1015-00005 · Calloway-Briggs Renewables Inc · Tax Memoranda

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

TO: Marcus Calloway, Chairman & CEO, Calloway-Briggs Renewables Inc. Theo Vasquez, CFO, Calloway-Briggs Renewables Inc. Priya Anand, VP, Project Finance, Calloway-Briggs Renewables Inc.

FROM: Sylvia Hartwell, Partner, Tax, Calderwood & Harkness LLP Leila Nazari, Associate, Tax, Calderwood & Harkness LLP

DATE: September 15, 2023

RE: Solstice Holdings, LLC — Analysis of Partnership Tax Allocations Under Section 704(b) and Compliance with Substantial Economic Effect Requirements

Matter No.: 1015-00005 Billing No.: 78204-001

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I. Executive Summary

This memorandum has been prepared at the request of Calloway-Briggs Renewables Inc. ("CBR") to analyze the partnership tax allocations set forth in the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (the "LLCA") for compliance with the substantial economic effect requirements of Section 704(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations promulgated thereunder, including Treasury Regulation Sections 1.704-1(b) and 1.704-2 (collectively, the "Section 704(b) Regulations"). This memorandum also evaluates the structure's compliance with the safe harbor principles established in Revenue Procedure 2007-65, 2007-2 C.B. 967, as applied to partnership-flip structures involving solar energy generating facilities.

Solstice Holdings, LLC (EIN 88-4071523) is a Delaware limited liability company classified as a partnership for federal income tax purposes, formed on August 14, 2023. The Partnership has two members: (i) CBR Solstice Manager, LLC (EIN 88-4071597), a wholly owned subsidiary of CBR, which serves as the Managing Member (hereinafter, "CBR Manager"); and (ii) Ridgeline Capital Partners, LLC (EIN 13-4827651), an institutional tax-equity investor (hereinafter, "Ridgeline" or the "Tax-Equity Member").

The LLCA establishes a partnership-flip structure with two distinct allocation periods that govern the allocation of tax items and cash distributions among the members:

Pre-Flip Period. During the Pre-Flip Period, Ridgeline receives 99% of all tax items — including investment tax credits ("ITCs"), Modified Accelerated Cost Recovery System ("MACRS") depreciation deductions, and allocable shares of taxable income and loss — and 30% of cash distributions. CBR Manager receives the remaining 1% of all tax items and 70% of cash distributions during this period.

Post-Flip Period. Following the occurrence of the Flip Date (as defined in the LLCA), Ridgeline's allocable share of all items — both tax items and cash distributions — is reduced to 5%, with CBR Manager receiving 95% of all items for the remainder of the Partnership's term.

The Flip Date is triggered when Ridgeline achieves its target after-tax yield of 7.25% internal rate of return ("IRR"), which is projected to occur in the fourth quarter of 2028 (approximately 5.0 years after the weighted-average commercial operation date ("COD") of October 25, 2023). The target yield calculation incorporates all cash distributions received by Ridgeline, the value of all tax benefits allocated to Ridgeline, and the projected residual value of Ridgeline's post-flip 5% interest.

Total capital contributions to the Partnership are as follows: Ridgeline will contribute $120,000,000, payable in two tranches — $96,000,000 at the closing on December 8, 2023, and $24,000,000 by February 6, 2024. CBR Manager will contribute $2,400,000 in cash, representing 2% of Ridgeline's total capital contribution, as well as its membership interests in the seven project companies holding the Solstice Portfolio.

Conclusion. Based on our analysis of the LLCA, the applicable provisions of the Code, Treasury Regulations, and published administrative guidance, we conclude that the allocations as structured in the LLCA should satisfy the substantial economic effect requirements of Section 704(b) and the Treasury Regulations thereunder, subject to the qualifications and limitations discussed in Sections X and XII of this memorandum. Specifically, the allocations satisfy the alternate test for economic effect under Treasury Regulation Section 1.704-1(b)(2)(ii)(d), including the qualified income offset requirement, and the substantiality requirement under Treasury Regulation Section 1.704-1(b)(2)(iii). In addition, the structure satisfies the safe harbor principles of Revenue Procedure 2007-65, providing additional comfort that the IRS should not challenge either the partnership characterization of Solstice Holdings or the validity of the tax allocations contained in the LLCA.

II. Background and Transaction Overview

A. The Solstice Portfolio

The Solstice Portfolio comprises seven utility-scale solar photovoltaic ("PV") projects with an aggregate nameplate capacity of 420 megawatts direct current ("MW(dc)"), located across West Texas and New Mexico. Each of the seven projects is held by a separate Delaware limited liability company, each of which is a disregarded entity for federal income tax purposes and is wholly owned by Solstice Holdings, LLC. The following table sets forth the key characteristics of each project:

The aggregate engineering, procurement, and construction ("EPC") cost for all seven projects is $384,600,000. The EPC contractor for all seven projects is Vasquez Brothers Construction, Inc., which was engaged pursuant to seven separate fixed-price EPC contracts. CBR has represented that Vasquez Brothers Construction, Inc. is an unrelated third party, and we have relied on that representation for purposes of this analysis.

All projects are expected to achieve COD during the fall of 2023, with individual CODs ranging from September 30, 2023 (Cimarron Solar, LLC) to November 18, 2023 (Amistad Solar, LLC). The weighted-average COD for the entire portfolio is approximately October 25, 2023, which is the reference date used in the LLCA for purposes of the flip calculation and ITC recapture period analysis.

The five Texas projects are each party to 15-year power purchase agreements ("PPAs") with Lone Star Grid Solutions, LLC, a creditworthy investment-grade offtaker, at a weighted-average contract price of $32.50 per megawatt-hour ("MWh") with a 1.5% annual escalator. The two New Mexico projects are each party to 20-year PPAs with Enchantment Power Cooperative at a weighted-average contract price of $29.75/MWh with a 2.0% annual escalator. These PPA structures provide a stable, long-term revenue base that supports the Partnership's reasonably anticipated pre-tax profit projections, as discussed further in Section VI.D below.

In addition to PPA revenues, the projects are expected to generate revenue from the sale of renewable energy certificates ("RECs") in applicable markets and, to a lesser extent, from capacity payments under the relevant grid operator tariffs. These ancillary revenue streams are included in the financial model but represent a relatively modest portion of total projected revenues.

B. Tax Benefits Generated

The projects in the Solstice Portfolio generate significant federal income tax benefits, which are the primary motivation for Ridgeline's investment. The following summarizes the key tax benefits:

Investment Tax Credits. The total eligible basis for purposes of the energy investment tax credit under Section 48 of the Code is $384,600,000, representing the aggregate EPC costs of the seven projects. The applicable ITC rate is 40%, computed as follows: (i) the base ITC rate of 30% under Section 48(a), as amended by the Inflation Reduction Act of 2022 (the "IRA"), which applies to projects that satisfy the prevailing wage and registered apprenticeship requirements of Section 48(a)(10); plus (ii) a 10% domestic content adder under Section 48(a)(12), which CBR has represented will be satisfied based on the sourcing of solar modules, inverters, racking, and structural steel from domestic manufacturers. Accordingly, the total ITCs generated by the Solstice Portfolio are $153,840,000 ($384,600,000 × 40%).

Of this total, $89,040,000 in ITCs will be allocated through the partnership allocation provisions of the LLCA, with 99% allocated to Ridgeline ($88,149,600) and 1% allocated to CBR Manager ($890,400) during the Pre-Flip Period.

The remaining $64,800,000 in ITCs will be transferred at the project-company level under the transferability election provided by Section 6418 of the Code, as added by the IRA. Of this amount, $60,000,000 has been sold to Pinehurst Insurance Group, Inc. at a transfer price of $0.92 per $1.00 of credit, resulting in gross transfer proceeds of $55,200,000. The remaining $4,800,000 in transferable credits will be retained and utilized directly by CBR on its own federal income tax return. The interaction between the Section 6418 transfer and the partnership-level ITC allocation is discussed further in Section VIII.B below.

MACRS Depreciation. The depreciable basis of the Solstice Portfolio for purposes of the Modified Accelerated Cost Recovery System is $307,680,000, computed as follows:

Total eligible basis: $384,600,000

Less: Basis reduction under § 50(c) (50% × $153,840,000 ITCs): ($76,920,000)

Depreciable basis: $307,680,000

Solar energy property qualifies as 5-year MACRS property under Section 168(e)(3)(B)(vi) of the Code. Because all seven projects are expected to be placed in service during calendar year 2023, they qualify for 100% first-year bonus depreciation under Section 168(k) (which has not yet begun to phase down for property placed in service before January 1, 2024). Accordingly, the full $307,680,000 of depreciable basis is expected to be deductible in the taxable year the projects are placed in service.

C. The Partnership-Flip Structure

The partnership-flip structure is the cornerstone of the Solstice Holdings transaction. Under this structure, the economic arrangement between CBR Manager and Ridgeline is designed to accomplish two principal objectives: (i) to deliver the substantial majority of the tax benefits generated by the Solstice Portfolio to Ridgeline, as the Tax-Equity Member, during the Pre-Flip Period, in exchange for Ridgeline's capital contribution of $120,000,000; and (ii) to return the substantial majority of the ongoing economic value of the projects — including operating cash flow and residual asset value — to CBR Manager following the Flip Date.

Ridgeline's Investment. Ridgeline's $120,000,000 investment is structured as capital contributions to Solstice Holdings, LLC. The investment is payable in two tranches: (i) $96,000,000 at the closing on December 8, 2023 (representing 80% of the total commitment), and (ii) $24,000,000 no later than February 6, 2024, which is within 60 days of the projected COD of the last project in the portfolio (Amistad Solar, LLC, with a COD of November 18, 2023). Both tranches are fixed and determinable amounts, subject only to satisfaction of ministerial conditions precedent such as delivery of COD certificates, independent engineer certifications, and updated title insurance endorsements.

CBR Manager's Investment. CBR Manager contributes $2,400,000 in cash, which equals 2% of Ridgeline's total capital contribution. In addition, CBR Manager contributes its membership interests in each of the seven project companies to Solstice Holdings in a transaction intended to qualify as a tax-free contribution under Section 721 of the Code. The contributed membership interests represent the entirety of the project infrastructure — including the solar PV systems, land leases, PPAs, interconnection agreements, permits, and related project documents — and have a substantial fair market value reflecting the aggregate $384,600,000 in EPC costs and the value of the contracted revenue streams.

Cash Flow Sources and Distribution Waterfall. The Partnership's revenue is derived principally from PPA payments received by the project companies, which flow up to Solstice Holdings as the sole member of each disregarded entity. Additional revenue sources include REC sales and capacity payments. During the Pre-Flip Period, available cash is distributed 30% to Ridgeline and 70% to CBR Manager. This deliberate divergence between tax allocations (99%/1%) and cash distributions (30%/70%) is a fundamental feature of the partnership-flip structure: Ridgeline derives the primary economic value of its investment from tax benefits rather than cash flow, while CBR Manager retains the majority of operating cash flow to service its obligations (including payments on the Osprey National Bank back-leverage facility) and to fund ongoing project operations.

CBR Purchase Option. Following the Flip Date, CBR Manager has the right, but not the obligation, to purchase Ridgeline's residual 5% interest in Solstice Holdings at fair market value (with a floor price of $1.00). The purchase option is exercisable within a 180-day window following the Flip Date. The FMV purchase price is to be determined by mutual agreement of the parties or, if they are unable to agree, by an independent appraiser selected in accordance with the procedures set forth in the LLCA. The purchase option does not constitute a fixed-price or bargain purchase option, and its terms are designed to comply with the requirements of Revenue Procedure 2007-65, as discussed further in Section VI.E below.

III. Legal Framework — Section 704(b) and the Substantial Economic Effect Doctrine

A. General Rule Under Section 704(b)

Section 704(a) of the Code provides the general rule that a partner's distributive share of any item of income, gain, loss, deduction, or credit shall be determined by the partnership agreement. However, Section 704(b) imposes a critical limitation on this general rule: if the partnership agreement's allocation of any such item does not have "substantial economic effect," the item must instead be allocated in accordance with the partner's "interest in the partnership" ("PIP"), as determined by taking into account all facts and circumstances.

The Treasury Regulations under Section 704(b) establish a comprehensive framework for evaluating whether a partnership allocation has substantial economic effect. This framework involves a two-part analysis: first, the allocation must have "economic effect" (i.e., the allocation must be consistent with the underlying economic arrangement of the partners); and second, the economic effect must be "substantial" (i.e., the allocation must have a meaningful impact on the dollar amounts received by the partners, independent of tax consequences).

The Regulations provide three alternative methods for establishing that an allocation has the requisite economic effect: (i) the primary test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b); (ii) the alternate test under Treasury Regulation Section 1.704-1(b)(2)(ii)(d); and (iii) the "economic effect equivalence" standard under Treasury Regulation Section 1.704-1(b)(2)(ii)(i). As discussed below, the LLCA is structured to satisfy the alternate test for economic effect, which is the standard mechanism employed in tax-equity partnership-flip transactions where the tax-equity investor does not undertake an unlimited deficit restoration obligation.

B. The Primary Economic Effect Test

Under the primary test set forth in Treasury Regulation Section 1.704-1(b)(2)(ii)(b), an allocation is deemed to have economic effect if, and only if, throughout the full term of the partnership, the partnership agreement satisfies all three of the following requirements:

(i) Capital Account Maintenance. The partnership agreement must require that capital accounts be determined and maintained for each partner in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). These rules prescribe that capital accounts be credited with cash contributions, the fair market value of property contributions, and allocations of income and gain, and debited with cash and property distributions (at fair market value) and allocations of loss and deduction.

(ii) Liquidating Distributions in Accordance with Capital Accounts. The partnership agreement must provide that, upon the liquidation of a partner's interest (or, if later, upon the liquidation of the partnership), liquidating distributions are made in accordance with the positive capital account balances of the partners, after taking into account all capital account adjustments for the taxable year in which the liquidation occurs, by the end of such taxable year (or, if later, within 90 days after the date of such liquidation).

(iii) Unconditional Deficit Restoration Obligation. The partnership agreement must provide that if a partner has a deficit balance in its capital account following the liquidation of its interest, such partner is unconditionally obligated to restore the amount of such deficit balance to the partnership by the end of the taxable year of liquidation (or, if later, within 90 days after the date of such liquidation), which amount shall be paid to creditors of the partnership or distributed to other partners in accordance with their positive capital account balances.

In the context of tax-equity partnership-flip structures, the primary test is generally not available for allocations to the tax-equity investor because institutional tax-equity investors rarely agree to undertake unlimited deficit restoration obligations. As discussed in Section IV.C below, Ridgeline has a limited (or zero) deficit restoration obligation, which means the primary test cannot be relied upon with respect to allocations to Ridgeline. The LLCA therefore relies on the alternate test for economic effect.

C. The Alternate Test for Economic Effect

The alternate test for economic effect, set forth in Treasury Regulation Section 1.704-1(b)(2)(ii)(d), provides an alternative pathway for establishing economic effect where a partner does not have an unlimited deficit restoration obligation. Under the alternate test, an allocation has economic effect if the partnership agreement satisfies the following requirements:

(i) The first two requirements of the primary test — capital account maintenance in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv), and liquidating distributions in accordance with positive capital account balances — must be satisfied.

(ii) In lieu of the unlimited deficit restoration obligation, the partnership agreement must contain a "qualified income offset" ("QIO") provision. The QIO requires that if a partner unexpectedly receives any adjustment, allocation, or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that causes or increases a deficit in the partner's capital account (in excess of any limited dollar amount of the deficit that the partner is obligated to restore), the partnership agreement must provide for a special allocation to such partner of items of income and gain in an amount and manner sufficient to eliminate the deficit balance as quickly as possible.

(iii) The partnership agreement must not allocate losses or deductions to a partner to the extent that such allocation would cause or increase a deficit balance in the partner's adjusted capital account (taking into account any limited deficit restoration obligation) in excess of the partner's share of partnership minimum gain. This is commonly referred to as the "loss limitation" or "limitation on allocation of losses" provision.

The alternate test is the standard mechanism for establishing economic effect in partnership-flip structures. The tax-equity investor (here, Ridgeline) is protected by the QIO provision, which ensures that if unexpected events cause the partner's capital account to go into deficit beyond the agreed-upon amount, the partnership must allocate sufficient income and gain to restore the capital account to zero (or to the amount of the limited deficit restoration obligation). At the same time, the loss limitation provision prevents allocations from causing an impermissible deficit in the first instance, except to the extent of minimum gain.

D. Substantiality

Even if an allocation satisfies the economic effect requirement, it must also satisfy the separate requirement of "substantiality" under Treasury Regulation Section 1.704-1(b)(2)(iii). The substantiality requirement is designed to ensure that the partnership's allocation scheme has a meaningful economic impact on the partners' non-tax positions — that is, the allocation must have a reasonable possibility of affecting substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences.

The Regulations identify two specific types of allocations that fail the substantiality test:

Shifting Allocations. Under Treasury Regulation Section 1.704-1(b)(2)(iii)(b), an allocation is a "shifting allocation" if, at the time the allocation becomes part of the partnership agreement, (i) there is a strong likelihood that the net increases and net decreases that will be recorded in the partners' respective capital accounts will not differ substantially from the net increases and net decreases that would be recorded in the absence of the allocation, and (ii) the total tax liability of the partners for the taxable year is reduced. A shifting allocation is one in which the tax benefits of the allocation are shared among the partners in a year, with no meaningful change in their relative economic positions.

Transitory Allocations. Under Treasury Regulation Section 1.704-1(b)(2)(iii)(c), a two-part allocation — an original allocation in one year followed by an offsetting allocation in a subsequent year — is "transitory" if (i) there is a strong likelihood at the time the allocations become part of the partnership agreement that the original allocation will be largely offset by the subsequent allocation, and (ii) the net tax impact of the original and subsequent allocations enhances the after-tax economic consequences of at least one partner without substantially diminishing the after-tax economic consequences of any other partner.

The transitory allocation test is of particular relevance to partnership-flip structures because the flip from 99%/1% allocations to 5%/95% allocations might superficially appear to involve an original allocation that is "offset" by a subsequent allocation. However, as discussed in detail in Section V.C below, the partnership-flip structure should pass the substantiality test for several important reasons.

First, the pre-flip and post-flip allocations are not offsetting in a meaningful economic sense. The pre-flip allocation of 99% of tax items to Ridgeline delivers genuine economic value to Ridgeline in the form of tax benefits (ITCs and depreciation deductions) that are monetized on Ridgeline's own tax return. The post-flip allocation of 95% of all items to CBR Manager delivers genuine economic value to CBR Manager in the form of long-term operating cash flow and residual ownership. The total economic impact on each partner is not the same as it would be absent the allocation.

Second, the after-tax economic consequences to each partner differ substantially from what would result under a PIP allocation. If all items were allocated in accordance with the partners' interests in the partnership (e.g., based on capital contributions or some other objective measure), the tax benefits would not flow disproportionately to Ridgeline, and the cash flow would not flow disproportionately to CBR Manager. The flip structure reflects a genuine economic bargain in which each partner receives different types of value.

Third, there is a meaningful (non-de minimis) risk that the allocations will not perfectly offset. If project performance is below expectations, Ridgeline's capital account may not fully recover, and the flip may be delayed or the economics of the transaction may differ materially from projections. This uncertainty further supports the conclusion that the allocations are not transitory.

IV. Analysis of LLCA Allocation Provisions

A. Capital Account Maintenance (Article V of LLCA)

Article V, Section 5.1 of the LLCA expressly requires that the Partnership maintain a separate capital account for each member in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). The LLCA provides that each member's capital account shall be:

(a) Credited with (i) the amount of cash contributed by such member to the Partnership, (ii) the fair market value (net of liabilities assumed or to which such property is subject) of property contributed by such member, and (iii) allocations to such member of items of Partnership income and gain (including income and gain exempt from tax and income and gain described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding income and gain described in Treasury Regulation Section 1.704-1(b)(4)(i));

(b) Debited with (i) the amount of cash distributed to such member by the Partnership, (ii) the fair market value (net of liabilities assumed or to which such property is subject) of property distributed to such member, and (iii) allocations to such member of items of Partnership loss and deduction (including expenditures described in Section 705(a)(2)(B) of the Code and loss and deduction described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding items described in Treasury Regulation Section 1.704-1(b)(4)(i) or Section 1.704-1(b)(4)(iii)).

The initial capital accounts of the members upon closing are as follows:

Ridgeline: $120,000,000, consisting of $96,000,000 funded at closing on December 8, 2023, and $24,000,000 to be funded no later than February 6, 2024. The LLCA treats the full $120,000,000 as Ridgeline's committed capital, with the second tranche constituting a binding, unconditional obligation. For purposes of capital account maintenance, the first tranche will be credited upon receipt and the second tranche will be credited upon its contribution.

CBR Manager: $2,400,000 in cash, plus the fair market value of the contributed membership interests in the seven project companies. The fair market value of the contributed project company interests is significant, reflecting the aggregate EPC costs of $384,600,000 and the economic value of the contracted revenue streams, land leases, interconnection agreements, and related project assets. The determination of fair market value for capital account purposes will be supported by an independent appraisal prepared by Greystone Worthington, LLC (Helen Farber, ASA, CFA), which has been engaged to provide a valuation as of the contribution date.

The LLCA also includes revaluation provisions that permit the Partnership to adjust the book value of Partnership property (and correspondingly adjust the members' capital accounts) upon the occurrence of specified events, including (i) the admission of a new member, (ii) the liquidation of a member's interest, (iii) a distribution of property in kind to a member in connection with a partial or full liquidation, and (iv) the grant of an interest in the Partnership as consideration for the provision of services. These revaluation provisions comply with Treasury Regulation Section 1.704-1(b)(2)(iv)(f) and ensure that the capital accounts accurately reflect the economic positions of the members at the time of any triggering event.

With respect to the Section 704(c) allocations arising from CBR Manager's contribution of the project company interests, the LLCA provides that the Partnership shall use the "traditional method" with curative allocations under Treasury Regulation Section 1.704-3(c). This method addresses any disparities between the book value and the tax basis of the contributed property by first making allocations of tax items that correspond to the book allocations (traditional method) and, to the extent the traditional method cannot fully account for the book-tax disparity, by making curative allocations of other Partnership tax items (of the same character) to achieve the same result as if the contributed property had been sold at its book value. This approach ensures that the economic benefit and burden of any built-in gain or loss in the contributed property is appropriately borne by the contributing partner (CBR Manager) rather than being shifted to Ridgeline.

Conclusion: The capital account maintenance provisions of the LLCA satisfy the first prong of the economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(1).

B. Liquidating Distributions in Accordance with Capital Accounts

Article XII, Section 12.3 of the LLCA provides that upon dissolution and winding up of the Partnership, after payment of all debts and liabilities owed to creditors (including any member in its capacity as a creditor), establishment of reasonable reserves for contingent or unforeseen liabilities, and payment of any liquidation expenses, the remaining assets of the Partnership shall be distributed to the members in accordance with their respective positive capital account balances, as determined after taking into account all capital account adjustments for the Partnership's taxable year during which the liquidation occurs. Such distributions are required to be made by the later of (i) the end of the taxable year of liquidation, or (ii) 90 days after the date of liquidation.

This provision is unqualified by, and operates independently of, the flip mechanics. That is, upon liquidation, the distribution waterfall follows capital account balances regardless of whether the Partnership is in the Pre-Flip Period or the Post-Flip Period at the time of liquidation. This distinction is critical: the Pre-Flip and Post-Flip allocation ratios govern the ongoing allocation of tax items and operating distributions during the life of the Partnership, but the terminal distribution of assets is governed solely by the capital account balances of the members. This design ensures that the allocations have genuine economic effect because each dollar of income, gain, loss, or deduction allocated to a member ultimately affects the amount that member receives upon liquidation.

Conclusion: The liquidating distribution provisions of the LLCA satisfy the second prong of the economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).

C. Deficit Restoration Obligations

The LLCA addresses deficit restoration obligations differently for each member, which is a standard feature of partnership-flip structures:

Ridgeline (Tax-Equity Member): Article V, Section 5.5(b) of the LLCA provides that Ridgeline shall not be obligated to restore any deficit balance in its capital account upon the liquidation of its interest or the liquidation of the Partnership. Ridgeline's deficit restoration obligation is expressly set at zero. This is consistent with standard institutional tax-equity investor requirements: Ridgeline's economic exposure is limited to its invested capital of $120,000,000, and it will not be required to contribute additional amounts to satisfy a capital account deficit.

CBR Manager (Managing Member): Article V, Section 5.5(a) of the LLCA provides that CBR Manager shall be unconditionally obligated to restore the full amount of any deficit balance in its capital account upon the liquidation of its interest or the liquidation of the Partnership, to be contributed to the Partnership no later than the later of (i) the end of the taxable year of liquidation, or (ii) 90 days after the date of liquidation. This unlimited deficit restoration obligation ensures that CBR Manager bears the ultimate economic risk associated with the Partnership's operations and provides additional assurance that the economic effect of allocations to CBR Manager is genuine.

Because Ridgeline does not undertake an unlimited deficit restoration obligation, the Partnership cannot rely solely on the primary economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b) for allocations to Ridgeline. The absence of a DRO for Ridgeline means that the third prong of the primary test is not satisfied with respect to Ridgeline's allocations. Accordingly, as discussed below, the LLCA relies on the alternate test for economic effect with respect to all allocations to Ridgeline.

We note that the unlimited DRO undertaken by CBR Manager as Managing Member is supported by the financial position of CBR Manager and its parent, Calloway-Briggs Renewables Inc. The DRO is an essential structural element that supports the economic effect of allocations to CBR Manager under the primary test and provides Ridgeline with additional comfort that the Partnership's obligations will be met upon liquidation.

D. Qualified Income Offset (QIO)

Because the alternate test for economic effect requires a qualified income offset in lieu of an unlimited deficit restoration obligation, Article V, Section 5.6 of the LLCA includes a QIO provision that tracks the requirements of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3).

Specifically, the LLCA provides that if Ridgeline unexpectedly receives any adjustment, allocation, or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6) — including (a) adjustments under Sections 734(b) or 743(b) that are reasonably expected to be made, (b) allocations of loss or deduction under Section 704(e)(2) or Treasury Regulation Section 1.751-1(b)(2)(ii), or (c) distributions that are reasonably expected to be made and that are not offset by reasonably expected increases in capital accounts — that create or increase a deficit in Ridgeline's adjusted capital account (as defined in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)), the Partnership shall allocate items of income and gain to Ridgeline in an amount and manner sufficient to eliminate the deficit balance as quickly as possible.

The QIO provision serves as a safety valve that prevents Ridgeline's capital account from remaining in an impermissible deficit position. In the event that unanticipated events cause Ridgeline to receive allocations or distributions that push its capital account below zero (in excess of its DRO amount, which is zero), the QIO ensures that subsequent income and gain are allocated to Ridgeline to restore its capital account to at least zero before any further allocations of income and gain are made to the members in accordance with the standard Pre-Flip or Post-Flip ratios.

In addition, the LLCA includes a loss limitation provision in Article V, Section 5.7, which provides that Ridgeline may not be allocated losses or deductions to the extent such allocation would cause its adjusted capital account balance (determined after taking into account its share of partnership minimum gain and partner nonrecourse debt minimum gain, and after giving effect to the items described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6)) to be less than zero. Any losses or deductions that would otherwise be allocated to Ridgeline but for this limitation are reallocated to CBR Manager. To the extent subsequent income or gain is allocated to CBR Manager as a result of this reallocation, the LLCA provides that subsequent allocations of income and gain shall be made first to CBR Manager in an amount equal to such prior reallocations before reverting to the standard allocation ratios.

Conclusion: The QIO provision and loss limitation provision in the LLCA satisfy the requirements of the alternate test for economic effect under Treasury Regulation Section 1.704-1(b)(2)(ii)(d).

E. Minimum Gain Chargeback

Article V, Section 5.8 of the LLCA includes a minimum gain chargeback provision that tracks the mandatory requirements of Treasury Regulation Section 1.704-2(f). This provision provides that, notwithstanding any other provision of the LLCA to the contrary, if there is a net decrease in partnership minimum gain during any taxable year, each member who would otherwise be allocated a share of such net decrease must be allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such member's share of the net decrease in partnership minimum gain, determined in accordance with Treasury Regulation Section 1.704-2(g). Allocations pursuant to this provision are made before any other allocations under the LLCA for the applicable taxable year.

Partnership minimum gain is relevant to the Solstice Holdings structure because the Partnership is expected to have outstanding nonrecourse liabilities during its term. Specifically, as of the closing date, the projects are expected to have nonrecourse liabilities including draws on the Osprey National Bank construction facility (to the extent any amounts remain outstanding following the closing and Ridgeline's capital contribution) and a back-leverage term loan in the principal amount of $68,000,000. To the extent that these nonrecourse liabilities generate partnership minimum gain (as determined under Treasury Regulation Section 1.704-2(d)), the minimum gain chargeback provision ensures that the members are allocated income and gain upon any net decrease in such minimum gain, thereby preventing the members from receiving a permanent, unrecaptured benefit from nonrecourse financing.

In addition, Article V, Section 5.9 of the LLCA includes a partner nonrecourse debt minimum gain chargeback provision consistent with Treasury Regulation Section 1.704-2(i)(4). This provision is applicable to the extent that any liability of the Partnership constitutes "partner nonrecourse debt" within the meaning of Treasury Regulation Section 1.704-2(b)(4) — that is, a nonrecourse liability for which a member (or a related person) bears the economic risk of loss. The Osprey National Bank back-leverage term loan of $68,000,000, which is secured by CBR Manager's interest in Solstice Holdings, may constitute partner nonrecourse debt to the extent that CBR Manager bears the economic risk of loss with respect to such indebtedness. Any deductions attributable to increases in partner nonrecourse debt minimum gain are treated as partner nonrecourse deductions allocable to CBR Manager, and any net decrease in partner nonrecourse debt minimum gain triggers a corresponding chargeback allocation to CBR Manager.

F. Nonrecourse Deductions and Partner Nonrecourse Deductions

Article V, Section 5.10 of the LLCA addresses the allocation of nonrecourse deductions and partner nonrecourse deductions:

Nonrecourse Deductions. Nonrecourse deductions, as determined under Treasury Regulation Section 1.704-2(b)(1), are allocated among the members in accordance with their respective percentage interests during the applicable allocation period — 99% to Ridgeline and 1% to CBR Manager during the Pre-Flip Period, and 5% to Ridgeline and 95% to CBR Manager during the Post-Flip Period. This allocation method is permissible under Treasury Regulation Section 1.704-2(e), which provides that nonrecourse deductions may be allocated in any manner that is reasonably consistent with allocations (that have substantial economic effect) of some other significant partnership item attributable to the property securing the nonrecourse liabilities. The allocation of nonrecourse deductions in the same ratios as the overall tax allocation percentages is consistent with the allocation of depreciation deductions (the most significant item attributable to the solar energy property), and therefore satisfies this requirement.

Partner Nonrecourse Deductions. Partner nonrecourse deductions, as determined under Treasury Regulation Section 1.704-2(i)(2), are allocated entirely to CBR Manager. This is consistent with Treasury Regulation Section 1.704-2(i)(1), which requires that partner nonrecourse deductions be allocated to the partner that bears the economic risk of loss for the corresponding partner nonrecourse debt. As noted above, the Osprey National Bank back-leverage facility is secured by CBR Manager's interest in Solstice Holdings, and CBR Manager bears the economic risk of loss with respect to such indebtedness under the constructive liquidation analysis of Treasury Regulation Section 1.752-2(b). Accordingly, any deductions attributable to this partner nonrecourse debt are properly allocated to CBR Manager.

V. Analysis of the Pre-Flip / Post-Flip Allocation Shift

A. Pre-Flip Allocations (Projected Years 1–5)

During the Pre-Flip Period, which is projected to span from the closing on December 8, 2023 through the Flip Date in Q4 2028 (approximately five years), the LLCA allocates tax items and cash distributions as follows:

Tax Items: 99% to Ridgeline / 1% to CBR Manager Cash Distributions: 30% to Ridgeline / 70% to CBR Manager

The significant divergence between the tax allocation ratio and the cash distribution ratio is a deliberate and fundamental feature of the partnership-flip structure. This divergence permits Ridgeline to obtain the substantial majority of the tax benefits generated by the Solstice Portfolio — which are the primary source of economic value for Ridgeline's investment — while simultaneously allowing CBR Manager to retain the majority of the operating cash flow generated by the projects. CBR Manager uses this cash flow to service its obligations, including payments on the Osprey National Bank back-leverage facility, ongoing project operating and maintenance expenses (to the extent not covered by project-level reserves), and administrative expenses.

The key tax items allocated during the Pre-Flip Period are as follows:

Investment Tax Credits. Total ITCs allocated to the Partnership: $89,040,000. Ridgeline receives 99% of these ITCs, or $88,149,600. CBR Manager receives the remaining 1%, or $890,400. These ITCs are allocated in the first taxable year in which the underlying energy property is placed in service (i.e., 2023 for most projects and 2024 for any projects not placed in service until 2024, although all projects are currently projected to achieve COD in Q4 2023).

MACRS Depreciation. Total depreciable basis: $307,680,000. Under 100% first-year bonus depreciation, the entire depreciable basis is deductible in the year the property is placed in service. Ridgeline receives 99% of this depreciation, or $304,603,200. CBR Manager receives 1%, or $3,076,800. This depreciation allocation will have a dramatic impact on the members' capital accounts in Year 1, as discussed in Section IX below.

Taxable Income and Losses. The financial model projects that the Partnership will generate net taxable losses in the early years of operations due to operating expenses exceeding revenue (net of the substantial depreciation deductions). These losses are allocated 99% to Ridgeline and 1% to CBR Manager. In later years of the Pre-Flip Period, as revenue grows with PPA escalators and depreciation deductions decline, the Partnership is expected to generate taxable income, which will also be allocated in the 99%/1% ratio.

B. Post-Flip Allocations

Following the Flip Date, all items — both tax items and cash distributions — are allocated 5% to Ridgeline and 95% to CBR Manager. This represents a substantial shift from the Pre-Flip allocation ratios and is designed to return the economic benefits of the Partnership to CBR Manager for the remaining life of the projects. The post-flip allocation ratios apply to all items of income, gain, loss, deduction, and credit, as well as all distributions of available cash and proceeds from capital events (such as project sales or refinancings).

The Flip Date is triggered when Ridgeline achieves its target after-tax IRR of 7.25%, calculated based on Ridgeline's total cash-on-cash returns and tax benefits. The financial model projects that this target will be achieved in Q4 2028, approximately five years after the weighted-average COD.

Following the Flip Date, Ridgeline retains a 5% residual interest in the Partnership, which represents a de minimis ongoing economic stake. This residual interest is subject to CBR Manager's purchase option at fair market value (with a floor of $1.00), as described in Section II.C above.

C. Substantiality of the Allocation Shift

The critical question under the substantiality analysis is whether the shift from 99%/1% (Pre-Flip) to 5%/95% (Post-Flip) constitutes a "transitory allocation" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(iii)(c). We conclude that it does not, for the following reasons:

The Pre-Flip and Post-Flip Allocations Are Not Offsetting. Under the transitory allocation test, the threshold inquiry is whether the original allocation (here, the Pre-Flip 99%/1% allocation) will be "largely offset" by the subsequent allocation (here, the Post-Flip 5%/95% allocation) such that the net capital account changes to each partner are substantially the same as they would have been under a PIP allocation. In the partnership-flip structure, the allocations are not offsetting in the required sense. The pre-flip allocation delivers disproportionate tax benefits to Ridgeline (including ITCs and depreciation deductions worth hundreds of millions of dollars), while the post-flip allocation delivers disproportionate cash flow and residual economics to CBR Manager. These are fundamentally different types of value, and the allocation of each type of value to different partners does not constitute an offset.

The Economic Consequences Differ Substantially From PIP. The after-tax economic consequences to each partner differ substantially from what would result under a PIP allocation. Under a PIP allocation — which might, for example, allocate all items in proportion to the partners' capital contributions (approximately 98%/2%) — Ridgeline would receive a proportionate share of both tax items and cash distributions, and CBR Manager would receive a proportionate share of both. The flip structure, by contrast, creates a genuine economic divergence: Ridgeline receives value primarily through tax benefits and limited cash distributions during the Pre-Flip Period, while CBR Manager receives value primarily through operating cash flow during the Pre-Flip Period and through the substantial majority of all items during the Post-Flip Period. The relative economic positions of the partners at any given time — and cumulatively over the life of the Partnership — differ meaningfully from what would result under a PIP allocation.

The Net Tax Impact Does Not Enhance Both Partners. The transitory allocation test requires that the net tax impact of the original and offsetting allocations enhance the after-tax economic consequences of at least one partner without substantially diminishing the after-tax economic consequences of any other partner. In the partnership-flip structure, the allocation of 99% of tax items to Ridgeline clearly benefits Ridgeline from a tax perspective, but the corresponding allocation of only 30% of cash distributions to Ridgeline during the Pre-Flip Period means that Ridgeline sacrifices current cash flow in exchange for tax benefits. CBR Manager, by contrast, receives 70% of cash distributions during the Pre-Flip Period but only 1% of tax benefits. The economic trade-offs are genuine: each partner bears economic risk and receives a different mix of value.

Meaningful Economic Risk. At the time the allocations are made, there is a meaningful, non-de minimis economic risk that the flip projections may not materialize as anticipated. Project underperformance (due to weather variability, equipment degradation, curtailment, or other factors), changes in PPA pricing or counterparty credit quality, and changes in interest rates or discount rates could all affect the timing of the flip and the ultimate economic returns to each partner. Ridgeline's capital account may not fully recover to a positive balance, depending on actual project performance and the timing of income allocations. This economic uncertainty further supports the conclusion that the allocations are not transitory.

The Allocations Are Not "Shifting" Allocations. The allocations in the LLCA also survive scrutiny under the shifting allocations test of Treasury Regulation Section 1.704-1(b)(2)(iii)(b). While the allocations do shift tax items disproportionately to Ridgeline during the Pre-Flip Period, this is not "shifting" within the meaning of the Regulation because the economic consequences to each partner differ substantially from what they would be absent the allocation. The shifting allocations test requires that the net capital account changes to each partner be substantially the same as they would have been absent the allocation, and that the total tax liability of the partners for the year be reduced. Here, the capital account changes differ substantially from what they would be under a PIP allocation — Ridgeline's capital account declines dramatically in Year 1 due to the 99% depreciation allocation, while CBR Manager's capital account remains relatively stable — and the overall economic arrangement of the partners is fundamentally different from what it would be absent the special allocation.

Conclusion: The pre-flip/post-flip allocation shift in the LLCA satisfies the substantiality requirement of Treasury Regulation Section 1.704-1(b)(2)(iii). The allocations are neither transitory nor impermissible shifting allocations.

VI. Rev. Proc. 2007-65 Safe Harbor Compliance

A. Overview of Safe Harbor

Revenue Procedure 2007-65, 2007-2 C.B. 967, provides a safe harbor under which the Internal Revenue Service will not challenge: (i) the status of a wind energy project as a partnership for federal income tax purposes; (ii) the allocation of partnership items; or (iii) the treatment of the members as partners (rather than as, e.g., lender-borrower or lessor-lessee), provided that the partnership satisfies all of the requirements set forth in the Revenue Procedure. Although Revenue Procedure 2007-65 was originally promulgated in the context of wind energy projects, it has been widely applied by analogy to solar energy projects and other renewable energy partnership-flip structures, and the IRS has generally indicated that it will apply the same safe harbor principles to solar projects.

Compliance with the safe harbor is not mandatory — the allocations can be valid under Section 704(b) without satisfying the safe harbor — but satisfaction of the safe harbor provides significant additional comfort that the IRS will not challenge the structure upon audit. The following subsections analyze each of the key safe harbor requirements and their satisfaction by the Solstice Holdings structure.

B. Minimum Unconditional Investment by Tax-Equity Investor

Revenue Procedure 2007-65 requires that the tax-equity investor's total capital contribution must constitute a minimum of 20% of the total fixed and determinable capital contributions to the partnership, excluding any contributions funded from cash flow generated by the projects or from borrowings secured by the projects. In addition, at least 75% of the tax-equity investor's total contribution must be fixed and determinable at the time of closing.

Ridgeline's total capital contribution of $120,000,000 constitutes the substantial majority of the cash contributions to Solstice Holdings. CBR Manager's cash contribution is $2,400,000. Accordingly, Ridgeline's contribution represents approximately 98% of the total cash contributions ($120,000,000 / $122,400,000), which far exceeds the 20% minimum threshold. Moreover, 100% of Ridgeline's $120,000,000 contribution is fixed and determinable: the first tranche of $96,000,000 (80% of the total) is funded at closing, and the second tranche of $24,000,000 (20% of the total) is due by February 6, 2024, subject only to the satisfaction of ministerial conditions precedent (delivery of COD certificates, independent engineer certifications, and title insurance endorsements). Because both tranches are for fixed dollar amounts and are not contingent on project performance, they satisfy the "fixed and determinable" requirement.

The 75% threshold is also easily met: $96,000,000 funded at closing represents 80% of the total $120,000,000 commitment.

C. Minimum Investment by Sponsor

Revenue Procedure 2007-65 requires that the project sponsor (here, CBR Manager) must maintain a minimum investment of at least 1% of total partnership capital at all times during the life of the partnership. This requirement ensures that the sponsor has meaningful "skin in the game" and that the tax-equity investor is not the sole source of capital for the partnership.

CBR Manager's cash contribution of $2,400,000 equals 2% of Ridgeline's $120,000,000 capital contribution, and represents approximately 1.96% of the total cash capital of $122,400,000. In addition, CBR Manager contributes the membership interests in the seven project companies, which have substantial fair market value well in excess of the 1% threshold. Furthermore, CBR Manager has an unlimited deficit restoration obligation, which provides additional assurance of CBR Manager's ongoing financial commitment to the Partnership.

The LLCA also contains provisions prohibiting CBR Manager from withdrawing or reducing its capital account below the 1% minimum at any time during the term of the Partnership, except in connection with a liquidation of the Partnership. This ongoing maintenance covenant further ensures compliance with the safe harbor requirement.

D. Reasonably Anticipated Profits

Revenue Procedure 2007-65 requires that the partnership must have "reasonably anticipated pre-tax profits" over its life. This means that, when viewed over the full term of the partnership, the cumulative pre-tax income of the partnership (exclusive of tax credits) must be expected to exceed the cumulative pre-tax deductions and losses.

The Solstice Portfolio is well-supported by long-term contracted revenue streams. The five Texas projects are under 15-year PPAs with Lone Star Grid Solutions, LLC, and the two New Mexico projects are under 20-year PPAs with Enchantment Power Cooperative. The weighted-average PPA prices ($32.50/MWh for Texas and $29.75/MWh for New Mexico) include annual escalators (1.5% and 2.0%, respectively) that provide revenue growth over time. The financial model prepared by Theo Vasquez, CFO of CBR, and reviewed by Larchmont & Associates (Susan Kaplan, Managing Director), projects that the Partnership will achieve cumulative pre-tax profitability by approximately Year 8 (2031). Beyond Year 8, the Partnership is expected to generate increasing cumulative pre-tax profits throughout the remaining term of the PPAs and beyond.

This conclusion is supported by the independent engineer report prepared by Meridian Technical Advisors, LLC (Dr. Rajan Mehta, principal engineer), which validates the P50 energy yield assumptions used in the financial model. The report concludes that the seven projects are expected to generate energy output consistent with the financial model's assumptions, with appropriate degradation factors and availability adjustments. In addition, an independent appraisal prepared by Greystone Worthington, LLC (Helen Farber, ASA, CFA) supports the eligible basis of the projects and the fair market value of the contributed project company interests.

Accordingly, the Partnership satisfies the reasonably anticipated pre-tax profits requirement of Revenue Procedure 2007-65.

E. Purchase Option at Fair Market Value

Revenue Procedure 2007-65 requires that any purchase option held by the sponsor must be exercisable only at the fair market value of the interest being acquired. A fixed-price or bargain purchase option would violate the safe harbor and could potentially recharacterize the arrangement as a financing transaction rather than a true partnership.

Article XIV, Section 14.2 of the LLCA grants CBR Manager a call option to purchase Ridgeline's residual 5% post-flip interest, exercisable within a 180-day window following the Flip Date. The purchase price is the fair market value of Ridgeline's interest at the time of exercise, subject to a floor of $1.00. The LLCA does not include any fixed-price component, cap, or other mechanism that could reduce the purchase price below fair market value. Fair market value is to be determined by mutual agreement of the parties or, if the parties are unable to agree within 30 days after CBR Manager's exercise of the option, by an independent appraiser selected in accordance with the procedures set forth in Section 14.3 of the LLCA (which provides for each party to select one appraiser, with the two appraisers selecting a third, and the determination of the third appraiser being binding).

The absence of a bargain purchase element is critical not only for safe harbor compliance but also for supporting the substantiality of the pre-flip/post-flip allocation shift. If CBR Manager could acquire Ridgeline's interest at a below-market price, the economic risk borne by Ridgeline would be reduced, potentially undermining the conclusion that the allocations have substantial economic effect.

F. Flip Date Timing

Revenue Procedure 2007-65 requires that the flip date — the date on which the tax allocation percentages shift — must not occur earlier than five years after the projects are placed in service. This requirement is designed to ensure that the tax-equity investor's investment has a meaningful duration and to coordinate with the five-year ITC recapture period under Section 50(a) of the Code.

The projected Flip Date for the Solstice Holdings structure is Q4 2028, which is approximately 5.0 years after the weighted-average COD of October 25, 2023. Individual project CODs range from September 30, 2023 (Cimarron Solar, LLC) to November 18, 2023 (Amistad Solar, LLC). Even using the earliest project COD as the reference date, the projected Flip Date of Q4 2028 is more than five years after such date (September 30, 2023 + 5 years = September 30, 2028).

Importantly, the Flip Date is not a fixed calendar date; rather, it is triggered by Ridgeline's achievement of its target after-tax IRR of 7.25%. The financial model projects that this target will not be achieved before Q4 2028, but the actual Flip Date will depend on realized project performance, actual cash distributions, and the value of tax benefits actually received by Ridgeline. In the event of project underperformance, the Flip Date could be delayed beyond Q4 2028 (see Section X.D below), but it cannot occur earlier than the point at which Ridgeline's target yield is achieved, and the LLCA includes a separate floor that prevents the Flip Date from occurring earlier than the fifth anniversary of the latest project COD (November 18, 2028).

G. Summary of Safe Harbor Compliance

The following table summarizes each key safe harbor requirement and the basis for the Partnership's compliance:

VII. MACRS Depreciation Allocation Analysis

A. Depreciable Basis Computation

The determination of the depreciable basis for the Solstice Portfolio requires careful application of the basis reduction rules applicable to property for which an investment tax credit is claimed. Under Section 50(c)(1) of the Code, the basis of any property eligible for the energy credit under Section 48 is reduced by 50% of the amount of the credit determined with respect to such property. The computation is as follows:

Total eligible basis (aggregate EPC costs): $384,600,000

Total ITCs determined under § 48: $153,840,000 ($384,600,000 × 40%)

Basis reduction under § 50(c)(1): $76,920,000 (50% × $153,840,000)

Depreciable basis: $307,680,000 ($384,600,000 − $76,920,000)

It is important to note that the basis reduction under Section 50(c) applies to the full amount of ITCs determined with respect to the property, regardless of whether such credits are allocated through the partnership or transferred under Section 6418. The total ITC determined is $

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
TO: Marcus Calloway, Chairman & CEO, Calloway-Briggs Renewables Inc. Theo Vasquez, CFO, Calloway-Briggs Renewables Inc. Priya Anand, VP, Project Finance, Calloway-Briggs Renewables Inc.
FROM: Sylvia Hartwell, Partner, Tax, Calderwood & Harkness LLP Leila Nazari, Associate, Tax, Calderwood & Harkness LLP
DATE: September 15, 2023
RE: Solstice Holdings, LLC — Analysis of Partnership Tax Allocations Under Section 704(b) and Compliance with Substantial Economic Effect Requirements
Matter No.: 1015-00005 Billing No.: 78204-001
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I. Executive Summary
This memorandum has been prepared at the request of Calloway-Briggs Renewables Inc. ("CBR") to analyze the partnership tax allocations set forth in the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (the "LLCA") for compliance with the substantial economic effect requirements of Section 704(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations promulgated thereunder, including Treasury Regulation Sections 1.704-1(b) and 1.704-2 (collectively, the "Section 704(b) Regulations"). This memorandum also evaluates the structure's compliance with the safe harbor principles established in Revenue Procedure 2007-65, 2007-2 C.B. 967, as applied to partnership-flip structures involving solar energy generating facilities.
Solstice Holdings, LLC (EIN 88-4071523) is a Delaware limited liability company classified as a partnership for federal income tax purposes, formed on August 14, 2023. The Partnership has two members: (i) CBR Solstice Manager, LLC (EIN 88-4071597), a wholly owned subsidiary of CBR, which serves as the Managing Member (hereinafter, "CBR Manager"); and (ii) Ridgeline Capital Partners, LLC (EIN 13-4827651), an institutional tax-equity investor (hereinafter, "Ridgeline" or the "Tax-Equity Member").
The LLCA establishes a partnership-flip structure with two distinct allocation periods that govern the allocation of tax items and cash distributions among the members:
Pre-Flip Period. During the Pre-Flip Period, Ridgeline receives 99% of all tax items — including investment tax credits ("ITCs"), Modified Accelerated Cost Recovery System ("MACRS") depreciation deductions, and allocable shares of taxable income and loss — and 30% of cash distributions. CBR Manager receives the remaining 1% of all tax items and 70% of cash distributions during this period.
Post-Flip Period. Following the occurrence of the Flip Date (as defined in the LLCA), Ridgeline's allocable share of all items — both tax items and cash distributions — is reduced to 5%, with CBR Manager receiving 95% of all items for the remainder of the Partnership's term.
The Flip Date is triggered when Ridgeline achieves its target after-tax yield of 7.25% internal rate of return ("IRR"), which is projected to occur in the fourth quarter of 2028 (approximately 5.0 years after the weighted-average commercial operation date ("COD") of October 25, 2023). The target yield calculation incorporates all cash distributions received by Ridgeline, the value of all tax benefits allocated to Ridgeline, and the projected residual value of Ridgeline's post-flip 5% interest.
Total capital contributions to the Partnership are as follows: Ridgeline will contribute $120,000,000, payable in two tranches — $96,000,000 at the closing on December 8, 2023, and $24,000,000 by February 6, 2024. CBR Manager will contribute $2,400,000 in cash, representing 2% of Ridgeline's total capital contribution, as well as its membership interests in the seven project companies holding the Solstice Portfolio.
Conclusion. Based on our analysis of the LLCA, the applicable provisions of the Code, Treasury Regulations, and published administrative guidance, we conclude that the allocations as structured in the LLCA should satisfy the substantial economic effect requirements of Section 704(b) and the Treasury Regulations thereunder, subject to the qualifications and limitations discussed in Sections X and XII of this memorandum. Specifically, the allocations satisfy the alternate test for economic effect under Treasury Regulation Section 1.704-1(b)(2)(ii)(d), including the qualified income offset requirement, and the substantiality requirement under Treasury Regulation Section 1.704-1(b)(2)(iii). In addition, the structure satisfies the safe harbor principles of Revenue Procedure 2007-65, providing additional comfort that the IRS should not challenge either the partnership characterization of Solstice Holdings or the validity of the tax allocations contained in the LLCA.
II. Background and Transaction Overview
A. The Solstice Portfolio
The Solstice Portfolio comprises seven utility-scale solar photovoltaic ("PV") projects with an aggregate nameplate capacity of 420 megawatts direct current ("MW(dc)"), located across West Texas and New Mexico. Each of the seven projects is held by a separate Delaware limited liability company, each of which is a disregarded entity for federal income tax purposes and is wholly owned by Solstice Holdings, LLC. The following table sets forth the key characteristics of each project:
The aggregate engineering, procurement, and construction ("EPC") cost for all seven projects is $384,600,000. The EPC contractor for all seven projects is Vasquez Brothers Construction, Inc., which was engaged pursuant to seven separate fixed-price EPC contracts. CBR has represented that Vasquez Brothers Construction, Inc. is an unrelated third party, and we have relied on that representation for purposes of this analysis.
All projects are expected to achieve COD during the fall of 2023, with individual CODs ranging from September 30, 2023 (Cimarron Solar, LLC) to November 18, 2023 (Amistad Solar, LLC). The weighted-average COD for the entire portfolio is approximately October 25, 2023, which is the reference date used in the LLCA for purposes of the flip calculation and ITC recapture period analysis.
The five Texas projects are each party to 15-year power purchase agreements ("PPAs") with Lone Star Grid Solutions, LLC, a creditworthy investment-grade offtaker, at a weighted-average contract price of $32.50 per megawatt-hour ("MWh") with a 1.5% annual escalator. The two New Mexico projects are each party to 20-year PPAs with Enchantment Power Cooperative at a weighted-average contract price of $29.75/MWh with a 2.0% annual escalator. These PPA structures provide a stable, long-term revenue base that supports the Partnership's reasonably anticipated pre-tax profit projections, as discussed further in Section VI.D below.
In addition to PPA revenues, the projects are expected to generate revenue from the sale of renewable energy certificates ("RECs") in applicable markets and, to a lesser extent, from capacity payments under the relevant grid operator tariffs. These ancillary revenue streams are included in the financial model but represent a relatively modest portion of total projected revenues.
B. Tax Benefits Generated
The projects in the Solstice Portfolio generate significant federal income tax benefits, which are the primary motivation for Ridgeline's investment. The following summarizes the key tax benefits:
Investment Tax Credits. The total eligible basis for purposes of the energy investment tax credit under Section 48 of the Code is $384,600,000, representing the aggregate EPC costs of the seven projects. The applicable ITC rate is 40%, computed as follows: (i) the base ITC rate of 30% under Section 48(a), as amended by the Inflation Reduction Act of 2022 (the "IRA"), which applies to projects that satisfy the prevailing wage and registered apprenticeship requirements of Section 48(a)(10); plus (ii) a 10% domestic content adder under Section 48(a)(12), which CBR has represented will be satisfied based on the sourcing of solar modules, inverters, racking, and structural steel from domestic manufacturers. Accordingly, the total ITCs generated by the Solstice Portfolio are $153,840,000 ($384,600,000 × 40%).
Of this total, $89,040,000 in ITCs will be allocated through the partnership allocation provisions of the LLCA, with 99% allocated to Ridgeline ($88,149,600) and 1% allocated to CBR Manager ($890,400) during the Pre-Flip Period.
The remaining $64,800,000 in ITCs will be transferred at the project-company level under the transferability election provided by Section 6418 of the Code, as added by the IRA. Of this amount, $60,000,000 has been sold to Pinehurst Insurance Group, Inc. at a transfer price of $0.92 per $1.00 of credit, resulting in gross transfer proceeds of $55,200,000. The remaining $4,800,000 in transferable credits will be retained and utilized directly by CBR on its own federal income tax return. The interaction between the Section 6418 transfer and the partnership-level ITC allocation is discussed further in Section VIII.B below.
MACRS Depreciation. The depreciable basis of the Solstice Portfolio for purposes of the Modified Accelerated Cost Recovery System is $307,680,000, computed as follows:
Total eligible basis: $384,600,000
Less: Basis reduction under § 50(c) (50% × $153,840,000 ITCs): ($76,920,000)
Depreciable basis: $307,680,000
Solar energy property qualifies as 5-year MACRS property under Section 168(e)(3)(B)(vi) of the Code. Because all seven projects are expected to be placed in service during calendar year 2023, they qualify for 100% first-year bonus depreciation under Section 168(k) (which has not yet begun to phase down for property placed in service before January 1, 2024). Accordingly, the full $307,680,000 of depreciable basis is expected to be deductible in the taxable year the projects are placed in service.
C. The Partnership-Flip Structure
The partnership-flip structure is the cornerstone of the Solstice Holdings transaction. Under this structure, the economic arrangement between CBR Manager and Ridgeline is designed to accomplish two principal objectives: (i) to deliver the substantial majority of the tax benefits generated by the Solstice Portfolio to Ridgeline, as the Tax-Equity Member, during the Pre-Flip Period, in exchange for Ridgeline's capital contribution of $120,000,000; and (ii) to return the substantial majority of the ongoing economic value of the projects — including operating cash flow and residual asset value — to CBR Manager following the Flip Date.
Ridgeline's Investment. Ridgeline's $120,000,000 investment is structured as capital contributions to Solstice Holdings, LLC. The investment is payable in two tranches: (i) $96,000,000 at the closing on December 8, 2023 (representing 80% of the total commitment), and (ii) $24,000,000 no later than February 6, 2024, which is within 60 days of the projected COD of the last project in the portfolio (Amistad Solar, LLC, with a COD of November 18, 2023). Both tranches are fixed and determinable amounts, subject only to satisfaction of ministerial conditions precedent such as delivery of COD certificates, independent engineer certifications, and updated title insurance endorsements.
CBR Manager's Investment. CBR Manager contributes $2,400,000 in cash, which equals 2% of Ridgeline's total capital contribution. In addition, CBR Manager contributes its membership interests in each of the seven project companies to Solstice Holdings in a transaction intended to qualify as a tax-free contribution under Section 721 of the Code. The contributed membership interests represent the entirety of the project infrastructure — including the solar PV systems, land leases, PPAs, interconnection agreements, permits, and related project documents — and have a substantial fair market value reflecting the aggregate $384,600,000 in EPC costs and the value of the contracted revenue streams.
Cash Flow Sources and Distribution Waterfall. The Partnership's revenue is derived principally from PPA payments received by the project companies, which flow up to Solstice Holdings as the sole member of each disregarded entity. Additional revenue sources include REC sales and capacity payments. During the Pre-Flip Period, available cash is distributed 30% to Ridgeline and 70% to CBR Manager. This deliberate divergence between tax allocations (99%/1%) and cash distributions (30%/70%) is a fundamental feature of the partnership-flip structure: Ridgeline derives the primary economic value of its investment from tax benefits rather than cash flow, while CBR Manager retains the majority of operating cash flow to service its obligations (including payments on the Osprey National Bank back-leverage facility) and to fund ongoing project operations.
CBR Purchase Option. Following the Flip Date, CBR Manager has the right, but not the obligation, to purchase Ridgeline's residual 5% interest in Solstice Holdings at fair market value (with a floor price of $1.00). The purchase option is exercisable within a 180-day window following the Flip Date. The FMV purchase price is to be determined by mutual agreement of the parties or, if they are unable to agree, by an independent appraiser selected in accordance with the procedures set forth in the LLCA. The purchase option does not constitute a fixed-price or bargain purchase option, and its terms are designed to comply with the requirements of Revenue Procedure 2007-65, as discussed further in Section VI.E below.
III. Legal Framework — Section 704(b) and the Substantial Economic Effect Doctrine
A. General Rule Under Section 704(b)
Section 704(a) of the Code provides the general rule that a partner's distributive share of any item of income, gain, loss, deduction, or credit shall be determined by the partnership agreement. However, Section 704(b) imposes a critical limitation on this general rule: if the partnership agreement's allocation of any such item does not have "substantial economic effect," the item must instead be allocated in accordance with the partner's "interest in the partnership" ("PIP"), as determined by taking into account all facts and circumstances.
The Treasury Regulations under Section 704(b) establish a comprehensive framework for evaluating whether a partnership allocation has substantial economic effect. This framework involves a two-part analysis: first, the allocation must have "economic effect" (i.e., the allocation must be consistent with the underlying economic arrangement of the partners); and second, the economic effect must be "substantial" (i.e., the allocation must have a meaningful impact on the dollar amounts received by the partners, independent of tax consequences).
The Regulations provide three alternative methods for establishing that an allocation has the requisite economic effect: (i) the primary test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b); (ii) the alternate test under Treasury Regulation Section 1.704-1(b)(2)(ii)(d); and (iii) the "economic effect equivalence" standard under Treasury Regulation Section 1.704-1(b)(2)(ii)(i). As discussed below, the LLCA is structured to satisfy the alternate test for economic effect, which is the standard mechanism employed in tax-equity partnership-flip transactions where the tax-equity investor does not undertake an unlimited deficit restoration obligation.
B. The Primary Economic Effect Test
Under the primary test set forth in Treasury Regulation Section 1.704-1(b)(2)(ii)(b), an allocation is deemed to have economic effect if, and only if, throughout the full term of the partnership, the partnership agreement satisfies all three of the following requirements:
(i) Capital Account Maintenance. The partnership agreement must require that capital accounts be determined and maintained for each partner in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). These rules prescribe that capital accounts be credited with cash contributions, the fair market value of property contributions, and allocations of income and gain, and debited with cash and property distributions (at fair market value) and allocations of loss and deduction.
(ii) Liquidating Distributions in Accordance with Capital Accounts. The partnership agreement must provide that, upon the liquidation of a partner's interest (or, if later, upon the liquidation of the partnership), liquidating distributions are made in accordance with the positive capital account balances of the partners, after taking into account all capital account adjustments for the taxable year in which the liquidation occurs, by the end of such taxable year (or, if later, within 90 days after the date of such liquidation).
(iii) Unconditional Deficit Restoration Obligation. The partnership agreement must provide that if a partner has a deficit balance in its capital account following the liquidation of its interest, such partner is unconditionally obligated to restore the amount of such deficit balance to the partnership by the end of the taxable year of liquidation (or, if later, within 90 days after the date of such liquidation), which amount shall be paid to creditors of the partnership or distributed to other partners in accordance with their positive capital account balances.
In the context of tax-equity partnership-flip structures, the primary test is generally not available for allocations to the tax-equity investor because institutional tax-equity investors rarely agree to undertake unlimited deficit restoration obligations. As discussed in Section IV.C below, Ridgeline has a limited (or zero) deficit restoration obligation, which means the primary test cannot be relied upon with respect to allocations to Ridgeline. The LLCA therefore relies on the alternate test for economic effect.
C. The Alternate Test for Economic Effect
The alternate test for economic effect, set forth in Treasury Regulation Section 1.704-1(b)(2)(ii)(d), provides an alternative pathway for establishing economic effect where a partner does not have an unlimited deficit restoration obligation. Under the alternate test, an allocation has economic effect if the partnership agreement satisfies the following requirements:
(i) The first two requirements of the primary test — capital account maintenance in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv), and liquidating distributions in accordance with positive capital account balances — must be satisfied.
(ii) In lieu of the unlimited deficit restoration obligation, the partnership agreement must contain a "qualified income offset" ("QIO") provision. The QIO requires that if a partner unexpectedly receives any adjustment, allocation, or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that causes or increases a deficit in the partner's capital account (in excess of any limited dollar amount of the deficit that the partner is obligated to restore), the partnership agreement must provide for a special allocation to such partner of items of income and gain in an amount and manner sufficient to eliminate the deficit balance as quickly as possible.
(iii) The partnership agreement must not allocate losses or deductions to a partner to the extent that such allocation would cause or increase a deficit balance in the partner's adjusted capital account (taking into account any limited deficit restoration obligation) in excess of the partner's share of partnership minimum gain. This is commonly referred to as the "loss limitation" or "limitation on allocation of losses" provision.
The alternate test is the standard mechanism for establishing economic effect in partnership-flip structures. The tax-equity investor (here, Ridgeline) is protected by the QIO provision, which ensures that if unexpected events cause the partner's capital account to go into deficit beyond the agreed-upon amount, the partnership must allocate sufficient income and gain to restore the capital account to zero (or to the amount of the limited deficit restoration obligation). At the same time, the loss limitation provision prevents allocations from causing an impermissible deficit in the first instance, except to the extent of minimum gain.
D. Substantiality
Even if an allocation satisfies the economic effect requirement, it must also satisfy the separate requirement of "substantiality" under Treasury Regulation Section 1.704-1(b)(2)(iii). The substantiality requirement is designed to ensure that the partnership's allocation scheme has a meaningful economic impact on the partners' non-tax positions — that is, the allocation must have a reasonable possibility of affecting substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences.
The Regulations identify two specific types of allocations that fail the substantiality test:
Shifting Allocations. Under Treasury Regulation Section 1.704-1(b)(2)(iii)(b), an allocation is a "shifting allocation" if, at the time the allocation becomes part of the partnership agreement, (i) there is a strong likelihood that the net increases and net decreases that will be recorded in the partners' respective capital accounts will not differ substantially from the net increases and net decreases that would be recorded in the absence of the allocation, and (ii) the total tax liability of the partners for the taxable year is reduced. A shifting allocation is one in which the tax benefits of the allocation are shared among the partners in a year, with no meaningful change in their relative economic positions.
Transitory Allocations. Under Treasury Regulation Section 1.704-1(b)(2)(iii)(c), a two-part allocation — an original allocation in one year followed by an offsetting allocation in a subsequent year — is "transitory" if (i) there is a strong likelihood at the time the allocations become part of the partnership agreement that the original allocation will be largely offset by the subsequent allocation, and (ii) the net tax impact of the original and subsequent allocations enhances the after-tax economic consequences of at least one partner without substantially diminishing the after-tax economic consequences of any other partner.
The transitory allocation test is of particular relevance to partnership-flip structures because the flip from 99%/1% allocations to 5%/95% allocations might superficially appear to involve an original allocation that is "offset" by a subsequent allocation. However, as discussed in detail in Section V.C below, the partnership-flip structure should pass the substantiality test for several important reasons.
First, the pre-flip and post-flip allocations are not offsetting in a meaningful economic sense. The pre-flip allocation of 99% of tax items to Ridgeline delivers genuine economic value to Ridgeline in the form of tax benefits (ITCs and depreciation deductions) that are monetized on Ridgeline's own tax return. The post-flip allocation of 95% of all items to CBR Manager delivers genuine economic value to CBR Manager in the form of long-term operating cash flow and residual ownership. The total economic impact on each partner is not the same as it would be absent the allocation.
Second, the after-tax economic consequences to each partner differ substantially from what would result under a PIP allocation. If all items were allocated in accordance with the partners' interests in the partnership (e.g., based on capital contributions or some other objective measure), the tax benefits would not flow disproportionately to Ridgeline, and the cash flow would not flow disproportionately to CBR Manager. The flip structure reflects a genuine economic bargain in which each partner receives different types of value.
Third, there is a meaningful (non-de minimis) risk that the allocations will not perfectly offset. If project performance is below expectations, Ridgeline's capital account may not fully recover, and the flip may be delayed or the economics of the transaction may differ materially from projections. This uncertainty further supports the conclusion that the allocations are not transitory.
IV. Analysis of LLCA Allocation Provisions
A. Capital Account Maintenance (Article V of LLCA)
Article V, Section 5.1 of the LLCA expressly requires that the Partnership maintain a separate capital account for each member in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). The LLCA provides that each member's capital account shall be:
(a) Credited with (i) the amount of cash contributed by such member to the Partnership, (ii) the fair market value (net of liabilities assumed or to which such property is subject) of property contributed by such member, and (iii) allocations to such member of items of Partnership income and gain (including income and gain exempt from tax and income and gain described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding income and gain described in Treasury Regulation Section 1.704-1(b)(4)(i));
(b) Debited with (i) the amount of cash distributed to such member by the Partnership, (ii) the fair market value (net of liabilities assumed or to which such property is subject) of property distributed to such member, and (iii) allocations to such member of items of Partnership loss and deduction (including expenditures described in Section 705(a)(2)(B) of the Code and loss and deduction described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding items described in Treasury Regulation Section 1.704-1(b)(4)(i) or Section 1.704-1(b)(4)(iii)).
The initial capital accounts of the members upon closing are as follows:
Ridgeline: $120,000,000, consisting of $96,000,000 funded at closing on December 8, 2023, and $24,000,000 to be funded no later than February 6, 2024. The LLCA treats the full $120,000,000 as Ridgeline's committed capital, with the second tranche constituting a binding, unconditional obligation. For purposes of capital account maintenance, the first tranche will be credited upon receipt and the second tranche will be credited upon its contribution.
CBR Manager: $2,400,000 in cash, plus the fair market value of the contributed membership interests in the seven project companies. The fair market value of the contributed project company interests is significant, reflecting the aggregate EPC costs of $384,600,000 and the economic value of the contracted revenue streams, land leases, interconnection agreements, and related project assets. The determination of fair market value for capital account purposes will be supported by an independent appraisal prepared by Greystone Worthington, LLC (Helen Farber, ASA, CFA), which has been engaged to provide a valuation as of the contribution date.
The LLCA also includes revaluation provisions that permit the Partnership to adjust the book value of Partnership property (and correspondingly adjust the members' capital accounts) upon the occurrence of specified events, including (i) the admission of a new member, (ii) the liquidation of a member's interest, (iii) a distribution of property in kind to a member in connection with a partial or full liquidation, and (iv) the grant of an interest in the Partnership as consideration for the provision of services. These revaluation provisions comply with Treasury Regulation Section 1.704-1(b)(2)(iv)(f) and ensure that the capital accounts accurately reflect the economic positions of the members at the time of any triggering event.
With respect to the Section 704(c) allocations arising from CBR Manager's contribution of the project company interests, the LLCA provides that the Partnership shall use the "traditional method" with curative allocations under Treasury Regulation Section 1.704-3(c). This method addresses any disparities between the book value and the tax basis of the contributed property by first making allocations of tax items that correspond to the book allocations (traditional method) and, to the extent the traditional method cannot fully account for the book-tax disparity, by making curative allocations of other Partnership tax items (of the same character) to achieve the same result as if the contributed property had been sold at its book value. This approach ensures that the economic benefit and burden of any built-in gain or loss in the contributed property is appropriately borne by the contributing partner (CBR Manager) rather than being shifted to Ridgeline.
Conclusion: The capital account maintenance provisions of the LLCA satisfy the first prong of the economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(1).
B. Liquidating Distributions in Accordance with Capital Accounts
Article XII, Section 12.3 of the LLCA provides that upon dissolution and winding up of the Partnership, after payment of all debts and liabilities owed to creditors (including any member in its capacity as a creditor), establishment of reasonable reserves for contingent or unforeseen liabilities, and payment of any liquidation expenses, the remaining assets of the Partnership shall be distributed to the members in accordance with their respective positive capital account balances, as determined after taking into account all capital account adjustments for the Partnership's taxable year during which the liquidation occurs. Such distributions are required to be made by the later of (i) the end of the taxable year of liquidation, or (ii) 90 days after the date of liquidation.
This provision is unqualified by, and operates independently of, the flip mechanics. That is, upon liquidation, the distribution waterfall follows capital account balances regardless of whether the Partnership is in the Pre-Flip Period or the Post-Flip Period at the time of liquidation. This distinction is critical: the Pre-Flip and Post-Flip allocation ratios govern the ongoing allocation of tax items and operating distributions during the life of the Partnership, but the terminal distribution of assets is governed solely by the capital account balances of the members. This design ensures that the allocations have genuine economic effect because each dollar of income, gain, loss, or deduction allocated to a member ultimately affects the amount that member receives upon liquidation.
Conclusion: The liquidating distribution provisions of the LLCA satisfy the second prong of the economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).
C. Deficit Restoration Obligations
The LLCA addresses deficit restoration obligations differently for each member, which is a standard feature of partnership-flip structures:
Ridgeline (Tax-Equity Member): Article V, Section 5.5(b) of the LLCA provides that Ridgeline shall not be obligated to restore any deficit balance in its capital account upon the liquidation of its interest or the liquidation of the Partnership. Ridgeline's deficit restoration obligation is expressly set at zero. This is consistent with standard institutional tax-equity investor requirements: Ridgeline's economic exposure is limited to its invested capital of $120,000,000, and it will not be required to contribute additional amounts to satisfy a capital account deficit.
CBR Manager (Managing Member): Article V, Section 5.5(a) of the LLCA provides that CBR Manager shall be unconditionally obligated to restore the full amount of any deficit balance in its capital account upon the liquidation of its interest or the liquidation of the Partnership, to be contributed to the Partnership no later than the later of (i) the end of the taxable year of liquidation, or (ii) 90 days after the date of liquidation. This unlimited deficit restoration obligation ensures that CBR Manager bears the ultimate economic risk associated with the Partnership's operations and provides additional assurance that the economic effect of allocations to CBR Manager is genuine.
Because Ridgeline does not undertake an unlimited deficit restoration obligation, the Partnership cannot rely solely on the primary economic effect test under Treasury Regulation Section 1.704-1(b)(2)(ii)(b) for allocations to Ridgeline. The absence of a DRO for Ridgeline means that the third prong of the primary test is not satisfied with respect to Ridgeline's allocations. Accordingly, as discussed below, the LLCA relies on the alternate test for economic effect with respect to all allocations to Ridgeline.
We note that the unlimited DRO undertaken by CBR Manager as Managing Member is supported by the financial position of CBR Manager and its parent, Calloway-Briggs Renewables Inc. The DRO is an essential structural element that supports the economic effect of allocations to CBR Manager under the primary test and provides Ridgeline with additional comfort that the Partnership's obligations will be met upon liquidation.
D. Qualified Income Offset (QIO)
Because the alternate test for economic effect requires a qualified income offset in lieu of an unlimited deficit restoration obligation, Article V, Section 5.6 of the LLCA includes a QIO provision that tracks the requirements of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3).
Specifically, the LLCA provides that if Ridgeline unexpectedly receives any adjustment, allocation, or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6) — including (a) adjustments under Sections 734(b) or 743(b) that are reasonably expected to be made, (b) allocations of loss or deduction under Section 704(e)(2) or Treasury Regulation Section 1.751-1(b)(2)(ii), or (c) distributions that are reasonably expected to be made and that are not offset by reasonably expected increases in capital accounts — that create or increase a deficit in Ridgeline's adjusted capital account (as defined in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)), the Partnership shall allocate items of income and gain to Ridgeline in an amount and manner sufficient to eliminate the deficit balance as quickly as possible.
The QIO provision serves as a safety valve that prevents Ridgeline's capital account from remaining in an impermissible deficit position. In the event that unanticipated events cause Ridgeline to receive allocations or distributions that push its capital account below zero (in excess of its DRO amount, which is zero), the QIO ensures that subsequent income and gain are allocated to Ridgeline to restore its capital account to at least zero before any further allocations of income and gain are made to the members in accordance with the standard Pre-Flip or Post-Flip ratios.
In addition, the LLCA includes a loss limitation provision in Article V, Section 5.7, which provides that Ridgeline may not be allocated losses or deductions to the extent such allocation would cause its adjusted capital account balance (determined after taking into account its share of partnership minimum gain and partner nonrecourse debt minimum gain, and after giving effect to the items described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6)) to be less than zero. Any losses or deductions that would otherwise be allocated to Ridgeline but for this limitation are reallocated to CBR Manager. To the extent subsequent income or gain is allocated to CBR Manager as a result of this reallocation, the LLCA provides that subsequent allocations of income and gain shall be made first to CBR Manager in an amount equal to such prior reallocations before reverting to the standard allocation ratios.
Conclusion: The QIO provision and loss limitation provision in the LLCA satisfy the requirements of the alternate test for economic effect under Treasury Regulation Section 1.704-1(b)(2)(ii)(d).
E. Minimum Gain Chargeback
Article V, Section 5.8 of the LLCA includes a minimum gain chargeback provision that tracks the mandatory requirements of Treasury Regulation Section 1.704-2(f). This provision provides that, notwithstanding any other provision of the LLCA to the contrary, if there is a net decrease in partnership minimum gain during any taxable year, each member who would otherwise be allocated a share of such net decrease must be allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such member's share of the net decrease in partnership minimum gain, determined in accordance with Treasury Regulation Section 1.704-2(g). Allocations pursuant to this provision are made before any other allocations under the LLCA for the applicable taxable year.
Partnership minimum gain is relevant to the Solstice Holdings structure because the Partnership is expected to have outstanding nonrecourse liabilities during its term. Specifically, as of the closing date, the projects are expected to have nonrecourse liabilities including draws on the Osprey National Bank construction facility (to the extent any amounts remain outstanding following the closing and Ridgeline's capital contribution) and a back-leverage term loan in the principal amount of $68,000,000. To the extent that these nonrecourse liabilities generate partnership minimum gain (as determined under Treasury Regulation Section 1.704-2(d)), the minimum gain chargeback provision ensures that the members are allocated income and gain upon any net decrease in such minimum gain, thereby preventing the members from receiving a permanent, unrecaptured benefit from nonrecourse financing.
In addition, Article V, Section 5.9 of the LLCA includes a partner nonrecourse debt minimum gain chargeback provision consistent with Treasury Regulation Section 1.704-2(i)(4). This provision is applicable to the extent that any liability of the Partnership constitutes "partner nonrecourse debt" within the meaning of Treasury Regulation Section 1.704-2(b)(4) — that is, a nonrecourse liability for which a member (or a related person) bears the economic risk of loss. The Osprey National Bank back-leverage term loan of $68,000,000, which is secured by CBR Manager's interest in Solstice Holdings, may constitute partner nonrecourse debt to the extent that CBR Manager bears the economic risk of loss with respect to such indebtedness. Any deductions attributable to increases in partner nonrecourse debt minimum gain are treated as partner nonrecourse deductions allocable to CBR Manager, and any net decrease in partner nonrecourse debt minimum gain triggers a corresponding chargeback allocation to CBR Manager.
F. Nonrecourse Deductions and Partner Nonrecourse Deductions
Article V, Section 5.10 of the LLCA addresses the allocation of nonrecourse deductions and partner nonrecourse deductions:
Nonrecourse Deductions. Nonrecourse deductions, as determined under Treasury Regulation Section 1.704-2(b)(1), are allocated among the members in accordance with their respective percentage interests during the applicable allocation period — 99% to Ridgeline and 1% to CBR Manager during the Pre-Flip Period, and 5% to Ridgeline and 95% to CBR Manager during the Post-Flip Period. This allocation method is permissible under Treasury Regulation Section 1.704-2(e), which provides that nonrecourse deductions may be allocated in any manner that is reasonably consistent with allocations (that have substantial economic effect) of some other significant partnership item attributable to the property securing the nonrecourse liabilities. The allocation of nonrecourse deductions in the same ratios as the overall tax allocation percentages is consistent with the allocation of depreciation deductions (the most significant item attributable to the solar energy property), and therefore satisfies this requirement.
Partner Nonrecourse Deductions. Partner nonrecourse deductions, as determined under Treasury Regulation Section 1.704-2(i)(2), are allocated entirely to CBR Manager. This is consistent with Treasury Regulation Section 1.704-2(i)(1), which requires that partner nonrecourse deductions be allocated to the partner that bears the economic risk of loss for the corresponding partner nonrecourse debt. As noted above, the Osprey National Bank back-leverage facility is secured by CBR Manager's interest in Solstice Holdings, and CBR Manager bears the economic risk of loss with respect to such indebtedness under the constructive liquidation analysis of Treasury Regulation Section 1.752-2(b). Accordingly, any deductions attributable to this partner nonrecourse debt are properly allocated to CBR Manager.
V. Analysis of the Pre-Flip / Post-Flip Allocation Shift
A. Pre-Flip Allocations (Projected Years 1–5)
During the Pre-Flip Period, which is projected to span from the closing on December 8, 2023 through the Flip Date in Q4 2028 (approximately five years), the LLCA allocates tax items and cash distributions as follows:
Tax Items: 99% to Ridgeline / 1% to CBR Manager Cash Distributions: 30% to Ridgeline / 70% to CBR Manager
The significant divergence between the tax allocation ratio and the cash distribution ratio is a deliberate and fundamental feature of the partnership-flip structure. This divergence permits Ridgeline to obtain the substantial majority of the tax benefits generated by the Solstice Portfolio — which are the primary source of economic value for Ridgeline's investment — while simultaneously allowing CBR Manager to retain the majority of the operating cash flow generated by the projects. CBR Manager uses this cash flow to service its obligations, including payments on the Osprey National Bank back-leverage facility, ongoing project operating and maintenance expenses (to the extent not covered by project-level reserves), and administrative expenses.
The key tax items allocated during the Pre-Flip Period are as follows:
Investment Tax Credits. Total ITCs allocated to the Partnership: $89,040,000. Ridgeline receives 99% of these ITCs, or $88,149,600. CBR Manager receives the remaining 1%, or $890,400. These ITCs are allocated in the first taxable year in which the underlying energy property is placed in service (i.e., 2023 for most projects and 2024 for any projects not placed in service until 2024, although all projects are currently projected to achieve COD in Q4 2023).
MACRS Depreciation. Total depreciable basis: $307,680,000. Under 100% first-year bonus depreciation, the entire depreciable basis is deductible in the year the property is placed in service. Ridgeline receives 99% of this depreciation, or $304,603,200. CBR Manager receives 1%, or $3,076,800. This depreciation allocation will have a dramatic impact on the members' capital accounts in Year 1, as discussed in Section IX below.
Taxable Income and Losses. The financial model projects that the Partnership will generate net taxable losses in the early years of operations due to operating expenses exceeding revenue (net of the substantial depreciation deductions). These losses are allocated 99% to Ridgeline and 1% to CBR Manager. In later years of the Pre-Flip Period, as revenue grows with PPA escalators and depreciation deductions decline, the Partnership is expected to generate taxable income, which will also be allocated in the 99%/1% ratio.
B. Post-Flip Allocations
Following the Flip Date, all items — both tax items and cash distributions — are allocated 5% to Ridgeline and 95% to CBR Manager. This represents a substantial shift from the Pre-Flip allocation ratios and is designed to return the economic benefits of the Partnership to CBR Manager for the remaining life of the projects. The post-flip allocation ratios apply to all items of income, gain, loss, deduction, and credit, as well as all distributions of available cash and proceeds from capital events (such as project sales or refinancings).
The Flip Date is triggered when Ridgeline achieves its target after-tax IRR of 7.25%, calculated based on Ridgeline's total cash-on-cash returns and tax benefits. The financial model projects that this target will be achieved in Q4 2028, approximately five years after the weighted-average COD.
Following the Flip Date, Ridgeline retains a 5% residual interest in the Partnership, which represents a de minimis ongoing economic stake. This residual interest is subject to CBR Manager's purchase option at fair market value (with a floor of $1.00), as described in Section II.C above.
C. Substantiality of the Allocation Shift
The critical question under the substantiality analysis is whether the shift from 99%/1% (Pre-Flip) to 5%/95% (Post-Flip) constitutes a "transitory allocation" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(iii)(c). We conclude that it does not, for the following reasons:
The Pre-Flip and Post-Flip Allocations Are Not Offsetting. Under the transitory allocation test, the threshold inquiry is whether the original allocation (here, the Pre-Flip 99%/1% allocation) will be "largely offset" by the subsequent allocation (here, the Post-Flip 5%/95% allocation) such that the net capital account changes to each partner are substantially the same as they would have been under a PIP allocation. In the partnership-flip structure, the allocations are not offsetting in the required sense. The pre-flip allocation delivers disproportionate tax benefits to Ridgeline (including ITCs and depreciation deductions worth hundreds of millions of dollars), while the post-flip allocation delivers disproportionate cash flow and residual economics to CBR Manager. These are fundamentally different types of value, and the allocation of each type of value to different partners does not constitute an offset.
The Economic Consequences Differ Substantially From PIP. The after-tax economic consequences to each partner differ substantially from what would result under a PIP allocation. Under a PIP allocation — which might, for example, allocate all items in proportion to the partners' capital contributions (approximately 98%/2%) — Ridgeline would receive a proportionate share of both tax items and cash distributions, and CBR Manager would receive a proportionate share of both. The flip structure, by contrast, creates a genuine economic divergence: Ridgeline receives value primarily through tax benefits and limited cash distributions during the Pre-Flip Period, while CBR Manager receives value primarily through operating cash flow during the Pre-Flip Period and through the substantial majority of all items during the Post-Flip Period. The relative economic positions of the partners at any given time — and cumulatively over the life of the Partnership — differ meaningfully from what would result under a PIP allocation.
The Net Tax Impact Does Not Enhance Both Partners. The transitory allocation test requires that the net tax impact of the original and offsetting allocations enhance the after-tax economic consequences of at least one partner without substantially diminishing the after-tax economic consequences of any other partner. In the partnership-flip structure, the allocation of 99% of tax items to Ridgeline clearly benefits Ridgeline from a tax perspective, but the corresponding allocation of only 30% of cash distributions to Ridgeline during the Pre-Flip Period means that Ridgeline sacrifices current cash flow in exchange for tax benefits. CBR Manager, by contrast, receives 70% of cash distributions during the Pre-Flip Period but only 1% of tax benefits. The economic trade-offs are genuine: each partner bears economic risk and receives a different mix of value.
Meaningful Economic Risk. At the time the allocations are made, there is a meaningful, non-de minimis economic risk that the flip projections may not materialize as anticipated. Project underperformance (due to weather variability, equipment degradation, curtailment, or other factors), changes in PPA pricing or counterparty credit quality, and changes in interest rates or discount rates could all affect the timing of the flip and the ultimate economic returns to each partner. Ridgeline's capital account may not fully recover to a positive balance, depending on actual project performance and the timing of income allocations. This economic uncertainty further supports the conclusion that the allocations are not transitory.
The Allocations Are Not "Shifting" Allocations. The allocations in the LLCA also survive scrutiny under the shifting allocations test of Treasury Regulation Section 1.704-1(b)(2)(iii)(b). While the allocations do shift tax items disproportionately to Ridgeline during the Pre-Flip Period, this is not "shifting" within the meaning of the Regulation because the economic consequences to each partner differ substantially from what they would be absent the allocation. The shifting allocations test requires that the net capital account changes to each partner be substantially the same as they would have been absent the allocation, and that the total tax liability of the partners for the year be reduced. Here, the capital account changes differ substantially from what they would be under a PIP allocation — Ridgeline's capital account declines dramatically in Year 1 due to the 99% depreciation allocation, while CBR Manager's capital account remains relatively stable — and the overall economic arrangement of the partners is fundamentally different from what it would be absent the special allocation.
Conclusion: The pre-flip/post-flip allocation shift in the LLCA satisfies the substantiality requirement of Treasury Regulation Section 1.704-1(b)(2)(iii). The allocations are neither transitory nor impermissible shifting allocations.
VI. Rev. Proc. 2007-65 Safe Harbor Compliance
A. Overview of Safe Harbor
Revenue Procedure 2007-65, 2007-2 C.B. 967, provides a safe harbor under which the Internal Revenue Service will not challenge: (i) the status of a wind energy project as a partnership for federal income tax purposes; (ii) the allocation of partnership items; or (iii) the treatment of the members as partners (rather than as, e.g., lender-borrower or lessor-lessee), provided that the partnership satisfies all of the requirements set forth in the Revenue Procedure. Although Revenue Procedure 2007-65 was originally promulgated in the context of wind energy projects, it has been widely applied by analogy to solar energy projects and other renewable energy partnership-flip structures, and the IRS has generally indicated that it will apply the same safe harbor principles to solar projects.
Compliance with the safe harbor is not mandatory — the allocations can be valid under Section 704(b) without satisfying the safe harbor — but satisfaction of the safe harbor provides significant additional comfort that the IRS will not challenge the structure upon audit. The following subsections analyze each of the key safe harbor requirements and their satisfaction by the Solstice Holdings structure.
B. Minimum Unconditional Investment by Tax-Equity Investor
Revenue Procedure 2007-65 requires that the tax-equity investor's total capital contribution must constitute a minimum of 20% of the total fixed and determinable capital contributions to the partnership, excluding any contributions funded from cash flow generated by the projects or from borrowings secured by the projects. In addition, at least 75% of the tax-equity investor's total contribution must be fixed and determinable at the time of closing.
Ridgeline's total capital contribution of $120,000,000 constitutes the substantial majority of the cash contributions to Solstice Holdings. CBR Manager's cash contribution is $2,400,000. Accordingly, Ridgeline's contribution represents approximately 98% of the total cash contributions ($120,000,000 / $122,400,000), which far exceeds the 20% minimum threshold. Moreover, 100% of Ridgeline's $120,000,000 contribution is fixed and determinable: the first tranche of $96,000,000 (80% of the total) is funded at closing, and the second tranche of $24,000,000 (20% of the total) is due by February 6, 2024, subject only to the satisfaction of ministerial conditions precedent (delivery of COD certificates, independent engineer certifications, and title insurance endorsements). Because both tranches are for fixed dollar amounts and are not contingent on project performance, they satisfy the "fixed and determinable" requirement.
The 75% threshold is also easily met: $96,000,000 funded at closing represents 80% of the total $120,000,000 commitment.
C. Minimum Investment by Sponsor
Revenue Procedure 2007-65 requires that the project sponsor (here, CBR Manager) must maintain a minimum investment of at least 1% of total partnership capital at all times during the life of the partnership. This requirement ensures that the sponsor has meaningful "skin in the game" and that the tax-equity investor is not the sole source of capital for the partnership.
CBR Manager's cash contribution of $2,400,000 equals 2% of Ridgeline's $120,000,000 capital contribution, and represents approximately 1.96% of the total cash capital of $122,400,000. In addition, CBR Manager contributes the membership interests in the seven project companies, which have substantial fair market value well in excess of the 1% threshold. Furthermore, CBR Manager has an unlimited deficit restoration obligation, which provides additional assurance of CBR Manager's ongoing financial commitment to the Partnership.
The LLCA also contains provisions prohibiting CBR Manager from withdrawing or reducing its capital account below the 1% minimum at any time during the term of the Partnership, except in connection with a liquidation of the Partnership. This ongoing maintenance covenant further ensures compliance with the safe harbor requirement.
D. Reasonably Anticipated Profits
Revenue Procedure 2007-65 requires that the partnership must have "reasonably anticipated pre-tax profits" over its life. This means that, when viewed over the full term of the partnership, the cumulative pre-tax income of the partnership (exclusive of tax credits) must be expected to exceed the cumulative pre-tax deductions and losses.
The Solstice Portfolio is well-supported by long-term contracted revenue streams. The five Texas projects are under 15-year PPAs with Lone Star Grid Solutions, LLC, and the two New Mexico projects are under 20-year PPAs with Enchantment Power Cooperative. The weighted-average PPA prices ($32.50/MWh for Texas and $29.75/MWh for New Mexico) include annual escalators (1.5% and 2.0%, respectively) that provide revenue growth over time. The financial model prepared by Theo Vasquez, CFO of CBR, and reviewed by Larchmont & Associates (Susan Kaplan, Managing Director), projects that the Partnership will achieve cumulative pre-tax profitability by approximately Year 8 (2031). Beyond Year 8, the Partnership is expected to generate increasing cumulative pre-tax profits throughout the remaining term of the PPAs and beyond.
This conclusion is supported by the independent engineer report prepared by Meridian Technical Advisors, LLC (Dr. Rajan Mehta, principal engineer), which validates the P50 energy yield assumptions used in the financial model. The report concludes that the seven projects are expected to generate energy output consistent with the financial model's assumptions, with appropriate degradation factors and availability adjustments. In addition, an independent appraisal prepared by Greystone Worthington, LLC (Helen Farber, ASA, CFA) supports the eligible basis of the projects and the fair market value of the contributed project company interests.
Accordingly, the Partnership satisfies the reasonably anticipated pre-tax profits requirement of Revenue Procedure 2007-65.
E. Purchase Option at Fair Market Value
Revenue Procedure 2007-65 requires that any purchase option held by the sponsor must be exercisable only at the fair market value of the interest being acquired. A fixed-price or bargain purchase option would violate the safe harbor and could potentially recharacterize the arrangement as a financing transaction rather than a true partnership.
Article XIV, Section 14.2 of the LLCA grants CBR Manager a call option to purchase Ridgeline's residual 5% post-flip interest, exercisable within a 180-day window following the Flip Date. The purchase price is the fair market value of Ridgeline's interest at the time of exercise, subject to a floor of $1.00. The LLCA does not include any fixed-price component, cap, or other mechanism that could reduce the purchase price below fair market value. Fair market value is to be determined by mutual agreement of the parties or, if the parties are unable to agree within 30 days after CBR Manager's exercise of the option, by an independent appraiser selected in accordance with the procedures set forth in Section 14.3 of the LLCA (which provides for each party to select one appraiser, with the two appraisers selecting a third, and the determination of the third appraiser being binding).
The absence of a bargain purchase element is critical not only for safe harbor compliance but also for supporting the substantiality of the pre-flip/post-flip allocation shift. If CBR Manager could acquire Ridgeline's interest at a below-market price, the economic risk borne by Ridgeline would be reduced, potentially undermining the conclusion that the allocations have substantial economic effect.
F. Flip Date Timing
Revenue Procedure 2007-65 requires that the flip date — the date on which the tax allocation percentages shift — must not occur earlier than five years after the projects are placed in service. This requirement is designed to ensure that the tax-equity investor's investment has a meaningful duration and to coordinate with the five-year ITC recapture period under Section 50(a) of the Code.
The projected Flip Date for the Solstice Holdings structure is Q4 2028, which is approximately 5.0 years after the weighted-average COD of October 25, 2023. Individual project CODs range from September 30, 2023 (Cimarron Solar, LLC) to November 18, 2023 (Amistad Solar, LLC). Even using the earliest project COD as the reference date, the projected Flip Date of Q4 2028 is more than five years after such date (September 30, 2023 + 5 years = September 30, 2028).
Importantly, the Flip Date is not a fixed calendar date; rather, it is triggered by Ridgeline's achievement of its target after-tax IRR of 7.25%. The financial model projects that this target will not be achieved before Q4 2028, but the actual Flip Date will depend on realized project performance, actual cash distributions, and the value of tax benefits actually received by Ridgeline. In the event of project underperformance, the Flip Date could be delayed beyond Q4 2028 (see Section X.D below), but it cannot occur earlier than the point at which Ridgeline's target yield is achieved, and the LLCA includes a separate floor that prevents the Flip Date from occurring earlier than the fifth anniversary of the latest project COD (November 18, 2028).
G. Summary of Safe Harbor Compliance
The following table summarizes each key safe harbor requirement and the basis for the Partnership's compliance:
VII. MACRS Depreciation Allocation Analysis
A. Depreciable Basis Computation
The determination of the depreciable basis for the Solstice Portfolio requires careful application of the basis reduction rules applicable to property for which an investment tax credit is claimed. Under Section 50(c)(1) of the Code, the basis of any property eligible for the energy credit under Section 48 is reduced by 50% of the amount of the credit determined with respect to such property. The computation is as follows:
Total eligible basis (aggregate EPC costs): $384,600,000
Total ITCs determined under § 48: $153,840,000 ($384,600,000 × 40%)
Basis reduction under § 50(c)(1): $76,920,000 (50% × $153,840,000)
Depreciable basis: $307,680,000 ($384,600,000 − $76,920,000)
It is important to note that the basis reduction under Section 50(c) applies to the full amount of ITCs determined with respect to the property, regardless of whether such credits are allocated through the partnership or transferred under Section 6418. The total ITC determined is $

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