PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / TAX ADVICE
TAX STRUCTURE MEMORANDUM
MEMORANDUM
TO:
Graham Whitfield, Managing Partner & Co-Founder, Ardent Capital Management III LLC
Priya Ranganathan, Partner, Healthcare Investing, Ardent Capital Management III LLC
Thomas Kearney, Vice President, Healthcare Investing, Ardent Capital Management III LLC
FROM:
Leonard Cross, Specialist Partner, Tax — Calderwood & Harkness LLP
Osgood & Vail CPAs LLP (80 Pine Street, New York, NY 10005)
DATE: December 20, 2024
RE: Tax Structuring Analysis — Proposed Acquisition of MedVance Health Systems, Inc. (EIN: 62-7083149) by Ardent Healthcare Holdings Inc. (EIN: 93-2047861)
C&H Matter No.: 0478231.0001
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I. EXECUTIVE SUMMARY
This memorandum analyzes the federal and state income tax, transfer tax, and structural implications of the proposed acquisition of one hundred percent (100%) of the outstanding equity of MedVance Health Systems, Inc. ("MedVance" or the "Target") by Ardent Healthcare Holdings Inc. (the "Purchaser"), a newly formed Delaware acquisition vehicle, for a total purchase price of Six Hundred Twenty Million Dollars ($620,000,000) (the "Transaction"). The Transaction is being pursued by Ardent Capital Partners III LP ("Ardent Capital"), acting through its general partner, Ardent Capital Management III LLC ("Ardent GP"), as the next platform investment in Ardent Capital's healthcare services vertical.
This analysis was prepared jointly by Leonard Cross of Calderwood & Harkness LLP, tax counsel to Ardent Capital, and the tax advisory team at Osgood & Vail CPAs LLP, the Purchaser's external tax advisors, in consultation with Blackwell Thornton LLP (quality-of-earnings advisor to Ardent Capital) and Prumvane & Reese LLP (the Target's historical auditor) for purposes of obtaining factual data inputs, tax basis schedules, and historical tax return information. The legal conclusions, privilege assertions, and structural recommendations contained herein are those of Calderwood & Harkness LLP; all quantitative analyses, computations, and financial modeling have been reviewed and validated by Osgood & Vail CPAs LLP.
Our principal conclusions and recommendations are as follows:
1. Recommended Acquisition Structure — Stock Purchase. A straight stock purchase is recommended as the most tax-efficient acquisition structure for the Transaction. The Purchaser should acquire 100% of MedVance's issued and outstanding common stock directly from the selling stockholders. A stock purchase avoids entity-level gain recognition by MedVance, eliminates the risk of double taxation that would arise in an asset purchase, and preserves MedVance's healthcare regulatory approvals, Medicare and Medicaid provider numbers, state licenses, and payor contracts without the need for assignment or reissuance.
2. Section 338(h)(10) Election — Not Recommended. Based on the detailed analysis set forth in Section IV of this memorandum, a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), is not recommended. Even assuming that such an election is available (which presents threshold issues given that MedVance is a stand-alone C corporation rather than a member of a selling consolidated group or an S corporation), the estimated incremental entity-level tax cost of approximately Seventeen Million Two Hundred Thousand Dollars ($17,200,000) substantially exceeds the discounted present value of the incremental depreciation and amortization tax shield that would be generated by a step-up in the tax basis of MedVance's assets. The sellers (Crestline Growth Equity Fund II LP and Ryland Family Holdings LLC) have indicated that they will not agree to a gross-up of the purchase price to compensate for this incremental tax burden, and the economic cost would therefore reduce net seller proceeds or be absorbed by the Purchaser.
3. State Transfer Taxes — Manageable. State transfer taxes across the four states in which MedVance operates — Tennessee, Alabama, Georgia, and Kentucky — are estimated to be minimal in the aggregate, as a stock acquisition does not trigger real estate transfer taxes (legal title to real property does not change) and none of these jurisdictions impose a stock transfer tax applicable to this Transaction. The estimated aggregate state transfer tax exposure is detailed in Section V and summarized in Exhibit C.
4. Management Rollover Equity — Tax-Deferred Under Section 351. The management rollover equity (approximately $18,600,000 in value) can be structured on a tax-deferred basis under Section 351 of the Code, subject to satisfaction of the "control immediately after" requirement and the conditions described in Section VI herein. We recommend structuring the rollover as a concurrent Section 351 contribution to the Purchaser, with the management contributors and Ardent Capital treated as part of the same transferor group.
5. Foregone Basis Step-Up. In a stock purchase without a Section 338 election, the Purchaser will not achieve a step-up in the tax basis of MedVance's underlying assets. The assets will retain their historical (inside) tax bases. The estimated value of the foregone step-up and related depreciation and amortization tax shield is quantified in Section VII and Exhibit B, confirming that the net present value of the step-up benefit does not justify the cost of the election.
This memorandum is based on the facts and financial data available as of the date hereof, including MedVance's unaudited financial results for the fiscal year ending December 31, 2024 (reflecting revenue of approximately $387,000,000 and adjusted EBITDA of approximately $78,400,000), as well as audited financial statements for fiscal years 2021 through 2023. The analysis should be updated if material changes arise prior to execution of the Stock Purchase Agreement (the "SPA"), which is currently anticipated for early February 2025 (target execution date of February 10, 2025), or if the Transaction structure, purchase price, financing terms, or equity rollover arrangements are modified in any material respect.
II. BACKGROUND AND FACTUAL ASSUMPTIONS
A. Transaction Overview
The proposed Transaction contemplates that Ardent Capital Partners III LP, acting through its general partner Ardent Capital Management III LLC, will cause Ardent Healthcare Holdings Inc., a newly formed Delaware corporation (the "Purchaser"), to acquire one hundred percent (100%) of the issued and outstanding shares of common stock of MedVance Health Systems, Inc. ("MedVance" or the "Target"), a Delaware corporation headquartered in Nashville, Tennessee, that owns and operates healthcare facilities in four southeastern states.
The total purchase price for the Transaction is Six Hundred Twenty Million Dollars ($620,000,000), representing an enterprise value-to-EBITDA multiple of approximately 7.91x based on MedVance's 2024 adjusted EBITDA of $78,400,000. The purchase price is subject to customary adjustments for working capital, indebtedness, cash, and transaction expenses as of the closing date, to be set forth in the SPA.
The selling equityholders and their approximate ownership percentages in MedVance are as follows:
Of the management holders' aggregate equity value of approximately $76,260,000, an estimated $18,600,000 (approximately 24.4% of their aggregate MedVance equity value) will be rolled over into equity of the Purchaser, as described in Section VI of this memorandum. The balance of the management holders' equity (approximately $57,660,000) will be acquired for cash on the same terms as the Crestline and Ryland interests.
The Transaction will be funded through a combination of equity and debt, as follows:
(a) Ardent Equity Contribution: Ardent Capital Partners III LP will contribute Two Hundred Ninety Million Dollars ($290,000,000) in cash equity to the Purchaser in exchange for shares of Purchaser common stock.
(b) Management Rollover: Rolling management members will contribute MedVance shares with an aggregate value of approximately $18,600,000 to the Purchaser in exchange for shares of Purchaser common stock (the "Rollover Equity"), as described in Section VI.
(c) Term Loan B: Three Hundred Forty Million Dollars ($340,000,000) in first-lien term loan debt (the "Term Loan B"), to be provided by a syndicate led by Ridgeline National Bank, N.A., as administrative agent, with Pinnacle Commercial Credit Corp. as co-lender. The Term Loan B is expected to bear interest at SOFR plus 425 basis points per annum, with a maturity of seven years.
(d) Revolving Credit Facility: A Fifty Million Dollar ($50,000,000) senior secured revolving credit facility (the "Revolver"), expected to be undrawn at closing, provided by the same lending syndicate.
Existing MedVance indebtedness of approximately $41,300,000, owed to Granton Savings Bank, N.A. under a credit agreement dated March 15, 2019 (as amended), will be repaid in full at closing from seller proceeds, and the related liens on MedVance's assets will be released. The purchase price is therefore calculated on a cash-free, debt-free basis, with the $41,300,000 of existing indebtedness effectively reducing the net cash consideration payable to the selling equityholders.
B. Target Entity and Tax Profile
MedVance Health Systems, Inc. is a corporation organized under the laws of the State of Delaware (Delaware File No. 4938217; Federal EIN: 62-7083149). MedVance has been taxable as a C corporation for federal income tax purposes since its incorporation. No election under Subchapter S of the Code has been made or has been in effect at any time during MedVance's existence. MedVance's principal executive office is located at 4200 West End Avenue, Suite 1100, Nashville, Tennessee 37205.
MedVance owns and operates healthcare facilities — including outpatient surgery centers, rehabilitation clinics, and urgent care facilities — across four states: Tennessee, Alabama, Georgia, and Kentucky. MedVance employs approximately 2,450 full-time equivalent employees across its operations and holds Medicare and Medicaid provider agreements, certificates of need, state healthcare facility licenses, and managed care payor contracts in each of the four states.
We have reviewed MedVance's federal and state income tax returns for tax years 2021, 2022, and 2023, which were made available in the electronic data room maintained by the Target. Based on our review and discussions with Prumvane & Reese LLP (MedVance's historical auditor, located at 424 Church Street, Nashville, TN 37219), we note the following with respect to MedVance's historical tax profile:
(i) Federal Income Tax Returns. MedVance filed timely federal corporate income tax returns (Form 1120) for each of the reviewed tax years. MedVance reported positive federal taxable income in each year, reflecting the company's consistent profitability during the review period. The federal income tax liability for the three-year period ranged from approximately $4,900,000 to $7,200,000 annually, reflecting the 21% corporate rate.
(ii) Net Operating Loss Carryforwards. Based on our review of the returns and related schedules, MedVance has minimal federal net operating loss ("NOL") carryforwards. Specifically, MedVance reported an NOL carryforward of approximately $3,150,000 as of the end of tax year 2023, attributable to a partial-year operating loss incurred during the fiscal year ended December 31, 2020, which was a period of reduced patient volumes due to the COVID-19 pandemic. This NOL is a post-2017 NOL subject to the 80% taxable income limitation under Section 172(a)(2) of the Code and does not expire. The NOL is expected to have been partially utilized against 2024 taxable income, and we estimate the remaining NOL carryforward at year-end 2024 to be approximately $1,200,000, subject to confirmation upon review of the 2024 return.
(iii) Tax Credit Positions. MedVance has claimed the Work Opportunity Tax Credit ("WOTC") and certain state-level credits related to healthcare investment in prior years. No material federal tax credit carryforwards were identified. We have requested confirmation of any state tax credit positions from Prumvane & Reese.
(iv) Open Audit Years. The federal statute of limitations for assessment remains open for tax years 2021 through 2024. No federal or state income tax audits of MedVance are currently pending or have been conducted within the past five years, according to representations made by MedVance's management and confirmed by Prumvane & Reese LLP. The absence of pending audits is a favorable factor, though the Transaction may increase the likelihood of review by taxing authorities in future periods.
We have relied upon the asset-by-asset tax basis schedules prepared by Prumvane & Reese LLP for purposes of computing the estimated incremental gain that would arise in a deemed asset sale (Sections IV and VII herein), and upon the quality-of-earnings adjustments prepared by Blackwell Thornton LLP for purposes of validating the adjusted EBITDA and certain balance sheet items used in our analysis.
C. Purchaser Entity Structure
Ardent Healthcare Holdings Inc. (the "Purchaser") is a corporation to be organized under the laws of the State of Delaware (anticipated Delaware File No. 7201548; Federal EIN: 93-2047861). The Purchaser's formation is anticipated to occur on or about January 8, 2025. Because this memorandum is dated December 20, 2024, the references to the Purchaser's incorporation date and state filings reflect the anticipated formation, and this memorandum should be updated to confirm the actual formation date and filing details when available.
The Purchaser will be a direct, wholly owned subsidiary of Ardent Capital Partners III LP (Federal EIN: 87-3541982), a Delaware limited partnership. Ardent Capital Partners III LP is the investment fund vehicle through which Ardent Capital Management III LLC (the general partner) deploys capital on behalf of the fund's limited partners. Upon consummation of the Transaction and the management rollover, the Purchaser will be owned approximately 93.9% by Ardent Capital Partners III LP and approximately 6.1% by the rolling management members (based on the relative equity contributions of $290,000,000 and $18,600,000, respectively, subject to adjustment for any differences in per-share valuation between cash and rollover equity).
Ardent Capital Partners III LP is classified as a partnership for federal income tax purposes. It was organized as a Delaware limited partnership and has not elected to be classified as a corporation. Accordingly, items of income, gain, loss, deduction, and credit of Ardent Capital Partners III LP flow through to its partners (the limited partners and the general partner) for federal income tax purposes. The Purchaser, as a Delaware corporation, will be taxable as a C corporation for federal and all applicable state income tax purposes from and after its formation. No election to be classified as a disregarded entity or partnership is contemplated for the Purchaser.
Post-closing, the organizational structure will be as follows: Ardent Capital Management III LLC (general partner) and the limited partners invest through Ardent Capital Partners III LP (a partnership), which in turn holds approximately 93.9% of the stock of Ardent Healthcare Holdings Inc. (a C corporation), which in turn holds 100% of the stock of MedVance Health Systems, Inc. (a C corporation). The rolling management members will hold approximately 6.1% of the stock of the Purchaser directly (or through personal holding vehicles, as determined in connection with the rollover structuring).
III. STOCK PURCHASE vs. ASSET PURCHASE ANALYSIS
A. Overview of Structural Alternatives
In connection with the proposed acquisition of MedVance, two primary acquisition structures have been evaluated:
(1) Stock Purchase. Under a stock purchase structure, the Purchaser acquires one hundred percent (100%) of MedVance's issued and outstanding common stock directly from the selling stockholders (Crestline, Ryland Holdings, and the management holders) in exchange for cash (and, in the case of the rolling management members, a combination of cash and Purchaser stock). MedVance continues as a going concern, and its assets, liabilities, contracts, licenses, and tax attributes remain in place at the entity level. Legal title to MedVance's assets does not change.
(2) Asset Purchase. Under an asset purchase structure, the Purchaser (or a newly formed subsidiary thereof) would acquire substantially all of MedVance's assets and assume specified liabilities directly from MedVance, rather than acquiring MedVance's stock from its stockholders. Following the asset transfer, MedVance would retain any excluded assets and liabilities, distribute the net proceeds to its stockholders, and ultimately dissolve.
We note that a merger structure — whether a forward merger of MedVance with and into the Purchaser (or a subsidiary thereof) or a reverse merger of a transitory subsidiary into MedVance — would be treated as a stock acquisition for federal income tax purposes absent a Section 338 election, because the result is that the Purchaser acquires the Target's stock (or the economic equivalent thereof) from the selling stockholders. Accordingly, the analysis set forth herein encompasses merger alternatives under the "stock purchase" rubric. A reverse triangular merger, in which MedVance survives as a subsidiary of the Purchaser, is functionally equivalent to a stock purchase and may be the preferred implementation mechanism for corporate law purposes; the tax consequences analyzed below would be the same.
B. Stock Purchase — Tax Consequences
The federal income tax consequences of a stock purchase to each of the relevant parties are summarized below.
To the Sellers. Each selling stockholder would recognize capital gain (long-term, assuming a holding period in excess of one year, which we understand to be the case for all selling stockholders) equal to the excess of the amount realized on the sale of its MedVance stock over such stockholder's adjusted tax basis in the shares sold. The amount realized includes cash and the fair market value of any other property received, less selling expenses.
• Crestline Growth Equity Fund II LP. Crestline is organized as a Delaware limited partnership and is classified as a partnership for federal income tax purposes. Gain recognized by Crestline on the sale of its MedVance shares flows through to Crestline's partners, and the characterization of such gain (as long-term capital gain) and the applicable tax rates are determined at the partner level. To the extent that Crestline's partners include tax-exempt entities (such as pension funds or endowments), the gain generally would not be subject to unrelated business income tax ("UBIT") because gain from the sale of stock is generally excluded from UBIT. To the extent Crestline's partners include non-U.S. persons, the gain on the sale of MedVance stock generally would not be subject to U.S. federal income tax under Section 865 of the Code (source rules for personal property sales), unless MedVance is a "United States real property holding corporation" within the meaning of Section 897 of the Code, which we have not analyzed for purposes of this memorandum.
• Ryland Family Holdings LLC. Ryland Holdings is organized as a Delaware limited liability company and is understood to be classified as a partnership (or, if a single-member LLC, as a disregarded entity) for federal income tax purposes. Similar to Crestline, gain recognized by Ryland Holdings flows through to its members. Based on our understanding that the Ryland family members are U.S. individuals, the gain would be taxable at the applicable long-term capital gains rate.
• Individual Management Holders. Individual management holders — including Daniel Burch (CEO), Angela Moretti (CFO), Dr. Samir Patel (CMO), Karen Tolliver (COO), and others — who sell their MedVance shares for cash (as opposed to rolling over into Purchaser equity) will recognize long-term capital gain taxable at the current maximum federal rate of 20%, plus the 3.8% net investment income tax ("NIIT") under Section 1411 of the Code, for a combined maximum federal rate of 23.8%. State income taxes in the stockholder's state of residence would also apply. For management holders who participate in the rollover, the tax consequences of the rollover portion are analyzed separately in Section VI.
To the Purchaser. The Purchaser takes a cost basis in the acquired MedVance stock equal to the aggregate purchase price of $620,000,000, subject to adjustment for purchase price adjustments, working capital true-ups, and the portion of the purchase price satisfied through the issuance of Purchaser stock in the management rollover (which would be valued at fair market value for this purpose). Critically, in a stock purchase, there is no step-up in the tax basis of MedVance's underlying assets. MedVance's historical (inside) tax basis in its assets — including its real property, medical equipment, furniture, fixtures, leasehold improvements, identifiable intangible assets, and goodwill — carries over unchanged. This means that the Purchaser's new MedVance subsidiary will continue to compute depreciation, amortization, and gain or loss on future asset dispositions based on MedVance's historical tax basis, not the purchase price. The implications of this foregone step-up are analyzed in detail in Section VII and Exhibit B.
To MedVance. In a stock purchase, there are no federal income tax consequences at the MedVance entity level. MedVance does not recognize gain or loss on the sale of its stock by its stockholders. MedVance continues as a going concern — an indirect, wholly owned subsidiary of Ardent Capital Partners III LP (through the Purchaser) — with its existing tax attributes intact. These attributes include, without limitation, MedVance's remaining federal NOL carryforwards (estimated at approximately $1,200,000 at year-end 2024), any tax credit carryforwards, its existing depreciation and amortization schedules, its method of accounting, and its tax elections. However, the change in ownership of MedVance stock will trigger a Section 382 ownership change, which imposes an annual limitation on the use of pre-change NOLs, as analyzed in Section III.D below.
From a healthcare regulatory perspective, the stock purchase structure is strongly preferable. A stock acquisition preserves MedVance's Medicare and Medicaid provider numbers, its certificates of need (to the extent applicable), its state healthcare facility licenses, and its managed care payor contracts, all of which remain in the name of MedVance and are not subject to assignment, novation, or reissuance. This avoids the significant regulatory friction, delay, and potential revenue disruption that could result from an asset purchase, which would require new provider enrollment applications, license transfers, and contract assignments in each of the four states in which MedVance operates.
C. Asset Purchase — Tax Consequences
The federal income tax consequences of an asset purchase to each of the relevant parties are summarized below for comparative purposes.
To MedVance (the Seller Entity). In an asset purchase, MedVance itself would be the seller. MedVance would recognize gain (or loss) on the sale of each asset, with the character of the gain determined on an asset-by-asset basis. Ordinary income would be recognized to the extent of depreciation recapture under Sections 1245 and 1250 of the Code with respect to tangible personal property and real property, respectively. Gain attributable to the sale of goodwill and going concern value would generally be treated as long-term capital gain to MedVance (a corporation); however, because capital gains of a C corporation are taxed at the same 21% federal rate as ordinary income, the character distinction is less significant at the entity level than it would be for individual taxpayers. The aggregate entity-level gain would be substantial, reflecting the large spread between the purchase price (plus assumed liabilities) and MedVance's aggregate adjusted tax basis in its assets. This entity-level gain would be subject to the 21% federal corporate income tax rate, plus applicable state corporate income taxes in Tennessee (6.5% excise tax on net earnings), Alabama (6.5%), Georgia (5.75%), and Kentucky (5.0%), calculated with reference to MedVance's apportionment factors in each state.
To the Sellers (at the Stockholder Level). After MedVance pays entity-level taxes on the asset sale gain, the remaining net proceeds would be distributed to MedVance's stockholders in liquidation of the company. Each stockholder would recognize capital gain (or loss) on the liquidating distribution equal to the difference between the amount distributed and the stockholder's adjusted tax basis in its MedVance stock. This results in a classic "double tax" — the same economic gain is taxed once at the corporate level (at a 21% federal rate, plus state taxes) and again at the stockholder level (at up to 23.8% for individuals, considering the NIIT). The aggregate double-tax burden is economically significant, and neither Crestline nor Ryland Holdings has indicated a willingness to accept the reduced after-tax proceeds that would result from an asset sale structure unless the purchase price were increased (grossed up) to compensate for the additional tax cost.
To the Purchaser. In an asset purchase, the Purchaser (or its acquisition subsidiary) receives a cost basis in each acquired asset equal to the portion of the purchase price (including assumed liabilities) allocated to that asset under the residual method prescribed by Section 1060 of the Code, consistent with the allocation methodology under Treasury Regulation Section 1.338-6. This permits the Purchaser to depreciate and amortize each asset based on its fair market value, generating incremental tax deductions relative to MedVance's historical tax basis. The most significant component of this step-up benefit arises from the amortization of goodwill and going concern value (allocated to Class VII under Section 1060), which is amortizable over 15 years under Section 197 on a straight-line basis.
We estimate the aggregate present value of the step-up benefit from an asset purchase as follows, based on a preliminary allocation of the $620,000,000 purchase price (plus approximately $41,300,000 in assumed liabilities, for an aggregate consideration of approximately $661,300,000) among the Section 1060 asset classes:
At a combined federal and blended state effective tax rate of approximately 25.5%, the annual incremental tax shield from the step-up would be approximately $10,139,000. Discounted at an after-tax rate of 8.0% over the expected Ardent Capital holding period of five to seven years, with a terminal value reflecting the remaining amortization periods, the present value of the aggregate step-up benefit is estimated at approximately $12,800,000 to $14,900,000, depending on exit assumptions. This present value estimate is central to the Section 338(h)(10) cost-benefit analysis in Section IV.
D. Section 382 Considerations in a Stock Purchase
The acquisition of 100% of MedVance's stock by the Purchaser — a new owner unrelated to the existing stockholders — will constitute an "ownership change" within the meaning of Section 382(g) of the Code. An ownership change occurs when, as a result of one or more owner shifts or equity structure shifts, the percentage of stock of the loss corporation (MedVance) owned by one or more "5-percent shareholders" increases by more than 50 percentage points over such shareholders' lowest percentage ownership at any time during the applicable testing period (generally three years). Because the Purchaser is acquiring 100% of MedVance's stock, the ownership change is unambiguous and will occur as of the closing date.
Following the ownership change, Section 382 imposes an annual limitation on MedVance's ability to utilize its pre-change NOLs (and certain other pre-change tax attributes, including built-in losses recognized during the five-year recognition period) to offset taxable income in post-change tax years. The annual Section 382 limitation is equal to the product of:
(i) the fair market value of MedVance's stock immediately before the ownership change; and
(ii) the applicable long-term tax-exempt rate published by the IRS for the month of the ownership change.
For purposes of this analysis, we estimate the value of MedVance's stock immediately before the ownership change at approximately $578,700,000 (the $620,000,000 purchase price less the $41,300,000 of existing indebtedness to be repaid at closing, which represents a reasonable proxy for equity value). Assuming an applicable long-term tax-exempt rate of approximately 4.50% (based on rates published by the IRS for recent months; the actual rate will be determined by the rate in effect for the month in which the closing occurs), the estimated annual Section 382 limitation would be approximately:
$578,700,000 × 4.50% = $26,042,000 per year
Given that MedVance's estimated pre-change federal NOL carryforward is only approximately $1,200,000 as of year-end 2024, the Section 382 limitation is not a material constraint. The entire pre-change NOL could be utilized within the first post-change tax year, subject to the 80% taxable income limitation under Section 172(a)(2) of the Code. Accordingly, the Section 382 limitation does not present a meaningful economic impediment to the stock purchase structure.
We note that the Section 382 analysis would be more consequential if MedVance had significant pre-change NOLs or net unrealized built-in losses ("NUBIL"). Based on our review of MedVance's balance sheet, we do not believe that MedVance is in a NUBIL position; to the contrary, MedVance appears to have a net unrealized built-in gain ("NUBIG") position (given that the fair market value of its assets exceeds their aggregate tax basis), which would provide a potential benefit under the NUBIG rules of Section 382(h) by increasing the Section 382 limitation in the recognition period. However, given the immateriality of the pre-change NOLs, a detailed NUBIG analysis has not been undertaken.
E. Recommendation: Stock Purchase
Based on the foregoing analysis, we recommend that the Transaction be structured as a stock purchase. The principal considerations supporting this recommendation are as follows:
(a) Avoidance of Double Taxation. A stock purchase avoids the entity-level gain recognition and resulting corporate income tax that would arise in an asset purchase. The selling stockholders pay a single level of tax on their gain, at capital gains rates. This is the most tax-efficient outcome for the sellers and, because the sellers have indicated an unwillingness to absorb the additional tax cost of an asset deal, the most cost-effective structure for the Purchaser as well.
(b) Seller Preference. Both Crestline Growth Equity Fund II LP and Ryland Family Holdings LLC have expressed a strong preference for a stock purchase. An asset purchase would require either a significant gross-up of the purchase price (estimated at $25,000,000 to $30,000,000 to make the sellers whole on an after-tax basis) or would reduce the sellers' net after-tax proceeds, either of which would impair deal economics or jeopardize the Transaction.
(c) Preservation of Healthcare Regulatory Approvals. A stock purchase preserves MedVance's Medicare and Medicaid provider numbers, certificates of need, state healthcare facility licenses, accreditations, and managed care payor contracts without interruption. An asset purchase would require new enrollment applications, license transfers, and contract novations in Tennessee, Alabama, Georgia, and Kentucky, introducing regulatory risk, administrative burden, and potential revenue disruption during the transition period.
(d) Simplified Transfer Mechanics. A stock purchase is mechanically simpler, involving the transfer of stock certificates (or book-entry shares) against payment, rather than the individual conveyance of each asset and the assumption of each liability, with the attendant need for bills of sale, assignment agreements, deeds, and third-party consents.
(e) Section 382 Impact Is Manageable. The Section 382 ownership change limitation is not a significant constraint given the immateriality of MedVance's pre-change NOLs (estimated at approximately $1,200,000).
(f) Section 338(h)(10) Election Does Not Justify the Cost. As analyzed in detail in Section IV, the incremental tax cost of a Section 338(h)(10) election (approximately $17,200,000) exceeds the discounted present value of the step-up benefit, and the election is therefore not recommended.
IV. SECTION 338(h)(10) ELECTION ANALYSIS
A. Overview of Section 338(h)(10)
Section 338(h)(10) of the Code, together with Treasury Regulation Section 1.338(h)(10)-1, permits the acquiring corporation and the selling shareholder(s) in a "qualified stock purchase" to jointly elect to treat the stock acquisition as if it were an asset acquisition for federal income tax purposes. If the election is made, the Target is deemed to have sold all of its assets at fair market value in a single transaction on the acquisition date, recognized gain or loss on the deemed sale, and then distributed the proceeds in complete liquidation to the selling stockholder(s). The actual stock sale is disregarded for tax purposes.
The potential advantage of a Section 338(h)(10) election to the Purchaser is that it achieves a step-up in the tax basis of the Target's assets to fair market value, without requiring the legal mechanics of an actual asset purchase. The Purchaser's new subsidiary (the "new Target") starts with a clean slate of asset bases, permitting incremental depreciation and amortization deductions.
However, the availability of a Section 338(h)(10) election is subject to specific requirements:
(i) Qualified Stock Purchase. The acquisition must constitute a "qualified stock purchase" within the meaning of Section 338(d)(3) — i.e., the acquiring corporation must acquire at least 80% of the total voting power and 80% of the total value of the Target's stock by purchase within a 12-month acquisition period. This requirement will be satisfied here, as the Purchaser will acquire 100% of MedVance's stock in a single closing.
(ii) Target Must Be a Member of a Selling Consolidated Group or an S Corporation. Section 338(h)(10) is available only where the Target is (a) a member of a selling "affiliated group" (within the meaning of Section 1504(a)) that files a consolidated federal income tax return, or (b) an S corporation. This is a critical threshold issue for MedVance.
Application to MedVance. MedVance is a stand-alone C corporation. It is not a subsidiary member of an affiliated group that files a consolidated federal income tax return. Its stockholders are Crestline (a limited partnership), Ryland Holdings (an LLC), and individual management holders — none of which is a corporation that could be the common parent of an affiliated group with MedVance as a member. Accordingly, MedVance does not appear to qualify for a Section 338(h)(10) election under the standard rules.
We have considered whether MedVance could qualify through alternative mechanisms, including whether the selling stockholders could be viewed as constituting a "selling affiliated group" or whether any of the selling entities could be treated as a corporation for this purpose. Based on our analysis, we do not believe that the selling stockholders can be treated as an affiliated group within the meaning of Section 1504(a), as none of the selling stockholders is a corporation that owns 80% or more of MedVance's stock. Crestline, as a partnership, is disregarded for purposes of the affiliated group definition, and Ryland Holdings, as an LLC classified as a partnership (or disregarded entity), is similarly disregarded.
Section 338(g) Election. As an alternative, the Purchaser could make a unilateral election under Section 338(g) of the Code. A Section 338(g) election treats the Target as having sold all of its assets and repurchased them at fair market value on the day after the acquisition date, but — unlike a Section 338(h)(10) election — it does not eliminate the shareholder-level gain on the actual stock sale. Instead, a Section 338(g) election results in two levels of tax: (1) entity-level tax on the deemed asset sale (as in a 338(h)(10) election), and (2) stockholder-level tax on the actual stock sale (which is not disregarded). This makes a Section 338(g) election generally undesirable in the context of an acquisition of a C corporation, because it exacerbates rather than mitigates the double-tax problem.
Notwithstanding the threshold issues with the availability of a Section 338(h)(10) election, we present the full cost-benefit analysis below for completeness, in order to quantify the economic impact and confirm our recommendation.
B. Tax Consequences of a Section 338(h)(10) Election
Assuming, for purposes of this analysis, that a Section 338(h)(10) election were available and were made, the tax consequences would be as follows:
Deemed Asset Sale at the Target Level. MedVance would be treated as having sold all of its assets at fair market value in a single deemed transaction on the closing date. The aggregate deemed sales price ("ADSP") would be determined under Treasury Regulation Section 1.338-4 based on the purchase price, assumed liabilities, and other relevant items, and would be allocated among MedVance's assets using the residual method under Treasury Regulation Section 1.338-6 (consistent with the Section 1060 methodology).
The estimated entity-level tax cost of the deemed asset sale is summarized below, based on the preliminary purchase price allocation and asset basis schedules provided by Prumvane & Reese LLP:
The estimated gain is further broken down by asset category for purposes of computing character and tax:
The estimated federal and state income taxes on the deemed asset sale gain are as follows:
The detailed computation underlying this summary, including adjustments for the interaction between federal and state taxes (i.e., the federal deductibility of state income taxes, net operating loss utilization, and apportionment mechanics), is set forth in Exhibit A.
Step-Up Benefit to the Purchaser. If the Section 338(h)(10) election were made, the Purchaser's new MedVance subsidiary (the "new Target") would obtain a fair market value basis in all of MedVance's assets, permitting incremental depreciation and amortization deductions over the applicable recovery periods. As summarized in Section III.C above and detailed in Exhibit B, the estimated present value of the incremental tax shield from these deductions, discounted at 8.0% over a five-to-seven-year holding period, is approximately $12,800,000 to $14,900,000.
C. Cost-Benefit Analysis
The following table summarizes the cost-benefit analysis of the Section 338(h)(10) election:
Under both the five-year and seven-year hold period scenarios, the incremental entity-level tax cost of the deemed asset sale exceeds the present value of the step-up benefit, resulting in a net cost to the Transaction parties. The following additional considerations reinforce the conclusion that the election should not be made:
(a) Timing Mismatch. The $17,200,000 incremental tax cost is borne at closing (or funded from purchase price proceeds), representing an immediate cash outflow. The step-up benefit, by contrast, is realized gradually over future tax periods as incremental depreciation and amortization deductions reduce taxable income. The step-up benefit is therefore subject to time-value-of-money discounting and is inherently less certain (depending on MedVance's future profitability, tax rates, holding period, and exit structure).
(b) Seller Resistance. The $17,200,000 entity-level tax would be borne economically by the selling stockholders through a reduction in their net after-tax proceeds (because the deemed asset sale occurs at the MedVance entity level, and the after-tax proceeds are then deemed distributed to the sellers). Crestline Growth Equity Fund II LP and Ryland Family Holdings LLC have indicated through their counsel that they will not agree to a gross-up of the purchase price to offset this additional tax cost. Accordingly, unless the Purchaser is willing to increase the purchase price by approximately $17,200,000 (or negotiate a sharing arrangement), the incremental tax will reduce seller proceeds and may jeopardize the negotiated deal economics.
(c) Complexity and Risk. The election mechanics are complex and require joint execution by the Purchaser and the sellers (or, in the case of a Section 338(g) election, impose the entire cost on the Purchaser unilaterally). Errors in the election process, purchase price allocation, or compliance with applicable Treasury Regulations could give rise to penalties or adverse tax consequences.
(d) Section 338(g) Is Worse. If a Section 338(h)(10) election is unavailable (as we believe it to be, given MedVance's stand-alone C corporation status), the only alternative is a unilateral Section 338(g) election. A Section 338(g) election does not eliminate the stockholder-level tax on the actual stock sale; rather, it adds an entity-level deemed asset sale tax on top of the stockholder-level tax, resulting in an aggregate tax cost significantly exceeding $17,200,000.
D. Recommendation: Do Not Make Section 338(h)(10) Election
Based on the foregoing analysis, we recommend against making a Section 338(h)(10) election (or a Section 338(g) election) in connection with the Transaction. The estimated $17,200,000 incremental entity-level tax cost exceeds the discounted present value of the step-up benefit under all reasonable assumptions regarding holding period and discount rate. Moreover, the election likely is not available given MedVance's status as a stand-alone C corporation, the sellers will not agree to a gross-up, and the complexity and risk of the election mechanics are not warranted.
The Transaction should proceed as a straight stock purchase with no Section 338 election.
V. STATE TAX NEXUS AND TRANSFER TAX ANALYSIS
A. State Income Tax Nexus — MedVance Operations
MedVance currently files state income and/or franchise tax returns in Tennessee, Alabama, Georgia, and Kentucky, the four states in which it operates healthcare facilities. Below, we summarize the corporate income/franchise tax regime in each state and MedVance's estimated apportionment methodology.
1. Tennessee. Tennessee imposes two principal business taxes on corporations doing business in the state:
(a) Corporate Excise Tax. Tennessee's corporate excise tax is imposed at a rate of 6.5% on net earnings (taxable income) apportioned to Tennessee. Tennessee uses a single-factor (gross receipts) apportionment formula for tax years beginning on or after January 1, 2016, though certain taxpayers may use alternative formulas. MedVance's Tennessee apportionment factor is estimated at approximately 50%, reflecting the concentration of MedVance's patient revenue, facilities, and employees in the Nashville metropolitan area and other Tennessee locations. This is the state in which MedVance generates its largest share of revenue.
(b) Franchise Tax. Tennessee's franchise tax is imposed at a rate of 0.25% of the greater of (i) net worth apportioned to Tennessee or (ii) the book value of real and tangible personal property owned or used in Tennessee. The Tennessee General Assembly has enacted legislation to phase out the franchise tax, with full repeal effective for tax years beginning on or after January 1, 2024. However, the current status of the phase-out and its applicability for tax year 2025 and beyond should be confirmed, as there have been discussions regarding a partial repeal applying only to the property measure, leaving the net worth measure in place. We recommend confirming the precise effective dates and scope of the franchise tax repeal as an open item (see Section IX).
Transfer Tax — Stock Sale. Tennessee does not impose a transfer tax on the sale of corporate stock. Tennessee does impose a real estate transfer tax at a rate of $0.37 per $100 of consideration on transfers of real property. However, because a stock acquisition does not involve a change in legal title to MedVance's real property — MedVance continues to hold title in its own name as a surviving entity — the Tennessee real estate transfer tax is not triggered by the Transaction. We note that certain Tennessee counties impose an additional local transfer tax, but these, too, apply only to conveyances of real property and are inapplicable to a stock purchase.
2. Alabama.
(a) Corporate Income Tax. Alabama imposes a corporate income tax at a rate of 6.5% on net income apportioned to Alabama. Alabama uses a single-factor (sales) apportionment formula for tax years beginning on or after January 1, 2021. MedVance's Alabama apportionment factor is estimated at approximately 25%, reflecting the significant presence of MedVance's facilities in Birmingham and Huntsville.
(b) Business Privilege Tax. Alabama imposes a business privilege tax on corporations at graduated rates based on the corporation's net worth apportioned to Alabama. The minimum privilege tax is $100, and the maximum is $15,000. For a corporation of MedVance's size, the maximum annual business privilege tax of $15,000 would apply.
Transfer Tax — Stock Sale. Alabama does not impose a transfer tax on the sale of corporate stock. Alabama's real estate transfer tax (deed tax) applies to conveyances of real property at a rate of $0.50 per $500 (or fraction thereof) of consideration paid for the real property. Because legal title to MedVance's Alabama real property does not change in a stock purchase, this tax is not triggered. We have confirmed that Alabama does not impose a bulk sales tax or other transfer-level tax on the stock acquisition.
3. Georgia.
(a) Corporate Income Tax. Georgia imposes a corporate income tax at a rate of 5.75% on net income apportioned to Georgia. Georgia uses a single-factor (sales) apportionment formula. MedVance's Georgia apportionment factor is estimated at approximately 15%, reflecting MedVance's smaller but significant operations in the Atlanta metropolitan area and other Georgia locations.
(b) Intangibles Tax. Georgia historically imposed an intangibles tax on certain types of intangible property, but this tax has been repealed and is no longer in effect. No Georgia intangibles tax applies to the Transaction.
Transfer Tax — Stock Sale. Georgia imposes a real estate transfer tax at a rate of $1.00 per $1,000 of consideration on transfers of real property. As with the other states, this tax is not triggered in a stock purchase because legal title to MedVance's Georgia real property does not change. Georgia does not impose a separate stock transfer tax.
4. Kentucky.
(a) Corporate Income Tax. Kentucky imposes a flat corporate income tax at a rate of 5.0% on net income apportioned to Kentucky. Kentucky uses a single-factor (sales) apportionment formula for tax years beginning on or after January 1, 2018. MedVance's Kentucky apportionment factor is estimated at approximately 10%, reflecting MedVance's smaller operations in the Lexington and Louisville areas.
(b) Limited Liability Entity Tax (LLET). Kentucky imposes a limited liability entity tax on certain entities doing business in the state, including corporations and limited liability companies. The LLET is imposed at the greater of (i) 0.095% of Kentucky gross receipts or (ii) 0.75% of Kentucky gross profits, with a minimum of $175 per year. The LLET is creditable against the regular Kentucky corporate income tax. We have confirmed that MedVance files and pays the LLET in Kentucky. If MedVance has any Kentucky-organized subsidiaries, they would also be subject to the LLET; we have not identified any such subsidiaries in our review but recommend confirmation as an open item.
Transfer Tax — Stock Sale. Kentucky does not impose a transfer tax on the sale of corporate stock. Kentucky imposes a real property transfer tax at a rate of $0.50 per $500 of consideration on conveyances of real property, but this is not triggered in a stock purchase.
B. Change-of-Ownership Implications for State Tax Purposes
We have analyzed whether the change in ownership of MedVance's stock triggers any adverse state-level tax consequences, including the following:
Real Property Reassessment for Ad Valorem Tax Purposes. In some states and localities, a change in the ownership of an entity that owns real property can trigger a reassessment of the real property for ad valorem (property) tax purposes, even though legal title does not change. We have reviewed the applicable rules in each of the four states:
• Tennessee: Tennessee does not have a provision that triggers reassessment of real property upon a change in ownership of the entity that holds the property. Real property in Tennessee is assessed on a periodic cycle (typically every four to six years, depending on the county), and the change in MedVance's stock ownership should not, by itself, accelerate or alter the assessment schedule.
• Alabama: Alabama similarly does not trigger a real property reassessment based on a change in stock ownership of the entity holding the property. Property assessments in Alabama are based on fair market value as determined by county assessors on a regular basis.
• Georgia: Georgia does not impose a reassessment trigger based on changes in entity ownership. Georgia properties are assessed annually at 40% of fair market value, and the change in MedVance's stock ownership would not alter this process.
• Kentucky: Kentucky does not trigger a real property reassessment upon a change in stock ownership of the holding entity. Kentucky properties are assessed annually by county property valuation administrators.
Loss of State Tax Incentives, Credits, or Abatements. We have reviewed the data room materials for any economic development incentives, tax credits, or property tax abatements held by MedVance in any of the four states. Based on our review, MedVance received a property tax abatement from the Industrial Development Board of the Metropolitan Government of Nashville and Davidson County, Tennessee, in connection with the development of its Nashville headquarters facility, which provides a partial abatement of real property taxes through December 31, 2028. We recommend confirming whether the terms of this abatement include a change-of-control trigger that would terminate or reduce the abatement upon a change in ownership of MedVance's stock. Many economic development incentive agreements contain such provisions, and a loss of the abatement could result in an annual incremental property tax cost of approximately $120,000 to $180,000. This is identified as an open item in Section IX.
We have not identified any other material state tax incentives, credits, or abatements that would be affected by the ownership change, but recommend that the diligence team confirm this with MedVance management.
State-Level NOL Limitations. Several states have rules that parallel or are similar to the federal Section 382 limitation, restricting the use of pre-change NOLs following an ownership change. Tennessee does not have a separate Section 382-type limitation; instead, Tennessee generally conforms to the federal limitation by incorporating federal taxable income (as adjusted) as the starting point for the excise tax computation. Alabama, Georgia, and Kentucky similarly start with federal taxable income (or adjusted gross income) as a base, and to the extent that the federal Section 382 limitation reduces the NOL deduction available for federal purposes, the same limitation effectively flows through to the state returns. Given the immateriality of MedVance's pre-change NOLs, this issue is not significant for any state.
C. Transfer Tax Summary
The following table summarizes the estimated state-level transfer and related taxes applicable to the Transaction:
We note that nominal filing fees may be incurred in connection with updating corporate records, registered agent filings, or change-of-control notifications in each state, but these are expected to be de minimis (in the aggregate, less than $5,000) and are not reflected in the table above.
D. Purchaser's State Tax Nexus
As the direct parent of MedVance following the closing, the Purchaser (Ardent Healthcare Holdings Inc., a Delaware corporation) will need to analyze its own state income tax filing obligations:
(a) Tennessee, Alabama, Georgia, and Kentucky. As the parent of a subsidiary (MedVance) that operates in these states, the Purchaser may be required to file state income tax returns if any of these states impose combined or unitary reporting requirements, or if the Purchaser is deemed to have nexus through the activities of its subsidiary. Tennessee does not currently require combined reporting, and each corporation files separately; however, the Purchaser should monitor legislative developments, as combined reporting has been discussed in Tennessee. Alabama requires combined reporting for affiliated groups engaged in a unitary business, and the Purchaser may be required to file as part of a combined group with MedVance in Alabama. Georgia requires separate reporting by each corporate entity, though certain elections for consolidated or combined filing are available. Kentucky does not require combined reporting. We recommend that Osgood & Vail prepare a detailed nexus study for the Purchaser upon closing to confirm filing obligations in each state.
(b) Delaware. As a Delaware corporation, the Purchaser will be subject to the Delaware franchise tax. The Delaware franchise tax is calculated using either the Authorized Shares Method or the Assumed Par Value Capital Method, whichever produces a lower tax. Given the Purchaser's expected capitalization (substantial equity contribution and resulting capital surplus), the Assumed Par Value Capital Method is likely to produce a lower tax liability, but the annual franchise tax could still be significant (potentially in the range of $75,000 to $200,000 per year, depending on the authorized shares and capitalization structure). We recommend that the Purchaser's formation documents be structured to minimize Delaware franchise tax exposure, including by authorizing a limited number of shares and maintaining a favorable ratio of total gross assets to authorized shares.
(c) Ardent Capital Partners III LP — State Filing Obligations. As a Delaware limited partnership, Ardent Capital Partners III LP may have state income tax filing obligations in states where it is deemed to be doing business through its subsidiaries. In particular, states that tax partnership income may require Ardent Capital Partners III LP to file information returns, and states with non-resident withholding requirements may require withholding on income allocated to non-resident partners. Tennessee imposes a "Hall Tax" on interest and dividend income (though this tax has been fully repealed as of January 1, 2021). Alabama, Georgia, and Kentucky each require partnerships with income sourced to the state to file partnership information returns and may require composite returns or withholding on behalf of non-resident partners. We recommend that Osgood & Vail analyze the partnership-level filing obligations as part of the post-closing tax compliance work.
VI. TREATMENT OF MANAGEMENT ROLLOVER EQUITY
A. Overview of Rollover Structure
As described in Section II.A, certain members of MedVance's management team will roll over a portion of their equity in MedVance into equity of the Purchaser, rather than receiving cash for 100% of their MedVance shares. The key terms of the proposed rollover are as follows:
• Aggregate Management Equity in MedVance: The management holders collectively own approximately 12.3% of MedVance's outstanding common stock, representing approximately $76,260,000 of the $620,000,000 aggregate purchase price.
• Rollover Amount: The rolling management members will contribute MedVance shares with an aggregate value of approximately $18,600,000 to the Purchaser in exchange for newly issued shares of Purchaser common stock (or a class of common stock designated for management). This represents approximately 24.4% of the management holders' aggregate MedVance equity value. The remaining approximately 75.6% of the management holders' MedVance equity (approximately $57,660,000 in aggregate value) will be acquired by the Purchaser for cash on the same terms as the shares acquired from Crestline and Ryland Holdings.
• Rolling Management Members: The participating management members are expected to include Daniel Burch (Chief Executive Officer), Angela Moretti (Chief Financial Officer), Dr. Samir Patel (Chief Medical Officer), Karen Tolliver (Chief Operating Officer), and certain other senior executives as specified in the SPA and related management equity documentation. The specific rollover amounts for each individual will be determined in connection with the negotiation of the management equity arrangements.
• Rollover Mechanism: The management members will contribute their MedVance shares to the Purchaser in exchange for newly issued shares of the Purchaser. This contribution is intended to be structured as a tax-deferred exchange under Section 351 of the Code, concurrent with or immediately prior to the Purchaser's acquisition of the remaining MedVance shares from Crestline and Ryland Holdings for cash.
B. Section 351 Tax-Deferred Treatment
Section 351(a) of the Code provides that no gain or loss shall be recognized if one or more persons transfer property to a corporation solely in exchange for stock of such corporation, and immediately after the exchange, the transferors are in "control" of the corporation. "Control" is defined in Section 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.
The application of Section 351 to the management rollover requires satisfaction of three elements:
(i) Transfer of Property. The rolling management members will transfer shares of MedVance common stock to the Purchaser. Shares of stock constitute "property" for purposes of Section 351. We note that services do not constitute "property" under Section 351(d), but the MedVance shares to be contributed are existing shares held by the management members, not services to be rendered. To the extent that any management member's MedVance shares were originally received as compensatory equity, the Section 83 implications are addressed in Section VI.E below, but the shares themselves, once vested and included in income, constitute property for Section 351 purposes.
(ii) Solely in Exchange for Stock. The rolling management members must receive solely stock of the Purchaser in exchange for their contributed MedVance shares. If any management member receives cash, promissory notes, or other property ("boot") in addition to Purchaser stock in the exchange, the boot will trigger gain recognition to the extent of the boot received (Section 351(b)). As structured, each rolling management member will receive only Purchaser stock for the rollover portion of their MedVance shares. The cash received for the non-rollover portion is treated as a separate transaction, as discussed in Section VI.C below.
(iii) Control Immediately After the