1001-00006 · Ardent Capital Partners · Structure & Entity Selection

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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 Claire Ashworth, Co-Founder & Managing Partner Ardent Capital Partners III LP 600 Lexington Avenue, 38th Floor New York, NY 10022

Date: February 12, 2024

Re: Preliminary Tax Structure Analysis — Proposed Acquisition of Pinnacle Health Services Group LLC

Engagement No.: 1001-00006

Matter No.: 1001-00006

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I. Executive Summary

Calderwood & Harkness LLP has been engaged by Ardent Capital Partners III LP ("Ardent Capital" or "Fund III") to advise on the tax structuring of the proposed acquisition of 100% of the membership interests in Pinnacle Health Services Group LLC ("Pinnacle" or the "Company") at an aggregate enterprise value of approximately $412 million. This memorandum sets forth our preliminary analysis of the principal structural alternatives available for the proposed acquisition and provides our recommendation as to the optimal structure from a federal income tax perspective. Supplemental memoranda addressing specific sub-topics identified herein are either in preparation or have been delivered separately, as noted below.

Pinnacle is a Delaware limited liability company currently classified as a partnership for federal income tax purposes (EIN 82-1947632). The Company has never filed a Form 8832 electing corporate classification, and has filed annual partnership returns (Form 1065) since its formation in 2016. Pinnacle operates 34 urgent care clinics and 8 ambulatory surgery centers across five states — Pennsylvania, Virginia, Maryland, North Carolina, and Georgia — and employs approximately 1,620 individuals, including 142 employed physicians. For the fiscal year ended December 31, 2023, Pinnacle reported total revenue of approximately $287.4 million and Adjusted EBITDA of approximately $51.8 million, implying an EV/EBITDA acquisition multiple of approximately 7.95x.

This memorandum analyzes two principal acquisition structure alternatives:

(A) A partnership acquisition structure in which Pinnacle's existing partnership tax classification is maintained, and the buyer acquires the membership interests of the partnership entity, combined with a Section 754 election giving rise to a Section 743(b) basis step-up in Pinnacle's assets; and

(B) A corporate acquisition structure involving a "check-the-box" election under Treasury Regulations Section 301.7701-3 to convert Pinnacle from a partnership to a C-corporation immediately prior to closing, followed by a stock acquisition of the deemed corporation, potentially with an election under Section 338(h)(10) of the Internal Revenue Code to treat the stock acquisition as a deemed asset acquisition.

After analyzing both alternatives, and taking into account the economic terms of the proposed acquisition, the composition of the seller group, the rollover equity arrangements, the anticipated financing structure, the operating profile of the Company, and the tax characteristics of Fund III's limited partner base, Calderwood & Harkness recommends a three-tier partnership acquisition structure, organized as follows:

Ardent Healthcare Holdings LLC (taxed as a partnership; equity aggregator) ↓ Ardent Healthcare Intermediate Inc. (C-corporation blocker entity) ↓ Pinnacle Health Services Group LLC (surviving partnership entity; operating company)

This recommended structure optimizes the buyer's amortization benefit through a Section 743(b) basis step-up of approximately $224.4 million without triggering incremental seller-level gain recognition, preserves flow-through characteristics for Fund III's tax-exempt and foreign limited partners through the C-corporation blocker, facilitates tax-deferred rollover equity treatment under Section 721 at the Holdings LLC level, and provides structural flexibility for a future exit, including a potential initial public offering.

The following supplemental memoranda are either in preparation or have been delivered:

• A separate detailed memorandum comparing Section 338(h)(10) treatment versus Section 754 / 743(b) treatment will be delivered on February 28, 2024.

• A separate blocker entity analysis memorandum was delivered on February 16, 2024.

• A separate rollover equity tax memorandum (Section 721 vs. Section 351 analysis) will be delivered on February 22, 2024.

• A separate state and local tax memorandum will be delivered on February 20, 2024.

• A separate earnout tax characterization memorandum will be delivered on March 1, 2024.

This memorandum should be read in conjunction with those supplemental analyses as they become available.

II. Transaction Overview

A. Parties

The following is a summary of the principal parties to the proposed transaction and their respective advisors:

Buyer / Sponsor. Ardent Capital Partners III LP ("Ardent Capital" or "Fund III") is a Delaware limited partnership with a vintage year of 2022 and total committed capital of approximately $3.2 billion. Fund III is managed by its general partner, Ardent Capital GP III LLC, a Delaware limited liability company. The Co-Founders and Managing Partners of the Ardent Capital platform are Dominic Ferrera and Claire Ashworth. The deal team for the proposed Pinnacle acquisition is led by Marcus Pellegrino, Partner, Healthcare, within the Ardent Capital investment team.

Target. Pinnacle Health Services Group LLC is a Delaware limited liability company classified as a partnership for federal income tax purposes (EIN 82-1947632). The Company is headquartered at 2200 Renaissance Boulevard, Suite 400, King of Prussia, Pennsylvania 19406. Pinnacle was founded in 2016 by Dr. Raymond Carvallo and Dr. Nadia Ostrowski. The current ownership of the Company is as follows:

Seller's Counsel. Whitford & Gaines LLP, Philadelphia, Pennsylvania. The engagement is led by Patricia Engelman, Partner, Tax, and Kevin Driscoll, Associate, M&A/Tax.

Buyer's M&A Counsel. Harcourt Shaw & DeVries LLP, New York, New York. The engagement is led by Thomas Kundra, Partner, M&A, and Allison Cho, Associate, M&A.

Financial Advisor to Ardent Capital. Meridian Tuck Partners LLC, New York, New York. The engagement is led by Daniel Kessler, Managing Director.

Financial Advisor to Pinnacle. Larchmont & Co., Philadelphia, Pennsylvania. The engagement is led by Sarah Quinlan, Managing Director.

B. Transaction Economics

The principal economic terms of the proposed acquisition, as set forth in the term sheet executed on January 28, 2024, are summarized below:

The proposed financing structure for the acquisition is as follows:

Senior Secured Facilities. Graystone National Bank, N.A. will serve as lead arranger and administrative agent for the senior secured credit facilities, which will consist of: (i) a Term Loan B in the principal amount of $155,000,000, bearing interest at SOFR plus 425 basis points, with a seven-year maturity, to be syndicated among Graystone, Ridgepoint Capital Markets LLC, and Thorncrest Credit Partners LP; and (ii) a Revolving Credit Facility in the aggregate principal amount of $35,000,000, bearing interest at SOFR plus 375 basis points, with a five-year maturity. The Term Loan B will be drawn in full at closing to fund a portion of the purchase price. The Revolving Credit Facility is expected to be undrawn at closing and will be available for working capital and general corporate purposes post-closing.

Mezzanine Facility. Cascadia Mezzanine Fund IV LP will provide a subordinated mezzanine facility in the principal amount of $30,000,000, consisting of subordinated notes bearing interest at 12.5% cash pay plus 2.0% payment-in-kind (PIK), with an eight-year maturity. In connection with the mezzanine facility, Cascadia will receive warrants entitling it to acquire 2.5% of the fully diluted equity interests in the holding company (Ardent Healthcare Holdings LLC).

C. Transaction Mechanics

The proposed acquisition will be structured as a reverse merger. Specifically, Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of the buyer structure, will merge with and into Pinnacle Health Services Group LLC, with Pinnacle surviving the merger as a wholly owned subsidiary of Ardent Healthcare Intermediate Inc. As a result of the merger, 100% of the pre-closing membership interests in Pinnacle will be acquired by the buyer structure, and the pre-closing members of Pinnacle will receive their respective merger consideration — either cash or a combination of cash and Class B Units in the holding company (for rollover participants) — in exchange for their membership interests.

The reverse merger structure is preferred over a direct purchase of membership interests for several reasons, including: (i) the reverse merger provides a cleaner mechanism for effecting the simultaneous exchange of consideration to multiple sellers; (ii) the merger agreement form provides more comprehensive representations, warranties, and indemnification provisions than a typical membership interest purchase agreement; and (iii) the merger structure ensures that all membership interests, including those of minority physician-investors, are acquired in a single, coordinated transaction without requiring separate purchase agreements.

D. Rollover Equity

Certain founders and members of senior management will roll over a portion of their equity proceeds into the post-closing buyer entity, as summarized below:

The rollover equity of $59,547,730 (rounded herein to $59.54 million) represents the following percentages of post-closing equity:

• Pre-dilution: $59.54M ÷ ($198.5M + $59.54M) = approximately 23.08%

• Fully diluted (after giving effect to the 2.5% warrant coverage to Cascadia Mezzanine Fund IV LP): approximately 22.50%

The rollover equity will be structured as Class B Units in Ardent Healthcare Holdings LLC, the top-tier holding company. The vesting terms are as follows:

• 50% of the rollover equity shall be fully vested at closing.

• 50% of the rollover equity shall vest ratably over a 36-month period following the closing date, subject to the continued employment of Dr. Carvallo and Dr. Ostrowski with the Company (or an affiliate thereof). Mr. Farnsworth's unvested portion is also subject to continued employment.

• The unvested component of the rollover equity will be treated as "profits interests" for federal income tax purposes, meaning that the unvested units will initially have a liquidation value of zero and will participate only in the future appreciation of the enterprise above a designated threshold (the "hurdle" or "participation threshold"), which is expected to be set at the closing date fair market value of the enterprise on a per-unit basis.

The dollar amounts of the unvested rollover equity are as follows:

Each rollover participant will be required to file an election under Section 83(b) of the Internal Revenue Code within 30 days of the closing date with respect to their unvested Class B Units. The Section 83(b) election ensures that the unvested units are included in income (if any income inclusion is required) at the time of the closing, based on the fair market value of the units at that time, rather than being deferred until vesting occurs. For unvested units that are properly structured as profits interests with a zero liquidation value at issuance, the Section 83(b) election is expected to result in zero income inclusion at the time of the election. This treatment is consistent with Revenue Procedure 93-27, Revenue Procedure 2001-43, and proposed Treasury Regulations under Section 83 relating to partnership interests.

A separate rollover equity tax memorandum, including a detailed analysis of Section 721 versus Section 351 treatment and the profits interest characterization, will be delivered on or about February 22, 2024.

E. Earnout

The purchase agreement will include a two-period earnout provision, pursuant to which additional consideration may be payable to the pre-closing members of Pinnacle based on the post-closing financial performance of the Company. The earnout terms are as follows:

The earnout payments are binary — the full payment for each period is earned if the target EBITDA threshold is met or exceeded, and no payment is made if the target is not met. No pro rata or proportional payment mechanism applies for performance below the target threshold.

The purchase agreement will include an earnout acceleration clause pursuant to which 100% of any remaining unpaid earnout amounts shall become immediately payable upon a change of control of the holding company (Ardent Healthcare Holdings LLC) during the earnout period.

The federal income tax characterization of the earnout payments — whether as additional purchase price (capital gains treatment to sellers), compensation for services (ordinary income treatment), or imputed interest — requires detailed analysis based on the specific terms of the earnout provision, the employment relationship of the earnout recipients, and applicable case law and IRS guidance. A separate earnout tax characterization memorandum is anticipated to be delivered on or about March 1, 2024.

III. Current Tax Classification of Pinnacle

Pinnacle Health Services Group LLC is organized as a limited liability company under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.). For federal income tax purposes, the classification of a domestic limited liability company with two or more members is determined under the entity classification rules set forth in Treasury Regulations Section 301.7701-3 (the "check-the-box" regulations).

Under Treasury Regulations Section 301.7701-3(b)(1), a domestic eligible entity that has two or more members is classified as a partnership by default, unless the entity affirmatively elects to be classified as an association taxable as a corporation by filing a Form 8832 (Entity Classification Election) with the Internal Revenue Service. A domestic eligible entity that has a single owner is disregarded as an entity separate from its owner by default, unless an affirmative election to be classified as a corporation is made.

Based on our review of the following materials, we have confirmed that Pinnacle has not filed a Form 8832 electing corporate classification at any time since its formation:

(a) Representations made by Patricia Engelman, Partner, Tax, and Kevin Driscoll, Associate, M&A/Tax, at Whitford & Gaines LLP (Pinnacle's counsel) in correspondence dated January 22, 2024, confirming that no Form 8832 election has been filed by Pinnacle;

(b) Review of Pinnacle's historical federal income tax returns (Forms 1065, U.S. Return of Partnership Income) for the tax years 2016 through 2022 (the 2023 return is not yet filed but is expected to be filed on extension), as provided by Brewer Stanfield & Associates LLP, Pinnacle's independent accounting firm; and

(c) Review of the Company's Amended and Restated Operating Agreement dated August 12, 2016 (as amended by the First Amendment dated March 3, 2020), which contains provisions consistent with partnership tax classification, including provisions for the allocation of items of income, gain, loss, deduction, and credit among the members and the issuance of Schedules K-1.

Accordingly, Pinnacle is and has at all times since its formation been classified as a partnership for federal income tax purposes under the default classification rules. The Company has filed Forms 1065 annually and has issued Schedules K-1 (Partner's Share of Income, Deductions, Credits, etc.) to its members for each taxable year.

All of Pinnacle's membership interests are currently held by U.S. persons (individual U.S. citizens or residents). No foreign partners hold interests in Pinnacle. As a result, withholding under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") (Sections 897 and 1445 of the Internal Revenue Code) is not expected to be required in connection with the proposed acquisition. Nevertheless, as a customary safeguard, FIRPTA non-foreign status certificates (affidavits of U.S. person status) will be obtained from each selling member at or prior to closing. Additionally, withholding certificates under Section 1446(f), which requires withholding on the transfer of a partnership interest by a foreign transferor, will be addressed in the closing documentation, although this provision is not expected to be applicable given the domestic status of all sellers.

IV. Alternative Acquisition Structures

A. Structure Alternative 1: Partnership Acquisition (Recommended)

1. Overview of the Structure

Under the recommended partnership acquisition structure, the buyer will acquire 100% of the membership interests in Pinnacle through a reverse merger, with Pinnacle surviving as a partnership for federal income tax purposes. The post-closing organizational structure will consist of three tiers:

Tier 1 — Ardent Healthcare Holdings LLC. A newly formed Delaware limited liability company, classified as a partnership for federal income tax purposes under the default classification rules of Treasury Regulations Section 301.7701-3(b)(1). No Form 8832 election will be filed for Holdings LLC. The members of Holdings LLC will include: (i) Ardent Capital Partners III LP (through Ardent Capital GP III LLC as general partner), contributing the Fund III committed equity of $198.5 million; (ii) the rollover participants (Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth), holding Class B Units; and (iii) Cascadia Mezzanine Fund IV LP, holding warrants exercisable for 2.5% of the fully diluted equity. Holdings LLC will serve as the equity aggregator for the transaction, consolidating all equity investments into a single entity at the top of the organizational structure. Future management incentive equity participants (to be determined post-closing) may also receive equity interests in Holdings LLC.

Tier 2 — Ardent Healthcare Intermediate Inc. A newly formed Delaware C-corporation, wholly owned by Holdings LLC. Intermediate Inc. will serve as a blocker entity for the purpose of: (a) blocking unrelated business taxable income ("UBTI") that would otherwise flow through to tax-exempt limited partners of Fund III; (b) isolating state tax nexus to the operating states and preventing pass-through nexus to Holdings LLC; and (c) facilitating a potential future IPO exit through a conventional corporate vehicle. Intermediate Inc. will hold 100% of the membership interests in the surviving Pinnacle entity following the merger.

Tier 3 — Pinnacle Health Services Group LLC. The target company, surviving the reverse merger, continuing as a Delaware limited liability company classified as a partnership for federal income tax purposes. Post-closing, Pinnacle will be directly owned by Intermediate Inc. as its sole member. In this single-member configuration, Pinnacle would ordinarily be disregarded as an entity separate from Intermediate Inc. under Treasury Regulations Section 301.7701-3(b)(1)(ii). However, depending on the final structure (including whether any de minimis interests are retained by other parties or whether the rollover is structured at the Pinnacle level versus the Holdings LLC level), Pinnacle may either be a disregarded entity or, if it has more than one member, a partnership. For purposes of this memorandum, we assume that Pinnacle will have a single member (Intermediate Inc.) post-closing, in which case it will be disregarded as an entity separate from Intermediate Inc. for federal income tax purposes. Notwithstanding this disregarded status, the Section 754 election and the Section 743(b) basis adjustment computations described below are determined as of the date of the transfer of the partnership interests (i.e., the closing date), at which time Pinnacle is still a multi-member partnership with a Section 754 election in effect.

Merger Mechanics. Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Intermediate Inc., will merge with and into Pinnacle. Upon the effective time of the merger, Merger Sub will cease to exist and Pinnacle will survive as a wholly owned subsidiary of Intermediate Inc. The pre-closing members of Pinnacle will surrender their membership interests in exchange for (a) cash consideration (for non-rollover members and the cashed-out portion of rollover participants' interests) and (b) Class B Units in Holdings LLC (for the rolled-over portion of rollover participants' interests).

Entity Formation. The following entities will be formed through the Delaware Secretary of State, with Pemberton Industries, 251 Little Falls Drive, Wilmington, Delaware 19808, serving as registered agent for each:

• Ardent Healthcare Holdings LLC (anticipated File No. 7834219)

• Ardent Healthcare Intermediate Inc. (anticipated File No. 7834223)

• Ardent Healthcare Merger Sub LLC (anticipated File No. 7834227)

2. Federal Income Tax Consequences to Sellers

Sale of Partnership Interests Under Section 741. Each selling member of Pinnacle will recognize gain or loss upon the sale or exchange of their membership interest in Pinnacle in the reverse merger. Under Section 741 of the Internal Revenue Code, gain or loss from the sale or exchange of a partnership interest is recognized as if the interest were a capital asset, except as otherwise provided in Section 751. Gain is computed as the excess of the amount realized over the seller's adjusted outside basis in the partnership interest. The amount realized includes the sum of all cash received, the fair market value of any property received (including Class B Units in Holdings LLC for rollover participants), and the seller's share of partnership liabilities assumed or relieved in the transaction (per Section 752(d)).

Character of Gain. For each selling member who has held their Pinnacle membership interest for more than one year — which includes all of the co-founders, the CFO, and each of the 14 minority physician-investors, all of whom have held their interests since the Company's founding or within a reasonable time thereafter — the gain recognized on the sale will generally be characterized as long-term capital gain, taxable at the preferential rates applicable to long-term capital gains under Section 1(h) of the Internal Revenue Code (currently a maximum federal rate of 20%, plus the 3.8% net investment income tax under Section 1411, for an aggregate maximum federal rate of 23.8%).

Section 751(a) Recharacterization — "Hot Assets." Notwithstanding the general capital gain characterization under Section 741, Section 751(a) requires that any portion of the gain attributable to the selling member's share of the partnership's "unrealized receivables" (as defined in Section 751(c)) or "inventory" (as defined in Section 751(d)(1), including substantially appreciated inventory) shall be treated as ordinary income rather than capital gain. This recharacterization is mandatory and applies regardless of the length of time the selling member has held the partnership interest.

Pinnacle's accounts receivable from medical services — including amounts billed and unbilled to commercial insurance payors, Medicare, Medicaid, and self-pay patients — constitute "unrealized receivables" within the meaning of Section 751(c). Unrealized receivables include, among other items, rights to payment for goods delivered or to be delivered or services rendered or to be rendered, to the extent not previously included in income under the method of accounting used by the partnership.

Calderwood & Harkness will coordinate with Northmark Advisory Group LLC (the quality of earnings advisor retained by Ardent Capital) and Brewer Stanfield & Associates LLP (Pinnacle's independent accounting firm) to quantify the ordinary income component of each seller's gain attributable to Section 751(a) hot assets. Preliminary analysis suggests that Pinnacle's net accounts receivable at the projected closing date will total approximately $32.4 million. The portion of each seller's gain recharacterized as ordinary income under Section 751(a) will be determined on a pro rata basis, generally equal to the excess of the seller's allocable share of the amount that would be treated as ordinary income if Pinnacle sold all of its Section 751 assets for their fair market value over the seller's allocable share of the partnership's basis in those assets.

Rollover Participants. To the extent the rollover is structured as a Section 721 contribution (as recommended — see Section V below), the portion of each rollover participant's Pinnacle membership interest that is contributed to Holdings LLC in exchange for Class B Units will be a tax-deferred transaction and will not generate current gain recognition. Only the cashed-out portion of each rollover participant's interest will give rise to gain recognition under Sections 741 and 751(a). The tax-deferred treatment is subject to certain conditions, including the absence of a "disguised sale" under Section 707(a)(2)(B) and the Treasury Regulations thereunder. This analysis is addressed in the separate rollover equity tax memorandum to be delivered on February 22, 2024.

3. Federal Income Tax Consequences to Buyer — Section 754 Election and Section 743(b) Basis Step-Up

Section 754 Election. A critical element of the recommended partnership acquisition structure is the making of a Section 754 election by Pinnacle. Under Section 754, a partnership may elect to adjust the basis of its assets in the case of a transfer of a partnership interest by sale or exchange (under Section 743(b)) or a distribution of partnership property (under Section 734(b)). The Section 754 election is made by filing a statement with the partnership's federal income tax return (Form 1065) for the taxable year in which the relevant transfer or distribution occurs. In this case, Pinnacle will make the Section 754 election on its Form 1065 for the taxable year ending December 31, 2024, which is the taxable year that includes the anticipated closing date of the transaction (targeted for Q2 2024).

It is important to note that, once made, the Section 754 election is irrevocable absent the consent of the Internal Revenue Service. The consequences of the irrevocable nature of this election are discussed in Section IV.A.5 below.

Section 743(b) Basis Adjustment. Upon the transfer of a partnership interest by sale or exchange, if a Section 754 election is in effect, Section 743(b) provides that the partnership shall adjust the basis of its assets with respect to the transferee partner. The adjustment is equal to the difference between (i) the transferee partner's outside basis in the partnership interest (generally equal to the purchase price paid for the interest) and (ii) the transferee partner's proportionate share of the partnership's inside basis in its assets (determined under Section 743(b)(1) and Treasury Regulations Section 1.743-1(d)).

The Section 743(b) adjustment is a "special basis adjustment" that applies only to the transferee partner (here, Ardent Healthcare Intermediate Inc.) and does not affect the common basis of the partnership's assets with respect to other partners (although, post-closing, Intermediate Inc. is expected to be the sole partner).

Computation of the Section 743(b) Basis Step-Up. Based on the transaction economics and the preliminary information available regarding Pinnacle's inside basis in its assets, the Section 743(b) basis step-up is computed as follows:

The aggregate inside basis figure of $187,600,000 is a preliminary estimate based on information provided by Brewer Stanfield & Associates LLP and is subject to verification through the ongoing tax diligence process. The final Section 743(b) adjustment will be computed based on Pinnacle's actual inside basis as of the closing date.

Allocation of the Section 743(b) Step-Up Under Section 755. The Section 743(b) basis adjustment must be allocated among Pinnacle's assets under the rules of Section 755 and Treasury Regulations Section 1.755-1. Under these rules, the basis adjustment is allocated first between two categories of partnership assets: (i) capital assets and Section 1231(b) assets ("capital gain property") and (ii) all other property ("ordinary income property"). Within each category, the basis adjustment is then allocated among specific assets in a manner generally consistent with the residual method of allocation prescribed by Section 1060.

The preliminary allocation of the total enterprise value of $412,000,000 among Pinnacle's asset classes (which determines the allocation of the Section 743(b) step-up) is as follows:

The Class V intangible assets include the following components, each of which constitutes a Section 197 intangible asset subject to 15-year amortization (except as otherwise noted):

• Payor contracts: $78,300,000 (amortizable over 15 years under Section 197(d)(1)(C)(i))

• Assembled workforce: $12,100,000 (amortizable over 3 years; note that while assembled workforce is not a separately amortizable Section 197 intangible when acquired as part of the acquisition of a trade or business, the Section 743(b) adjustment allocated to this asset is amortizable as part of the step-up — treatment to be confirmed in the detailed PPA memorandum)

• Trade name: $38,400,000 (amortizable over 15 years under Section 197(d)(1)(F))

• Non-compete agreements: $17,400,000 (amortizable over 5 years under Section 197(d)(1)(E), or the term of the agreement, whichever is shorter; the non-compete term is expected to be 5 years)

A detailed purchase price allocation schedule and supporting memorandum will be prepared separately (anticipated delivery in April 2024) and will be coordinated with the buyer's independent valuation firm (to be engaged).

Amortization Benefit. The Section 743(b) basis step-up of $224,400,000 is amortizable over the weighted-average useful life of the underlying assets, taking into account the different amortization periods applicable to each asset class. Based on the preliminary allocation above, the weighted-average useful life is estimated at approximately 11.2 years, computed as follows:

Note: The Class I and Class III step-up amounts do not generate amortization deductions in the same manner as the intangible and tangible property classes; the accounts receivable step-up will generate a deduction upon collection. The weighted-average useful life of approximately 11.2 years is a blended estimate across all depreciable and amortizable asset classes.

Based on these preliminary estimates:

• Annual amortization deduction: $224,400,000 ÷ 11.2 years = approximately $20,040,000 per year

• Blended federal and state effective tax rate: approximately 25% (consisting of the 21% federal corporate income tax rate applicable to Intermediate Inc., plus a blended state effective tax rate of approximately 4%, net of the federal deduction for state taxes paid)

• Annual tax benefit: $20,040,000 × 25% = approximately $5,010,000 per year

These estimates are subject to refinement based on the final purchase price allocation, the actual closing date, and the applicable tax rates.

Tax Receivable Agreement (TRA). The parties have discussed entering into a Tax Receivable Agreement pursuant to which Ardent (through the holding company structure) would share a portion of the realized tax benefits from the Section 743(b) step-up with the pre-closing members of Pinnacle and the rollover participants. The preliminary terms contemplate a sharing percentage of 85%, meaning that 85% of the cash tax savings actually realized by the buyer as a result of the Section 743(b) amortization deductions would be payable to the TRA beneficiaries, with the buyer retaining the remaining 15% of the benefit. Based on the estimated annual tax benefit of $5,010,000:

• Estimated annual TRA payment: 85% × $5,010,000 = approximately $4,260,000 per year (declining over the amortization period as the amortization deductions are fully utilized)

Calderwood & Harkness will prepare a draft Tax Receivable Agreement for client review. The TRA will address, among other things, the computation methodology, payment timing, early termination provisions (including acceleration upon a change of control), and the treatment of audit adjustments that may affect the realized tax benefits. Delivery of the draft TRA is anticipated in March 2024.

4. Advantages of Partnership Acquisition Structure

The recommended partnership acquisition structure offers the following principal advantages:

(a) Automatic basis step-up via Section 743(b). The buyer obtains a full basis step-up in its share of Pinnacle's assets without requiring a taxable transaction at the entity level. Unlike the Section 338(h)(10) alternative (discussed in Section IV.B below), the Section 743(b) step-up does not require a deemed asset sale or deemed liquidation of the target entity. The step-up arises automatically upon the transfer of the partnership interests, provided a Section 754 election is in effect.

(b) Single level of tax on sellers. The selling members of Pinnacle are subject to a single level of tax on their gain from the sale of their partnership interests. Because Pinnacle is a partnership and not a corporation, there is no entity-level tax imposed on the Company in connection with the sale. This contrasts with the corporate acquisition structure, in which a check-the-box election followed by a Section 338(h)(10) election would trigger entity-level gain that flows through to the sellers.

(c) Preservation of flow-through character for Fund III's limited partners. The partnership classification of Holdings LLC preserves the flow-through character of income and deductions for the limited partners of Fund III, to the extent they invest through the Holdings LLC structure. For tax-exempt and foreign limited partners, the C-corporation blocker (Intermediate Inc.) is interposed to block UBTI and withholding tax exposure. This dual structure allows Ardent to accommodate the diverse tax profiles of its investor base.

(d) Tax-deferred rollover equity under Section 721. The rollover equity can be structured as a tax-deferred contribution of partnership interests (or the economic equivalent thereof through the merger mechanics) to Holdings LLC under Section 721, which provides that no gain or loss is recognized by a partner or a partnership upon the contribution of property to the partnership in exchange for a partnership interest. This treatment allows the rollover participants to defer recognition of gain on the rolled-over portion of their equity until a future disposition of their Class B Units.

(e) Structural flexibility for future exit. The three-tier structure provides significant flexibility for future exit strategies, including a potential initial public offering. In an IPO scenario, Intermediate Inc. (the C-corporation blocker) could serve as the IPO vehicle, or a new C-corporation could be formed above or alongside the existing structure. The existence of a C-corporation in the structure from inception simplifies the IPO preparation process and avoids the need for a taxable conversion at the time of the IPO.

(f) No incremental seller-level gain. Unlike the Section 338(h)(10) alternative, the partnership acquisition structure does not trigger incremental seller-level gain beyond the gain inherent in the sale of the partnership interests. This is a significant economic advantage, as discussed in the comparative analysis in Section IV.B below.

(g) Favorable treatment of profits interests. The partnership structure at the Holdings LLC level allows unvested rollover equity to be structured as profits interests under Revenue Procedure 93-27 and Revenue Procedure 2001-43, with favorable tax treatment. Specifically, a properly structured profits interest is not taxable at the time of grant (even if no Section 83(b) election is made), and the holder is treated as a partner for tax purposes from the date of grant. The availability of the Section 83(b) election provides an additional layer of protection, ensuring that no income is recognized on the profits interest at the time of vesting (because the election causes the income inclusion to occur at the time of grant, when the value of the profits interest is zero).

5. Disadvantages and Risks of Partnership Acquisition Structure

The partnership acquisition structure also presents certain disadvantages and risks that should be carefully considered:

(a) Irrevocability of Section 754 election. Once made, the Section 754 election is irrevocable absent the consent of the Internal Revenue Service, which is granted only in limited circumstances. The election applies to all future transfers of partnership interests in Pinnacle, not only the acquisition transfer. This means that if, in a future sale or other transfer of Pinnacle interests, the transferee's purchase price is less than its proportionate share of Pinnacle's inside basis (after prior adjustments), the Section 754 election would require a downward adjustment to the basis of partnership assets with respect to the new transferee. While this scenario would arise only in a sale at a depressed valuation, it is a structural risk that should be understood at the outset.

(b) Computational complexity and ongoing tracking requirements. The Section 743(b) adjustment is a "special basis adjustment" that applies only to the transferee partner. Pinnacle must maintain separate books and records to track the special basis adjustment and its amortization over time. This requirement adds ongoing administrative complexity and cost, particularly in the context of a multi-state healthcare operation with numerous asset categories and varying amortization periods. Pinnacle's accounting firm (or a successor firm retained by Ardent) must be capable of maintaining these records accurately.

(c) Section 751(a) hot asset recharacterization. The mandatory recharacterization of a portion of the sellers' gain as ordinary income under Section 751(a) may increase the aggregate tax liability of the selling members relative to a structure in which all gain is treated as long-term capital gain. While this recharacterization is a function of Pinnacle's asset composition (and would apply regardless of the acquisition structure chosen), the detailed allocation analysis required by Section 751(a) adds complexity to the closing process and may create disagreements between buyer and seller counsel regarding the appropriate allocation methodology.

(d) Ongoing partnership compliance obligations. Post-closing, Pinnacle must continue to file Form 1065 (U.S. Return of Partnership Income) and issue Schedules K-1 to its partners (including Intermediate Inc.) for each taxable year. While the administrative burden is somewhat reduced by the fact that Pinnacle will have only a single member post-closing (and may therefore be treated as a disregarded entity for ongoing filing purposes), the Section 754 election and Section 743(b) adjustment computations must nonetheless be reflected on the final pre-closing return and tracked in subsequent years.

(e) State tax non-conformity risk. The treatment of the Section 743(b) basis adjustment at the state level varies by jurisdiction. While most states generally conform to the federal treatment, certain states may not fully recognize the Section 743(b) adjustment or may apply different rules for computing the adjustment or its amortization. This risk is particularly relevant for Pinnacle given its operations in five states (Pennsylvania, Virginia, Maryland, North Carolina, and Georgia). A detailed state-by-state conformity analysis will be provided in the separate State and Local Tax Memorandum dated February 20, 2024.

B. Structure Alternative 2: Corporate Acquisition (Check-the-box Election)

1. Overview. Under the corporate acquisition alternative, Pinnacle would file a Form 8832 (Entity Classification Election) with the Internal Revenue Service, electing to be classified as an association taxable as a corporation (i.e., a C-corporation) for federal income tax purposes, effective immediately prior to the closing date of the acquisition. This election is commonly referred to as a "check-the-box" election.

The deemed tax consequences of a check-the-box election by a partnership are specified in Treasury Regulations Section 301.7701-3(g)(1)(i), which provides that the election is treated as if the partnership contributed all of its assets and liabilities to a newly formed corporation in exchange for all of the stock of the corporation, followed immediately by a deemed distribution of the stock to the partners of the partnership in proportion to their partnership interests. This is known as the "assets-over" form of incorporation.

The deemed contribution of assets to the newly formed corporation is generally treated as a tax-free transaction under Section 351 of the Internal Revenue Code, provided that the transferors (the deemed contributing partners) hold at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock of the corporation immediately after the exchange. In this case, the Section 351 requirements should be satisfied because all of the pre-closing partners of Pinnacle would be the deemed transferors, and they would collectively hold 100% of the stock of the deemed corporation immediately after the deemed exchange.

However, even if Section 351 applies, certain gain may be recognized if the sum of the liabilities assumed by the deemed corporation exceeds the aggregate adjusted basis of the assets contributed. Under Section 357(c), if the liabilities assumed exceed the basis of the contributed assets, the excess is treated as gain recognized by the contributing transferor. Based on the preliminary information available, Pinnacle's funded debt of $81.3 million does not appear to exceed its aggregate inside basis of $187.6 million, but this requires further diligence to confirm, particularly with respect to contingent liabilities and other obligations that may be treated as "liabilities" for Section 357(c) purposes.

Following the deemed incorporation, Ardent would acquire 100% of the stock of the newly deemed corporation, either through a direct stock purchase or through a merger structure analogous to the reverse merger described in Section IV.A above.

2. Section 338(h)(10) Election — Preliminary Analysis

If the corporate acquisition structure were adopted and the stock of the deemed corporation were acquired, the buyer and sellers could jointly elect under Section 338(h)(10) of the Internal Revenue Code to treat the qualified stock purchase as a deemed asset acquisition for tax purposes. A detailed comparison memorandum analyzing Section 338(h)(10) versus Section 754 / 743(b) will be delivered on February 28, 2024. This section provides a preliminary overview of the key considerations.

Effect of a Section 338(h)(10) Election. If a Section 338(h)(10) election were made:

(i) The target (the deemed corporation resulting from the check-the-box election) would be treated as having sold all of its assets in a single transaction on the closing date for an amount equal to the "aggregate deemed sale price" (ADSP), as computed under Treasury Regulations Section 1.338-4.

(ii) The deemed asset sale would generate gain recognized at the target entity level, computed as the excess of the ADSP allocated to each asset over the target's adjusted basis in that asset. This gain would be reported on the target's final tax return (a short-period return for the period ending on the closing date).

(iii) The buyer would obtain a full basis step-up in all of the target's assets, with the stepped-up basis equal to the "adjusted grossed-up basis" (AGUB) of the target's assets, computed under Treasury Regulations Section 1.338-5. The AGUB is generally equal to the purchase price for the stock, plus the target's liabilities, plus certain other relevant items.

(iv) The buyer's stepped-up basis in the target's assets would be amortizable over the applicable recovery periods — 15 years for Section 197 intangibles (including goodwill), and the applicable MACRS recovery periods for tangible personal property.

Incremental Seller-Level Gain. The critical disadvantage of the Section 338(h)(10) approach in this transaction is the incremental seller-level gain that would be triggered by the deemed asset sale. Under the recommended partnership acquisition structure, the sellers recognize gain only on the sale of their partnership interests (Sections 741 and 751(a)), and no entity-level tax is imposed on Pinnacle. Under the Section 338(h)(10) approach, the deemed asset sale at the target level generates entity-level gain that, although it technically occurs at the corporation level, is reported on the target's final corporate tax return and effectively flows through to the selling shareholders through the liquidation mechanics of the Section 338(h)(10) election.

The incremental seller-level gain under the Section 338(h)(10) approach is computed as follows:

This incremental gain of approximately $48.3 million represents gain that the sellers would recognize in addition to the gain they would recognize under the partnership acquisition structure. At a blended federal and state tax rate applicable to the sellers (estimated at approximately 25%, considering both capital gains and ordinary income components), the incremental tax cost to the sellers would be approximately $12,075,000.

Buyer Amortization Benefit Under Section 338(h)(10). The buyer would obtain a full basis step-up to $412 million in Pinnacle's assets under the Section 338(h)(10) election, which is economically comparable to the Section 743(b) step-up in the partnership structure. However, under the Section 338(h)(10) approach, the step-up would be allocated among the target's assets under the residual method of Section 1060, with all intangible assets (including goodwill) amortizable over 15 years under Section 197. The net present value of the buyer's amortization benefit under the Section 338(h)(10) approach is computed as follows:

• Aggregate step-up: $412,000,000 − $187,600,000 = $224,400,000

• Amortization period: 15 years (for Section 197 intangibles, which constitute the majority of the step-up)

• Annual amortization deduction: $224,400,000 ÷ 15 = $14,960,000

• Blended tax rate: 25%

• Annual tax benefit: $14,960,000 × 25% = $3,740,000

• Net present value (8% discount rate, 15 years): approximately $31,700,000

Net Comparison. The incremental seller-level gain of approximately $48.3 million (approximately $12.1 million in incremental taxes) significantly exceeds the NPV of the buyer's amortization benefit of approximately $31.7 million. Moreover, the NPV of the buyer's amortization benefit under the Section 338(h)(10) approach ($31.7 million) is less than the NPV of the buyer's amortization benefit under the recommended partnership acquisition structure (approximately $35.6 million), because the partnership structure allows for shorter amortization periods on certain asset categories (e.g., assembled workforce over 3 years, non-competes over 5 years, tangible assets over 5-7 years) compared to the uniform 15-year amortization period that would apply under Section 197 to all intangible assets acquired in a Section 338(h)(10) transaction.

Even if Ardent were to agree to compensate the sellers for their incremental tax cost (a "tax gross-up" or "tax indemnity" that is customary in Section 338(h)(10) transactions), the economics of the Section 338(h)(10) approach are materially unfavorable compared to the partnership acquisition structure.

Conclusion. Based on this preliminary analysis, Calderwood & Harkness does not recommend the Section 338(h)(10) approach. The Section 754 / 743(b) approach under the partnership acquisition structure achieves substantially the same buyer amortization benefit — and, in fact, a superior amortization benefit due to the availability of shorter recovery periods for certain asset classes — without triggering the approximately $48.3 million in incremental seller-level gain that would result from the Section 338(h)(10) election.

3. Disadvantages of Corporate Acquisition Structure

In addition to the unfavorable economics of the Section 338(h)(10) election discussed above, the corporate acquisition structure presents the following additional disadvantages:

(a) Incremental seller-level gain. As described above, the corporate acquisition structure with a Section 338(h)(10) election would trigger approximately $48.3 million in incremental seller-level gain, resulting in approximately $12.1 million in incremental taxes to the selling members. Even without a Section 338(h)(10) election, the check-the-box conversion itself may generate gain if Section 357(c) applies.

(b) Potential double taxation. If the C-corporation classification were maintained post-closing without a Section 338(h)(10) election, the corporate acquisition structure would subject Pinnacle's income to double taxation: first at the entity level (at the 21% federal corporate tax rate, plus applicable state corporate income taxes) and again at the shareholder level upon distribution of earnings (at the applicable dividend tax rate). While the Section 338(h)(10) election eliminates the double taxation issue by treating the transaction as a deemed asset sale on the final corporate return, the election comes with its own costs as described above.

(c) Check-the-box election as a taxable event. The check-the-box election itself — converting Pinnacle from a partnership to a corporation — is a taxable event that must be carefully analyzed. While the deemed incorporation is generally treated as a tax-free Section 351 transaction (as discussed in Section IV.B.1 above), gain may be recognized if Pinnacle's liabilities exceed the aggregate basis of its assets at the time of the conversion (under Section 357(c)), or if certain other exceptions to Section 351 non-recognition apply. This requires further diligence to confirm, and introduces transactional risk that is absent from the partnership acquisition structure.

(d) Loss of partnership flow-through benefits. Converting Pinnacle to a C-corporation would permanently eliminate the flow-through character of the entity, precluding the pass-through of income, deductions, and credits to the partners. While the recommended partnership structure also interposes a C-corporation blocker (Intermediate Inc.) between Holdings LLC and Pinnacle, the blocker is designed to serve specific tax policy objectives (Blocking UBTI and isolating state tax nexus) while preserving flow-through treatment at the Holdings LLC level. The corporate acquisition structure would eliminate flow-through treatment entirely.

(e) Seller opposition. Patricia Engelman, Partner, Tax, at Whitford & Gaines LLP, has indicated in preliminary discussions that Pinnacle's founders — Dr. Carvallo and Dr. Ostrowski — strongly prefer to avoid any acquisition structure that would increase their tax liability relative to a straightforward partnership interest sale. Given that the corporate acquisition structure with a Section 338(h)(10) election would trigger approximately $48.3 million in incremental seller-level gain, seller opposition to this structure is expected to be significant. Proceeding with the corporate structure over seller objections would likely require the buyer to compensate the sellers for their incremental tax cost (through a higher purchase price or a tax indemnity), which would reduce the net economic benefit to Ardent.

V. Rollover Equity — Structural Considerations (Preliminary)

As described in Section II.D above, three of Pinnacle's existing members — Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth — will contribute a portion of their equity proceeds to Ardent Healthcare Holdings LLC in exchange for Class B Units. The aggregate rollover amount is approximately $59.54 million. This section provides a preliminary analysis of the tax treatment of the rollover transaction under the recommended partnership acquisition structure.

Two Potential Tax-Deferred Treatment Pathways. The rollover may qualify for tax-deferred treatment under one of two provisions of the Internal Revenue Code, depending on the tax classification of the recipient entity:

Section 721 — Partnership Contribution. If Holdings LLC is classified as a partnership for federal income tax purposes (as recommended), the contribution of property (including partnership interests in Pinnacle) to Holdings LLC in exchange for Class B Units is governed by Section 721(a), which provides that no gain or loss shall be recognized by a partnership or any of its partners upon the contribution of property to the partnership in exchange for a partnership interest. Under Section 721, the contributing partner takes a carryover basis in the Class B Units equal to the contributor's adjusted basis in the contributed property (Section 722), and Holdings LLC takes a carryover basis in the contributed property equal to the contributor's adjusted basis immediately before the contribution (Section 723). No gain is recognized by either party.

Section 351 — Corporate Contribution. If a corporate structure were used at the holding company level — that is, if Holdings LLC were organized as a corporation rather than a partnership — the contribution of property in exchange for stock would be governed by Section 351(a), which provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation, provided that the transferors, as a group, hold at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock of the corporation immediately after the exchange. However, this pathway is not applicable under the recommended structure because Holdings LLC is classified as a partnership, not a corporation.

Recommendation. Calderwood & Harkness recommends Section 721 treatment at the Holdings LLC level. This approach preserves the carryover basis in the contributed interests (which, when combined with the Section 743(b) step-up at the Pinnacle level, provides the buyer with the full economic benefit of the stepped-up basis), avoids current gain recognition by the rollover participants on the contributed portion of their interests, and maintains consistency with the overall partnership acquisition structure. The partnership classification of Holdings LLC also allows the rollover to be structured as a direct contribution of partnership interests (or the economic equivalent thereof through the merger mechanics) without the need to satisfy the 80% control requirement of Section 351.

Additionally, the partnership structure at the Holdings LLC level allows the unvested portion of the rollover equity to be characterized as profits interests under Revenue Procedure 93-27 and Revenue Procedure 2001-43, which provide that the receipt of a profits interest in exchange for services rendered to or for the benefit of the partnership is generally not a taxable event if certain conditions are met. This favorable treatment is available only in the partnership context and would not be available if Holdings LLC were classified as a corporation.

A detailed rollover equity tax memorandum analyzing Section 721 versus Section 351 treatment, the mechanics of the contribution, the disguised sale rules of Section 707(a)(2)(B), and the profits interest characterization of the unvested component will be delivered separately on or about February 22, 2024.

VI. Blocker Entity — Ardent Healthcare Intermediate Inc.

The recommended acquisition structure interposes a C-corporation blocker entity — Ardent Healthcare Intermediate Inc. — between Holdings LLC and Pinnacle (the surviving operating entity). This section describes the purposes and benefits of the blocker entity.

Purposes of the blocker Entity.

(a) blocking UBTI for Tax-Exempt Limited Partners. Fund III's limited partner base includes tax-exempt investors such as university endowments, charitable foundations, and pension funds. Under Section 512(a)(1) of the Internal Revenue Code, a tax-exempt organization is subject to the unrelated business income tax ("UBIT") on its "unrelated business taxable income" ("UBTI"). UBTI includes, among other items, income from a trade or business regularly carried on by the tax-exempt organization that is not substantially related to the organization's exempt purpose. Importantly, under Section 512(c)(1), if a tax-exempt organization is a partner in a partnership, the organization's share of the partnership's gross income from an unrelated trade or business is included in the organization's UBTI.

Additionally, under Section 514, income from debt-financed property is treated as UBTI to the extent of the debt-financed percentage. Given that the proposed acquisition will be significantly leveraged (with $155 million in term loan debt, $35 million in revolving credit capacity, and $30 million in mezzanine financing), the debt-financed income flowing through the partnership structure would generate substantial UBTI for any tax-exempt limited partner that holds its interest in Fund III through the partnership structure.

By interposing a C-corporation (Intermediate Inc.) between Holdings LLC and the operating entity (Pinnacle), the income from Pinnacle's operations is "Blocked" at the Intermediate Inc. level. The tax-exempt limited partners receive only dividends from Intermediate Inc. (through the chain of entities), and dividends from a controlled corporation are generally not treated as UBTI. This blocker structure is the standard approach used by private equity sponsors to accommodate tax-exempt investors.

(b) Facilitating a Potential Future IPO Exit. A C-corporation is the standard vehicle for an initial public offering in the U.S. public equity markets. By incorporating a C-corporation blocker into the acquisition structure from inception, the buyer preserves the option to use Intermediate Inc. (or a successor entity) as the IPO vehicle in a future exit, without the need for a taxable conversion from partnership to corporate form at the time of the IPO. This structural planning reduces the tax friction associated with a future public exit and provides optionality for the Ardent deal team.

(c) Isolating State Tax Nexus. Intermediate Inc. will file corporate income tax returns in each of the states in which Pinnacle operates (Pennsylvania, Virginia, Maryland, North Carolina, and Georgia). By concentrating the operating income and the corresponding state tax obligations at the Intermediate Inc. level, the blocker structure shields Holdings LLC from direct nexus in those states. This is particularly important because Holdings LLC, as a partnership, would otherwise create pass-through nexus for its members (including Fund III and the individual rollover participants) in each state in which Pinnacle operates, potentially subjecting those members to filing obligations and withholding requirements in multiple states.

(d) Mitigating New York Nexus Risk. Ardent Capital's offices are located at 600 Lexington Avenue, 38th Floor, New York, New York 10022. The management activities conducted from these offices — including deal origination, portfolio company oversight, investment committee meetings, and fund administration — could create nexus for Holdings LLC in New York, potentially subjecting Holdings LLC and its members to the New York City unincorporated business tax (UBT) and the New York State personal income tax on a p

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 Claire Ashworth, Co-Founder & Managing Partner Ardent Capital Partners III LP 600 Lexington Avenue, 38th Floor New York, NY 10022
Date: February 12, 2024
Re: Preliminary Tax Structure Analysis — Proposed Acquisition of Pinnacle Health Services Group LLC
Engagement No.: 1001-00006
Matter No.: 1001-00006
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I. Executive Summary
Calderwood & Harkness LLP has been engaged by Ardent Capital Partners III LP ("Ardent Capital" or "Fund III") to advise on the tax structuring of the proposed acquisition of 100% of the membership interests in Pinnacle Health Services Group LLC ("Pinnacle" or the "Company") at an aggregate enterprise value of approximately $412 million. This memorandum sets forth our preliminary analysis of the principal structural alternatives available for the proposed acquisition and provides our recommendation as to the optimal structure from a federal income tax perspective. Supplemental memoranda addressing specific sub-topics identified herein are either in preparation or have been delivered separately, as noted below.
Pinnacle is a Delaware limited liability company currently classified as a partnership for federal income tax purposes (EIN 82-1947632). The Company has never filed a Form 8832 electing corporate classification, and has filed annual partnership returns (Form 1065) since its formation in 2016. Pinnacle operates 34 urgent care clinics and 8 ambulatory surgery centers across five states — Pennsylvania, Virginia, Maryland, North Carolina, and Georgia — and employs approximately 1,620 individuals, including 142 employed physicians. For the fiscal year ended December 31, 2023, Pinnacle reported total revenue of approximately $287.4 million and Adjusted EBITDA of approximately $51.8 million, implying an EV/EBITDA acquisition multiple of approximately 7.95x.
This memorandum analyzes two principal acquisition structure alternatives:
(A) A partnership acquisition structure in which Pinnacle's existing partnership tax classification is maintained, and the buyer acquires the membership interests of the partnership entity, combined with a Section 754 election giving rise to a Section 743(b) basis step-up in Pinnacle's assets; and
(B) A corporate acquisition structure involving a "check-the-box" election under Treasury Regulations Section 301.7701-3 to convert Pinnacle from a partnership to a C-corporation immediately prior to closing, followed by a stock acquisition of the deemed corporation, potentially with an election under Section 338(h)(10) of the Internal Revenue Code to treat the stock acquisition as a deemed asset acquisition.
After analyzing both alternatives, and taking into account the economic terms of the proposed acquisition, the composition of the seller group, the rollover equity arrangements, the anticipated financing structure, the operating profile of the Company, and the tax characteristics of Fund III's limited partner base, Calderwood & Harkness recommends a three-tier partnership acquisition structure, organized as follows:
Ardent Healthcare Holdings LLC (taxed as a partnership; equity aggregator) ↓ Ardent Healthcare Intermediate Inc. (C-corporation blocker entity) ↓ Pinnacle Health Services Group LLC (surviving partnership entity; operating company)
This recommended structure optimizes the buyer's amortization benefit through a Section 743(b) basis step-up of approximately $224.4 million without triggering incremental seller-level gain recognition, preserves flow-through characteristics for Fund III's tax-exempt and foreign limited partners through the C-corporation blocker, facilitates tax-deferred rollover equity treatment under Section 721 at the Holdings LLC level, and provides structural flexibility for a future exit, including a potential initial public offering.
The following supplemental memoranda are either in preparation or have been delivered:
•  A separate detailed memorandum comparing Section 338(h)(10) treatment versus Section 754 / 743(b) treatment will be delivered on February 28, 2024.
•  A separate blocker entity analysis memorandum was delivered on February 16, 2024.
•  A separate rollover equity tax memorandum (Section 721 vs. Section 351 analysis) will be delivered on February 22, 2024.
•  A separate state and local tax memorandum will be delivered on February 20, 2024.
•  A separate earnout tax characterization memorandum will be delivered on March 1, 2024.
This memorandum should be read in conjunction with those supplemental analyses as they become available.
II. Transaction Overview
A. Parties
The following is a summary of the principal parties to the proposed transaction and their respective advisors:
Buyer / Sponsor. Ardent Capital Partners III LP ("Ardent Capital" or "Fund III") is a Delaware limited partnership with a vintage year of 2022 and total committed capital of approximately $3.2 billion. Fund III is managed by its general partner, Ardent Capital GP III LLC, a Delaware limited liability company. The Co-Founders and Managing Partners of the Ardent Capital platform are Dominic Ferrera and Claire Ashworth. The deal team for the proposed Pinnacle acquisition is led by Marcus Pellegrino, Partner, Healthcare, within the Ardent Capital investment team.
Target. Pinnacle Health Services Group LLC is a Delaware limited liability company classified as a partnership for federal income tax purposes (EIN 82-1947632). The Company is headquartered at 2200 Renaissance Boulevard, Suite 400, King of Prussia, Pennsylvania 19406. Pinnacle was founded in 2016 by Dr. Raymond Carvallo and Dr. Nadia Ostrowski. The current ownership of the Company is as follows:
Seller's Counsel. Whitford & Gaines LLP, Philadelphia, Pennsylvania. The engagement is led by Patricia Engelman, Partner, Tax, and Kevin Driscoll, Associate, M&A/Tax.
Buyer's M&A Counsel. Harcourt Shaw & DeVries LLP, New York, New York. The engagement is led by Thomas Kundra, Partner, M&A, and Allison Cho, Associate, M&A.
Financial Advisor to Ardent Capital. Meridian Tuck Partners LLC, New York, New York. The engagement is led by Daniel Kessler, Managing Director.
Financial Advisor to Pinnacle. Larchmont & Co., Philadelphia, Pennsylvania. The engagement is led by Sarah Quinlan, Managing Director.
B. Transaction Economics
The principal economic terms of the proposed acquisition, as set forth in the term sheet executed on January 28, 2024, are summarized below:
The proposed financing structure for the acquisition is as follows:
Senior Secured Facilities. Graystone National Bank, N.A. will serve as lead arranger and administrative agent for the senior secured credit facilities, which will consist of: (i) a Term Loan B in the principal amount of $155,000,000, bearing interest at SOFR plus 425 basis points, with a seven-year maturity, to be syndicated among Graystone, Ridgepoint Capital Markets LLC, and Thorncrest Credit Partners LP; and (ii) a Revolving Credit Facility in the aggregate principal amount of $35,000,000, bearing interest at SOFR plus 375 basis points, with a five-year maturity. The Term Loan B will be drawn in full at closing to fund a portion of the purchase price. The Revolving Credit Facility is expected to be undrawn at closing and will be available for working capital and general corporate purposes post-closing.
Mezzanine Facility. Cascadia Mezzanine Fund IV LP will provide a subordinated mezzanine facility in the principal amount of $30,000,000, consisting of subordinated notes bearing interest at 12.5% cash pay plus 2.0% payment-in-kind (PIK), with an eight-year maturity. In connection with the mezzanine facility, Cascadia will receive warrants entitling it to acquire 2.5% of the fully diluted equity interests in the holding company (Ardent Healthcare Holdings LLC).
C. Transaction Mechanics
The proposed acquisition will be structured as a reverse merger. Specifically, Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of the buyer structure, will merge with and into Pinnacle Health Services Group LLC, with Pinnacle surviving the merger as a wholly owned subsidiary of Ardent Healthcare Intermediate Inc. As a result of the merger, 100% of the pre-closing membership interests in Pinnacle will be acquired by the buyer structure, and the pre-closing members of Pinnacle will receive their respective merger consideration — either cash or a combination of cash and Class B Units in the holding company (for rollover participants) — in exchange for their membership interests.
The reverse merger structure is preferred over a direct purchase of membership interests for several reasons, including: (i) the reverse merger provides a cleaner mechanism for effecting the simultaneous exchange of consideration to multiple sellers; (ii) the merger agreement form provides more comprehensive representations, warranties, and indemnification provisions than a typical membership interest purchase agreement; and (iii) the merger structure ensures that all membership interests, including those of minority physician-investors, are acquired in a single, coordinated transaction without requiring separate purchase agreements.
D. Rollover Equity
Certain founders and members of senior management will roll over a portion of their equity proceeds into the post-closing buyer entity, as summarized below:
The rollover equity of $59,547,730 (rounded herein to $59.54 million) represents the following percentages of post-closing equity:
•  Pre-dilution: $59.54M ÷ ($198.5M + $59.54M) = approximately 23.08%
•  Fully diluted (after giving effect to the 2.5% warrant coverage to Cascadia Mezzanine Fund IV LP): approximately 22.50%
The rollover equity will be structured as Class B Units in Ardent Healthcare Holdings LLC, the top-tier holding company. The vesting terms are as follows:
•  50% of the rollover equity shall be fully vested at closing.
•  50% of the rollover equity shall vest ratably over a 36-month period following the closing date, subject to the continued employment of Dr. Carvallo and Dr. Ostrowski with the Company (or an affiliate thereof). Mr. Farnsworth's unvested portion is also subject to continued employment.
•  The unvested component of the rollover equity will be treated as "profits interests" for federal income tax purposes, meaning that the unvested units will initially have a liquidation value of zero and will participate only in the future appreciation of the enterprise above a designated threshold (the "hurdle" or "participation threshold"), which is expected to be set at the closing date fair market value of the enterprise on a per-unit basis.
The dollar amounts of the unvested rollover equity are as follows:
Each rollover participant will be required to file an election under Section 83(b) of the Internal Revenue Code within 30 days of the closing date with respect to their unvested Class B Units. The Section 83(b) election ensures that the unvested units are included in income (if any income inclusion is required) at the time of the closing, based on the fair market value of the units at that time, rather than being deferred until vesting occurs. For unvested units that are properly structured as profits interests with a zero liquidation value at issuance, the Section 83(b) election is expected to result in zero income inclusion at the time of the election. This treatment is consistent with Revenue Procedure 93-27, Revenue Procedure 2001-43, and proposed Treasury Regulations under Section 83 relating to partnership interests.
A separate rollover equity tax memorandum, including a detailed analysis of Section 721 versus Section 351 treatment and the profits interest characterization, will be delivered on or about February 22, 2024.
E. Earnout
The purchase agreement will include a two-period earnout provision, pursuant to which additional consideration may be payable to the pre-closing members of Pinnacle based on the post-closing financial performance of the Company. The earnout terms are as follows:
The earnout payments are binary — the full payment for each period is earned if the target EBITDA threshold is met or exceeded, and no payment is made if the target is not met. No pro rata or proportional payment mechanism applies for performance below the target threshold.
The purchase agreement will include an earnout acceleration clause pursuant to which 100% of any remaining unpaid earnout amounts shall become immediately payable upon a change of control of the holding company (Ardent Healthcare Holdings LLC) during the earnout period.
The federal income tax characterization of the earnout payments — whether as additional purchase price (capital gains treatment to sellers), compensation for services (ordinary income treatment), or imputed interest — requires detailed analysis based on the specific terms of the earnout provision, the employment relationship of the earnout recipients, and applicable case law and IRS guidance. A separate earnout tax characterization memorandum is anticipated to be delivered on or about March 1, 2024.
III. Current Tax Classification of Pinnacle
Pinnacle Health Services Group LLC is organized as a limited liability company under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.). For federal income tax purposes, the classification of a domestic limited liability company with two or more members is determined under the entity classification rules set forth in Treasury Regulations Section 301.7701-3 (the "check-the-box" regulations).
Under Treasury Regulations Section 301.7701-3(b)(1), a domestic eligible entity that has two or more members is classified as a partnership by default, unless the entity affirmatively elects to be classified as an association taxable as a corporation by filing a Form 8832 (Entity Classification Election) with the Internal Revenue Service. A domestic eligible entity that has a single owner is disregarded as an entity separate from its owner by default, unless an affirmative election to be classified as a corporation is made.
Based on our review of the following materials, we have confirmed that Pinnacle has not filed a Form 8832 electing corporate classification at any time since its formation:
(a) Representations made by Patricia Engelman, Partner, Tax, and Kevin Driscoll, Associate, M&A/Tax, at Whitford & Gaines LLP (Pinnacle's counsel) in correspondence dated January 22, 2024, confirming that no Form 8832 election has been filed by Pinnacle;
(b) Review of Pinnacle's historical federal income tax returns (Forms 1065, U.S. Return of Partnership Income) for the tax years 2016 through 2022 (the 2023 return is not yet filed but is expected to be filed on extension), as provided by Brewer Stanfield & Associates LLP, Pinnacle's independent accounting firm; and
(c) Review of the Company's Amended and Restated Operating Agreement dated August 12, 2016 (as amended by the First Amendment dated March 3, 2020), which contains provisions consistent with partnership tax classification, including provisions for the allocation of items of income, gain, loss, deduction, and credit among the members and the issuance of Schedules K-1.
Accordingly, Pinnacle is and has at all times since its formation been classified as a partnership for federal income tax purposes under the default classification rules. The Company has filed Forms 1065 annually and has issued Schedules K-1 (Partner's Share of Income, Deductions, Credits, etc.) to its members for each taxable year.
All of Pinnacle's membership interests are currently held by U.S. persons (individual U.S. citizens or residents). No foreign partners hold interests in Pinnacle. As a result, withholding under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") (Sections 897 and 1445 of the Internal Revenue Code) is not expected to be required in connection with the proposed acquisition. Nevertheless, as a customary safeguard, FIRPTA non-foreign status certificates (affidavits of U.S. person status) will be obtained from each selling member at or prior to closing. Additionally, withholding certificates under Section 1446(f), which requires withholding on the transfer of a partnership interest by a foreign transferor, will be addressed in the closing documentation, although this provision is not expected to be applicable given the domestic status of all sellers.
IV. Alternative Acquisition Structures
A. Structure Alternative 1: Partnership Acquisition (Recommended)
1. Overview of the Structure
Under the recommended partnership acquisition structure, the buyer will acquire 100% of the membership interests in Pinnacle through a reverse merger, with Pinnacle surviving as a partnership for federal income tax purposes. The post-closing organizational structure will consist of three tiers:
Tier 1 — Ardent Healthcare Holdings LLC. A newly formed Delaware limited liability company, classified as a partnership for federal income tax purposes under the default classification rules of Treasury Regulations Section 301.7701-3(b)(1). No Form 8832 election will be filed for Holdings LLC. The members of Holdings LLC will include: (i) Ardent Capital Partners III LP (through Ardent Capital GP III LLC as general partner), contributing the Fund III committed equity of $198.5 million; (ii) the rollover participants (Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth), holding Class B Units; and (iii) Cascadia Mezzanine Fund IV LP, holding warrants exercisable for 2.5% of the fully diluted equity. Holdings LLC will serve as the equity aggregator for the transaction, consolidating all equity investments into a single entity at the top of the organizational structure. Future management incentive equity participants (to be determined post-closing) may also receive equity interests in Holdings LLC.
Tier 2 — Ardent Healthcare Intermediate Inc. A newly formed Delaware C-corporation, wholly owned by Holdings LLC. Intermediate Inc. will serve as a blocker entity for the purpose of: (a) blocking unrelated business taxable income ("UBTI") that would otherwise flow through to tax-exempt limited partners of Fund III; (b) isolating state tax nexus to the operating states and preventing pass-through nexus to Holdings LLC; and (c) facilitating a potential future IPO exit through a conventional corporate vehicle. Intermediate Inc. will hold 100% of the membership interests in the surviving Pinnacle entity following the merger.
Tier 3 — Pinnacle Health Services Group LLC. The target company, surviving the reverse merger, continuing as a Delaware limited liability company classified as a partnership for federal income tax purposes. Post-closing, Pinnacle will be directly owned by Intermediate Inc. as its sole member. In this single-member configuration, Pinnacle would ordinarily be disregarded as an entity separate from Intermediate Inc. under Treasury Regulations Section 301.7701-3(b)(1)(ii). However, depending on the final structure (including whether any de minimis interests are retained by other parties or whether the rollover is structured at the Pinnacle level versus the Holdings LLC level), Pinnacle may either be a disregarded entity or, if it has more than one member, a partnership. For purposes of this memorandum, we assume that Pinnacle will have a single member (Intermediate Inc.) post-closing, in which case it will be disregarded as an entity separate from Intermediate Inc. for federal income tax purposes. Notwithstanding this disregarded status, the Section 754 election and the Section 743(b) basis adjustment computations described below are determined as of the date of the transfer of the partnership interests (i.e., the closing date), at which time Pinnacle is still a multi-member partnership with a Section 754 election in effect.
Merger Mechanics. Ardent Healthcare Merger Sub LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Intermediate Inc., will merge with and into Pinnacle. Upon the effective time of the merger, Merger Sub will cease to exist and Pinnacle will survive as a wholly owned subsidiary of Intermediate Inc. The pre-closing members of Pinnacle will surrender their membership interests in exchange for (a) cash consideration (for non-rollover members and the cashed-out portion of rollover participants' interests) and (b) Class B Units in Holdings LLC (for the rolled-over portion of rollover participants' interests).
Entity Formation. The following entities will be formed through the Delaware Secretary of State, with Pemberton Industries, 251 Little Falls Drive, Wilmington, Delaware 19808, serving as registered agent for each:
•  Ardent Healthcare Holdings LLC (anticipated File No. 7834219)
•  Ardent Healthcare Intermediate Inc. (anticipated File No. 7834223)
•  Ardent Healthcare Merger Sub LLC (anticipated File No. 7834227)
2. Federal Income Tax Consequences to Sellers
Sale of Partnership Interests Under Section 741. Each selling member of Pinnacle will recognize gain or loss upon the sale or exchange of their membership interest in Pinnacle in the reverse merger. Under Section 741 of the Internal Revenue Code, gain or loss from the sale or exchange of a partnership interest is recognized as if the interest were a capital asset, except as otherwise provided in Section 751. Gain is computed as the excess of the amount realized over the seller's adjusted outside basis in the partnership interest. The amount realized includes the sum of all cash received, the fair market value of any property received (including Class B Units in Holdings LLC for rollover participants), and the seller's share of partnership liabilities assumed or relieved in the transaction (per Section 752(d)).
Character of Gain. For each selling member who has held their Pinnacle membership interest for more than one year — which includes all of the co-founders, the CFO, and each of the 14 minority physician-investors, all of whom have held their interests since the Company's founding or within a reasonable time thereafter — the gain recognized on the sale will generally be characterized as long-term capital gain, taxable at the preferential rates applicable to long-term capital gains under Section 1(h) of the Internal Revenue Code (currently a maximum federal rate of 20%, plus the 3.8% net investment income tax under Section 1411, for an aggregate maximum federal rate of 23.8%).
Section 751(a) Recharacterization — "Hot Assets." Notwithstanding the general capital gain characterization under Section 741, Section 751(a) requires that any portion of the gain attributable to the selling member's share of the partnership's "unrealized receivables" (as defined in Section 751(c)) or "inventory" (as defined in Section 751(d)(1), including substantially appreciated inventory) shall be treated as ordinary income rather than capital gain. This recharacterization is mandatory and applies regardless of the length of time the selling member has held the partnership interest.
Pinnacle's accounts receivable from medical services — including amounts billed and unbilled to commercial insurance payors, Medicare, Medicaid, and self-pay patients — constitute "unrealized receivables" within the meaning of Section 751(c). Unrealized receivables include, among other items, rights to payment for goods delivered or to be delivered or services rendered or to be rendered, to the extent not previously included in income under the method of accounting used by the partnership.
Calderwood & Harkness will coordinate with Northmark Advisory Group LLC (the quality of earnings advisor retained by Ardent Capital) and Brewer Stanfield & Associates LLP (Pinnacle's independent accounting firm) to quantify the ordinary income component of each seller's gain attributable to Section 751(a) hot assets. Preliminary analysis suggests that Pinnacle's net accounts receivable at the projected closing date will total approximately $32.4 million. The portion of each seller's gain recharacterized as ordinary income under Section 751(a) will be determined on a pro rata basis, generally equal to the excess of the seller's allocable share of the amount that would be treated as ordinary income if Pinnacle sold all of its Section 751 assets for their fair market value over the seller's allocable share of the partnership's basis in those assets.
Rollover Participants. To the extent the rollover is structured as a Section 721 contribution (as recommended — see Section V below), the portion of each rollover participant's Pinnacle membership interest that is contributed to Holdings LLC in exchange for Class B Units will be a tax-deferred transaction and will not generate current gain recognition. Only the cashed-out portion of each rollover participant's interest will give rise to gain recognition under Sections 741 and 751(a). The tax-deferred treatment is subject to certain conditions, including the absence of a "disguised sale" under Section 707(a)(2)(B) and the Treasury Regulations thereunder. This analysis is addressed in the separate rollover equity tax memorandum to be delivered on February 22, 2024.
3. Federal Income Tax Consequences to Buyer — Section 754 Election and Section 743(b) Basis Step-Up
Section 754 Election. A critical element of the recommended partnership acquisition structure is the making of a Section 754 election by Pinnacle. Under Section 754, a partnership may elect to adjust the basis of its assets in the case of a transfer of a partnership interest by sale or exchange (under Section 743(b)) or a distribution of partnership property (under Section 734(b)). The Section 754 election is made by filing a statement with the partnership's federal income tax return (Form 1065) for the taxable year in which the relevant transfer or distribution occurs. In this case, Pinnacle will make the Section 754 election on its Form 1065 for the taxable year ending December 31, 2024, which is the taxable year that includes the anticipated closing date of the transaction (targeted for Q2 2024).
It is important to note that, once made, the Section 754 election is irrevocable absent the consent of the Internal Revenue Service. The consequences of the irrevocable nature of this election are discussed in Section IV.A.5 below.
Section 743(b) Basis Adjustment. Upon the transfer of a partnership interest by sale or exchange, if a Section 754 election is in effect, Section 743(b) provides that the partnership shall adjust the basis of its assets with respect to the transferee partner. The adjustment is equal to the difference between (i) the transferee partner's outside basis in the partnership interest (generally equal to the purchase price paid for the interest) and (ii) the transferee partner's proportionate share of the partnership's inside basis in its assets (determined under Section 743(b)(1) and Treasury Regulations Section 1.743-1(d)).
The Section 743(b) adjustment is a "special basis adjustment" that applies only to the transferee partner (here, Ardent Healthcare Intermediate Inc.) and does not affect the common basis of the partnership's assets with respect to other partners (although, post-closing, Intermediate Inc. is expected to be the sole partner).
Computation of the Section 743(b) Basis Step-Up. Based on the transaction economics and the preliminary information available regarding Pinnacle's inside basis in its assets, the Section 743(b) basis step-up is computed as follows:
The aggregate inside basis figure of $187,600,000 is a preliminary estimate based on information provided by Brewer Stanfield & Associates LLP and is subject to verification through the ongoing tax diligence process. The final Section 743(b) adjustment will be computed based on Pinnacle's actual inside basis as of the closing date.
Allocation of the Section 743(b) Step-Up Under Section 755. The Section 743(b) basis adjustment must be allocated among Pinnacle's assets under the rules of Section 755 and Treasury Regulations Section 1.755-1. Under these rules, the basis adjustment is allocated first between two categories of partnership assets: (i) capital assets and Section 1231(b) assets ("capital gain property") and (ii) all other property ("ordinary income property"). Within each category, the basis adjustment is then allocated among specific assets in a manner generally consistent with the residual method of allocation prescribed by Section 1060.
The preliminary allocation of the total enterprise value of $412,000,000 among Pinnacle's asset classes (which determines the allocation of the Section 743(b) step-up) is as follows:
The Class V intangible assets include the following components, each of which constitutes a Section 197 intangible asset subject to 15-year amortization (except as otherwise noted):
•  Payor contracts: $78,300,000 (amortizable over 15 years under Section 197(d)(1)(C)(i))
•  Assembled workforce: $12,100,000 (amortizable over 3 years; note that while assembled workforce is not a separately amortizable Section 197 intangible when acquired as part of the acquisition of a trade or business, the Section 743(b) adjustment allocated to this asset is amortizable as part of the step-up — treatment to be confirmed in the detailed PPA memorandum)
•  Trade name: $38,400,000 (amortizable over 15 years under Section 197(d)(1)(F))
•  Non-compete agreements: $17,400,000 (amortizable over 5 years under Section 197(d)(1)(E), or the term of the agreement, whichever is shorter; the non-compete term is expected to be 5 years)
A detailed purchase price allocation schedule and supporting memorandum will be prepared separately (anticipated delivery in April 2024) and will be coordinated with the buyer's independent valuation firm (to be engaged).
Amortization Benefit. The Section 743(b) basis step-up of $224,400,000 is amortizable over the weighted-average useful life of the underlying assets, taking into account the different amortization periods applicable to each asset class. Based on the preliminary allocation above, the weighted-average useful life is estimated at approximately 11.2 years, computed as follows:
Note: The Class I and Class III step-up amounts do not generate amortization deductions in the same manner as the intangible and tangible property classes; the accounts receivable step-up will generate a deduction upon collection. The weighted-average useful life of approximately 11.2 years is a blended estimate across all depreciable and amortizable asset classes.
Based on these preliminary estimates:
•  Annual amortization deduction: $224,400,000 ÷ 11.2 years = approximately $20,040,000 per year
•  Blended federal and state effective tax rate: approximately 25% (consisting of the 21% federal corporate income tax rate applicable to Intermediate Inc., plus a blended state effective tax rate of approximately 4%, net of the federal deduction for state taxes paid)
•  Annual tax benefit: $20,040,000 × 25% = approximately $5,010,000 per year
These estimates are subject to refinement based on the final purchase price allocation, the actual closing date, and the applicable tax rates.
Tax Receivable Agreement (TRA). The parties have discussed entering into a Tax Receivable Agreement pursuant to which Ardent (through the holding company structure) would share a portion of the realized tax benefits from the Section 743(b) step-up with the pre-closing members of Pinnacle and the rollover participants. The preliminary terms contemplate a sharing percentage of 85%, meaning that 85% of the cash tax savings actually realized by the buyer as a result of the Section 743(b) amortization deductions would be payable to the TRA beneficiaries, with the buyer retaining the remaining 15% of the benefit. Based on the estimated annual tax benefit of $5,010,000:
•  Estimated annual TRA payment: 85% × $5,010,000 = approximately $4,260,000 per year (declining over the amortization period as the amortization deductions are fully utilized)
Calderwood & Harkness will prepare a draft Tax Receivable Agreement for client review. The TRA will address, among other things, the computation methodology, payment timing, early termination provisions (including acceleration upon a change of control), and the treatment of audit adjustments that may affect the realized tax benefits. Delivery of the draft TRA is anticipated in March 2024.
4. Advantages of Partnership Acquisition Structure
The recommended partnership acquisition structure offers the following principal advantages:
(a) Automatic basis step-up via Section 743(b). The buyer obtains a full basis step-up in its share of Pinnacle's assets without requiring a taxable transaction at the entity level. Unlike the Section 338(h)(10) alternative (discussed in Section IV.B below), the Section 743(b) step-up does not require a deemed asset sale or deemed liquidation of the target entity. The step-up arises automatically upon the transfer of the partnership interests, provided a Section 754 election is in effect.
(b) Single level of tax on sellers. The selling members of Pinnacle are subject to a single level of tax on their gain from the sale of their partnership interests. Because Pinnacle is a partnership and not a corporation, there is no entity-level tax imposed on the Company in connection with the sale. This contrasts with the corporate acquisition structure, in which a check-the-box election followed by a Section 338(h)(10) election would trigger entity-level gain that flows through to the sellers.
(c) Preservation of flow-through character for Fund III's limited partners. The partnership classification of Holdings LLC preserves the flow-through character of income and deductions for the limited partners of Fund III, to the extent they invest through the Holdings LLC structure. For tax-exempt and foreign limited partners, the C-corporation blocker (Intermediate Inc.) is interposed to block UBTI and withholding tax exposure. This dual structure allows Ardent to accommodate the diverse tax profiles of its investor base.
(d) Tax-deferred rollover equity under Section 721. The rollover equity can be structured as a tax-deferred contribution of partnership interests (or the economic equivalent thereof through the merger mechanics) to Holdings LLC under Section 721, which provides that no gain or loss is recognized by a partner or a partnership upon the contribution of property to the partnership in exchange for a partnership interest. This treatment allows the rollover participants to defer recognition of gain on the rolled-over portion of their equity until a future disposition of their Class B Units.
(e) Structural flexibility for future exit. The three-tier structure provides significant flexibility for future exit strategies, including a potential initial public offering. In an IPO scenario, Intermediate Inc. (the C-corporation blocker) could serve as the IPO vehicle, or a new C-corporation could be formed above or alongside the existing structure. The existence of a C-corporation in the structure from inception simplifies the IPO preparation process and avoids the need for a taxable conversion at the time of the IPO.
(f) No incremental seller-level gain. Unlike the Section 338(h)(10) alternative, the partnership acquisition structure does not trigger incremental seller-level gain beyond the gain inherent in the sale of the partnership interests. This is a significant economic advantage, as discussed in the comparative analysis in Section IV.B below.
(g) Favorable treatment of profits interests. The partnership structure at the Holdings LLC level allows unvested rollover equity to be structured as profits interests under Revenue Procedure 93-27 and Revenue Procedure 2001-43, with favorable tax treatment. Specifically, a properly structured profits interest is not taxable at the time of grant (even if no Section 83(b) election is made), and the holder is treated as a partner for tax purposes from the date of grant. The availability of the Section 83(b) election provides an additional layer of protection, ensuring that no income is recognized on the profits interest at the time of vesting (because the election causes the income inclusion to occur at the time of grant, when the value of the profits interest is zero).
5. Disadvantages and Risks of Partnership Acquisition Structure
The partnership acquisition structure also presents certain disadvantages and risks that should be carefully considered:
(a) Irrevocability of Section 754 election. Once made, the Section 754 election is irrevocable absent the consent of the Internal Revenue Service, which is granted only in limited circumstances. The election applies to all future transfers of partnership interests in Pinnacle, not only the acquisition transfer. This means that if, in a future sale or other transfer of Pinnacle interests, the transferee's purchase price is less than its proportionate share of Pinnacle's inside basis (after prior adjustments), the Section 754 election would require a downward adjustment to the basis of partnership assets with respect to the new transferee. While this scenario would arise only in a sale at a depressed valuation, it is a structural risk that should be understood at the outset.
(b) Computational complexity and ongoing tracking requirements. The Section 743(b) adjustment is a "special basis adjustment" that applies only to the transferee partner. Pinnacle must maintain separate books and records to track the special basis adjustment and its amortization over time. This requirement adds ongoing administrative complexity and cost, particularly in the context of a multi-state healthcare operation with numerous asset categories and varying amortization periods. Pinnacle's accounting firm (or a successor firm retained by Ardent) must be capable of maintaining these records accurately.
(c) Section 751(a) hot asset recharacterization. The mandatory recharacterization of a portion of the sellers' gain as ordinary income under Section 751(a) may increase the aggregate tax liability of the selling members relative to a structure in which all gain is treated as long-term capital gain. While this recharacterization is a function of Pinnacle's asset composition (and would apply regardless of the acquisition structure chosen), the detailed allocation analysis required by Section 751(a) adds complexity to the closing process and may create disagreements between buyer and seller counsel regarding the appropriate allocation methodology.
(d) Ongoing partnership compliance obligations. Post-closing, Pinnacle must continue to file Form 1065 (U.S. Return of Partnership Income) and issue Schedules K-1 to its partners (including Intermediate Inc.) for each taxable year. While the administrative burden is somewhat reduced by the fact that Pinnacle will have only a single member post-closing (and may therefore be treated as a disregarded entity for ongoing filing purposes), the Section 754 election and Section 743(b) adjustment computations must nonetheless be reflected on the final pre-closing return and tracked in subsequent years.
(e) State tax non-conformity risk. The treatment of the Section 743(b) basis adjustment at the state level varies by jurisdiction. While most states generally conform to the federal treatment, certain states may not fully recognize the Section 743(b) adjustment or may apply different rules for computing the adjustment or its amortization. This risk is particularly relevant for Pinnacle given its operations in five states (Pennsylvania, Virginia, Maryland, North Carolina, and Georgia). A detailed state-by-state conformity analysis will be provided in the separate State and Local Tax Memorandum dated February 20, 2024.
B. Structure Alternative 2: Corporate Acquisition (Check-the-box Election)
1. Overview.  Under the corporate acquisition alternative, Pinnacle would file a Form 8832 (Entity Classification Election) with the Internal Revenue Service, electing to be classified as an association taxable as a corporation (i.e., a C-corporation) for federal income tax purposes, effective immediately prior to the closing date of the acquisition. This election is commonly referred to as a "check-the-box" election.
The deemed tax consequences of a check-the-box election by a partnership are specified in Treasury Regulations Section 301.7701-3(g)(1)(i), which provides that the election is treated as if the partnership contributed all of its assets and liabilities to a newly formed corporation in exchange for all of the stock of the corporation, followed immediately by a deemed distribution of the stock to the partners of the partnership in proportion to their partnership interests. This is known as the "assets-over" form of incorporation.
The deemed contribution of assets to the newly formed corporation is generally treated as a tax-free transaction under Section 351 of the Internal Revenue Code, provided that the transferors (the deemed contributing partners) hold at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock of the corporation immediately after the exchange. In this case, the Section 351 requirements should be satisfied because all of the pre-closing partners of Pinnacle would be the deemed transferors, and they would collectively hold 100% of the stock of the deemed corporation immediately after the deemed exchange.
However, even if Section 351 applies, certain gain may be recognized if the sum of the liabilities assumed by the deemed corporation exceeds the aggregate adjusted basis of the assets contributed. Under Section 357(c), if the liabilities assumed exceed the basis of the contributed assets, the excess is treated as gain recognized by the contributing transferor. Based on the preliminary information available, Pinnacle's funded debt of $81.3 million does not appear to exceed its aggregate inside basis of $187.6 million, but this requires further diligence to confirm, particularly with respect to contingent liabilities and other obligations that may be treated as "liabilities" for Section 357(c) purposes.
Following the deemed incorporation, Ardent would acquire 100% of the stock of the newly deemed corporation, either through a direct stock purchase or through a merger structure analogous to the reverse merger described in Section IV.A above.
2. Section 338(h)(10) Election — Preliminary Analysis
If the corporate acquisition structure were adopted and the stock of the deemed corporation were acquired, the buyer and sellers could jointly elect under Section 338(h)(10) of the Internal Revenue Code to treat the qualified stock purchase as a deemed asset acquisition for tax purposes. A detailed comparison memorandum analyzing Section 338(h)(10) versus Section 754 / 743(b) will be delivered on February 28, 2024. This section provides a preliminary overview of the key considerations.
Effect of a Section 338(h)(10) Election. If a Section 338(h)(10) election were made:
(i) The target (the deemed corporation resulting from the check-the-box election) would be treated as having sold all of its assets in a single transaction on the closing date for an amount equal to the "aggregate deemed sale price" (ADSP), as computed under Treasury Regulations Section 1.338-4.
(ii) The deemed asset sale would generate gain recognized at the target entity level, computed as the excess of the ADSP allocated to each asset over the target's adjusted basis in that asset. This gain would be reported on the target's final tax return (a short-period return for the period ending on the closing date).
(iii) The buyer would obtain a full basis step-up in all of the target's assets, with the stepped-up basis equal to the "adjusted grossed-up basis" (AGUB) of the target's assets, computed under Treasury Regulations Section 1.338-5. The AGUB is generally equal to the purchase price for the stock, plus the target's liabilities, plus certain other relevant items.
(iv) The buyer's stepped-up basis in the target's assets would be amortizable over the applicable recovery periods — 15 years for Section 197 intangibles (including goodwill), and the applicable MACRS recovery periods for tangible personal property.
Incremental Seller-Level Gain. The critical disadvantage of the Section 338(h)(10) approach in this transaction is the incremental seller-level gain that would be triggered by the deemed asset sale. Under the recommended partnership acquisition structure, the sellers recognize gain only on the sale of their partnership interests (Sections 741 and 751(a)), and no entity-level tax is imposed on Pinnacle. Under the Section 338(h)(10) approach, the deemed asset sale at the target level generates entity-level gain that, although it technically occurs at the corporation level, is reported on the target's final corporate tax return and effectively flows through to the selling shareholders through the liquidation mechanics of the Section 338(h)(10) election.
The incremental seller-level gain under the Section 338(h)(10) approach is computed as follows:
This incremental gain of approximately $48.3 million represents gain that the sellers would recognize in addition to the gain they would recognize under the partnership acquisition structure. At a blended federal and state tax rate applicable to the sellers (estimated at approximately 25%, considering both capital gains and ordinary income components), the incremental tax cost to the sellers would be approximately $12,075,000.
Buyer Amortization Benefit Under Section 338(h)(10). The buyer would obtain a full basis step-up to $412 million in Pinnacle's assets under the Section 338(h)(10) election, which is economically comparable to the Section 743(b) step-up in the partnership structure. However, under the Section 338(h)(10) approach, the step-up would be allocated among the target's assets under the residual method of Section 1060, with all intangible assets (including goodwill) amortizable over 15 years under Section 197. The net present value of the buyer's amortization benefit under the Section 338(h)(10) approach is computed as follows:
•  Aggregate step-up: $412,000,000 − $187,600,000 = $224,400,000
•  Amortization period: 15 years (for Section 197 intangibles, which constitute the majority of the step-up)
•  Annual amortization deduction: $224,400,000 ÷ 15 = $14,960,000
•  Blended tax rate: 25%
•  Annual tax benefit: $14,960,000 × 25% = $3,740,000
•  Net present value (8% discount rate, 15 years): approximately $31,700,000
Net Comparison. The incremental seller-level gain of approximately $48.3 million (approximately $12.1 million in incremental taxes) significantly exceeds the NPV of the buyer's amortization benefit of approximately $31.7 million. Moreover, the NPV of the buyer's amortization benefit under the Section 338(h)(10) approach ($31.7 million) is less than the NPV of the buyer's amortization benefit under the recommended partnership acquisition structure (approximately $35.6 million), because the partnership structure allows for shorter amortization periods on certain asset categories (e.g., assembled workforce over 3 years, non-competes over 5 years, tangible assets over 5-7 years) compared to the uniform 15-year amortization period that would apply under Section 197 to all intangible assets acquired in a Section 338(h)(10) transaction.
Even if Ardent were to agree to compensate the sellers for their incremental tax cost (a "tax gross-up" or "tax indemnity" that is customary in Section 338(h)(10) transactions), the economics of the Section 338(h)(10) approach are materially unfavorable compared to the partnership acquisition structure.
Conclusion. Based on this preliminary analysis, Calderwood & Harkness does not recommend the Section 338(h)(10) approach. The Section 754 / 743(b) approach under the partnership acquisition structure achieves substantially the same buyer amortization benefit — and, in fact, a superior amortization benefit due to the availability of shorter recovery periods for certain asset classes — without triggering the approximately $48.3 million in incremental seller-level gain that would result from the Section 338(h)(10) election.
3. Disadvantages of Corporate Acquisition Structure
In addition to the unfavorable economics of the Section 338(h)(10) election discussed above, the corporate acquisition structure presents the following additional disadvantages:
(a) Incremental seller-level gain. As described above, the corporate acquisition structure with a Section 338(h)(10) election would trigger approximately $48.3 million in incremental seller-level gain, resulting in approximately $12.1 million in incremental taxes to the selling members. Even without a Section 338(h)(10) election, the check-the-box conversion itself may generate gain if Section 357(c) applies.
(b) Potential double taxation. If the C-corporation classification were maintained post-closing without a Section 338(h)(10) election, the corporate acquisition structure would subject Pinnacle's income to double taxation: first at the entity level (at the 21% federal corporate tax rate, plus applicable state corporate income taxes) and again at the shareholder level upon distribution of earnings (at the applicable dividend tax rate). While the Section 338(h)(10) election eliminates the double taxation issue by treating the transaction as a deemed asset sale on the final corporate return, the election comes with its own costs as described above.
(c) Check-the-box election as a taxable event. The check-the-box election itself — converting Pinnacle from a partnership to a corporation — is a taxable event that must be carefully analyzed. While the deemed incorporation is generally treated as a tax-free Section 351 transaction (as discussed in Section IV.B.1 above), gain may be recognized if Pinnacle's liabilities exceed the aggregate basis of its assets at the time of the conversion (under Section 357(c)), or if certain other exceptions to Section 351 non-recognition apply. This requires further diligence to confirm, and introduces transactional risk that is absent from the partnership acquisition structure.
(d) Loss of partnership flow-through benefits. Converting Pinnacle to a C-corporation would permanently eliminate the flow-through character of the entity, precluding the pass-through of income, deductions, and credits to the partners. While the recommended partnership structure also interposes a C-corporation blocker (Intermediate Inc.) between Holdings LLC and Pinnacle, the blocker is designed to serve specific tax policy objectives (Blocking UBTI and isolating state tax nexus) while preserving flow-through treatment at the Holdings LLC level. The corporate acquisition structure would eliminate flow-through treatment entirely.
(e) Seller opposition. Patricia Engelman, Partner, Tax, at Whitford & Gaines LLP, has indicated in preliminary discussions that Pinnacle's founders — Dr. Carvallo and Dr. Ostrowski — strongly prefer to avoid any acquisition structure that would increase their tax liability relative to a straightforward partnership interest sale. Given that the corporate acquisition structure with a Section 338(h)(10) election would trigger approximately $48.3 million in incremental seller-level gain, seller opposition to this structure is expected to be significant. Proceeding with the corporate structure over seller objections would likely require the buyer to compensate the sellers for their incremental tax cost (through a higher purchase price or a tax indemnity), which would reduce the net economic benefit to Ardent.
V. Rollover Equity — Structural Considerations (Preliminary)
As described in Section II.D above, three of Pinnacle's existing members — Dr. Carvallo, Dr. Ostrowski, and Mr. Farnsworth — will contribute a portion of their equity proceeds to Ardent Healthcare Holdings LLC in exchange for Class B Units. The aggregate rollover amount is approximately $59.54 million. This section provides a preliminary analysis of the tax treatment of the rollover transaction under the recommended partnership acquisition structure.
Two Potential Tax-Deferred Treatment Pathways. The rollover may qualify for tax-deferred treatment under one of two provisions of the Internal Revenue Code, depending on the tax classification of the recipient entity:
Section 721 — Partnership Contribution. If Holdings LLC is classified as a partnership for federal income tax purposes (as recommended), the contribution of property (including partnership interests in Pinnacle) to Holdings LLC in exchange for Class B Units is governed by Section 721(a), which provides that no gain or loss shall be recognized by a partnership or any of its partners upon the contribution of property to the partnership in exchange for a partnership interest. Under Section 721, the contributing partner takes a carryover basis in the Class B Units equal to the contributor's adjusted basis in the contributed property (Section 722), and Holdings LLC takes a carryover basis in the contributed property equal to the contributor's adjusted basis immediately before the contribution (Section 723). No gain is recognized by either party.
Section 351 — Corporate Contribution. If a corporate structure were used at the holding company level — that is, if Holdings LLC were organized as a corporation rather than a partnership — the contribution of property in exchange for stock would be governed by Section 351(a), which provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation, provided that the transferors, as a group, hold at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock of the corporation immediately after the exchange. However, this pathway is not applicable under the recommended structure because Holdings LLC is classified as a partnership, not a corporation.
Recommendation. Calderwood & Harkness recommends Section 721 treatment at the Holdings LLC level. This approach preserves the carryover basis in the contributed interests (which, when combined with the Section 743(b) step-up at the Pinnacle level, provides the buyer with the full economic benefit of the stepped-up basis), avoids current gain recognition by the rollover participants on the contributed portion of their interests, and maintains consistency with the overall partnership acquisition structure. The partnership classification of Holdings LLC also allows the rollover to be structured as a direct contribution of partnership interests (or the economic equivalent thereof through the merger mechanics) without the need to satisfy the 80% control requirement of Section 351.
Additionally, the partnership structure at the Holdings LLC level allows the unvested portion of the rollover equity to be characterized as profits interests under Revenue Procedure 93-27 and Revenue Procedure 2001-43, which provide that the receipt of a profits interest in exchange for services rendered to or for the benefit of the partnership is generally not a taxable event if certain conditions are met. This favorable treatment is available only in the partnership context and would not be available if Holdings LLC were classified as a corporation.
A detailed rollover equity tax memorandum analyzing Section 721 versus Section 351 treatment, the mechanics of the contribution, the disguised sale rules of Section 707(a)(2)(B), and the profits interest characterization of the unvested component will be delivered separately on or about February 22, 2024.
VI. Blocker Entity — Ardent Healthcare Intermediate Inc.
The recommended acquisition structure interposes a C-corporation blocker entity — Ardent Healthcare Intermediate Inc. — between Holdings LLC and Pinnacle (the surviving operating entity). This section describes the purposes and benefits of the blocker entity.
Purposes of the blocker Entity.
(a) blocking UBTI for Tax-Exempt Limited Partners. Fund III's limited partner base includes tax-exempt investors such as university endowments, charitable foundations, and pension funds. Under Section 512(a)(1) of the Internal Revenue Code, a tax-exempt organization is subject to the unrelated business income tax ("UBIT") on its "unrelated business taxable income" ("UBTI"). UBTI includes, among other items, income from a trade or business regularly carried on by the tax-exempt organization that is not substantially related to the organization's exempt purpose. Importantly, under Section 512(c)(1), if a tax-exempt organization is a partner in a partnership, the organization's share of the partnership's gross income from an unrelated trade or business is included in the organization's UBTI.
Additionally, under Section 514, income from debt-financed property is treated as UBTI to the extent of the debt-financed percentage. Given that the proposed acquisition will be significantly leveraged (with $155 million in term loan debt, $35 million in revolving credit capacity, and $30 million in mezzanine financing), the debt-financed income flowing through the partnership structure would generate substantial UBTI for any tax-exempt limited partner that holds its interest in Fund III through the partnership structure.
By interposing a C-corporation (Intermediate Inc.) between Holdings LLC and the operating entity (Pinnacle), the income from Pinnacle's operations is "Blocked" at the Intermediate Inc. level. The tax-exempt limited partners receive only dividends from Intermediate Inc. (through the chain of entities), and dividends from a controlled corporation are generally not treated as UBTI. This blocker structure is the standard approach used by private equity sponsors to accommodate tax-exempt investors.
(b) Facilitating a Potential Future IPO Exit. A C-corporation is the standard vehicle for an initial public offering in the U.S. public equity markets. By incorporating a C-corporation blocker into the acquisition structure from inception, the buyer preserves the option to use Intermediate Inc. (or a successor entity) as the IPO vehicle in a future exit, without the need for a taxable conversion from partnership to corporate form at the time of the IPO. This structural planning reduces the tax friction associated with a future public exit and provides optionality for the Ardent deal team.
(c) Isolating State Tax Nexus. Intermediate Inc. will file corporate income tax returns in each of the states in which Pinnacle operates (Pennsylvania, Virginia, Maryland, North Carolina, and Georgia). By concentrating the operating income and the corresponding state tax obligations at the Intermediate Inc. level, the blocker structure shields Holdings LLC from direct nexus in those states. This is particularly important because Holdings LLC, as a partnership, would otherwise create pass-through nexus for its members (including Fund III and the individual rollover participants) in each state in which Pinnacle operates, potentially subjecting those members to filing obligations and withholding requirements in multiple states.
(d) Mitigating New York Nexus Risk. Ardent Capital's offices are located at 600 Lexington Avenue, 38th Floor, New York, New York 10022. The management activities conducted from these offices — including deal origination, portfolio company oversight, investment committee meetings, and fund administration — could create nexus for Holdings LLC in New York, potentially subjecting Holdings LLC and its members to the New York City unincorporated business tax (UBT) and the New York State personal income tax on a p

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