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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

October 10, 2023

FROM: Leonard Cross, Partner, Tax Practice Group Calderwood & Harkness LLP 425 Lexington Avenue, 36th Floor New York, NY 10017

TO: James Prentice, Responsible Partner, Mergers & Acquisitions (Houston) Megan Chu, Lead Associate, Mergers & Acquisitions (Houston)

RE: Federal Income Tax Structuring Analysis — Proposed Formation of Solstice Plateau Energy Holdings LLC (Joint Venture between Calloway-Briggs Renewables Inc. and Lumen Ridge Infrastructure Partners LLC)

MATTER NUMBER: 48172.001

This memorandum is prepared in connection with our representation of Calloway-Briggs Renewables Inc. ("CBR") and is subject to attorney-client privilege and work product protections. The analysis and recommendations contained herein reflect our preliminary views based on the facts available to us as of the date hereof, and are not intended as formal tax advice to any party other than CBR. This memorandum should not be relied upon by Lumen Ridge Infrastructure Partners LLC, its affiliates, or any third party without our express written consent. The conclusions set forth herein are subject to change based on final transaction documents, further diligence, and developments in applicable law.

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I. Executive Summary

This memorandum analyzes the federal income tax structuring considerations arising from the proposed formation of Solstice Plateau Energy Holdings LLC ("Solstice Plateau" or the "JV"), a 50/50 joint venture between Calloway-Briggs Renewables Inc. ("CBR"), a Texas corporation (EIN 46-2837451), and Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge"), a Delaware limited liability company (EIN 83-1924076). Solstice Plateau will be organized as a Delaware limited liability company and will serve as the vehicle through which the parties develop, construct, and operate a portfolio of eight utility-scale solar energy generation projects totaling approximately 1,200 MW DC across the states of Texas, New Mexico, and Arizona (collectively, the "Project Portfolio").

The total aggregate equity commitment of the members at formation is $300,000,000 — $150,000,000 from each member. CBR will contribute $60,000,000 in cash together with an in-kind contribution of the Project Portfolio (consisting of eight solar development projects at various stages of development) valued by the parties at $90,000,000 in the aggregate on a fair market value basis, for a total capital contribution of $150,000,000. CBR's adjusted tax basis in the contributed Project Portfolio is approximately $34,200,000, creating a built-in gain at the time of contribution of approximately $55,800,000. Lumen Ridge will contribute $150,000,000 in cash. Additional capital calls of up to $200,000,000 per member (or $400,000,000 in the aggregate) are contemplated, subject to supermajority approval of the Management Committee.

This memorandum addresses the following key tax structuring issues:

1. Entity Classification. Classification of Solstice Plateau as a partnership for federal income tax purposes under the check-the-box regulations (Treas. Reg. §301.7701-3), including the tax advantages of partnership treatment.

2. Tax Treatment of Initial Capital Contributions. Treatment of the members' respective cash contributions and CBR's in-kind contribution of the Project Portfolio under IRC §721, including carryover basis under IRC §723 and the $55,800,000 built-in gain.

3. Disguised Sale Analysis. Evaluation of the potential application of the disguised sale rules under IRC §707(a)(2)(B) and Treas. Reg. §1.707-3 to CBR's receipt of development management fees and construction management fees from the JV in connection with its contribution of the Project Portfolio.

4. Section 704(c) Allocation Methodology. Selection of the appropriate allocation method under IRC §704(c) and Treas. Reg. §1.704-3 for the contributed Project Portfolio, with a recommendation to adopt the remedial allocation method.

5. Depreciation and Bonus Depreciation. Application of the Modified Accelerated Cost Recovery System ("MACRS") depreciation rules and bonus depreciation under IRC §168(k) to both contributed property and new construction expenditures by the JV.

6. Investment Tax Credits. Eligibility for and allocation of Investment Tax Credits ("ITCs") under IRC §48, including the enhanced credit rates available under the Inflation Reduction Act of 2022.

7. Tax Protection Agreement. Design and implementation of a 7-year tax protection agreement to shield CBR from the recognition of the $55,800,000 built-in gain on the contributed Project Portfolio, including make-whole mechanics and minimum debt allocation covenants.

8. Partnership Representative. Designation of CBR as the Partnership Representative under IRC §6223, including push-out election covenants and consent and notice procedures.

9. State and Local Tax Considerations. A preliminary overview of state tax implications in Texas, New Mexico, Arizona, and Delaware.

Summary Recommendation. Based on our analysis, we recommend that the parties structure Solstice Plateau as a Delaware limited liability company that retains its default classification as a partnership for federal income tax purposes under Treas. Reg. §301.7701-3(b)(1). We further recommend that the LLC Agreement provide for the remedial allocation method under IRC §704(c) and Treas. Reg. §1.704-3(d) for the contributed Project Portfolio; that ITCs be allocated 50/50 consistent with the members' ownership interests; that the JV elect bonus depreciation under IRC §168(k) on all eligible new construction expenditures; and that the parties execute a 7-year tax protection agreement that shields CBR from recognition of the $55,800,000 built-in gain through make-whole payments and minimum debt allocation covenants. CBR should be designated as the Partnership Representative, acting through Priya Narayanan (CFO of CBR), with appropriate push-out election covenants and consent and notice requirements included in the LLC Agreement. These recommendations are discussed in detail in the sections that follow.

II. Background and Transaction Overview

A. The Parties

1. Calloway-Briggs Renewables Inc.

Calloway-Briggs Renewables Inc. ("CBR") is a Texas corporation organized under the laws of the State of Texas and headquartered at 2300 Travis Street, Suite 4200, Houston, Texas 77006. CBR was founded in 2011 and is a privately held developer and operator of utility-scale solar energy projects across the United States. The company is majority-owned by its co-founders, Margaret "Meg" Calloway, who serves as Chairwoman and Chief Executive Officer, and Thomas R. Briggs, who serves as President. A minority institutional investor, Cascadia Growth Equity Fund III, L.P. (Owen Charbonneau, Managing Director), holds an approximately 22% equity stake in CBR.

For its fiscal year ending December 31, 2022, CBR reported revenues of approximately $412 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $98 million. CBR's current development pipeline includes approximately 3.8 GW of solar projects in various stages of development, permitting, and construction across multiple states. The key management personnel relevant to this transaction include Priya Narayanan (Chief Financial Officer), Daniel Estrada (Senior Vice President, Corporate Development), and Rebecca Whitfield (General Counsel). CBR's existing independent auditor is Greystone Hamill LLP.

CBR is classified as a C corporation for federal income tax purposes and files its federal income tax return on Form 1120. CBR's federal employer identification number is 46-2837451.

2. Lumen Ridge Infrastructure Partners LLC

Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge") is a Delaware limited liability company organized in 2018, with its principal office located at 301 Tresser Boulevard, Suite 1400, Stamford, Connecticut 06901. Lumen Ridge is managed by Lumen Ridge Capital Advisors LLC, its investment manager, and serves as a dedicated renewable energy infrastructure investment vehicle with approximately $4.2 billion in assets under management. The fund invests across the capital structure in renewable energy projects, with a particular emphasis on utility-scale solar, onshore wind, and battery energy storage systems.

Key principals of Lumen Ridge and its investment manager include Nathaniel "Nate" Forsythe (Co-Founder and Managing Partner), Carolyn J. Delaney (Partner and Head of Solar Investments), Victor Osei (Chief Financial Officer), and Amanda Prescott (General Counsel and Chief Compliance Officer). Lumen Ridge is advised in connection with the proposed JV by Whitmore Zanthor Group LLC as its financial advisor and by Haverford, Quinn & Steele LLP ("HQS") as its legal counsel. Lumen Ridge's federal employer identification number is 83-1924076.

Lumen Ridge is itself classified as a partnership for federal income tax purposes, meaning that its allocable share of JV income, loss, deductions, and credits will flow through to its underlying institutional investors, which include pension funds, insurance companies, and other institutional limited partners. As noted in Section III.C below, certain of Lumen Ridge's tax-exempt investors may face unrelated business taxable income ("UBTI") concerns to the extent the JV generates debt-financed income; however, this is an internal Lumen Ridge structuring consideration and is outside the scope of this memorandum.

3. The JV Entity

Solstice Plateau Energy Holdings LLC ("Solstice Plateau" or the "JV") will be formed as a Delaware limited liability company. Its registered agent will be Peachtree Corporate Services, Inc., located at 1209 Orange Street, Suite 300, Wilmington, Delaware 19801. The principal business office of the JV will be co-located with CBR's offices at 2300 Travis Street, Suite 4210, Houston, Texas 77006. The JV will be managed by a Management Committee composed of three representatives designated by CBR and three representatives designated by Lumen Ridge, with certain major decisions requiring supermajority approval (i.e., five of six votes).

B. Transaction Structure

The proposed transaction involves the formation of a 50/50 Delaware limited liability company joint venture between CBR and Lumen Ridge for the purpose of developing, constructing, and operating a portfolio of eight utility-scale solar energy generation projects in Texas, New Mexico, and Arizona. The principal economic terms of the proposed structure are summarized below.

Initial Capital Contributions. Each member will contribute initial capital of $150,000,000, as follows:

• CBR: $60,000,000 in cash, plus an in-kind contribution of the Project Portfolio (consisting of eight solar development projects at various stages of development), with an agreed fair market value of $90,000,000, for a total capital contribution of $150,000,000.

• Lumen Ridge: $150,000,000 in cash.

• Total Initial Capitalization: $300,000,000.

Additional Capital Calls. The LLC Agreement will authorize additional capital calls of up to $200,000,000 per member ($400,000,000 in the aggregate), subject to supermajority approval of the Management Committee (i.e., five of six votes). Combined with the initial capitalization, the total potential equity capitalization of the JV is $700,000,000.

Project-Level Debt. The JV intends to obtain a project-level non-recourse debt facility of up to $480,000,000 from Trident National Bank, N.A., on a 7-year term at an interest rate of SOFR plus 175 basis points. Lumen Ridge will be responsible for arranging the debt facility and will lead the negotiation of the credit agreement. The non-recourse nature of the facility is significant for tax purposes, as discussed in Sections VIII.F and XII below.

Management Arrangements. CBR will serve as the development and construction manager for all JV projects pursuant to a separate Development and Construction Management Agreement. CBR will receive: (i) an annual development management fee equal to 1.5% of aggregate capital deployed by the JV (approximately $4,500,000 per annum at full $300 million deployment); and (ii) a construction management fee equal to 3.0% of hard construction costs for each project. Estimated total hard construction costs for the 1,200 MW portfolio are approximately $720,000,000, yielding potential aggregate construction management fees of approximately $21,600,000 over the construction period. These fees are relevant to the disguised sale analysis discussed in Section IV.D.

Distribution Waterfall. Distributions of available cash will be made to the members in accordance with the following tiered waterfall:

• Tier 1: 50/50 to CBR and Lumen Ridge until each member achieves an 8.0% internal rate of return on its contributed capital.

• Tier 2: 60% to CBR / 40% to Lumen Ridge on amounts distributed above the 8.0% IRR threshold until Lumen Ridge has achieved a 12.0% internal rate of return.

• Tier 3: 50/50 to CBR and Lumen Ridge on all amounts distributed after Lumen Ridge has achieved a 12.0% internal rate of return.

The distribution waterfall is designed to incentivize CBR's development and operational performance by providing CBR with a promoted interest in the Tier 2 tranche, while ensuring that Lumen Ridge achieves its targeted return before the promote is triggered.

C. The Project Portfolio

The Project Portfolio contributed by CBR to the JV consists of eight utility-scale solar development projects, as summarized in the following table:

All eight projects are fully permitted, with the exception of the Brazos Point project in Wharton County, Texas, for which a permit application is currently pending. Based on discussions with CBR's development team (Daniel Estrada), the Brazos Point permit is expected to be issued prior to the anticipated closing date. As a condition to closing, the parties may wish to consider whether receipt of the Brazos Point permit should be a closing condition or whether appropriate risk allocation provisions should be included in the Contribution Agreement.

The two Sangre del Sol projects in Doña Ana County, New Mexico, are situated on land administered by the Bureau of Land Management ("BLM") under right-of-way grants. The terms of these BLM leases should be reviewed in connection with the transfer to the JV to confirm that assignment does not require BLM consent or trigger any adverse consequences under the applicable right-of-way grants.

Valuation. The parties have agreed on an aggregate fair market value of $90,000,000 for the Project Portfolio, based on a preliminary valuation range of $87,000,000 to $96,000,000 developed through discussions between the parties' financial advisors. A formal fairness analysis by Ridgeline Barrow & Co. (Marcus Delgado, Managing Director) is expected to be delivered on or about November 15, 2023, and is intended to confirm the $90,000,000 agreed value. As of the date of this memorandum, the Ridgeline Barrow fairness analysis has not yet been delivered. The final valuation is a critical input for the tax analysis, as it determines the magnitude of the built-in gain under Section 704(c) and the protected amount under the tax protection agreement.

Tax Basis and Built-In Gain. CBR's aggregate adjusted tax basis in the Project Portfolio is approximately $34,200,000. This basis reflects CBR's capitalized development expenditures (including soft costs, engineering and design costs, permitting and environmental review costs, land option payments, and other pre-construction expenditures) net of any applicable amortization or depreciation. For JV capital account purposes, the contributed property will be booked at the agreed fair market value of $90,000,000. The resulting built-in gain at the time of contribution is:

$90,000,000 (FMV) − $34,200,000 (Tax Basis) = $55,800,000 (Built-In Gain)

This $55,800,000 built-in gain is the central tax structuring issue addressed in this memorandum. Under IRC §704(c), the JV must allocate this built-in gain to CBR when it is recognized through depreciation, amortization, or sale of the contributed assets. The choice of allocation method and the design of the tax protection agreement are both driven by this built-in gain.

We note that the $34,200,000 aggregate tax basis figure is based on preliminary information provided by CBR's finance team. We strongly recommend that a detailed asset-by-asset tax basis schedule be obtained from CBR (coordinated through Priya Narayanan and Greystone Hamill LLP) to confirm the aggregate basis and to allocate basis among the individual projects for purposes of Section 704(c) layering. Project-level basis information will also be necessary for accurate computation of depreciation deductions and ITC-eligible basis.

D. JV Auditor and Tax Return Preparer

The JV intends to engage Pennington Clarke LLP as its independent auditor and tax return preparer. The engagement will be led by Harold Yeung, CPA, Engagement Partner at Pennington Clarke. The engagement letter is anticipated to be executed in early January 2024, in advance of the JV's first fiscal year. Pennington Clarke will be responsible for preparing the JV's federal partnership return (Form 1065), issuing Schedules K-1 to the members, maintaining the Section 704(c) schedules and remedial allocation computations, and preparing all required state income and franchise tax returns.

III. Entity Classification — Partnership Treatment

A. Default Classification Under Check-the-box Regulations

Solstice Plateau Energy Holdings LLC will be organized as a Delaware limited liability company with two members (CBR and Lumen Ridge). Under the entity classification regulations commonly known as the "check-the-box" regulations, the classification of an eligible entity for federal income tax purposes is determined under Treasury Regulation §301.7701-3.

A limited liability company organized under the laws of a U.S. state is a "domestic eligible entity" within the meaning of Treas. Reg. §301.7701-3(a). Under Treas. Reg. §301.7701-3(b)(1), the default classification for a domestic eligible entity with two or more members is a partnership. This default classification applies unless the entity affirmatively elects to be classified as an association taxable as a corporation by filing Form 8832 (Entity Classification Election) with the Internal Revenue Service.

No election on Form 8832 to be classified as a corporation is contemplated for Solstice Plateau. Accordingly, the JV will be classified as a partnership for U.S. federal income tax purposes from its date of formation, by operation of the default classification rules. The JV will file annual federal partnership income tax returns on IRS Form 1065 and will issue Schedules K-1 (Form 1065) to each member reflecting the member's allocable share of the JV's income, deductions, gains, losses, and credits.

We have reviewed the proposed LLC Agreement and are not aware of any provisions that would cause Solstice Plateau to be classified as a corporation under the pre-check-the-box "resemblance" tests or under any other provision of the Internal Revenue Code. Furthermore, we are not aware of any state-level entity classification considerations in Delaware, Texas, New Mexico, or Arizona that would override or supersede the JV's federal partnership classification. Each of these states generally follows the federal classification of limited liability companies for state income or franchise tax purposes, although the specific rules vary by jurisdiction and are addressed in the state tax analysis in Section X below.

B. Tax Advantages of Partnership Classification

Classification of the JV as a partnership provides significant structural and economic benefits to both members, which can be summarized as follows:

Pass-Through Taxation. A partnership is not a separate taxable entity for federal income tax purposes. Instead, items of income, deduction, gain, loss, and credit are computed at the partnership level and "pass through" to the partners, who report such items on their own federal income tax returns. This avoids the imposition of a federal income tax at the entity level, which is a substantial advantage compared to a C corporation structure where income is taxed at the corporate level (currently at a rate of 21%) and again upon distribution to shareholders as dividends (the so-called "double taxation" of corporate earnings).

Flexibility in Allocations. Under IRC §704(b) and the accompanying Treasury Regulations, a partnership has significant flexibility to allocate items of income, deduction, gain, loss, and credit among its partners in a manner that may differ from the partners' ownership percentages, provided that the allocations have "substantial economic effect" within the meaning of Treas. Reg. §1.704-1(b)(2). This flexibility is particularly valuable in the renewable energy context, where the ability to specially allocate tax benefits (such as depreciation deductions and ITCs) can be a key driver of transaction economics.

Investment Tax Credit Allocation. The pass-through structure enables both members to directly claim their allocable share of ITCs under IRC §48. In a corporate structure, the ITC would be available only at the entity level to offset the entity's own tax liability. Partnership treatment allows both CBR (as a C corporation with its own tax liability) and Lumen Ridge (as a flow-through vehicle whose investors have their own tax liabilities) to utilize their respective shares of ITCs.

Loss Pass-Through. Utility-scale solar projects typically generate significant net tax losses in their early years due to accelerated depreciation and bonus depreciation. Partnership classification allows these losses to pass through to the members, who may be able to use them to offset income from other sources, subject to the passive activity loss rules of IRC §469 and the at-risk rules of IRC §465 at the member level. The ability to utilize early-year tax losses is a core component of the economic model for renewable energy investments.

No Double Taxation on Distributions. Distributions from a partnership to a partner are generally not taxable events under IRC §731(a), provided the distribution does not exceed the partner's outside basis in its partnership interest. In contrast, distributions from a C corporation to its shareholders are generally taxable as dividends to the extent of the corporation's earnings and profits, and are also not deductible by the corporation, resulting in double taxation.

Tax-Free In-Kind Contributions. Under IRC §721(a), the contribution of property to a partnership in exchange for a partnership interest is generally not a taxable event. This is a critical advantage for the proposed transaction, as CBR's contribution of the Project Portfolio (with $55,800,000 of built-in gain) would be a taxable event if contributed to a C corporation in a transaction that did not qualify for nonrecognition treatment under IRC §351.

Basis Adjustments. Partnerships offer the ability to make elections under IRC §754 for optional basis adjustments to partnership property upon transfers of partnership interests or certain distributions, which can help align inside and outside basis and reduce phantom gain.

For these reasons, partnership classification is the strongly preferred structure for the JV, and both parties have expressed agreement that the JV should be classified as a partnership.

C. Tax Classification of the Members

The tax classification of each member affects how its allocable share of JV items is reported and utilized.

CBR. CBR is a Texas C corporation and is subject to federal corporate income tax under IRC §11 at a rate of 21%. CBR will report its allocable share of JV income, deductions, gains, losses, and credits on its federal corporate income tax return (Form 1120). ITCs allocated to CBR will be available to offset CBR's federal income tax liability, subject to the general business credit limitations under IRC §38. Depreciation deductions allocated to CBR will reduce CBR's corporate taxable income. To the extent the JV allocates net losses to CBR, such losses will be available to offset CBR's other income, subject to the limitation on corporate net operating loss deductions under IRC §172 (limited to 80% of taxable income for tax years beginning after December 31, 2020).

Lumen Ridge. Lumen Ridge is a Delaware LLC classified as a partnership for federal income tax purposes. Accordingly, Lumen Ridge's allocable share of JV items does not generate a tax liability at the Lumen Ridge entity level. Rather, Lumen Ridge's share of JV income, deductions, and credits flows through to Lumen Ridge's own investors (limited partners and members). The ultimate tax consequences to Lumen Ridge's investors depend on their individual tax characteristics — e.g., whether they are taxable corporations, tax-exempt entities, foreign investors, or individuals.

We note that certain tax-exempt investors in Lumen Ridge (such as pension funds and charitable organizations) may face unrelated business taxable income ("UBTI") concerns under IRC §511–§514 to the extent the JV generates debt-financed income (i.e., income derived from property acquired with debt). The $480,000,000 non-recourse credit facility from Trident National Bank is a potential source of debt-financed income that could generate UBTI for tax-exempt investors in Lumen Ridge. However, the structuring of Lumen Ridge's internal fund vehicles to address UBTI concerns (e.g., the use of "Blocker" corporations) is an internal Lumen Ridge matter and is not the subject of this memorandum. We understand that HQS and Lumen Ridge's tax advisors are separately addressing these issues.

IV. Tax Treatment of Initial Capital Contributions

A. CBR's Cash Contribution

CBR will contribute $60,000,000 in cash to the JV at closing. Under IRC §721(a), no gain or loss is recognized to a partner or a partnership upon the contribution of money to a partnership in exchange for a partnership interest. Accordingly, CBR's contribution of $60,000,000 in cash to the JV is a non-taxable event.

Under IRC §722, CBR's outside basis in its JV interest will include the $60,000,000 cash contributed. The JV's basis in the contributed cash is, of course, $60,000,000.

B. CBR's In-Kind Contribution — Project Portfolio

CBR will contribute the Project Portfolio (consisting of the eight solar development projects described in Section II.C above) to the JV at closing. The parties have agreed upon a fair market value of $90,000,000 for the Project Portfolio in the aggregate. CBR's adjusted tax basis in the contributed Project Portfolio is approximately $34,200,000.

Nonrecognition Under IRC §721. Under IRC §721(a), no gain or loss is recognized to a partner or to a partnership on the contribution of property to a partnership in exchange for a partnership interest. This rule applies regardless of whether the contributed property has appreciated or depreciated in value. Accordingly, CBR's contribution of the Project Portfolio — notwithstanding the $55,800,000 of built-in gain — does not trigger current gain recognition, provided that the contribution is a bona fide contribution to the partnership in exchange for a partnership interest and is not recharacterized as a disguised sale under IRC §707(a)(2)(B) (discussed in Section IV.D below).

The nonrecognition rule of IRC §721(a) applies to both CBR and the JV: CBR does not recognize gain on the transfer, and the JV does not recognize gain on the receipt of the contributed property.

Carryover Basis Under IRC §723. Under IRC §723, a partnership's basis in property contributed by a partner is the adjusted basis of such property to the contributing partner at the time of contribution, increased by the amount of any gain recognized by the contributing partner at the time of contribution. Because no gain will be recognized by CBR under IRC §721(a), the JV will take a carryover basis in the contributed Project Portfolio of approximately $34,200,000, equal to CBR's adjusted tax basis immediately prior to the contribution.

This carryover basis means that the JV's tax basis in the contributed property ($34,200,000) is significantly lower than the property's fair market value ($90,000,000) as reflected on the JV's books. This book/tax disparity of $55,800,000 gives rise to the Section 704(c) considerations discussed in Section V below.

CBR's Outside Basis. Under IRC §722, CBR's outside basis in its JV interest is the sum of the money and the adjusted basis of property contributed by CBR. Accordingly, CBR's initial outside basis in its JV interest is calculated as follows:

Cash contributed: $60,000,000 Tax basis of contributed Project Portfolio: $34,200,000 Total initial outside basis: $94,200,000

This outside basis figure is subject to adjustment for CBR's share of JV liabilities under IRC §752, as discussed in Section VIII.F below. CBR's initial outside basis of $94,200,000 is less than the $150,000,000 book value of CBR's capital account (reflecting the $90,000,000 book value of the contributed Project Portfolio), which creates an inherent asymmetry between CBR's book capital account and its tax basis in the JV interest.

Capital Account Treatment. For purposes of maintaining capital accounts in accordance with Treas. Reg. §1.704-1(b)(2)(iv), the contributed Project Portfolio will be booked at its agreed fair market value of $90,000,000. CBR's initial book capital account will be $150,000,000 ($60,000,000 cash + $90,000,000 book value of the Project Portfolio), equal to Lumen Ridge's initial book capital account of $150,000,000.

C. Lumen Ridge's Cash Contribution

Lumen Ridge will contribute $150,000,000 in cash to the JV at closing. Under IRC §721(a), no gain or loss is recognized to Lumen Ridge or to the JV on this contribution. Lumen Ridge's initial outside basis in its JV interest will be $150,000,000, subject to adjustment for its share of JV liabilities under IRC §752.

There is no built-in gain or loss associated with Lumen Ridge's all-cash contribution, and accordingly, no Section 704(c) issues arise with respect to Lumen Ridge's contribution.

D. Disguised Sale Considerations — IRC §707(a)(2)(B)

1. Applicable Legal Framework

IRC §707(a)(2)(B) provides that a transfer of property to a partnership by a partner, followed by a related transfer of money or other consideration from the partnership to the partner, is treated as a sale of property if, when viewed together, the two transfers are properly characterized as a sale or exchange of property. The Treasury Regulations under IRC §707(a)(2)(B) — specifically, Treas. Reg. §1.707-3 through §1.707-9 — set forth detailed rules for determining when a property contribution and a related distribution should be treated as a disguised sale.

Under Treas. Reg. §1.707-3(c), if a partner contributes property to a partnership and the partnership transfers money or other consideration to the partner within two years of the contribution, the transfers are presumed to constitute a sale of the property (in whole or in part) unless the facts and circumstances clearly establish that the transfers do not constitute a sale. Conversely, under Treas. Reg. §1.707-3(d), if the distribution to the contributing partner occurs more than two years after the contribution, the transfers are presumed not to constitute a sale unless the facts and circumstances clearly establish that they do.

Importantly, Treas. Reg. §1.707-4(a) provides a safe harbor for certain "guaranteed payments for capital" and "reasonable preferred returns." Additionally, Treas. Reg. §1.707-4(a)(2) provides that a transfer of money from a partnership to a partner that is characterized as compensation for services rendered by the partner to or on behalf of the partnership is not treated as part of a disguised sale, provided the services are performed after the property contribution and the compensation is reasonable.

2. Application to CBR's Management Fees

In the proposed transaction, CBR will contribute the Project Portfolio to the JV and will also receive development management fees and construction management fees from the JV. The development management fee is 1.5% of aggregate capital deployed per annum (approximately $4,500,000 per year at full $300 million deployment), and the construction management fee is 3.0% of hard construction costs (estimated aggregate fee of approximately $21,600,000). These fees will be paid to CBR commencing at or shortly after closing — i.e., within the two-year presumption period of Treas. Reg. §1.707-3(c).

We must therefore analyze whether these management fees constitute disguised consideration for the contributed Project Portfolio. The key factors supporting the conclusion that the management fees are not disguised sale consideration are as follows:

(a) The fees are compensation for actual, ongoing services to be rendered by CBR as the development and construction manager for the JV's projects. CBR's responsibilities will include managing the development, permitting, engineering, procurement, and construction of eight utility-scale solar projects with aggregate capacity of 1,200 MW — a complex, multi-year undertaking requiring substantial expertise and resources.

(b) The fee rates (1.5% development management fee and 3.0% construction management fee) are calculated based on industry-standard benchmarks for solar project development and construction management. Similar fee structures are commonly employed in the renewable energy industry for third-party and affiliated project managers.

(c) The fees are payable over the life of the projects and are contingent on the actual deployment of capital and the incurrence of actual hard construction costs — they are not lump-sum payments made at or near the time of the contribution.

(d) The fees are reasonable compensation for the services to be provided by CBR. The fee rates fall within the range of fees charged by independent third-party development and construction managers for comparable utility-scale solar projects.

(e) The Development and Construction Management Agreement between CBR and the JV will be a separately negotiated agreement that clearly characterizes the fees as compensation for services. The agreement will contain customary provisions regarding scope of services, performance standards, termination rights, and indemnification obligations.

3. Recommended Documentation

To further support the position that the management fees are not disguised sale consideration, we recommend the following documentation steps:

(a) Engage Ridgeline Barrow & Co. or another independent financial advisor to prepare a benchmarking analysis confirming that the 1.5% development management fee and 3.0% construction management fee are at fair market value and consistent with arm's-length rates for comparable services in the renewable energy industry.

(b) Ensure that the LLC Agreement and the Development and Construction Management Agreement clearly and consistently characterize the management fees as compensation for services, rather than as returns on or consideration for the contributed property.

(c) Maintain contemporaneous records documenting the services performed by CBR in its capacity as development and construction manager, including time records, project status reports, and deliverables.

(d) Ensure that the management fee payments are structured as periodic payments tied to actual capital deployment and construction milestones, rather than as upfront or accelerated payments that could be characterized as disguised consideration for the contributed property.

4. Conclusion on Disguised Sale Risk

Based on the foregoing analysis, we believe that the risk of the management fees being recharacterized as disguised sale consideration under IRC §707(a)(2)(B) is low, provided that proper documentation is obtained and maintained. The fees are reasonable compensation for genuine, ongoing services to be rendered by CBR over a multi-year period, are calculated at industry-standard rates, and are contingent on the actual deployment of capital and performance of services. These characteristics fall squarely within the safe harbor for service compensation under Treas. Reg. §1.707-4(a)(2) and are distinguishable from the types of transfers that the disguised sale rules are designed to capture.

We note, however, that the IRS could potentially take the position that some portion of the management fees constitutes disguised consideration for the Project Portfolio, particularly if the fees are viewed as above-market compensation. For this reason, the independent arm's-length analysis recommended above is an important element of the protective documentation.

E. IRC §704(c) Considerations — Overview

Because CBR's contributed Project Portfolio has a built-in gain of $55,800,000 (equal to the difference between the agreed fair market value of $90,000,000 and the adjusted tax basis of $34,200,000), IRC §704(c) requires the JV to take this built-in gain into account in allocating tax items attributable to the contributed property. The purpose of Section 704(c) is to prevent the noncontributing partner (Lumen Ridge) from bearing the tax burden of gain that accrued economically prior to the contribution, while the contributing partner (CBR) held the property.

Stated differently, Section 704(c) requires that the $55,800,000 of built-in gain be allocated to CBR — not to Lumen Ridge — when it is recognized by the JV through the depreciation of the contributed property, the sale or disposition of the contributed property, or other taxable events. The selection of the appropriate Section 704(c) allocation methodology is a critical structuring decision and is analyzed in detail in Section V below.

V. Section 704(c) Allocation Methodology

A. Overview of Available Methods

The Treasury Regulations under IRC §704(c) provide three permissible methods for making Section 704(c) allocations with respect to contributed property that has a book/tax disparity. The JV must select one of these methods for the contributed Project Portfolio. The three methods are:

1. Traditional Method — Treas. Reg. §1.704-3(b)

Under the traditional method, tax items attributable to contributed property are allocated to the contributing partner (CBR) to the extent of its book allocation, with any remaining tax items allocated to the noncontributing partner (Lumen Ridge) up to the amount of Lumen Ridge's book allocation. However, the traditional method is subject to the "ceiling rule," which provides that the total amount of tax items allocated to the partners with respect to contributed property cannot exceed the actual tax items of the partnership for the year. In other words, the partnership cannot allocate more tax depreciation than it actually has.

The ceiling rule creates a distortion when the tax basis of contributed property is significantly lower than its book value, as is the case here. Because the JV's tax depreciation on the contributed property ($34,200,000 of tax basis) is substantially less than its book depreciation (computed on the $90,000,000 book value), the ceiling rule prevents Lumen Ridge from receiving tax depreciation equal to its book depreciation allocation. This shortfall is sometimes referred to as the "ceiling rule distortion."

In the context of this transaction, the ceiling rule distortion under the traditional method would be substantial. Lumen Ridge would receive significantly less tax depreciation than its economic share (as reflected in its book depreciation allocation), which would increase Lumen Ridge's tax burden relative to its economic income. This result is unfavorable to Lumen Ridge.

2. Traditional Method with Curative Allocations — Treas. Reg. §1.704-3(c)

Under the traditional method with curative allocations, the partnership may make additional allocations of other tax items (i.e., items not attributable to the contributed property) to correct the ceiling rule distortions created by the traditional method. For example, the partnership could allocate additional depreciation deductions from partnership-purchased assets to Lumen Ridge, with an offsetting allocation of income to CBR, to correct the ceiling rule shortfall.

The curative allocation method is more favorable to Lumen Ridge than the traditional method, as it can eliminate the ceiling rule distortion to the extent that the partnership has other tax items available for curative allocation. However, the curative method has limitations: it depends on the availability of other partnership tax items of the same character, and it may not fully correct the distortion if such items are insufficient. Additionally, the use of curative allocations introduces complexity and may distort the allocation of items not related to the contributed property.

3. Remedial Allocation Method — Treas. Reg. §1.704-3(d)

Under the remedial allocation method, the partnership addresses the ceiling rule distortion by creating notional (or "phantom") tax items that do not correspond to any actual economic transaction. Specifically, when the ceiling rule prevents Lumen Ridge from receiving its full book allocation of tax depreciation, the JV creates a "remedial" depreciation deduction for Lumen Ridge and a corresponding "remedial" income item (ordinary income) for CBR. The remedial depreciation and the remedial income are equal in amount, so that the net effect on the JV's total taxable income is zero.

The remedial method completely eliminates the ceiling rule distortion, regardless of whether the partnership has other tax items available for curative allocation. It is the most mechanically complete and predictable of the three methods and is specifically sanctioned by the Treasury Regulations as a permissible Section 704(c) method.

Under the remedial method, the contributed property is treated for book purposes as if it were two separate assets: (i) a "tax asset" with a book value equal to the carryover tax basis ($34,200,000), which is depreciated over the remaining recovery period of the contributed property using CBR's existing depreciation method; and (ii) a "book-only asset" with a book value equal to the built-in gain ($55,800,000), which is depreciated over the recovery period that would apply if the asset were newly placed in service. Tax depreciation from the "tax asset" is allocated first to Lumen Ridge (up to its book allocation), with any remainder to CBR. The ceiling rule shortfall (i.e., the amount by which Lumen Ridge's book depreciation exceeds the tax depreciation available from the "tax asset") is made up through remedial depreciation to Lumen Ridge and offsetting remedial income to CBR.

B. Recommendation: Remedial Allocation Method

We recommend that the LLC Agreement provide for the adoption of the remedial allocation method under Treas. Reg. §1.704-3(d) for all items of income, deduction, gain, and loss attributable to the contributed Project Portfolio. Our recommendation is based on the following considerations:

Magnitude of Built-In Gain. The $55,800,000 built-in gain represents a substantial portion of the $90,000,000 fair market value of the contributed property (approximately 62%). This creates a significant ceiling rule distortion under the traditional method, which would materially disadvantage Lumen Ridge. The remedial method is the most effective tool for addressing this magnitude of book/tax disparity.

Lumen Ridge Expectations. In preliminary discussions relayed through HQS (Amanda Prescott), Lumen Ridge has strongly advocated for the remedial method. Lumen Ridge's investors expect to receive their full economic share of tax depreciation on the JV's assets, and the remedial method is the only method that guarantees this result irrespective of the availability of other partnership tax items for curative allocations.

Industry Standard. The remedial allocation method is the industry standard for renewable energy joint ventures involving significant contributed property. Major institutional investors in renewable energy infrastructure routinely require the use of the remedial method in partnership agreements, and the method is well-understood and regularly implemented by partnership tax return preparers.

CBR Impact and Mitigation. From CBR's perspective, the remedial method accelerates the recognition of the built-in gain through the allocation of remedial ordinary income to CBR. This phantom income increases CBR's tax liability without a corresponding cash distribution. However, the economic impact of the remedial income allocations is mitigated by two factors: (i) the LLC Agreement will include mandatory quarterly tax distributions (discussed in Section XI below) to ensure that CBR receives cash sufficient to cover the tax liability generated by remedial income allocations; and (ii) the 7-year tax protection agreement (Section VIII) protects CBR from gain recognition triggered by JV actions such as the sale of contributed assets.

Regulatory Certainty. The remedial method is a specifically authorized regulatory method under Treas. Reg. §1.704-3(d) and provides a high degree of certainty in its application. Unlike the curative method, which depends on the availability of other partnership tax items and involves judgment calls about appropriate curative allocations, the remedial method produces a mechanically determined result.

For these reasons, we believe the remedial allocation method is the appropriate choice for this transaction and is in CBR's interest as well as Lumen Ridge's, when considered in conjunction with the tax distribution and tax protection provisions.

C. Mechanics of the Remedial Method Applied to the Project Portfolio

The mechanics of the remedial allocation method as applied to the contributed Project Portfolio are summarized below. Precise calculations will depend on the final asset-by-asset tax basis schedules and applicable MACRS recovery periods, which are to be confirmed by Pennington Clarke LLP once engaged.

Step 1: Book the Contributed Property. The JV books the Project Portfolio at its agreed fair market value of $90,000,000 on the JV's balance sheet for capital account and book purposes. The JV's tax basis in the contributed property is $34,200,000 (carryover basis under IRC §723).

Step 2: Compute Book Depreciation. For book purposes, depreciation on the contributed property is computed on the full $90,000,000 book value, using the recovery period and depreciation method that would apply if the property were newly placed in service. For 5-year MACRS solar energy property, this would generally be a 5-year recovery period using the 200% declining balance method, switching to straight-line when optimal. Book depreciation is allocated between the members in accordance with their 50/50 ownership interests (i.e., $9,000,000 per year to each member in a simplified illustration assuming straight-line depreciation of $18,000,000 per year on the $90,000,000 book value).

Step 3: Compute Tax Depreciation on Carryover Basis. For tax purposes, the $34,200,000 carryover tax basis is depreciated over the remaining recovery period of the contributed property, using the depreciation method that was applicable to CBR prior to the contribution (carryover of depreciation method and remaining recovery period under IRC §168(i)(7)). The annual tax depreciation deduction from the contributed basis is significantly less than the annual book depreciation.

Step 4: Allocate Tax Depreciation and Create Remedial Items. Tax depreciation from the existing carryover basis is allocated first to Lumen Ridge, up to the amount of Lumen Ridge's book depreciation allocation. To the extent the available tax depreciation is insufficient to provide Lumen Ridge with tax depreciation equal to its book depreciation (which will be the case here due to the substantial book/tax disparity), the JV creates remedial items:

• Remedial Depreciation to Lumen Ridge: An additional (notional) depreciation deduction equal to the ceiling rule shortfall (i.e., the difference between Lumen Ridge's book depreciation and the tax depreciation available from the carryover basis).

• Remedial Income to CBR: An equal amount of corresponding ordinary income, allocated to CBR, offsetting the remedial depreciation to Lumen Ridge at the partnership level.

Illustrative Example. The following simplified illustration demonstrates the mechanics of the remedial method in the first year following the contribution, assuming: (a) the JV's annual book depreciation on the Project Portfolio is $18,000,000 (straight-line on $90,000,000 over 5 years); (b) the available tax depreciation from the $34,200,000 carryover basis is $6,840,000 (straight-line on $34,200,000 over 5 years); and (c) members share equally.

In this simplified illustration, all $6,840,000 of actual tax depreciation is allocated to Lumen Ridge under the Section 704(c) principles (because CBR, as the contributing partner, must absorb the built-in gain, which effectively deprives CBR of tax depreciation on the contributed property). Lumen Ridge's book depreciation of $9,000,000 exceeds the available tax depreciation of $6,840,000 by $2,160,000 — this shortfall is addressed through $2,160,000 of remedial depreciation to Lumen Ridge and $2,160,000 of offsetting remedial income to CBR.

We emphasize that the foregoing is a simplified illustration intended to demonstrate the mechanics of the remedial method. The actual calculations will be substantially more complex, reflecting: (a) asset-by-asset basis and depreciation schedules for each of the eight contributed projects; (b) the applicable remaining MACRS recovery period for each asset; (c) the interaction with bonus depreciation on new construction expenditures (which are not subject to 704(c)); and (d) the half-year and mid-quarter conventions. Detailed schedules will be prepared by Pennington Clarke LLP in connection with the preparation of the JV's first-year tax return.

D. Anti-Abuse Considerations

Treas. Reg. §1.704-3(a)(10) includes an anti-abuse rule providing that an allocation method (or combination of methods) is not reasonable if the contribution of property and the corresponding allocation of tax items with respect to the property are made with a view to shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value of the partners' aggregate tax liability. The anti-abuse rule targets situations where the chosen method is used to achieve results inconsistent with the purpose of Section 704(c).

The remedial allocation method is a specifically sanctioned regulatory method, and its use to eliminate the ceiling rule distortion on contributed property is precisely the purpose for which the method was designed. The adoption of the remedial method in this transaction is consistent with the purpose of Section 704(c) — i.e., to prevent Lumen Ridge from bearing the tax burden of gain that accrued while CBR held the Project Portfolio. We see no basis for the application of the anti-abuse rule to the use of the remedial method in this context.

VI. Depreciation — MACRS and Bonus Depreciation Under IRC §168(k)

A. MACRS Classification

Solar energy equipment is classified as 5-year MACRS property under IRC §168(e)(3)(B)(vi), which provides that "any equipment which uses solar energy to generate electricity" qualifies as 5-year property for purposes of the accelerated cost recovery system. This classification applies to solar photovoltaic modules, inverters, racking and mounting structures, transformers, electrical collection systems, and related equipment and improvements that are integral to the generation and delivery of solar electricity.

With respect to the contributed Project Portfolio, it is important to distinguish between two categories of assets:

Contributed Development-Stage Assets. The eight solar projects being contributed by CBR are in the development stage — they are permitted (with the exception of Brazos Point) but have not yet been constructed or placed in service. The development-stage assets capitalized by CBR (including soft costs, permitting fees, environmental review costs, engineering and design costs, land option payments, and other pre-construction expenditures) have an aggregate tax basis of approximately $34,200,000. These assets carry over to the JV at CBR's existing tax basis and are subject to continued depreciation over their remaining MACRS recovery lives using CBR's existing depreciation method, as provided under IRC §168(i)(7) for contributed property. The depreciable life of these assets begins when they are placed in service (i.e., upon completion of construction and commencement of commercial operations).

New Construction Expenditures. The substantial majority of the JV's depreciable asset base will consist of new construction expenditures incurred by the JV after the contribution — i.e., the costs of purchasing and installing solar modules, inverters, racking, electrical equipment, and related balance-of-system components for the eight projects. These new expenditures are partnership-purchased assets, not contributed property, and therefore have no book/tax disparity at the time of acquisition. The estimated total hard construction costs for the 1,200 MW portfolio are approximately $720,000,000, a significant portion of which will constitute 5-year MACRS property eligible for accelerated depreciation.

B. Bonus Depreciation Under IRC §168(k)

Under IRC §168(k), a taxpayer may claim an additional first-year depreciation deduction ("bonus depreciation") for certain qualified property placed in service during the taxable year. As enacted by the Tax Cuts and Jobs Act of 2017 (P.L. 115-97), bonus depreciation was initially set at 100% for property placed in service after September 27, 2017, and before January 1, 2023. The statute provides for a phase-down of the bonus depreciation rate beginning in 2023:

We note that there have been legislative proposals to restore 100% bonus depreciation, including proposals in both chambers of Congress. However, as of the date of this memorandum, no such legislation has been enacted. Our analysis is based on current law as set forth above.

The JV intends to elect bonus depreciation under IRC §168(k) on all eligible new construction costs. Assuming the JV's eight projects are placed in service on a rolling basis between 2024 and 2027, the applicable bonus depreciation rate will vary by project based on the year in which each project is placed in service. The JV and its tax advisors should develop a construction and commissioning schedule that takes into account the phase-down of bonus depreciation rates, with a view toward accelerating the commissioning of projects to the extent commercially practicable to maximize the available bonus depreciation benefit.

Contributed Property. The existing-basis contributed property ($34,200,000 of carryover tax basis) is not eligible for additional bonus depreciation. IRC §168(k) generally applies to property for which the "original use" begins with the taxpayer. Because CBR has already placed the development-stage assets in service (or capitalized them as part of a development-stage project), the JV is not the "first user" of these assets, and they do not qualify for bonus depreciation in the hands of the JV. However, new construction expenditures incurred by the JV on the contributed projects — i.e., the costs of constructing the solar generating facilities on the contributed project sites — do qualify for bonus depreciation because the JV is the first user of the newly constructed improvements.

Tax Loss Generation. The combination of bonus depreciation and regular MACRS depreciation on the JV's approximately $720,000,000 of new construction expenditures will generate substantial tax losses in the early years of the JV's operations. These losses pass through to the members in proportion to their allocable shares and, subject to applicable limitations at the member level (including passive activity loss limitations under IRC §469 and at-risk limitations under IRC §465), can be used to offset other taxable income. The magnitude and timing of these losses are a significant component of the investment returns for both members.

C. Interaction of Bonus Depreciation with Section 704(c)

New construction expenditures incurred by the JV after the formation date are partnership-purchased assets and are not subject to Section 704(c). These assets have no book/tax disparity at the time of acquisition (the JV's tax basis and book value in newly purchased assets are equal), and therefore no Section 704(c) allocation issues arise.

Bonus depreciation and regular MACRS depreciation on new construction assets are allocated between the members in accordance with their 50/50 ownership interests, consistent with the general allocation provisions of the LLC Agreement. Both members receive equal tax depreciation on these assets, without any 704(c) adjustments or remedial allocations.

The contributed property basis of $34,200,000 continues to be depreciated under the carryover depreciation method and remaining recovery period, and the Section 704(c) remedial allocation method applies to the tax depreciation attributable to this carryover basis, as described in Section V.C above. The two categories of depreciation — (i) carryover basis depreciation subject to 704(c) and (ii) new construction depreciation shared equally — must be tracked separately on the JV's books and in the preparation of the Schedules K-1.

VII. Investment Tax Credits Under IRC §48

A. Eligibility

Solar energy property placed in service by the JV is eligible for the Investment Tax Credit ("ITC") under IRC §48(a), which provides a tax credit for investment in certain energy property, including solar energy property described in IRC §48(a)(3)(A)(i). The ITC is claimed in the taxable year in which the eligible property is placed in service.

Under the Inflation Reduction Act of 2022 (P.L. 117-169) (the "IRA"), the ITC for solar energy property was extended and enhanced. The key credit rates applicable to the JV's projects are as follows:

Base Rate. The base ITC rate for solar energy property is 6% of eligible basis for projects that begin construction before January 1, 2033. However, this base rate increases to 30% if the project satisfies the prevailing wage and apprenticeship ("PWA") requirements set forth in IRC §48(a)(10) and related Treasury guidance. The PWA requirements mandate that: (i) laborers and mechanics employed in the construction, alteration, or repair of the project are paid wages at rates not less than the prevailing rates determined by the Secretary of Labor under the Davis-Bacon Act; and (ii) the project meets certain apprenticeship participation requirements during construction.

Given the scale and scope of the JV's portfolio (1,200 MW across eight projects), we expect that the projects will be designed to satisfy the PWA requirements, and the applicable ITC rate will be 30% of eligible basis. The LLC Agreement and the Development and Construction Management Agreement should include provisions requiring CBR (as development and construction manager) to ensure compliance with the PWA requirements for all JV projects.

Domestic Content Bonus. Under IRC §48(a)(12), an additional 10 percentage point bonus is available (increasing the total ITC from 30% to 40%) if the project meets domestic content requirements — specifically, if all steel, iron, and manufactured products that are components of the solar energy property are produced in the United States and satisfy applicable domestic content percentage thresholds as set forth in IRS guidance. The domestic content requirements are project-spe

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
October 10, 2023
FROM: Leonard Cross, Partner, Tax Practice Group Calderwood & Harkness LLP 425 Lexington Avenue, 36th Floor New York, NY 10017
TO: James Prentice, Responsible Partner, Mergers & Acquisitions (Houston) Megan Chu, Lead Associate, Mergers & Acquisitions (Houston)
RE: Federal Income Tax Structuring Analysis — Proposed Formation of Solstice Plateau Energy Holdings LLC (Joint Venture between Calloway-Briggs Renewables Inc. and Lumen Ridge Infrastructure Partners LLC)
MATTER NUMBER: 48172.001
This memorandum is prepared in connection with our representation of Calloway-Briggs Renewables Inc. ("CBR") and is subject to attorney-client privilege and work product protections. The analysis and recommendations contained herein reflect our preliminary views based on the facts available to us as of the date hereof, and are not intended as formal tax advice to any party other than CBR. This memorandum should not be relied upon by Lumen Ridge Infrastructure Partners LLC, its affiliates, or any third party without our express written consent. The conclusions set forth herein are subject to change based on final transaction documents, further diligence, and developments in applicable law.
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I. Executive Summary
This memorandum analyzes the federal income tax structuring considerations arising from the proposed formation of Solstice Plateau Energy Holdings LLC ("Solstice Plateau" or the "JV"), a 50/50 joint venture between Calloway-Briggs Renewables Inc. ("CBR"), a Texas corporation (EIN 46-2837451), and Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge"), a Delaware limited liability company (EIN 83-1924076). Solstice Plateau will be organized as a Delaware limited liability company and will serve as the vehicle through which the parties develop, construct, and operate a portfolio of eight utility-scale solar energy generation projects totaling approximately 1,200 MW DC across the states of Texas, New Mexico, and Arizona (collectively, the "Project Portfolio").
The total aggregate equity commitment of the members at formation is $300,000,000 — $150,000,000 from each member. CBR will contribute $60,000,000 in cash together with an in-kind contribution of the Project Portfolio (consisting of eight solar development projects at various stages of development) valued by the parties at $90,000,000 in the aggregate on a fair market value basis, for a total capital contribution of $150,000,000. CBR's adjusted tax basis in the contributed Project Portfolio is approximately $34,200,000, creating a built-in gain at the time of contribution of approximately $55,800,000. Lumen Ridge will contribute $150,000,000 in cash. Additional capital calls of up to $200,000,000 per member (or $400,000,000 in the aggregate) are contemplated, subject to supermajority approval of the Management Committee.
This memorandum addresses the following key tax structuring issues:
1. Entity Classification. Classification of Solstice Plateau as a partnership for federal income tax purposes under the check-the-box regulations (Treas. Reg. §301.7701-3), including the tax advantages of partnership treatment.
2. Tax Treatment of Initial Capital Contributions. Treatment of the members' respective cash contributions and CBR's in-kind contribution of the Project Portfolio under IRC §721, including carryover basis under IRC §723 and the $55,800,000 built-in gain.
3. Disguised Sale Analysis. Evaluation of the potential application of the disguised sale rules under IRC §707(a)(2)(B) and Treas. Reg. §1.707-3 to CBR's receipt of development management fees and construction management fees from the JV in connection with its contribution of the Project Portfolio.
4. Section 704(c) Allocation Methodology. Selection of the appropriate allocation method under IRC §704(c) and Treas. Reg. §1.704-3 for the contributed Project Portfolio, with a recommendation to adopt the remedial allocation method.
5. Depreciation and Bonus Depreciation. Application of the Modified Accelerated Cost Recovery System ("MACRS") depreciation rules and bonus depreciation under IRC §168(k) to both contributed property and new construction expenditures by the JV.
6. Investment Tax Credits. Eligibility for and allocation of Investment Tax Credits ("ITCs") under IRC §48, including the enhanced credit rates available under the Inflation Reduction Act of 2022.
7. Tax Protection Agreement. Design and implementation of a 7-year tax protection agreement to shield CBR from the recognition of the $55,800,000 built-in gain on the contributed Project Portfolio, including make-whole mechanics and minimum debt allocation covenants.
8. Partnership Representative. Designation of CBR as the Partnership Representative under IRC §6223, including push-out election covenants and consent and notice procedures.
9. State and Local Tax Considerations. A preliminary overview of state tax implications in Texas, New Mexico, Arizona, and Delaware.
Summary Recommendation. Based on our analysis, we recommend that the parties structure Solstice Plateau as a Delaware limited liability company that retains its default classification as a partnership for federal income tax purposes under Treas. Reg. §301.7701-3(b)(1). We further recommend that the LLC Agreement provide for the remedial allocation method under IRC §704(c) and Treas. Reg. §1.704-3(d) for the contributed Project Portfolio; that ITCs be allocated 50/50 consistent with the members' ownership interests; that the JV elect bonus depreciation under IRC §168(k) on all eligible new construction expenditures; and that the parties execute a 7-year tax protection agreement that shields CBR from recognition of the $55,800,000 built-in gain through make-whole payments and minimum debt allocation covenants. CBR should be designated as the Partnership Representative, acting through Priya Narayanan (CFO of CBR), with appropriate push-out election covenants and consent and notice requirements included in the LLC Agreement. These recommendations are discussed in detail in the sections that follow.
II. Background and Transaction Overview
A. The Parties
1. Calloway-Briggs Renewables Inc.
Calloway-Briggs Renewables Inc. ("CBR") is a Texas corporation organized under the laws of the State of Texas and headquartered at 2300 Travis Street, Suite 4200, Houston, Texas 77006. CBR was founded in 2011 and is a privately held developer and operator of utility-scale solar energy projects across the United States. The company is majority-owned by its co-founders, Margaret "Meg" Calloway, who serves as Chairwoman and Chief Executive Officer, and Thomas R. Briggs, who serves as President. A minority institutional investor, Cascadia Growth Equity Fund III, L.P. (Owen Charbonneau, Managing Director), holds an approximately 22% equity stake in CBR.
For its fiscal year ending December 31, 2022, CBR reported revenues of approximately $412 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $98 million. CBR's current development pipeline includes approximately 3.8 GW of solar projects in various stages of development, permitting, and construction across multiple states. The key management personnel relevant to this transaction include Priya Narayanan (Chief Financial Officer), Daniel Estrada (Senior Vice President, Corporate Development), and Rebecca Whitfield (General Counsel). CBR's existing independent auditor is Greystone Hamill LLP.
CBR is classified as a C corporation for federal income tax purposes and files its federal income tax return on Form 1120. CBR's federal employer identification number is 46-2837451.
2. Lumen Ridge Infrastructure Partners LLC
Lumen Ridge Infrastructure Partners LLC ("Lumen Ridge") is a Delaware limited liability company organized in 2018, with its principal office located at 301 Tresser Boulevard, Suite 1400, Stamford, Connecticut 06901. Lumen Ridge is managed by Lumen Ridge Capital Advisors LLC, its investment manager, and serves as a dedicated renewable energy infrastructure investment vehicle with approximately $4.2 billion in assets under management. The fund invests across the capital structure in renewable energy projects, with a particular emphasis on utility-scale solar, onshore wind, and battery energy storage systems.
Key principals of Lumen Ridge and its investment manager include Nathaniel "Nate" Forsythe (Co-Founder and Managing Partner), Carolyn J. Delaney (Partner and Head of Solar Investments), Victor Osei (Chief Financial Officer), and Amanda Prescott (General Counsel and Chief Compliance Officer). Lumen Ridge is advised in connection with the proposed JV by Whitmore Zanthor Group LLC as its financial advisor and by Haverford, Quinn & Steele LLP ("HQS") as its legal counsel. Lumen Ridge's federal employer identification number is 83-1924076.
Lumen Ridge is itself classified as a partnership for federal income tax purposes, meaning that its allocable share of JV income, loss, deductions, and credits will flow through to its underlying institutional investors, which include pension funds, insurance companies, and other institutional limited partners. As noted in Section III.C below, certain of Lumen Ridge's tax-exempt investors may face unrelated business taxable income ("UBTI") concerns to the extent the JV generates debt-financed income; however, this is an internal Lumen Ridge structuring consideration and is outside the scope of this memorandum.
3. The JV Entity
Solstice Plateau Energy Holdings LLC ("Solstice Plateau" or the "JV") will be formed as a Delaware limited liability company. Its registered agent will be Peachtree Corporate Services, Inc., located at 1209 Orange Street, Suite 300, Wilmington, Delaware 19801. The principal business office of the JV will be co-located with CBR's offices at 2300 Travis Street, Suite 4210, Houston, Texas 77006. The JV will be managed by a Management Committee composed of three representatives designated by CBR and three representatives designated by Lumen Ridge, with certain major decisions requiring supermajority approval (i.e., five of six votes).
B. Transaction Structure
The proposed transaction involves the formation of a 50/50 Delaware limited liability company joint venture between CBR and Lumen Ridge for the purpose of developing, constructing, and operating a portfolio of eight utility-scale solar energy generation projects in Texas, New Mexico, and Arizona. The principal economic terms of the proposed structure are summarized below.
Initial Capital Contributions. Each member will contribute initial capital of $150,000,000, as follows:
• CBR: $60,000,000 in cash, plus an in-kind contribution of the Project Portfolio (consisting of eight solar development projects at various stages of development), with an agreed fair market value of $90,000,000, for a total capital contribution of $150,000,000.
• Lumen Ridge: $150,000,000 in cash.
• Total Initial Capitalization: $300,000,000.
Additional Capital Calls. The LLC Agreement will authorize additional capital calls of up to $200,000,000 per member ($400,000,000 in the aggregate), subject to supermajority approval of the Management Committee (i.e., five of six votes). Combined with the initial capitalization, the total potential equity capitalization of the JV is $700,000,000.
Project-Level Debt. The JV intends to obtain a project-level non-recourse debt facility of up to $480,000,000 from Trident National Bank, N.A., on a 7-year term at an interest rate of SOFR plus 175 basis points. Lumen Ridge will be responsible for arranging the debt facility and will lead the negotiation of the credit agreement. The non-recourse nature of the facility is significant for tax purposes, as discussed in Sections VIII.F and XII below.
Management Arrangements. CBR will serve as the development and construction manager for all JV projects pursuant to a separate Development and Construction Management Agreement. CBR will receive: (i) an annual development management fee equal to 1.5% of aggregate capital deployed by the JV (approximately $4,500,000 per annum at full $300 million deployment); and (ii) a construction management fee equal to 3.0% of hard construction costs for each project. Estimated total hard construction costs for the 1,200 MW portfolio are approximately $720,000,000, yielding potential aggregate construction management fees of approximately $21,600,000 over the construction period. These fees are relevant to the disguised sale analysis discussed in Section IV.D.
Distribution Waterfall. Distributions of available cash will be made to the members in accordance with the following tiered waterfall:
• Tier 1: 50/50 to CBR and Lumen Ridge until each member achieves an 8.0% internal rate of return on its contributed capital.
• Tier 2: 60% to CBR / 40% to Lumen Ridge on amounts distributed above the 8.0% IRR threshold until Lumen Ridge has achieved a 12.0% internal rate of return.
• Tier 3: 50/50 to CBR and Lumen Ridge on all amounts distributed after Lumen Ridge has achieved a 12.0% internal rate of return.
The distribution waterfall is designed to incentivize CBR's development and operational performance by providing CBR with a promoted interest in the Tier 2 tranche, while ensuring that Lumen Ridge achieves its targeted return before the promote is triggered.
C. The Project Portfolio
The Project Portfolio contributed by CBR to the JV consists of eight utility-scale solar development projects, as summarized in the following table:
All eight projects are fully permitted, with the exception of the Brazos Point project in Wharton County, Texas, for which a permit application is currently pending. Based on discussions with CBR's development team (Daniel Estrada), the Brazos Point permit is expected to be issued prior to the anticipated closing date. As a condition to closing, the parties may wish to consider whether receipt of the Brazos Point permit should be a closing condition or whether appropriate risk allocation provisions should be included in the Contribution Agreement.
The two Sangre del Sol projects in Doña Ana County, New Mexico, are situated on land administered by the Bureau of Land Management ("BLM") under right-of-way grants. The terms of these BLM leases should be reviewed in connection with the transfer to the JV to confirm that assignment does not require BLM consent or trigger any adverse consequences under the applicable right-of-way grants.
Valuation. The parties have agreed on an aggregate fair market value of $90,000,000 for the Project Portfolio, based on a preliminary valuation range of $87,000,000 to $96,000,000 developed through discussions between the parties' financial advisors. A formal fairness analysis by Ridgeline Barrow & Co. (Marcus Delgado, Managing Director) is expected to be delivered on or about November 15, 2023, and is intended to confirm the $90,000,000 agreed value. As of the date of this memorandum, the Ridgeline Barrow fairness analysis has not yet been delivered. The final valuation is a critical input for the tax analysis, as it determines the magnitude of the built-in gain under Section 704(c) and the protected amount under the tax protection agreement.
Tax Basis and Built-In Gain. CBR's aggregate adjusted tax basis in the Project Portfolio is approximately $34,200,000. This basis reflects CBR's capitalized development expenditures (including soft costs, engineering and design costs, permitting and environmental review costs, land option payments, and other pre-construction expenditures) net of any applicable amortization or depreciation. For JV capital account purposes, the contributed property will be booked at the agreed fair market value of $90,000,000. The resulting built-in gain at the time of contribution is:
$90,000,000 (FMV) − $34,200,000 (Tax Basis) = $55,800,000 (Built-In Gain)
This $55,800,000 built-in gain is the central tax structuring issue addressed in this memorandum. Under IRC §704(c), the JV must allocate this built-in gain to CBR when it is recognized through depreciation, amortization, or sale of the contributed assets. The choice of allocation method and the design of the tax protection agreement are both driven by this built-in gain.
We note that the $34,200,000 aggregate tax basis figure is based on preliminary information provided by CBR's finance team. We strongly recommend that a detailed asset-by-asset tax basis schedule be obtained from CBR (coordinated through Priya Narayanan and Greystone Hamill LLP) to confirm the aggregate basis and to allocate basis among the individual projects for purposes of Section 704(c) layering. Project-level basis information will also be necessary for accurate computation of depreciation deductions and ITC-eligible basis.
D. JV Auditor and Tax Return Preparer
The JV intends to engage Pennington Clarke LLP as its independent auditor and tax return preparer. The engagement will be led by Harold Yeung, CPA, Engagement Partner at Pennington Clarke. The engagement letter is anticipated to be executed in early January 2024, in advance of the JV's first fiscal year. Pennington Clarke will be responsible for preparing the JV's federal partnership return (Form 1065), issuing Schedules K-1 to the members, maintaining the Section 704(c) schedules and remedial allocation computations, and preparing all required state income and franchise tax returns.
III. Entity Classification — Partnership Treatment
A. Default Classification Under Check-the-box Regulations
Solstice Plateau Energy Holdings LLC will be organized as a Delaware limited liability company with two members (CBR and Lumen Ridge). Under the entity classification regulations commonly known as the "check-the-box" regulations, the classification of an eligible entity for federal income tax purposes is determined under Treasury Regulation §301.7701-3.
A limited liability company organized under the laws of a U.S. state is a "domestic eligible entity" within the meaning of Treas. Reg. §301.7701-3(a). Under Treas. Reg. §301.7701-3(b)(1), the default classification for a domestic eligible entity with two or more members is a partnership. This default classification applies unless the entity affirmatively elects to be classified as an association taxable as a corporation by filing Form 8832 (Entity Classification Election) with the Internal Revenue Service.
No election on Form 8832 to be classified as a corporation is contemplated for Solstice Plateau. Accordingly, the JV will be classified as a partnership for U.S. federal income tax purposes from its date of formation, by operation of the default classification rules. The JV will file annual federal partnership income tax returns on IRS Form 1065 and will issue Schedules K-1 (Form 1065) to each member reflecting the member's allocable share of the JV's income, deductions, gains, losses, and credits.
We have reviewed the proposed LLC Agreement and are not aware of any provisions that would cause Solstice Plateau to be classified as a corporation under the pre-check-the-box "resemblance" tests or under any other provision of the Internal Revenue Code. Furthermore, we are not aware of any state-level entity classification considerations in Delaware, Texas, New Mexico, or Arizona that would override or supersede the JV's federal partnership classification. Each of these states generally follows the federal classification of limited liability companies for state income or franchise tax purposes, although the specific rules vary by jurisdiction and are addressed in the state tax analysis in Section X below.
B. Tax Advantages of Partnership Classification
Classification of the JV as a partnership provides significant structural and economic benefits to both members, which can be summarized as follows:
Pass-Through Taxation. A partnership is not a separate taxable entity for federal income tax purposes. Instead, items of income, deduction, gain, loss, and credit are computed at the partnership level and "pass through" to the partners, who report such items on their own federal income tax returns. This avoids the imposition of a federal income tax at the entity level, which is a substantial advantage compared to a C corporation structure where income is taxed at the corporate level (currently at a rate of 21%) and again upon distribution to shareholders as dividends (the so-called "double taxation" of corporate earnings).
Flexibility in Allocations. Under IRC §704(b) and the accompanying Treasury Regulations, a partnership has significant flexibility to allocate items of income, deduction, gain, loss, and credit among its partners in a manner that may differ from the partners' ownership percentages, provided that the allocations have "substantial economic effect" within the meaning of Treas. Reg. §1.704-1(b)(2). This flexibility is particularly valuable in the renewable energy context, where the ability to specially allocate tax benefits (such as depreciation deductions and ITCs) can be a key driver of transaction economics.
Investment Tax Credit Allocation. The pass-through structure enables both members to directly claim their allocable share of ITCs under IRC §48. In a corporate structure, the ITC would be available only at the entity level to offset the entity's own tax liability. Partnership treatment allows both CBR (as a C corporation with its own tax liability) and Lumen Ridge (as a flow-through vehicle whose investors have their own tax liabilities) to utilize their respective shares of ITCs.
Loss Pass-Through. Utility-scale solar projects typically generate significant net tax losses in their early years due to accelerated depreciation and bonus depreciation. Partnership classification allows these losses to pass through to the members, who may be able to use them to offset income from other sources, subject to the passive activity loss rules of IRC §469 and the at-risk rules of IRC §465 at the member level. The ability to utilize early-year tax losses is a core component of the economic model for renewable energy investments.
No Double Taxation on Distributions. Distributions from a partnership to a partner are generally not taxable events under IRC §731(a), provided the distribution does not exceed the partner's outside basis in its partnership interest. In contrast, distributions from a C corporation to its shareholders are generally taxable as dividends to the extent of the corporation's earnings and profits, and are also not deductible by the corporation, resulting in double taxation.
Tax-Free In-Kind Contributions. Under IRC §721(a), the contribution of property to a partnership in exchange for a partnership interest is generally not a taxable event. This is a critical advantage for the proposed transaction, as CBR's contribution of the Project Portfolio (with $55,800,000 of built-in gain) would be a taxable event if contributed to a C corporation in a transaction that did not qualify for nonrecognition treatment under IRC §351.
Basis Adjustments. Partnerships offer the ability to make elections under IRC §754 for optional basis adjustments to partnership property upon transfers of partnership interests or certain distributions, which can help align inside and outside basis and reduce phantom gain.
For these reasons, partnership classification is the strongly preferred structure for the JV, and both parties have expressed agreement that the JV should be classified as a partnership.
C. Tax Classification of the Members
The tax classification of each member affects how its allocable share of JV items is reported and utilized.
CBR. CBR is a Texas C corporation and is subject to federal corporate income tax under IRC §11 at a rate of 21%. CBR will report its allocable share of JV income, deductions, gains, losses, and credits on its federal corporate income tax return (Form 1120). ITCs allocated to CBR will be available to offset CBR's federal income tax liability, subject to the general business credit limitations under IRC §38. Depreciation deductions allocated to CBR will reduce CBR's corporate taxable income. To the extent the JV allocates net losses to CBR, such losses will be available to offset CBR's other income, subject to the limitation on corporate net operating loss deductions under IRC §172 (limited to 80% of taxable income for tax years beginning after December 31, 2020).
Lumen Ridge. Lumen Ridge is a Delaware LLC classified as a partnership for federal income tax purposes. Accordingly, Lumen Ridge's allocable share of JV items does not generate a tax liability at the Lumen Ridge entity level. Rather, Lumen Ridge's share of JV income, deductions, and credits flows through to Lumen Ridge's own investors (limited partners and members). The ultimate tax consequences to Lumen Ridge's investors depend on their individual tax characteristics — e.g., whether they are taxable corporations, tax-exempt entities, foreign investors, or individuals.
We note that certain tax-exempt investors in Lumen Ridge (such as pension funds and charitable organizations) may face unrelated business taxable income ("UBTI") concerns under IRC §511–§514 to the extent the JV generates debt-financed income (i.e., income derived from property acquired with debt). The $480,000,000 non-recourse credit facility from Trident National Bank is a potential source of debt-financed income that could generate UBTI for tax-exempt investors in Lumen Ridge. However, the structuring of Lumen Ridge's internal fund vehicles to address UBTI concerns (e.g., the use of "Blocker" corporations) is an internal Lumen Ridge matter and is not the subject of this memorandum. We understand that HQS and Lumen Ridge's tax advisors are separately addressing these issues.
IV. Tax Treatment of Initial Capital Contributions
A. CBR's Cash Contribution
CBR will contribute $60,000,000 in cash to the JV at closing. Under IRC §721(a), no gain or loss is recognized to a partner or a partnership upon the contribution of money to a partnership in exchange for a partnership interest. Accordingly, CBR's contribution of $60,000,000 in cash to the JV is a non-taxable event.
Under IRC §722, CBR's outside basis in its JV interest will include the $60,000,000 cash contributed. The JV's basis in the contributed cash is, of course, $60,000,000.
B. CBR's In-Kind Contribution — Project Portfolio
CBR will contribute the Project Portfolio (consisting of the eight solar development projects described in Section II.C above) to the JV at closing. The parties have agreed upon a fair market value of $90,000,000 for the Project Portfolio in the aggregate. CBR's adjusted tax basis in the contributed Project Portfolio is approximately $34,200,000.
Nonrecognition Under IRC §721. Under IRC §721(a), no gain or loss is recognized to a partner or to a partnership on the contribution of property to a partnership in exchange for a partnership interest. This rule applies regardless of whether the contributed property has appreciated or depreciated in value. Accordingly, CBR's contribution of the Project Portfolio — notwithstanding the $55,800,000 of built-in gain — does not trigger current gain recognition, provided that the contribution is a bona fide contribution to the partnership in exchange for a partnership interest and is not recharacterized as a disguised sale under IRC §707(a)(2)(B) (discussed in Section IV.D below).
The nonrecognition rule of IRC §721(a) applies to both CBR and the JV: CBR does not recognize gain on the transfer, and the JV does not recognize gain on the receipt of the contributed property.
Carryover Basis Under IRC §723. Under IRC §723, a partnership's basis in property contributed by a partner is the adjusted basis of such property to the contributing partner at the time of contribution, increased by the amount of any gain recognized by the contributing partner at the time of contribution. Because no gain will be recognized by CBR under IRC §721(a), the JV will take a carryover basis in the contributed Project Portfolio of approximately $34,200,000, equal to CBR's adjusted tax basis immediately prior to the contribution.
This carryover basis means that the JV's tax basis in the contributed property ($34,200,000) is significantly lower than the property's fair market value ($90,000,000) as reflected on the JV's books. This book/tax disparity of $55,800,000 gives rise to the Section 704(c) considerations discussed in Section V below.
CBR's Outside Basis. Under IRC §722, CBR's outside basis in its JV interest is the sum of the money and the adjusted basis of property contributed by CBR. Accordingly, CBR's initial outside basis in its JV interest is calculated as follows:
Cash contributed: $60,000,000 Tax basis of contributed Project Portfolio: $34,200,000 Total initial outside basis: $94,200,000
This outside basis figure is subject to adjustment for CBR's share of JV liabilities under IRC §752, as discussed in Section VIII.F below. CBR's initial outside basis of $94,200,000 is less than the $150,000,000 book value of CBR's capital account (reflecting the $90,000,000 book value of the contributed Project Portfolio), which creates an inherent asymmetry between CBR's book capital account and its tax basis in the JV interest.
Capital Account Treatment. For purposes of maintaining capital accounts in accordance with Treas. Reg. §1.704-1(b)(2)(iv), the contributed Project Portfolio will be booked at its agreed fair market value of $90,000,000. CBR's initial book capital account will be $150,000,000 ($60,000,000 cash + $90,000,000 book value of the Project Portfolio), equal to Lumen Ridge's initial book capital account of $150,000,000.
C. Lumen Ridge's Cash Contribution
Lumen Ridge will contribute $150,000,000 in cash to the JV at closing. Under IRC §721(a), no gain or loss is recognized to Lumen Ridge or to the JV on this contribution. Lumen Ridge's initial outside basis in its JV interest will be $150,000,000, subject to adjustment for its share of JV liabilities under IRC §752.
There is no built-in gain or loss associated with Lumen Ridge's all-cash contribution, and accordingly, no Section 704(c) issues arise with respect to Lumen Ridge's contribution.
D. Disguised Sale Considerations — IRC §707(a)(2)(B)
1. Applicable Legal Framework
IRC §707(a)(2)(B) provides that a transfer of property to a partnership by a partner, followed by a related transfer of money or other consideration from the partnership to the partner, is treated as a sale of property if, when viewed together, the two transfers are properly characterized as a sale or exchange of property. The Treasury Regulations under IRC §707(a)(2)(B) — specifically, Treas. Reg. §1.707-3 through §1.707-9 — set forth detailed rules for determining when a property contribution and a related distribution should be treated as a disguised sale.
Under Treas. Reg. §1.707-3(c), if a partner contributes property to a partnership and the partnership transfers money or other consideration to the partner within two years of the contribution, the transfers are presumed to constitute a sale of the property (in whole or in part) unless the facts and circumstances clearly establish that the transfers do not constitute a sale. Conversely, under Treas. Reg. §1.707-3(d), if the distribution to the contributing partner occurs more than two years after the contribution, the transfers are presumed not to constitute a sale unless the facts and circumstances clearly establish that they do.
Importantly, Treas. Reg. §1.707-4(a) provides a safe harbor for certain "guaranteed payments for capital" and "reasonable preferred returns." Additionally, Treas. Reg. §1.707-4(a)(2) provides that a transfer of money from a partnership to a partner that is characterized as compensation for services rendered by the partner to or on behalf of the partnership is not treated as part of a disguised sale, provided the services are performed after the property contribution and the compensation is reasonable.
2. Application to CBR's Management Fees
In the proposed transaction, CBR will contribute the Project Portfolio to the JV and will also receive development management fees and construction management fees from the JV. The development management fee is 1.5% of aggregate capital deployed per annum (approximately $4,500,000 per year at full $300 million deployment), and the construction management fee is 3.0% of hard construction costs (estimated aggregate fee of approximately $21,600,000). These fees will be paid to CBR commencing at or shortly after closing — i.e., within the two-year presumption period of Treas. Reg. §1.707-3(c).
We must therefore analyze whether these management fees constitute disguised consideration for the contributed Project Portfolio. The key factors supporting the conclusion that the management fees are not disguised sale consideration are as follows:
(a) The fees are compensation for actual, ongoing services to be rendered by CBR as the development and construction manager for the JV's projects. CBR's responsibilities will include managing the development, permitting, engineering, procurement, and construction of eight utility-scale solar projects with aggregate capacity of 1,200 MW — a complex, multi-year undertaking requiring substantial expertise and resources.
(b) The fee rates (1.5% development management fee and 3.0% construction management fee) are calculated based on industry-standard benchmarks for solar project development and construction management. Similar fee structures are commonly employed in the renewable energy industry for third-party and affiliated project managers.
(c) The fees are payable over the life of the projects and are contingent on the actual deployment of capital and the incurrence of actual hard construction costs — they are not lump-sum payments made at or near the time of the contribution.
(d) The fees are reasonable compensation for the services to be provided by CBR. The fee rates fall within the range of fees charged by independent third-party development and construction managers for comparable utility-scale solar projects.
(e) The Development and Construction Management Agreement between CBR and the JV will be a separately negotiated agreement that clearly characterizes the fees as compensation for services. The agreement will contain customary provisions regarding scope of services, performance standards, termination rights, and indemnification obligations.
3. Recommended Documentation
To further support the position that the management fees are not disguised sale consideration, we recommend the following documentation steps:
(a) Engage Ridgeline Barrow & Co. or another independent financial advisor to prepare a benchmarking analysis confirming that the 1.5% development management fee and 3.0% construction management fee are at fair market value and consistent with arm's-length rates for comparable services in the renewable energy industry.
(b) Ensure that the LLC Agreement and the Development and Construction Management Agreement clearly and consistently characterize the management fees as compensation for services, rather than as returns on or consideration for the contributed property.
(c) Maintain contemporaneous records documenting the services performed by CBR in its capacity as development and construction manager, including time records, project status reports, and deliverables.
(d) Ensure that the management fee payments are structured as periodic payments tied to actual capital deployment and construction milestones, rather than as upfront or accelerated payments that could be characterized as disguised consideration for the contributed property.
4. Conclusion on Disguised Sale Risk
Based on the foregoing analysis, we believe that the risk of the management fees being recharacterized as disguised sale consideration under IRC §707(a)(2)(B) is low, provided that proper documentation is obtained and maintained. The fees are reasonable compensation for genuine, ongoing services to be rendered by CBR over a multi-year period, are calculated at industry-standard rates, and are contingent on the actual deployment of capital and performance of services. These characteristics fall squarely within the safe harbor for service compensation under Treas. Reg. §1.707-4(a)(2) and are distinguishable from the types of transfers that the disguised sale rules are designed to capture.
We note, however, that the IRS could potentially take the position that some portion of the management fees constitutes disguised consideration for the Project Portfolio, particularly if the fees are viewed as above-market compensation. For this reason, the independent arm's-length analysis recommended above is an important element of the protective documentation.
E. IRC §704(c) Considerations — Overview
Because CBR's contributed Project Portfolio has a built-in gain of $55,800,000 (equal to the difference between the agreed fair market value of $90,000,000 and the adjusted tax basis of $34,200,000), IRC §704(c) requires the JV to take this built-in gain into account in allocating tax items attributable to the contributed property. The purpose of Section 704(c) is to prevent the noncontributing partner (Lumen Ridge) from bearing the tax burden of gain that accrued economically prior to the contribution, while the contributing partner (CBR) held the property.
Stated differently, Section 704(c) requires that the $55,800,000 of built-in gain be allocated to CBR — not to Lumen Ridge — when it is recognized by the JV through the depreciation of the contributed property, the sale or disposition of the contributed property, or other taxable events. The selection of the appropriate Section 704(c) allocation methodology is a critical structuring decision and is analyzed in detail in Section V below.
V. Section 704(c) Allocation Methodology
A. Overview of Available Methods
The Treasury Regulations under IRC §704(c) provide three permissible methods for making Section 704(c) allocations with respect to contributed property that has a book/tax disparity. The JV must select one of these methods for the contributed Project Portfolio. The three methods are:
1. Traditional Method — Treas. Reg. §1.704-3(b)
Under the traditional method, tax items attributable to contributed property are allocated to the contributing partner (CBR) to the extent of its book allocation, with any remaining tax items allocated to the noncontributing partner (Lumen Ridge) up to the amount of Lumen Ridge's book allocation. However, the traditional method is subject to the "ceiling rule," which provides that the total amount of tax items allocated to the partners with respect to contributed property cannot exceed the actual tax items of the partnership for the year. In other words, the partnership cannot allocate more tax depreciation than it actually has.
The ceiling rule creates a distortion when the tax basis of contributed property is significantly lower than its book value, as is the case here. Because the JV's tax depreciation on the contributed property ($34,200,000 of tax basis) is substantially less than its book depreciation (computed on the $90,000,000 book value), the ceiling rule prevents Lumen Ridge from receiving tax depreciation equal to its book depreciation allocation. This shortfall is sometimes referred to as the "ceiling rule distortion."
In the context of this transaction, the ceiling rule distortion under the traditional method would be substantial. Lumen Ridge would receive significantly less tax depreciation than its economic share (as reflected in its book depreciation allocation), which would increase Lumen Ridge's tax burden relative to its economic income. This result is unfavorable to Lumen Ridge.
2. Traditional Method with Curative Allocations — Treas. Reg. §1.704-3(c)
Under the traditional method with curative allocations, the partnership may make additional allocations of other tax items (i.e., items not attributable to the contributed property) to correct the ceiling rule distortions created by the traditional method. For example, the partnership could allocate additional depreciation deductions from partnership-purchased assets to Lumen Ridge, with an offsetting allocation of income to CBR, to correct the ceiling rule shortfall.
The curative allocation method is more favorable to Lumen Ridge than the traditional method, as it can eliminate the ceiling rule distortion to the extent that the partnership has other tax items available for curative allocation. However, the curative method has limitations: it depends on the availability of other partnership tax items of the same character, and it may not fully correct the distortion if such items are insufficient. Additionally, the use of curative allocations introduces complexity and may distort the allocation of items not related to the contributed property.
3. Remedial Allocation Method — Treas. Reg. §1.704-3(d)
Under the remedial allocation method, the partnership addresses the ceiling rule distortion by creating notional (or "phantom") tax items that do not correspond to any actual economic transaction. Specifically, when the ceiling rule prevents Lumen Ridge from receiving its full book allocation of tax depreciation, the JV creates a "remedial" depreciation deduction for Lumen Ridge and a corresponding "remedial" income item (ordinary income) for CBR. The remedial depreciation and the remedial income are equal in amount, so that the net effect on the JV's total taxable income is zero.
The remedial method completely eliminates the ceiling rule distortion, regardless of whether the partnership has other tax items available for curative allocation. It is the most mechanically complete and predictable of the three methods and is specifically sanctioned by the Treasury Regulations as a permissible Section 704(c) method.
Under the remedial method, the contributed property is treated for book purposes as if it were two separate assets: (i) a "tax asset" with a book value equal to the carryover tax basis ($34,200,000), which is depreciated over the remaining recovery period of the contributed property using CBR's existing depreciation method; and (ii) a "book-only asset" with a book value equal to the built-in gain ($55,800,000), which is depreciated over the recovery period that would apply if the asset were newly placed in service. Tax depreciation from the "tax asset" is allocated first to Lumen Ridge (up to its book allocation), with any remainder to CBR. The ceiling rule shortfall (i.e., the amount by which Lumen Ridge's book depreciation exceeds the tax depreciation available from the "tax asset") is made up through remedial depreciation to Lumen Ridge and offsetting remedial income to CBR.
B. Recommendation: Remedial Allocation Method
We recommend that the LLC Agreement provide for the adoption of the remedial allocation method under Treas. Reg. §1.704-3(d) for all items of income, deduction, gain, and loss attributable to the contributed Project Portfolio. Our recommendation is based on the following considerations:
Magnitude of Built-In Gain. The $55,800,000 built-in gain represents a substantial portion of the $90,000,000 fair market value of the contributed property (approximately 62%). This creates a significant ceiling rule distortion under the traditional method, which would materially disadvantage Lumen Ridge. The remedial method is the most effective tool for addressing this magnitude of book/tax disparity.
Lumen Ridge Expectations. In preliminary discussions relayed through HQS (Amanda Prescott), Lumen Ridge has strongly advocated for the remedial method. Lumen Ridge's investors expect to receive their full economic share of tax depreciation on the JV's assets, and the remedial method is the only method that guarantees this result irrespective of the availability of other partnership tax items for curative allocations.
Industry Standard. The remedial allocation method is the industry standard for renewable energy joint ventures involving significant contributed property. Major institutional investors in renewable energy infrastructure routinely require the use of the remedial method in partnership agreements, and the method is well-understood and regularly implemented by partnership tax return preparers.
CBR Impact and Mitigation. From CBR's perspective, the remedial method accelerates the recognition of the built-in gain through the allocation of remedial ordinary income to CBR. This phantom income increases CBR's tax liability without a corresponding cash distribution. However, the economic impact of the remedial income allocations is mitigated by two factors: (i) the LLC Agreement will include mandatory quarterly tax distributions (discussed in Section XI below) to ensure that CBR receives cash sufficient to cover the tax liability generated by remedial income allocations; and (ii) the 7-year tax protection agreement (Section VIII) protects CBR from gain recognition triggered by JV actions such as the sale of contributed assets.
Regulatory Certainty. The remedial method is a specifically authorized regulatory method under Treas. Reg. §1.704-3(d) and provides a high degree of certainty in its application. Unlike the curative method, which depends on the availability of other partnership tax items and involves judgment calls about appropriate curative allocations, the remedial method produces a mechanically determined result.
For these reasons, we believe the remedial allocation method is the appropriate choice for this transaction and is in CBR's interest as well as Lumen Ridge's, when considered in conjunction with the tax distribution and tax protection provisions.
C. Mechanics of the Remedial Method Applied to the Project Portfolio
The mechanics of the remedial allocation method as applied to the contributed Project Portfolio are summarized below. Precise calculations will depend on the final asset-by-asset tax basis schedules and applicable MACRS recovery periods, which are to be confirmed by Pennington Clarke LLP once engaged.
Step 1: Book the Contributed Property. The JV books the Project Portfolio at its agreed fair market value of $90,000,000 on the JV's balance sheet for capital account and book purposes. The JV's tax basis in the contributed property is $34,200,000 (carryover basis under IRC §723).
Step 2: Compute Book Depreciation. For book purposes, depreciation on the contributed property is computed on the full $90,000,000 book value, using the recovery period and depreciation method that would apply if the property were newly placed in service. For 5-year MACRS solar energy property, this would generally be a 5-year recovery period using the 200% declining balance method, switching to straight-line when optimal. Book depreciation is allocated between the members in accordance with their 50/50 ownership interests (i.e., $9,000,000 per year to each member in a simplified illustration assuming straight-line depreciation of $18,000,000 per year on the $90,000,000 book value).
Step 3: Compute Tax Depreciation on Carryover Basis. For tax purposes, the $34,200,000 carryover tax basis is depreciated over the remaining recovery period of the contributed property, using the depreciation method that was applicable to CBR prior to the contribution (carryover of depreciation method and remaining recovery period under IRC §168(i)(7)). The annual tax depreciation deduction from the contributed basis is significantly less than the annual book depreciation.
Step 4: Allocate Tax Depreciation and Create Remedial Items. Tax depreciation from the existing carryover basis is allocated first to Lumen Ridge, up to the amount of Lumen Ridge's book depreciation allocation. To the extent the available tax depreciation is insufficient to provide Lumen Ridge with tax depreciation equal to its book depreciation (which will be the case here due to the substantial book/tax disparity), the JV creates remedial items:
• Remedial Depreciation to Lumen Ridge: An additional (notional) depreciation deduction equal to the ceiling rule shortfall (i.e., the difference between Lumen Ridge's book depreciation and the tax depreciation available from the carryover basis).
• Remedial Income to CBR: An equal amount of corresponding ordinary income, allocated to CBR, offsetting the remedial depreciation to Lumen Ridge at the partnership level.
Illustrative Example. The following simplified illustration demonstrates the mechanics of the remedial method in the first year following the contribution, assuming: (a) the JV's annual book depreciation on the Project Portfolio is $18,000,000 (straight-line on $90,000,000 over 5 years); (b) the available tax depreciation from the $34,200,000 carryover basis is $6,840,000 (straight-line on $34,200,000 over 5 years); and (c) members share equally.
In this simplified illustration, all $6,840,000 of actual tax depreciation is allocated to Lumen Ridge under the Section 704(c) principles (because CBR, as the contributing partner, must absorb the built-in gain, which effectively deprives CBR of tax depreciation on the contributed property). Lumen Ridge's book depreciation of $9,000,000 exceeds the available tax depreciation of $6,840,000 by $2,160,000 — this shortfall is addressed through $2,160,000 of remedial depreciation to Lumen Ridge and $2,160,000 of offsetting remedial income to CBR.
We emphasize that the foregoing is a simplified illustration intended to demonstrate the mechanics of the remedial method. The actual calculations will be substantially more complex, reflecting: (a) asset-by-asset basis and depreciation schedules for each of the eight contributed projects; (b) the applicable remaining MACRS recovery period for each asset; (c) the interaction with bonus depreciation on new construction expenditures (which are not subject to 704(c)); and (d) the half-year and mid-quarter conventions. Detailed schedules will be prepared by Pennington Clarke LLP in connection with the preparation of the JV's first-year tax return.
D. Anti-Abuse Considerations
Treas. Reg. §1.704-3(a)(10) includes an anti-abuse rule providing that an allocation method (or combination of methods) is not reasonable if the contribution of property and the corresponding allocation of tax items with respect to the property are made with a view to shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value of the partners' aggregate tax liability. The anti-abuse rule targets situations where the chosen method is used to achieve results inconsistent with the purpose of Section 704(c).
The remedial allocation method is a specifically sanctioned regulatory method, and its use to eliminate the ceiling rule distortion on contributed property is precisely the purpose for which the method was designed. The adoption of the remedial method in this transaction is consistent with the purpose of Section 704(c) — i.e., to prevent Lumen Ridge from bearing the tax burden of gain that accrued while CBR held the Project Portfolio. We see no basis for the application of the anti-abuse rule to the use of the remedial method in this context.
VI. Depreciation — MACRS and Bonus Depreciation Under IRC §168(k)
A. MACRS Classification
Solar energy equipment is classified as 5-year MACRS property under IRC §168(e)(3)(B)(vi), which provides that "any equipment which uses solar energy to generate electricity" qualifies as 5-year property for purposes of the accelerated cost recovery system. This classification applies to solar photovoltaic modules, inverters, racking and mounting structures, transformers, electrical collection systems, and related equipment and improvements that are integral to the generation and delivery of solar electricity.
With respect to the contributed Project Portfolio, it is important to distinguish between two categories of assets:
Contributed Development-Stage Assets. The eight solar projects being contributed by CBR are in the development stage — they are permitted (with the exception of Brazos Point) but have not yet been constructed or placed in service. The development-stage assets capitalized by CBR (including soft costs, permitting fees, environmental review costs, engineering and design costs, land option payments, and other pre-construction expenditures) have an aggregate tax basis of approximately $34,200,000. These assets carry over to the JV at CBR's existing tax basis and are subject to continued depreciation over their remaining MACRS recovery lives using CBR's existing depreciation method, as provided under IRC §168(i)(7) for contributed property. The depreciable life of these assets begins when they are placed in service (i.e., upon completion of construction and commencement of commercial operations).
New Construction Expenditures. The substantial majority of the JV's depreciable asset base will consist of new construction expenditures incurred by the JV after the contribution — i.e., the costs of purchasing and installing solar modules, inverters, racking, electrical equipment, and related balance-of-system components for the eight projects. These new expenditures are partnership-purchased assets, not contributed property, and therefore have no book/tax disparity at the time of acquisition. The estimated total hard construction costs for the 1,200 MW portfolio are approximately $720,000,000, a significant portion of which will constitute 5-year MACRS property eligible for accelerated depreciation.
B. Bonus Depreciation Under IRC §168(k)
Under IRC §168(k), a taxpayer may claim an additional first-year depreciation deduction ("bonus depreciation") for certain qualified property placed in service during the taxable year. As enacted by the Tax Cuts and Jobs Act of 2017 (P.L. 115-97), bonus depreciation was initially set at 100% for property placed in service after September 27, 2017, and before January 1, 2023. The statute provides for a phase-down of the bonus depreciation rate beginning in 2023:
We note that there have been legislative proposals to restore 100% bonus depreciation, including proposals in both chambers of Congress. However, as of the date of this memorandum, no such legislation has been enacted. Our analysis is based on current law as set forth above.
The JV intends to elect bonus depreciation under IRC §168(k) on all eligible new construction costs. Assuming the JV's eight projects are placed in service on a rolling basis between 2024 and 2027, the applicable bonus depreciation rate will vary by project based on the year in which each project is placed in service. The JV and its tax advisors should develop a construction and commissioning schedule that takes into account the phase-down of bonus depreciation rates, with a view toward accelerating the commissioning of projects to the extent commercially practicable to maximize the available bonus depreciation benefit.
Contributed Property. The existing-basis contributed property ($34,200,000 of carryover tax basis) is not eligible for additional bonus depreciation. IRC §168(k) generally applies to property for which the "original use" begins with the taxpayer. Because CBR has already placed the development-stage assets in service (or capitalized them as part of a development-stage project), the JV is not the "first user" of these assets, and they do not qualify for bonus depreciation in the hands of the JV. However, new construction expenditures incurred by the JV on the contributed projects — i.e., the costs of constructing the solar generating facilities on the contributed project sites — do qualify for bonus depreciation because the JV is the first user of the newly constructed improvements.
Tax Loss Generation. The combination of bonus depreciation and regular MACRS depreciation on the JV's approximately $720,000,000 of new construction expenditures will generate substantial tax losses in the early years of the JV's operations. These losses pass through to the members in proportion to their allocable shares and, subject to applicable limitations at the member level (including passive activity loss limitations under IRC §469 and at-risk limitations under IRC §465), can be used to offset other taxable income. The magnitude and timing of these losses are a significant component of the investment returns for both members.
C. Interaction of Bonus Depreciation with Section 704(c)
New construction expenditures incurred by the JV after the formation date are partnership-purchased assets and are not subject to Section 704(c). These assets have no book/tax disparity at the time of acquisition (the JV's tax basis and book value in newly purchased assets are equal), and therefore no Section 704(c) allocation issues arise.
Bonus depreciation and regular MACRS depreciation on new construction assets are allocated between the members in accordance with their 50/50 ownership interests, consistent with the general allocation provisions of the LLC Agreement. Both members receive equal tax depreciation on these assets, without any 704(c) adjustments or remedial allocations.
The contributed property basis of $34,200,000 continues to be depreciated under the carryover depreciation method and remaining recovery period, and the Section 704(c) remedial allocation method applies to the tax depreciation attributable to this carryover basis, as described in Section V.C above. The two categories of depreciation — (i) carryover basis depreciation subject to 704(c) and (ii) new construction depreciation shared equally — must be tracked separately on the JV's books and in the preparation of the Schedules K-1.
VII. Investment Tax Credits Under IRC §48
A. Eligibility
Solar energy property placed in service by the JV is eligible for the Investment Tax Credit ("ITC") under IRC §48(a), which provides a tax credit for investment in certain energy property, including solar energy property described in IRC §48(a)(3)(A)(i). The ITC is claimed in the taxable year in which the eligible property is placed in service.
Under the Inflation Reduction Act of 2022 (P.L. 117-169) (the "IRA"), the ITC for solar energy property was extended and enhanced. The key credit rates applicable to the JV's projects are as follows:
Base Rate. The base ITC rate for solar energy property is 6% of eligible basis for projects that begin construction before January 1, 2033. However, this base rate increases to 30% if the project satisfies the prevailing wage and apprenticeship ("PWA") requirements set forth in IRC §48(a)(10) and related Treasury guidance. The PWA requirements mandate that: (i) laborers and mechanics employed in the construction, alteration, or repair of the project are paid wages at rates not less than the prevailing rates determined by the Secretary of Labor under the Davis-Bacon Act; and (ii) the project meets certain apprenticeship participation requirements during construction.
Given the scale and scope of the JV's portfolio (1,200 MW across eight projects), we expect that the projects will be designed to satisfy the PWA requirements, and the applicable ITC rate will be 30% of eligible basis. The LLC Agreement and the Development and Construction Management Agreement should include provisions requiring CBR (as development and construction manager) to ensure compliance with the PWA requirements for all JV projects.
Domestic Content Bonus. Under IRC §48(a)(12), an additional 10 percentage point bonus is available (increasing the total ITC from 30% to 40%) if the project meets domestic content requirements — specifically, if all steel, iron, and manufactured products that are components of the solar energy property are produced in the United States and satisfy applicable domestic content percentage thresholds as set forth in IRS guidance. The domestic content requirements are project-spe

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

MATTER NUMBER: 48172.001

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