the closing-date fair market value of Holdings LLC, and the Class B component reflecting the participant's right to share in post-closing appreciation. The unvested portion of the rollover (50%, subject to time-based vesting) will be structured entirely as Class B profits interests, with a liquidation value of zero at grant. This distinction is critical: the unvested 50% is specifically designed to have no value in a hypothetical liquidation of Holdings LLC at closing-date fair market value, thereby satisfying the "profits interest" definition. The capital account of each participant attributable to the unvested Class B Units will be zero at grant, and all economic value will accrue only to the extent of post-closing appreciation above the participation threshold.
This structure ensures that the unvested rollover equity is treated as a profits interest for federal income tax purposes, while the vested rollover equity is treated as a capital contribution under Section 721 of the Code, as discussed in Section VIII below.
III. Federal Income Tax Framework — Section 83 and Partnership Profits Interests
A. Section 83 Generally
Section 83(a) of the Internal Revenue Code provides the general rule governing the taxation of property transferred in connection with the performance of services. Specifically, Section 83(a) provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of (i) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (ii) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are either (x) transferable or (y) not subject to a substantial risk of forfeiture, whichever is applicable.
In the context of unvested Class B Units issued to the rollover participants, the relevant application of Section 83(a) is as follows. The Class B Units constitute "property" within the meaning of Section 83. The transfer of the Class B Units is made "in connection with the performance of services" because the vesting of the unvested component is conditioned upon continued employment with Pinnacle — a service-based condition. The "substantial risk of forfeiture" is the time-based vesting condition: namely, the requirement that each participant continue to provide services to Pinnacle (or its successor) over the 36-month vesting period. Under Treasury Regulation Section 1.83-3(c), property is subject to a substantial risk of forfeiture if the individual's rights to full enjoyment of the property are conditioned upon the future performance of substantial services.
Absent a Section 83(b) election, the tax consequences of the unvested Class B Units under Section 83(a) would be as follows: no income would be recognized at the time of grant (the closing date), because the Class B Units are subject to a substantial risk of forfeiture and are not transferable. Instead, income would be recognized at each subsequent vesting date (i.e., at each monthly vesting event over the 36-month period), in an amount equal to the then-fair market value of the vesting units minus any amount paid by the participant. Critically, the income recognized at each vesting event would be characterized as ordinary compensation income — not capital gain — regardless of the underlying nature of the appreciation in value of Holdings LLC's assets. This result would be highly unfavorable, as it would convert what should be capital appreciation into ordinary income, potentially taxable at the highest marginal rate (currently 37% for federal income tax purposes, plus the 3.8% net investment income tax and applicable state and local taxes).
The risk of ordinary income recognition at vesting is the primary tax concern addressed by this memorandum, and the principal reason we recommend the filing of a protective Section 83(b) election, as discussed in Section V below.
B. Partnership Profits Interests — Definition and Safe Harbor
1. Revenue Procedure 93-27.  Revenue Procedure 93-27, 1993-2 C.B. 343, establishes the IRS's position on the tax treatment of partnership profits interests received in connection with the performance of services. The revenue procedure defines a "profits interest" as a partnership interest other than a "capital interest." A "capital interest" is defined as an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and then the proceeds were distributed in a complete liquidation of the partnership. In other words, a capital interest is one that has a positive liquidation value at the time of receipt — the holder would receive a distribution even if the partnership were liquidated immediately after the grant. A profits interest, by contrast, is an interest that has zero liquidation value at the time of receipt — the holder would receive nothing if the partnership were liquidated at fair market value immediately after the grant, because the interest participates only in future profits and appreciation above the fair market value at grant.
Under Revenue Procedure 93-27, the IRS announced that it will not treat the receipt of a profits interest for services as a taxable event, provided that the following conditions are met:
(i) The profits interest is not a "capital interest" — that is, it would not give the holder a right to share in the proceeds if the partnership's assets were sold at fair market value and the partnership were liquidated immediately after the grant of the interest;
(ii) The profits interest does not relate to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease;
(iii) The partner does not dispose of the profits interest within two years of receipt; and
(iv) The profits interest is not an interest in a publicly traded partnership within the meaning of Section 7704 of the Code.
Application to the Class B Units. The Class B Units of Holdings LLC are structured with a participation threshold equal to the closing-date fair market value of Holdings LLC. In a hypothetical liquidation of Holdings LLC at fair market value on the closing date, all proceeds would be distributed to the Class A unitholders (Fund III and the vested rollover participants), and the Class B holders would receive nothing. Accordingly, the Class B Units have a liquidation value of zero at grant and qualify as "profits interests" rather than "capital interests." This satisfies the first condition of Revenue Procedure 93-27.
The remaining conditions are analyzed in detail in Section IV below, and we conclude that all four conditions are satisfied.
2. Revenue Procedure 2001-43.  Revenue Procedure 2001-43, 2001-2 C.B. 191, supplements Revenue Procedure 93-27 by addressing the specific treatment of unvested profits interests — that is, profits interests that are subject to a substantial risk of forfeiture at the time of grant. The revenue procedure provides that the IRS will not treat the grant of an unvested profits interest for services as a taxable event if both of the following conditions are met:
(i) The partnership and the service provider treat the service provider as the owner of the profits interest from the date of grant, and the service provider takes into account the distributive share of partnership income, gain, loss, deduction, and credit associated with the interest; and
(ii) Neither the partnership nor any partner deducts any amount (as wages, compensation, or otherwise) for the fair market value of the interest either at the time of grant or at the time the interest becomes substantially vested.
Revenue Procedure 2001-43 is particularly important in the present context because the unvested Class B Units are, by definition, subject to a substantial risk of forfeiture (the 36-month time-based vesting condition). Without the guidance of Revenue Procedure 2001-43, there would be significant uncertainty regarding whether Revenue Procedure 93-27's safe harbor applies to unvested profits interests at all — since the original revenue procedure was silent on the question of vesting.
Key Requirement — Treatment as Partner from Grant Date. The most important operational requirement of Revenue Procedure 2001-43 is that the service provider must be treated as a partner from the grant date — not from the vesting date. This means that Holdings LLC must allocate distributive share items of partnership income, gain, loss, deduction, and credit to the Class B holders from the closing date (May 31, 2024), even though the unvested Class B Units remain subject to forfeiture. The Holdings LLC operating agreement must include the necessary allocation provisions, and the partnership's annual Schedule K-1 filings must reflect these allocations. As discussed in Section VII below, we have incorporated the required allocation provisions into our markup of the LLC Agreement tax provisions (dated March 10, 2024).
No Deduction Requirement. In addition, neither Holdings LLC nor any of its partners (including Fund III) may deduct any amount for the fair market value of the unvested Class B Units at grant or at vesting. This requirement ensures that the non-recognition treatment of the profits interest grant is matched by a corresponding denial of any compensation deduction — the economics are treated as a partnership interest grant, not as a compensation payment.
C. Interaction Between Section 83 and Profits Interest Safe Harbors
The interaction between Section 83 of the Code and the partnership profits interest safe harbors established by Revenue Procedure 93-27 and Revenue Procedure 2001-43 is an area of significant doctrinal uncertainty. The fundamental question is whether Section 83 applies to the receipt of a partnership interest — including a profits interest — in connection with the performance of services, and if so, how Section 83 interacts with the partnership tax provisions of Subchapter K of the Code.
The IRS and Treasury Department have attempted to address this question through proposed regulations, but have not issued final guidance. In 2005, the IRS published proposed Treasury Regulations under Section 83 (Prop. Treas. Reg. § 1.83-3(l), REG-105346-03, 70 Fed. Reg. 29675 (May 24, 2005)) that would have provided, in relevant part, that Section 83 applies to the transfer of a partnership interest in connection with the performance of services. However, the proposed regulations also included an elective safe harbor (the "safe harbor election") under which the partnership and the service provider could elect to treat the interest as having a fair market value equal to the liquidation value of the interest at the time of grant. For a profits interest with zero liquidation value at grant, this safe harbor election would result in zero income recognition — essentially codifying the result of Revenue Procedure 93-27 within the Section 83 framework.
Importantly, the 2005 proposed regulations were never finalized. They were withdrawn from the IRS's priority guidance plan on multiple occasions, and as of the date of this memorandum, there is no indication that final regulations are forthcoming. In the absence of final regulations, the practitioner community has generally relied on the following approach, which we recommend here:
(a) Structure the unvested profits interest to satisfy all conditions of Revenue Procedure 93-27 and Revenue Procedure 2001-43;
(b) Treat the service provider as a partner from the date of grant, with full allocations of distributive share items;
(c) File a protective Section 83(b) election within 30 days of the grant date, reporting zero income inclusion (on the basis that the fair market value of the profits interest at grant is zero); and
(d) Maintain documentation supporting the zero liquidation value of the profits interest at grant (including the capital account waterfall and, ideally, a contemporaneous valuation or valuation analysis).
This "belt-and-suspenders" approach — combining the revenue procedure safe harbors with a protective Section 83(b) election — is widely recognized as best practice in the private equity, venture capital, and partnership tax communities. It is endorsed by the American Bar Association Section of Taxation and is consistent with the prevailing market practice in sponsor-backed acquisition transactions. We discuss the Section 83(b) election in detail in Section V below.
IV. Analysis: Qualification of Class B Units as Profits Interests
Having set forth the applicable legal framework, we now analyze whether the unvested Class B Units of Holdings LLC satisfy each of the four conditions of Revenue Procedure 93-27 for treatment as profits interests.
A. Liquidation Value Test
The threshold requirement for profits interest treatment is that the interest must have a liquidation value of zero at the time of grant. The test is a hypothetical one: if the partnership's assets were sold at fair market value on the grant date and the proceeds were distributed in a complete liquidation of the partnership, would the holder of the interest receive any distribution?
At the anticipated closing date of May 31, 2024, a hypothetical liquidation of Holdings LLC at fair market value would proceed as follows under the distribution waterfall set forth in the LLC Agreement:
Step 1: Holdings LLC would sell all of its assets (i.e., its indirect interest in Pinnacle through Intermediate Inc.) at fair market value, which, at the closing date, would equal the Transaction enterprise value of $412 million less net debt.
Step 2: After repayment of all partnership liabilities (including the first lien term loan and mezzanine debt), the net proceeds would equal the equity value of approximately $339.4 million (adjusted for transaction expenses funded through the capital structure).
Step 3: The net proceeds would be distributed in accordance with the LLC Agreement waterfall. Class A unitholders — consisting of Fund III ($198.5 million of committed equity) and the rollover participants (on their vested Class A Units) — would receive distributions equal to their respective capital account balances. Because the participation threshold for the Class B Units is set equal to the aggregate fair market value of Holdings LLC at closing, and because the hypothetical liquidation produces proceeds equal to (not exceeding) that aggregate fair market value, the Class B Units would be entitled to zero distributions.
Step 4: After distributions to Class A unitholders, no remaining proceeds would be available for distribution to Class B unitholders. The Class B unitholders would receive nothing.
Conclusion: The Class B Units have a liquidation value of zero at the time of grant (the closing date). This satisfies the "profits interest" definition under Revenue Procedure 93-27 and the first condition of the safe harbor.
We note that this conclusion depends on the participation threshold being properly set in the LLC Agreement at the closing-date fair market value of Holdings LLC. We recommend that the participation threshold be confirmed by reference to a capital account waterfall analysis prepared as of the closing date, and ideally supported by a contemporaneous independent valuation or a letter from the Transaction financial advisor confirming the fair market value. This recommendation is discussed further in Section X below.
B. No Substantially Certain and Predictable Income Stream
The second condition of Revenue Procedure 93-27 requires that the profits interest not relate to a substantially certain and predictable stream of income from partnership assets. This condition is aimed at interests in partnerships that hold passive, high-quality income-producing assets — such as investment-grade debt securities or triple-net leased real estate — where the income stream is so predictable that the profits interest effectively functions as a guaranteed payment or deferred compensation arrangement.
Pinnacle operates a diversified healthcare services business with reported revenue of $287.4 million in fiscal year 2023 and Adjusted EBITDA of $51.8 million. The business is subject to substantial operational, regulatory, and reimbursement risk, including:
•  Dependence on Medicare, Medicaid, and commercial payor reimbursement rates, which are subject to annual adjustment and legislative reform;
•  Regulatory risk associated with state licensure, Certificate of Need requirements, and federal fraud and abuse laws (Anti-Kickback Statute, Stark Law);
•  Operational risk associated with clinical staffing shortages, patient volume fluctuations, and competition from hospital systems and other post-acute care providers;
•  The general macroeconomic environment, interest rate conditions, and their impact on healthcare utilization and capital markets; and
•  The Transaction itself includes an earnout structure with two measurement periods (Period 1 target EBITDA of $58.0 million and Period 2 target EBITDA of $65.0 million), the very existence of which evidences meaningful performance uncertainty — if the income stream were substantially certain and predictable, an earnout would be unnecessary.
Conclusion: The income from Pinnacle's healthcare services operations is not a "substantially certain and predictable stream of income" within the meaning of Revenue Procedure 93-27. This condition is satisfied.
C. Two-Year Holding Period
The third condition of Revenue Procedure 93-27 requires that the partner not dispose of the profits interest within two years of receipt. The closing date is May 31, 2024, and accordingly, the earliest permissible disposition date is May 31, 2026.
Several structural features of the Transaction ensure compliance with this requirement:
•  The vesting schedule itself provides a significant structural safeguard: the unvested Class B Units vest ratably over 36 months, meaning that the last unvested tranche does not fully vest until May 31, 2027 — well beyond the two-year holding period.
•  The LLC Agreement contains customary transfer restrictions that prohibit the transfer, sale, pledge, or other disposition of Class B Units without the prior written consent of the board of managers of Holdings LLC (which is controlled by Fund III). These transfer restrictions are expected to remain in place for the duration of Fund III's investment in Holdings LLC.
•  The LLC Agreement also contains a right of first refusal, tag-along, and drag-along provisions that further restrict the transferability of Class B Units.
•  Earnout Period 2 ends on May 31, 2026, which coincides with the two-year holding period. We have reviewed the earnout provisions of the Merger Agreement and do not believe that the earnout payments, if any, constitute a "disposition" of the profits interest within the meaning of Revenue Procedure 93-27. The earnout payments are contingent consideration payable to the sellers of Pinnacle and are structurally separate from the rollover equity.
Conclusion: The structural features of the Transaction, including the vesting schedule and transfer restrictions, provide robust compliance with the two-year holding period requirement. No issues have been identified.
D. Not a Publicly Traded Partnership
The fourth and final condition of Revenue Procedure 93-27 requires that the profits interest not be an interest in a publicly traded partnership within the meaning of Section 7704 of the Code. A partnership is treated as publicly traded if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof).
Holdings LLC is a private Delaware limited liability company. Its membership interests are not listed, traded, or quoted on any established securities market, and there is no secondary market or trading platform through which membership interests in Holdings LLC may be bought, sold, or exchanged. The LLC Agreement prohibits transfers of membership interests except in compliance with stringent transfer restrictions and subject to the consent of the board of managers. Holdings LLC is not, and is not expected to become, a publicly traded partnership.
Conclusion: Holdings LLC is not a publicly traded partnership. This condition is satisfied.
E. Conclusion on Profits Interest Qualification
Based on the foregoing analysis, all four conditions of Revenue Procedure 93-27 are met with respect to the unvested Class B Units to be received by Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth. Additionally, the requirements of Revenue Procedure 2001-43 — specifically, the treatment of each Class B holder as a partner from the grant date and the prohibition on deducting the value of the interest — will be satisfied through the appropriate provisions in the Holdings LLC operating agreement, as described in Section VII below.
Accordingly, the grant of unvested Class B Units to the three rollover participants should not be treated as a taxable event for federal income tax purposes at the time of grant, and the IRS should not assert that the receipt of such interests gives rise to gross income under Section 61 or Section 83 of the Code.
This conclusion is subject to the caveats and limitations described in Section XII of this memorandum, including the absence of final Treasury Regulations definitively resolving the interaction between Section 83 and partnership profits interests, and the importance of filing a protective Section 83(b) election as a safeguard.
V. Section 83(b) Election — Protective Filing
A. Purpose and Mechanics
Section 83(b) of the Code permits a service provider who receives property that is subject to a substantial risk of forfeiture to make an affirmative election to include in gross income, in the taxable year in which the property is transferred, the excess of the fair market value of the property at the time of transfer over the amount (if any) paid for the property. By making this election, the service provider accelerates the recognition of income to the date of transfer, rather than deferring recognition until the property vests (i.e., until the substantial risk of forfeiture lapses).
In the typical case — for example, an employee who receives restricted stock — the Section 83(b) election requires the service provider to recognize ordinary income at the time of grant equal to the spread between the fair market value of the stock and the price paid. The advantage of the election is that any subsequent appreciation in the stock is taxed as capital gain (rather than ordinary income) when the stock is eventually sold, and no additional income is recognized at each vesting date.
In the context of partnership profits interests, the Section 83(b) election has a uniquely powerful effect. Because the profits interest has a liquidation value of zero at the time of grant (as established by the analysis in Section IV.A above), the Section 83(b) election results in an income inclusion of zero — the "excess" of the fair market value (zero) over the amount paid (zero) is zero. The election thus has no current tax cost to the participant. However, the election provides the critical benefit of locking in the grant-date value and preventing ordinary income recognition at each subsequent vesting date.
Without the Section 83(b) election, the tax consequences would be dramatically different. At each monthly vesting event over the 36-month vesting period, the participant would recognize ordinary compensation income equal to the then-fair market value of the vesting Class B Units minus any amount paid. If Holdings LLC (and, by extension, Pinnacle) appreciates in value between the closing date and each vesting date — as is expected, given the management team's growth plan and the earnout targets — the ordinary income exposure could be substantial. For example, if the value of Pinnacle's equity increases by 25% over the first 18 months of the vesting period, Dr. Carvallo could face ordinary income recognition in the millions of dollars on the Class B Units vesting during that period, with no corresponding cash distribution to fund the tax liability.
The protective Section 83(b) election eliminates this risk entirely. With the election in place, the participant recognizes zero income at grant, and each subsequent vesting event is a non-event for federal income tax purposes. All appreciation in the Class B Units is deferred until a taxable disposition (such as a sale of the units in a future exit transaction), at which point it would be taxed as capital gain — which, under current law, is taxed at significantly lower rates than ordinary income (20% maximum federal rate for long-term capital gain, versus 37% maximum federal rate for ordinary income, plus the 3.8% net investment income tax in each case).
B. Filing Requirements
The Section 83(b) election is subject to strict procedural requirements that must be scrupulously observed. Failure to comply with any of these requirements can result in the election being treated as invalid, with potentially catastrophic tax consequences. The filing requirements are as follows:
1. Timing. The election must be filed with the Internal Revenue Service within 30 days after the date on which the property is transferred to the service provider. In this case, the "transfer" occurs at the closing of the Transaction, which is anticipated to be May 31, 2024. Accordingly, the deadline for filing the Section 83(b) election is June 30, 2024 (30 calendar days after May 31, 2024). This deadline is absolute and cannot be extended for any reason — there is no provision for late filing, no procedure for requesting an extension, and no relief available under Section 9100 of the Code or any other provision. If the closing date changes, the 30-day deadline will adjust accordingly, and we will update this guidance.
2. Filing Location. The election must be filed with the IRS Service Center at which the participant files his or her individual federal income tax return. For participants residing in Pennsylvania (as we understand is the case for Dr. Carvallo and Dr. Ostrowski), the appropriate IRS Service Center is currently the Internal Revenue Service Center, Kansas City, MO 64999 (though this may be confirmed at the time of filing). We recommend filing via certified mail, return receipt requested, to establish proof of timely filing in the event of any subsequent dispute with the IRS.
3. Copy to Transferor. A copy of the filed election must be provided to the transferor — in this case, Ardent Healthcare Holdings LLC (c/o Ardent Capital Partners III LP, 600 Lexington Avenue, 38th Floor, New York, NY 10022). We recommend that each participant provide this copy promptly after filing, and that Holdings LLC acknowledge receipt in writing.
4. Attachment to Tax Return. A copy of the election must be attached to the participant's federal income tax return for the taxable year in which the property was transferred — in this case, the participant's 2024 federal income tax return (due April 15, 2025, or as extended). Although failure to attach the election to the tax return does not, by itself, invalidate the election (under Treasury Regulation Section 1.83-2(c)), we strongly recommend compliance with this requirement as a matter of best practice and to avoid any potential issues.
5. Content of Election. The election must contain the following information, as specified by Treasury Regulation Section 1.83-2(e): (i) the name, address, and taxpayer identification number of the person making the election; (ii) a description of each property with respect to which the election is being made; (iii) the date on which the property was transferred and the taxable year for which the election is made; (iv) the nature of the restriction(s) to which the property is subject; (v) the fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction that by its terms will never lapse); (vi) the amount (if any) paid for the property; and (vii) a statement that copies have been furnished as required.
Calderwood & Harkness will prepare the Section 83(b) election forms for each of Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth, together with transmittal letters and instructions for filing. The election forms and transmittal letters are expected to be delivered by May 28, 2024 — three days prior to the anticipated closing date — to allow for review and execution at or promptly after closing. Separate election forms are required for each participant.
C. Consequences of Failure to File
The consequences of failing to timely file the Section 83(b) election are severe and irreversible. If the election is not filed within the 30-day statutory period, the following consequences ensue:
(a) Each monthly vesting event over the 36-month vesting period would be treated as a separate taxable event under Section 83(a).
(b) At each vesting date, the participant would recognize ordinary compensation income equal to the then-fair market value of the Class B Units vesting on that date, minus any amount paid for such units.
(c) The income would be characterized as ordinary compensation income — not capital gain — regardless of the nature of the underlying appreciation in Holdings LLC's assets.
(d) Holdings LLC would be entitled to a corresponding compensation deduction under Section 83(h) at each vesting date, which would flow through to the other partners — but this deduction benefit to Holdings LLC's other partners does not offset the harm to the individual participant.
(e) The participant would owe income tax on the vesting income even if no cash distribution is made from Holdings LLC to fund the tax liability, potentially creating a cash shortfall. While the LLC Agreement provides for tax distributions (see Section VII.B below), those distributions are based on allocated partnership income — not Section 83(a) income inclusions — and may not fully cover the participant's incremental tax liability from vesting events.
To illustrate the potential magnitude of the risk, consider the following simplified example for Dr. Carvallo. His unvested Class B Units have a notional value of $16.21 million at closing. If the value of Holdings LLC increases by 25% over the first 18 months (a reasonable projection given Pinnacle's growth trajectory and the earnout targets), the units vesting during that period would have an aggregate fair market value significantly higher than their closing-date value. The incremental ordinary income exposure — the difference between the fair market value at each vesting date and the closing-date value — could easily reach several million dollars, taxable at the highest combined federal and state marginal rate (approximately 45% for a Pennsylvania resident, considering the 37% federal rate, the 3.8% net investment income tax, and Pennsylvania state income tax). This exposure would be entirely avoidable with a timely Section 83(b) election.
Failure to file is irrevocable. There is no late-filing relief for Section 83(b) elections. The IRS has consistently taken the position that the 30-day filing deadline is jurisdictional and cannot be extended. The Tax Court has upheld this position in numerous cases, and no court has granted relief for a late-filed Section 83(b) election. Accordingly, we cannot overemphasize the importance of timely filing.
D. Risk of Forfeiture
One potential downside of the Section 83(b) election should be noted for completeness. If a participant files a Section 83(b) election and subsequently forfeits the unvested Class B Units — for example, due to termination of employment during the vesting period — the participant cannot claim a deduction for the forfeited amount. Under Section 83(b)(1) (flush language), if property with respect to which a Section 83(b) election was made is subsequently forfeited, no deduction is allowed to the person who performed the services.
In the present context, however, this risk is mitigated by the fact that the Section 83(b) election results in zero income inclusion at grant. Because the participant recognized no income at the time of the election, there is no "phantom" income against which a deduction would be needed. The economic loss from forfeiture is simply the loss of the unvested units and the associated right to share in future appreciation — a loss that is economic in nature but does not create an unfavorable tax result beyond the loss of the benefit of the units themselves.
Accordingly, the risk of forfeiture does not alter our recommendation to file the Section 83(b) election. The downside risk (no deduction for forfeited units on which zero income was recognized) is modest and is far outweighed by the upside benefit (avoidance of ordinary income recognition at each vesting event).
E. Protective Nature of the Election
As discussed in Section III.C above, there is doctrinal uncertainty regarding whether Section 83 applies to partnership profits interests at all. Some commentators have argued that a profits interest — which has zero value at grant and which entitles the holder only to a share of future profits — is not "property" within the meaning of Section 83, or that the receipt of a profits interest is not a "transfer" of property "in connection with the performance of services." Under this view, Section 83 would simply not apply to the grant of a profits interest, and no election under Section 83(b) would be necessary.
However, the IRS has not adopted this view, and the proposed (but never finalized) 2005 regulations strongly suggest that the IRS considers Section 83 to be applicable to partnership interests, including profits interests. In this environment of uncertainty, the protective Section 83(b) election serves as a critically important safeguard. If the IRS were to assert that Section 83 applies to the grant of the Class B Units and that, absent a Section 83(b) election, income is recognized at each vesting date, the protective election would provide a complete defense — the participant would point to the timely filed election and the zero income inclusion at grant as evidence that all Section 83 requirements have been satisfied.
Conversely, if the IRS were to agree that Section 83 does not apply to profits interests at all (consistent with the revenue procedure safe harbors), the protective election would simply be a nullity — it would have no effect, positive or negative. The filing of the election in this scenario is harmless.
This "belt-and-suspenders" approach — combining compliance with the revenue procedure safe harbors and a protective Section 83(b) election — is the universally recommended approach among tax practitioners, is endorsed by the American Bar Association Tax Section, and is consistent with market practice in virtually all private equity-sponsored transactions involving management rollover or profits interest grants. We strongly recommend that each of the three rollover participants file the protective election.
VI. Unvested Component Allocation by Participant
A. Summary Table
The following table summarizes the rollover equity, vesting allocation, and unvested profits interest component for each of the three rollover participants:
B. Notes on Vesting Mechanics
The vesting of the unvested Class B Units operates as follows:
Monthly Ratable Vesting. One thirty-sixth (1/36th) of each participant's unvested Class B Units will vest on each monthly anniversary of the closing date. For purposes of calculating the number of units vesting at each monthly date, any fractional units resulting from the division will be rounded to the nearest whole unit, with any rounding adjustment applied to the final vesting tranche.
Vesting Commencement. The vesting period commences on June 1, 2024, the day following the closing date. The first monthly vesting date is June 30, 2024. For clarity, the closing date itself is not a vesting date for the unvested units — the 50% vesting at closing applies to the vested tranche, which vests as a single block upon the occurrence of the closing.
Full Vesting. Assuming continued compliance with the employment condition, the final vesting tranche will vest on May 31, 2027, which is 36 months after the closing date. At that point, all of the participant's Class B Units will be fully vested.
Accelerated Vesting Triggers. As noted in Section II.C above, the LLC Agreement is expected to include accelerated vesting provisions in connection with certain specified events. The terms under active negotiation include the following acceleration triggers:
(i) Change of Control. Upon a change of control of Holdings LLC (defined to include a sale of all or substantially all of the equity or assets of Holdings LLC or Pinnacle to an unaffiliated third party, or an initial public offering), all unvested Class B Units held by the rollover participants will vest in full immediately prior to the consummation of the change of control.
(ii) Termination Without Cause. Upon the termination of a participant's employment by Pinnacle (or its successor) without "cause" (as defined in the LLC Agreement), a negotiated portion of the participant's unvested Class B Units will accelerate and vest as of the date of termination. The precise acceleration formula (e.g., pro rata acceleration, cliff acceleration, or full acceleration) is under negotiation.
(iii) Resignation for Good Reason. Upon the resignation of a participant for "good reason" (as defined in the LLC Agreement), the same accelerated vesting provisions applicable to a termination without cause will apply.
(iv) Death or Disability. Upon the death or disability (as defined) of a participant, all unvested Class B Units held by such participant will vest in full as of the date of death or disability.
The specific definitions and mechanics of these accelerated vesting triggers will be set forth in the LLC Agreement, which is currently in markup between Calderwood & Harkness, Harcourt Shaw & DeVries LLP (buyer's M&A counsel), and Whitford & Gaines LLP (sellers' counsel). We will review the final accelerated vesting provisions for consistency with the profits interest analysis and Section 83(b) election guidance set forth in this memorandum.
VII. Partnership Tax Treatment of Class B Holders During Vesting Period
A. Allocation of Income and Loss
As discussed in Section III.B.2 above, Revenue Procedure 2001-43 requires that Holdings LLC treat each Class B holder as a partner from the grant date (the closing date, May 31, 2024) and allocate distributive share items of partnership income, gain, loss, deduction, and credit to each such holder during the entire vesting period. This requirement applies regardless of whether the Class B Units are vested or unvested — the holder is treated as a partner for all purposes of Subchapter K of the Code from the moment the units are issued.
The Holdings LLC operating agreement must include provisions that implement this requirement. Specifically, the LLC Agreement must provide for:
(a) The allocation of distributive share items to Class B holders in accordance with their respective interests in Holdings LLC, as determined under the economic terms of the Class B Units (including the participation threshold and sharing percentages);
(b) Maintenance of Section 704(b) capital accounts for each Class B holder, reflecting all allocations of income, gain, loss, deduction, and credit, as well as all contributions and distributions;
(c) Compliance with the "substantial economic effect" safe harbor of Treasury Regulation Section 1.704-1(b)(2), including the maintenance of capital accounts in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv), the requirement of capital account deficit restoration obligations or a qualified income offset, and minimum gain chargeback provisions under Treasury Regulation Sections 1.704-2(f) and 1.704-2(i);
(d) Allocation of items in a manner consistent with the partners' interests in the partnership under Section 704(b), taking into account the economic arrangement reflected in the participation threshold and distribution waterfall.
We have incorporated these provisions into our markup of the tax provisions of the LLC Agreement, dated March 10, 2024. The markup includes detailed allocation provisions, capital account maintenance rules, minimum gain chargeback provisions, and a qualified income offset. The markup is currently under review by Harcourt Shaw & DeVries LLP (on behalf of Ardent Capital) and Whitford & Gaines LLP (on behalf of the sellers and rollover participants). We recommend that all parties focus particular attention on the allocation provisions during the markup process, as the failure to properly allocate items to Class B holders from the grant date could jeopardize the safe harbor treatment under Revenue Procedure 2001-43.
B. Tax Distributions
During the vesting period (and thereafter), Class B holders will be allocated their distributive share of Holdings LLC's taxable income. Because Holdings LLC is a pass-through entity classified as a partnership for federal income tax purposes, each partner — including each Class B holder — is required to include its share of partnership income on its individual federal income tax return, regardless of whether any cash distribution is made.
To prevent the situation in which a Class B holder owes income tax on allocated partnership income but has not received a corresponding cash distribution, the LLC Agreement is expected to include a "tax distribution" provision. Under this provision, Holdings LLC will make quarterly estimated tax distributions to each partner (including each Class B holder) in an amount sufficient to cover the partner's estimated federal and state income tax liability arising from allocated partnership income. The tax distribution amount will be calculated based on an assumed highest combined marginal tax rate (federal plus state) applicable to individual members, which for Pennsylvania residents is currently approximately 40.8% (37% federal + 3.8% net investment income tax) for ordinary income (before considering the Pennsylvania state income tax of 3.07%, which does not conform to federal rates for all categories of income). The precise tax distribution formula will be set forth in the LLC Agreement.
Tax distributions are typically treated as advances against or offsets to future distributions under the distribution waterfall, ensuring that partners who receive tax distributions are not "double-dipped" when regular distributions are subsequently made.
C. Section 704(c) Considerations
The contribution of rollover equity into Holdings LLC — whether in the form of Class A Units (for the vested rollover) or Class B Units (for the unvested rollover) — involves the contribution of property (Pinnacle membership interests) to a partnership (Holdings LLC) in exchange for partnership interests. Under Section 704(c) of the Code, when property is contributed to a partnership, allocations of income, gain, loss, and deduction with respect to the contributed property must take into account any difference between the adjusted tax basis and the fair market value of the property at the time of contribution (the "built-in gain" or "built-in loss").
The purpose of Section 704(c) is to prevent the shifting of tax consequences among partners. For example, if a rollover participant contributes Pinnacle membership interests with a tax basis significantly lower than their fair market value (as is likely the case, given the substantial appreciation in Pinnacle's value since its founding), Section 704(c) ensures that the built-in gain is allocated back to the contributing partner when the property is sold or depreciated, rather than being shared among all partners.
Treasury Regulation Section 1.704-3 provides three methods for making Section 704(c) allocations: the traditional method (Section 1.704-3(b)), the traditional method with curative allocations (Section 1.704-3(c)), and the remedial allocation method (Section 1.704-3(d)). In our markup of the LLC Agreement tax provisions (dated March 10, 2024), Calderwood & Harkness has recommended the remedial allocation method under Treasury Regulation Section 1.704-3(d). The remedial allocation method provides the most complete elimination of ceiling rule distortions and is the method most commonly used in private equity-sponsored acquisition transactions. Under this method, Holdings LLC would create "remedial" allocations of tax items to eliminate any book-tax disparities created by the ceiling rule, ensuring that non-contributing partners are not adversely affected by the built-in gain inherent in the contributed property.
We note that the Section 704(c) analysis is somewhat simplified by the fact that the contributed property (Pinnacle membership interests) will, in most cases, have a fair market value at contribution that is consistent with the Transaction ent

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