MEMORANDUM

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the named recipients and may not be disclosed, distributed, or reproduced without the prior written consent of Calderwood & Harkness LLP.
Date: August 8, 2025
To: Sylvia Hartwell, Responsible Partner, Tax — Calderwood & Harkness LLP Leonard Cross, Billing Partner, Tax — Calderwood & Harkness LLP
From: Garrett Simmons, Lead Associate, Tax — Calderwood & Harkness LLP
Re: blocker Entity Architecture for Tax-Exempt and Non-U.S. Investors — Pinnacle Continuation Vehicle LP
Engagement Reference No.: 1002-00005
Matter No.: 117443.00001
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I. Executive Summary
The purpose of this memorandum is to recommend the optimal blocker entity architecture for the proposed Pinnacle Continuation Vehicle LP ("PCV" or the "CV") to accommodate two distinct categories of investors who require structural insulation from adverse U.S. federal income tax consequences arising from direct participation in a domestic limited partnership: (a) U.S. tax-exempt limited partners requiring protection from unrelated business taxable income ("UBTI") under Section 512 of the Internal Revenue Code of 1986, as amended (the "Code"), and (b) non-U.S. limited partners requiring protection from effectively connected income ("ECI") and withholding obligations under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") as codified in Sections 897 and 1446 of the Code.
Based on our analysis of the investor base, the portfolio composition, the aggregate built-in gain across the three concentrated portfolio company positions, and the broader structural considerations attendant to the continuation vehicle transaction, we recommend the formation of two blocker entities:
1.  PCV Domestic blocker Inc. — a Delaware C-corporation to be formed for the benefit of U.S. tax-exempt investors (Meridian Public Employees' Retirement System and Ashford University Endowment); and
2.  PCV International Holdings Ltd. — a Cayman Islands exempted company, electing corporate classification under Treas. Reg. § 301.7701-3 (Form 8832), to be formed for the benefit of non-U.S. investors (Sovereign Capital Partners (Cayman) Ltd.).
The total capital to be routed through these two blocker entities is $250 million, representing approximately 23.3% of the total CV capitalization of $1.074 billion. This amount is allocated as follows: (i) PCV Domestic blocker Inc. will receive $175 million of capital, comprising $125 million from Meridian Public Employees' Retirement System and $50 million from Ashford University Endowment; and (ii) PCV International Holdings Ltd. will receive $75 million of capital from Sovereign Capital Partners (Cayman) Ltd.
Both blocker entities should be formed by September 30, 2025, ahead of the target first close on October 15, 2025 and the anticipated final close on October 31, 2025. This timeline accommodates the filing of the Form 8832 check-the-box election for PCV International Holdings Ltd., which must be filed no later than 75 days after formation to be effective as of the date of formation, and allows adequate time for capitalization and subscription into the CV prior to the first close.
This memorandum addresses the following matters in connection with the proposed blocker architecture: entity classification and check-the-box elections, corporate-level tax leakage and its quantification, capitalization and governance of each blocker entity, the interaction between the blocker structure and the Section 704(c) allocations applicable to the $1.202 billion of aggregate unrealized built-in gain in the contributed portfolio, the inapplicability of the Section 1202 qualified small business stock ("QSBS") exclusion to corporate blocker entities, the formation timeline and coordination with related workstreams, and the principal risk factors that should be communicated to the affected investors and the deal team.
This memorandum should be read in conjunction with two companion memoranda being prepared concurrently: (i) the Section 704(c) Allocation Methodology Memo, being prepared by Leila Nazari, addressing the selection of the remedial allocation method for built-in gain on the contributed portfolio company interests; and (ii) the State Tax Nexus and Withholding Analysis Memo, which addresses state-level tax obligations of the CV and its constituent entities, including the blocker entities, in the principal jurisdictions where the portfolio companies maintain operations.
II. Background and Transaction Overview
A. The Continuation Vehicle
Pinnacle Venture Fund II LP ("Fund II") is a Delaware limited partnership (EIN: 84-3291067) formed for the purpose of making venture capital investments in early-stage and growth-stage technology companies. Fund II is managed by Pinnacle Capital Management LLC (EIN: 82-6140538), a Delaware limited liability company headquartered at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025. The general partner entity of Fund II is Pinnacle Capital Partners II LLC (EIN: 84-3291104), a Delaware limited liability company.
Fund II is a 2019 vintage fund. Its final close occurred in December 2019, with total committed capital of $875 million. As of the date of this memorandum, called capital stands at approximately $831.25 million, representing a 95% draw-down ratio. Based on the audited financials prepared by Andover & Strauss LLP as of June 30, 2025, Fund II's gross net asset value ("NAV") is approximately $1.82 billion, and its net NAV (after deduction of accrued carried interest, management fees, and fund expenses) is approximately $1.56 billion. Fund II has generated strong returns since inception, driven principally by the appreciation of its three largest portfolio company positions, which collectively represent the substantial majority of fund value.
The CV — to be formed as Pinnacle Continuation Vehicle LP, a Delaware limited partnership — will hold three concentrated portfolio company stakes to be transferred from Fund II. These positions, which represent the highest-conviction, longest-duration assets in Fund II's portfolio, are as follows:
Luminos Systems Inc. Luminos Systems Inc. is a Delaware C-corporation (EIN: 47-8823156) engaged in the development and commercialization of enterprise-grade artificial intelligence and machine learning infrastructure software. As of June 30, 2025, the fair market value of Fund II's interest in Luminos is approximately $612 million, against a cost basis of $58.5 million, representing unrealized appreciation of $553.5 million. Fund II holds approximately 24.7% of Luminos on a fully diluted basis. Luminos is headquartered in San Francisco, California.
ClearArc Software Inc. ClearArc Software Inc. is a Delaware C-corporation (EIN: 83-5519274) specializing in cybersecurity and data compliance solutions for regulated financial institutions. The fair market value of Fund II's interest in ClearArc as of June 30, 2025 is approximately $468 million, against a cost basis of $37.4 million, representing unrealized appreciation of $430.6 million. Fund II holds approximately 31.2% of ClearArc on a fully diluted basis. ClearArc is headquartered in Austin, Texas.
Vectral Cloud Inc. Vectral Cloud Inc. is a Delaware C-corporation (EIN: 85-1102847) engaged in the provision of hybrid cloud infrastructure and edge computing services. The fair market value of Fund II's interest in Vectral as of June 30, 2025 is approximately $260 million, against a cost basis of $42.1 million, representing unrealized appreciation of $217.9 million. Fund II holds approximately 18.9% of Vectral on a fully diluted basis. Vectral is headquartered in Denver, Colorado.
In the aggregate, the three portfolio company positions have a combined fair market value of $1.34 billion and a combined cost basis of $138 million, resulting in total unrealized built-in gain of $1.202 billion. The implied gross multiple on invested capital ("MOIC") for the three positions is approximately 9.71×.
The transfer of the three portfolio company interests from Fund II to the CV will be structured as a contribution under Section 721 of the Code, which provides for non-recognition of gain or loss on contributions of property to a partnership in exchange for a partnership interest. The Section 721 contribution will give rise to the Section 704(c) built-in gain allocations discussed in detail in Section VIII of this memorandum and in the companion Section 704(c) Allocation Methodology Memo.
B. CV Capitalization
The CV will be capitalized from three sources:
Rolling LPs. Existing limited partners of Fund II who elect to roll their interests into the CV (rather than cash out) will contribute approximately $680 million in NAV to the CV. These rolling LPs include, among others, Meridian Public Employees' Retirement System, Ashford University Endowment, and Sovereign Capital Partners (Cayman) Ltd. — the three investors who are the subjects of this memorandum — as well as various other institutional investors and high-net-worth individuals who are not expected to require blocker structures.
New Secondary Capital. Garrison Secondaries Fund IV LP, a secondary buyer vehicle managed by Garrison Capital Advisors LLC, will commit $380 million of new capital as the lead secondary buyer in the transaction. Garrison's commitment represents the principal source of fresh capital for the CV. The primary contact at Garrison is Mitchell Adler, Partner. Garrison's outside legal counsel is Whitfield & Calloway LLP, with Douglas Whitfield, Partner, serving as lead outside counsel.
GP Co-Investment. Pinnacle Capital Management LLC and its principals will make a co-investment of $14 million into the CV, consistent with standard general partner co-investment practices.
Total CV capitalization at close is projected to be $1.074 billion. Of the $380 million in Garrison secondary capital, approximately $280 million will be used to provide liquidity to Fund II limited partners who elect to cash out of the continuation vehicle transaction. The remaining $100 million will be designated for follow-on investment reserves and fund-level expenses.
The CV will be formed as a Delaware limited partnership, Pinnacle Continuation Vehicle LP, with a new general partner entity, Pinnacle CV Partners LLC, to be formed as a Delaware limited liability company. Hawthorne Reid LLP (Vanessa Liu, Partner) is serving as fund formation counsel and is responsible for preparing the limited partnership agreement and related formation documents.
The proposed economics of the CV are as follows: a management fee of 1.25% per annum calculated on net asset value; carried interest of 15% over a 7% annual preferred return calculated on a European-style (whole-fund) waterfall basis; and a fund term of five years from the date of the final close, subject to two one-year extension periods at the discretion of the general partner, in each case subject to the consent of the LP advisory committee.
C. Investors Requiring blocker Protection
Three limited partners of Fund II, each of which is electing to roll 100% of its existing Fund II interests into the CV, have been identified as requiring blocker entity protection for U.S. federal income tax purposes. The relevant characteristics of each investor are summarized below.
Meridian Public Employees' Retirement System. Meridian is a U.S. tax-exempt public pension fund qualifying for exemption from U.S. federal income tax under Sections 501(a) and 401(a) of the Code. Meridian's original commitment to Fund II was $125 million, and it is electing a 100% rollover of its Fund II interest into the CV. The primary contact at Meridian is Trevor Huang, Chief Investment Officer. Meridian has expressed a high degree of sensitivity to any structural arrangement that could result in the recognition of UBTI, and its investment committee approval for participation in the CV is conditioned on the availability of UBTI-blocking protection.
Ashford University Endowment. Ashford is a U.S. tax-exempt educational endowment qualifying for exemption from U.S. federal income tax under Section 501(c)(3) of the Code. Ashford's original commitment to Fund II was $50 million, and it is likewise electing a 100% rollover into the CV. The primary contact at Ashford is Camille Berger, Director of Investments. Like Meridian, Ashford has a high sensitivity to UBTI exposure and requires blocker protection as a condition of its continued participation.
Sovereign Capital Partners (Cayman) Ltd. Sovereign Capital is a Cayman Islands exempted company that serves as a non-U.S. feeder vehicle for a consortium of Asian family offices. Sovereign Capital's original commitment to Fund II was $75 million, and it is electing a 100% rollover into the CV. The primary contact is Kenneth Fong, Managing Director. Sovereign Capital has expressed a high degree of sensitivity to exposure to U.S. effectively connected income, FIRPTA withholding, and the administrative burden of direct U.S. income tax return filing obligations.
III. The Need for blocker Structures
A. UBTI Concerns for Tax-Exempt Investors
Organizations that qualify for exemption from U.S. federal income tax under Section 501(a) of the Code — including pension funds qualifying under Section 401(a) (such as Meridian) and educational and charitable organizations qualifying under Section 501(c)(3) (such as Ashford) — are generally exempt from U.S. federal income tax on their investment income. This exemption, however, is subject to a significant exception: tax-exempt organizations are subject to tax on UBTI as defined in Section 512 of the Code.
UBTI is broadly defined to include gross income derived by an exempt organization from any unrelated trade or business regularly carried on by the organization, less the deductions directly connected with the carrying on of such trade or business. The UBTI rules are designed to prevent tax-exempt organizations from enjoying a competitive advantage over taxable enterprises by conducting commercial activities under the umbrella of their tax-exempt status.
Several features of the CV structure create potential UBTI exposure for Meridian and Ashford if they were to invest directly as limited partners in the CV:
Debt-Financed Income (Section 512(b)(4)). Under Section 512(b)(4) of the Code, income derived from debt-financed property is treated as UBTI to the extent that such property is financed with "acquisition indebtedness" as defined in Section 514. If the CV were to incur borrowings — whether through a subscription-line credit facility, a leveraged co-investment alongside a portfolio company, or other forms of fund-level or investment-level indebtedness — the income allocable to the debt-financed portion of the CV's investments would constitute UBTI to Meridian and Ashford. This risk is particularly acute in the present context because the CV's $100 million follow-on reserve may be supplemented by borrowings to finance additional investments in the three portfolio companies, and the CV may also enter into a subscription credit facility to manage the timing of capital calls and distributions.
Income from Partnership Interests (Section 512(c)). Under Section 512(c), a tax-exempt organization that is a partner in a partnership is treated as having derived its allocable share of the partnership's gross income from an unrelated trade or business, to the extent the partnership itself is engaged in such a trade or business. While the CV's primary activity — holding equity interests in portfolio companies structured as C-corporations — does not itself constitute an unrelated trade or business, the CV's ancillary activities (such as providing management consulting services to portfolio companies, if applicable) could give rise to UBTI allocable to its partners.
Interaction of UBTI and Partnership Allocations. More generally, because the CV is structured as a pass-through entity for U.S. federal income tax purposes, any item of income, gain, deduction, or loss recognized at the partnership level flows through to the partners in accordance with their distributive shares under the limited partnership agreement. To the extent any such item constitutes UBTI, it retains that character in the hands of the tax-exempt partners. This includes not only operating income and debt-financed income, but also certain categories of fee income and other amounts that may be treated as UBTI under the broad definitional framework of Section 512.
If Meridian ($125 million) and Ashford ($50 million) were to hold their CV interests directly, they would be exposed to UBTI on: (i) debt-financed portfolio income to the extent the CV or any blocker-equivalent intermediate entity utilizes leverage, (ii) any operating income allocations from portfolio companies to the extent structured as pass-through entities (though the three current portfolio companies are C-corporations, there is no guarantee that the CV will not make follow-on investments in entities organized as partnerships or LLCs), and (iii) certain fee-related income. The magnitude of this exposure could be substantial, particularly if the CV utilizes leverage in connection with follow-on investments from the $100 million reserve.
B. ECI and FIRPTA Concerns for Non-U.S. Investors
Non-U.S. investors who hold interests in a U.S. partnership that is engaged in a U.S. trade or business face a distinct but equally significant set of adverse U.S. federal income tax consequences.
Effectively Connected Income (Sections 871(b) and 882(a)). Under Sections 871(b) and 882(a) of the Code, a nonresident alien individual or a foreign corporation that is engaged in a trade or business within the United States is subject to U.S. federal income tax on income that is "effectively connected" with the conduct of such trade or business. The tax is imposed at graduated rates (for nonresident alien individuals) or at the flat corporate rate of 21% (for foreign corporations) on net ECI, in the same manner as such income would be taxed if earned by a U.S. person.
Attribution Through Partnerships (Section 875(1)). Section 875(1) provides that a non-U.S. person who is a member of a partnership that is engaged in a U.S. trade or business is itself treated as engaged in such trade or business. This attribution rule means that if the CV is treated as engaged in a U.S. trade or business — whether by virtue of its own activities or the activities of its portfolio companies conducted through it — Sovereign Capital would be treated as engaged in a U.S. trade or business and would be subject to U.S. federal income tax on its allocable share of the CV's ECI.
FIRPTA (Section 897). The Foreign Investment in Real Property Tax Act, codified principally in Section 897 of the Code, provides that gain or loss realized by a non-U.S. person on the disposition of a "United States real property interest" ("USRPI") is treated as ECI, regardless of whether the non-U.S. person is otherwise engaged in a U.S. trade or business. A USRPI includes an interest in a domestic corporation that is a "United States real property holding corporation" ("USRPHC") — i.e., a corporation whose U.S. real property interests equal or exceed 50% of the sum of its U.S. real property interests, foreign real property interests, and other business assets used in a trade or business. While the three current portfolio companies (Luminos, ClearArc, and Vectral) are primarily software and technology companies, the determination of USRPHC status requires periodic analysis, and any significant real property holdings by these companies (including leasehold interests in certain circumstances) could trigger USRPI classification.
Section 1446 Withholding. Under Section 1446, a partnership that has income effectively connected with a U.S. trade or business is required to withhold tax on the allocable share of such income attributable to its foreign partners. The withholding rate is 21% for corporate foreign partners and the highest applicable rate for non-corporate foreign partners. Without a blocker, the CV would be required to withhold on Sovereign Capital's allocable share of any ECI recognized by the partnership.
Filing Obligations. Absent a blocker structure, Sovereign Capital would be required to file a U.S. federal income tax return (Form 1120-F for a foreign corporation) reporting its allocable share of CV income, as well as potentially state income tax returns in each jurisdiction in which the CV is treated as doing business. The administrative burden and compliance costs associated with these filing obligations are significant and represent an independent reason for Sovereign Capital to invest through a blocker entity.
If Sovereign Capital ($75 million) were to hold its CV interest directly, it would be exposed to: (i) U.S. federal income taxation on its allocable share of ECI at the 21% corporate rate; (ii) FIRPTA withholding under Section 1445 on dispositions of USRPIs; (iii) Section 1446 withholding on its allocable share of ECI; and (iv) U.S. federal and state income tax return filing obligations. The blocker structure recommended herein is designed to eliminate or mitigate each of these consequences.
IV. Proposed Domestic blocker Structure — PCV Domestic blocker Inc.
A. Entity Selection and Formation
We recommend the formation of a single domestic blocker entity with the following characteristics:
Entity Name: PCV Domestic blocker Inc.
Entity Type: Delaware C-corporation
Jurisdiction of Formation: State of Delaware
EIN: To be applied for upon formation (Form SS-4 to be filed with the Internal Revenue Service)
Default Tax Classification: Under Treas. Reg. § 301.7701-2(b), an entity organized as a corporation under the laws of a U.S. state is automatically classified as a corporation for U.S. federal tax purposes. No check-the-box election on Form 8832 is required. PCV Domestic blocker Inc. will be taxed as a C-corporation from the date of its formation.
Target Formation Date: September 30, 2025
Formation Filing: Certificate of Incorporation to be filed with the Delaware Secretary of State, Division of Corporations. The registered agent will be Pacific Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
The selection of Delaware as the jurisdiction of formation is consistent with standard market practice for domestic blocker entities in the private fund context. Delaware offers a well-developed body of corporate law, predictable judicial outcomes through the Court of Chancery, low formation and maintenance costs, and no state-level corporate income tax on income derived from sources outside the State of Delaware. Formation counsel at Hawthorne Reid LLP (Vanessa Liu) will prepare and file the Certificate of Incorporation, subject to our review of the tax-relevant provisions.
B. Structure and Investment Flow
PCV Domestic blocker Inc. will subscribe as a limited partner in Pinnacle Continuation Vehicle LP, contributing $175 million of capital in exchange for a limited partnership interest in the CV. The two tax-exempt investors will invest as shareholders of the Domestic blocker:
•  Meridian Public Employees' Retirement System will invest $125 million in PCV Domestic blocker Inc. in exchange for equity interests (common stock or preferred stock, as discussed in Section VII below).
•  Ashford University Endowment will invest $50 million in PCV Domestic blocker Inc. in exchange for equity interests.
The total capital routed through the Domestic blocker is $175 million. The investment flow is as follows:
Tax-Exempt LPs (Meridian: $125M; Ashford: $50M) → PCV Domestic blocker Inc. (Delaware C-corporation) → Pinnacle Continuation Vehicle LP (Delaware LP) → Portfolio Companies (Luminos Systems Inc., ClearArc Software Inc., Vectral Cloud Inc.)
From the perspective of the CV's limited partnership agreement, PCV Domestic blocker Inc. will be treated as a single limited partner with a $175 million capital commitment. The CV will not have direct visibility into, or privity with, the underlying tax-exempt investors; those investors' economic and governance rights will be established and protected at the Domestic blocker level through the corporate charter documents and a shareholders' agreement.
C. UBTI blocking Mechanics
The fundamental tax rationale for the Domestic blocker is straightforward: because PCV Domestic blocker Inc. is classified as a C-corporation for U.S. federal income tax purposes, income recognized by the Domestic blocker on account of its limited partnership interest in the CV — including operating income, debt-financed income, capital gains upon disposition of portfolio company interests, and any other items of income or gain — will be subject to corporate-level income tax at the applicable federal rate (currently 21%) but will not constitute UBTI to the tax-exempt shareholders when distributed as dividends.
This result follows from the operation of Section 512(b)(1) of the Code, which excludes from the computation of UBTI all dividends received by a tax-exempt organization. Because distributions from PCV Domestic blocker Inc. to Meridian and Ashford will take the form of dividends on corporate stock (or, in the case of a liquidating distribution, a return of capital and/or capital gain from the disposition of stock), such amounts are excluded from UBTI by statute. The interposition of the C-corporation blocker between the tax-exempt investors and the partnership effectively converts what would otherwise be items of UBTI (if received directly through the partnership) into dividend income, which is specifically excluded from the UBTI computation.
The net effect of the Domestic blocker structure is that UBTI is fully blocked for Meridian and Ashford. The cost of this protection is the corporate-level tax imposed on the Domestic blocker's allocable share of CV income, which is analyzed in detail in Section VI below (the "tax leakage"). PCV Domestic blocker Inc. will be required to file its own U.S. federal income tax return (Form 1120) on an annual basis and will pay corporate-level income tax at the 21% federal rate on its allocable share of partnership income from the CV. State-level income tax obligations, to the extent applicable, are discussed in Section X.C below and in the companion State Tax Nexus and Withholding Analysis Memo.
D. Rationale for a Single Domestic blocker
We recommend consolidating Meridian and Ashford into a single Domestic blocker entity rather than forming separate blocker entities for each investor. This recommendation is based on the following considerations:
Administrative Efficiency. A single blocker entity requires only one set of formation documents, one board of directors, one set of officers, one bank account, one annual Delaware franchise tax filing, one federal income tax return (Form 1120), and one set of audited financial statements. The use of separate blockers for each investor would double these administrative requirements without any incremental tax benefit.
Cost Reduction. The annual ongoing costs of maintaining a blocker entity — including registered agent fees, Delaware franchise tax, audit fees, tax return preparation fees, and director fees — are substantially the same regardless of the number of shareholders. Consolidation into a single entity achieves meaningful cost savings over the projected five- to seven-year life of the CV.
Consistent Tax Profile. Both Meridian and Ashford are U.S. tax-exempt organizations with identical UBTI-blocking needs. Neither requires any special tax treatment vis-à-vis the other. There is no tax or structural reason to maintain separate blocker entities.
Governance Protections. The governance concerns that might otherwise militate in favor of separate entities — principally, the desire of each investor to maintain independent control over its investment — can be adequately addressed through the corporate charter documents and a shareholders' agreement that provides appropriate minority protections for Ashford (as the 28.6% minority shareholder). These governance provisions are discussed in Section VII.A below.
In the event that Meridian or Ashford has specific governance, regulatory, or fiduciary requirements that are incompatible with a shared blocker structure, we would revise this recommendation and form separate entities. We are not currently aware of any such requirements, but we recommend confirming with each investor's counsel and internal legal teams prior to formation.
V. Proposed Offshore blocker Structure — PCV International Holdings Ltd.
A. Entity Selection and Formation
For the non-U.S. investor, Sovereign Capital Partners (Cayman) Ltd., we recommend the formation of an offshore blocker entity with the following characteristics:
Entity Name: PCV International Holdings Ltd.
Entity Type: Cayman Islands exempted company
Jurisdiction of Formation: Cayman Islands
EIN: Not applicable. PCV International Holdings Ltd. is a non-U.S. entity and is not required to obtain a U.S. employer identification number for general purposes. However, the entity will be required to provide a completed IRS Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting) to the CV in connection with withholding obligations under Sections 1445 and 1446 of the Code. The entity will obtain a U.S. EIN in connection with the filing of Form 1120-F (U.S. Income Tax Return of a Foreign Corporation).
Target Formation Date: September 30, 2025
Formation Process: Registration with the Cayman Islands Registrar of Companies, General Registry. The typical formation timeline for a Cayman Islands exempted company is approximately five to ten business days from the submission of a completed application, subject to the availability of the proposed company name and the completion of all required anti-money laundering and know-your-customer due diligence. Formation will be handled by Hawthorne Reid LLP in coordination with Cayman Islands local counsel.
The Cayman Islands is the most commonly used offshore jurisdiction for blocker entities in the private fund context. The Cayman Islands imposes no income tax, capital gains tax, or withholding tax, and the legal and regulatory infrastructure for the formation and administration of exempted companies is well-established and efficient. An exempted company is a specific form of Cayman company that is prohibited from carrying on business in the Cayman Islands (except in furtherance of its business conducted outside the Cayman Islands) and is exempt from future Cayman Islands taxation for a specified period (typically 20 to 30 years from the date of formation) pursuant to the Tax Concessions Act (as revised).
B. Check-the-box Election (Form 8832)
The entity classification of PCV International Holdings Ltd. for U.S. federal income tax purposes is a critical issue that requires careful attention and timely action.
A Cayman Islands exempted company is not included in the IRS "per se corporation" list set forth in Treas. Reg. § 301.7701-2(b)(8). That list enumerates specific foreign entity types that are treated as corporations for U.S. federal tax purposes without regard to any election. Because a Cayman Islands exempted company is not on this list, it is classified as an "eligible entity" under Treas. Reg. § 301.7701-3 and may elect its classification for U.S. federal tax purposes.
Under the default classification rules of Treas. Reg. § 301.7701-3(b), an eligible entity formed outside the United States is classified as follows: (i) if the entity has a single owner, it is disregarded as an entity separate from its owner (i.e., treated as a "disregarded entity"); and (ii) if the entity has two or more owners, it is classified as a partnership. In either case, the entity is treated as a pass-through entity, and income, gain, deductions, and losses of the entity flow through to its owner(s) for U.S. federal income tax purposes.
If PCV International Holdings Ltd. were treated as a disregarded entity or a partnership under the default rules, it would provide no ECI or FIRPTA blocking benefit to Sovereign Capital. The CV would "look through" the entity to its ultimate owner (Sovereign Capital) and treat Sovereign Capital as the partner in the CV for U.S. federal income tax purposes. Sovereign Capital would remain subject to ECI taxation, FIRPTA withholding, Section 1446 withholding, and U.S. tax return filing obligations as if it held the CV interest directly.
Accordingly, it is essential that PCV International Holdings Ltd. file a timely election on IRS Form 8832 (Entity Classification Election) to be classified as a corporation (specifically, an association taxable as a corporation) for U.S. federal tax purposes. This election will cause the entity to be treated as a foreign corporation — specifically, a foreign corporation that is a partner in the CV — thereby interposing the corporate form between Sovereign Capital and the partnership.
The Form 8832 election must be filed within the following timeframe to be effective as of the date of formation:
•  The election may specify an effective date that is no earlier than 75 days before the date the election is filed.
•  The election may specify an effective date that is no later than 12 months after the date the election is filed.
•  To ensure that the election is effective from the date of formation (anticipated to be September 30, 2025), the Form 8832 should be filed no later than December 14, 2025 (75 days after September 30, 2025).
However, given the target first close date of October 15, 2025, we strongly recommend filing the Form 8832 concurrently with or immediately following formation — ideally on or before October 15, 2025 — to ensure that the corporate classification is in effect prior to the first close and that the CV can properly treat PCV International Holdings Ltd. as a corporate partner from the inception of the CV. The Calderwood & Harkness team (Garrett Simmons) will be responsible for preparing and filing the Form 8832.
We emphasize that the failure to timely file the Form 8832 check-the-box election would be a critical deficiency in the blocker structure. Without this election, PCV International Holdings Ltd. would be treated as a pass-through entity and would afford Sovereign Capital no protection from ECI, FIRPTA, Section 1446 withholding, or U.S. filing obligations. This is a gating item for the formation process and must be tracked with the highest priority.
C. Structure and Investment Flow
PCV International Holdings Ltd. will subscribe as a limited partner in Pinnacle Continuation Vehicle LP, contributing $75 million of capital in exchange for a limited partnership interest in the CV. Sovereign Capital Partners (Cayman) Ltd. ($75 million) will invest as the sole shareholder of PCV International Holdings Ltd.
The total capital routed through the Offshore blocker is $75 million. The investment flow is as follows:
Non-U.S. LP (Sovereign Capital Partners (Cayman) Ltd.: $75M) → PCV International Holdings Ltd. (Cayman Islands exempted company, electing corporate classification under Form 8832) → Pinnacle Continuation Vehicle LP (Delaware LP) → Portfolio Companies (Luminos Systems Inc., ClearArc Software Inc., Vectral Cloud Inc.)
As with the Domestic blocker, PCV International Holdings Ltd. will be treated as a single limited partner in the CV with a $75 million capital commitment. The CV's limited partnership agreement will recognize the Offshore blocker as the limited partner of record; the underlying non-U.S. investor (Sovereign Capital) will not be a party to the LPA.
D. ECI and FIRPTA blocking Mechanics
The interposition of PCV International Holdings Ltd. — classified as a foreign corporation for U.S. federal tax purposes — between Sovereign Capital and the CV achieves the following results:
ECI blocking. Because PCV International Holdings Ltd., rather than Sovereign Capital, will be the direct partner in the CV, it is the Offshore blocker entity — and not Sovereign Capital — that will be treated as engaged in a U.S. trade or business under Section 875(1) to the extent the CV is so engaged. Any ECI recognized by the CV will be allocated to the Offshore blocker and will be subject to U.S. federal income tax at the corporate rate of 21% under Section 882(a). The Offshore blocker, as a foreign corporation with ECI, will be required to file Form 1120-F annually and pay U.S. federal income tax on its net ECI. However, Sovereign Capital — as the shareholder of the Offshore blocker rather than a direct partner in the CV — will not be treated as engaged in a U.S. trade or business and will not be subject to ECI taxation at the investor level.
FIRPTA blocking. Upon the disposition of a USRPI by the CV (if applicable), the gain recognized will be allocated to the Offshore blocker as a partner in the CV and treated as ECI under Section 897. Withholding under Section 1445 will apply at the blocker level (i.e., the CV will withhold on the disposition proceeds allocable to the Offshore blocker). The Offshore blocker will pay corporate-level tax on any FIRPTA gain. Sovereign Capital, however, will not be directly subject to FIRPTA withholding on distributions received from the Offshore blocker. This analysis is subject to the provisions of Section 897(h) relating to distributions by REITs, which we do not expect to be relevant in the present context, as none of the portfolio companies is a real estate investment trust.
Section 1446 Withholding. The CV will be required to withhold tax under Section 1446 on the Offshore blocker's allocable share of ECI. This withholding, at the 21% rate applicable to corporate foreign partners, will be creditable against the Offshore blocker's U.S. corporate income tax liability on Form 1120-F. The imposition of Section 1446 withholding at the CV/Blocker level is a cash-flow timing consideration but does not represent incremental tax cost, as the amounts withheld are applied as a credit against the blocker's tax liability.
Elimination of Sovereign Capital's U.S. Filing Obligations. Without the Offshore blocker, Sovereign Capital would be required to file a U.S. federal income tax return (Form 1120-F) and potentially state income tax returns in multiple jurisdictions. With the Offshore blocker in place, the filing obligations are borne by PCV International Holdings Ltd., and Sovereign Capital avoids direct U.S. tax return filing obligations.
In summary, the interposition of PCV International Holdings Ltd. insulates Sovereign Capital from: (i) direct ECI taxation under Section 882(a); (ii) FIRPTA withholding at the investor level under Section 1445; (iii) Section 1446 withholding at the investor level; and (iv) U.S. federal and state income tax return filing obligations.
Branch Profits Tax (Section 884). One significant additional tax cost associated with the Offshore blocker structure must be noted. Under Section 884 of the Code, a foreign corporation that has income effectively connected with a U.S. trade or business is subject to a "branch profits tax" on its "dividend equivalent amount" — broadly, the effectively connected earnings and profits of the foreign corporation that are distributed or deemed distributed to its shareholders. The branch profits tax is imposed at a rate of 30%, in addition to the regular corporate income tax on ECI.
The branch profits tax rate may be reduced by an applicable U.S. income tax treaty between the United States and the country of which the foreign corporation is a resident. However, the Cayman Islands does not have an income tax treaty with the United States. Accordingly, PCV International Holdings Ltd. will be subject to the full 30% branch profits tax rate on its effectively connected earnings and profits that are distributed or deemed distributed to Sovereign Capital.
We have considered whether the Offshore blocker should instead be formed in a jurisdiction that has a favorable income tax treaty with the United States (for example, the Netherlands, Luxembourg, or the United Kingdom), which could reduce or eliminate the branch profits tax. However, the use of a treaty jurisdiction introduces significant additional complexity, including: (i) the requirement to satisfy the "limitation on benefits" provisions of the applicable treaty (which may be difficult for a special-purpose holding entity); (ii) the need to establish real economic substance in the treaty jurisdiction to support the entity's entitlement to treaty benefits; (iii) potential scrutiny under the principal purpose test or other anti-avoidance provisions of the applicable treaty; and (iv) the additional cost and administrative burden of maintaining an entity in a non-Cayman jurisdiction. Given these considerations, and in light of the investor profile of Sovereign Capital (a Cayman Islands feeder vehicle for Asian family offices that is familiar with and prefers the Cayman Islands legal and regulatory environment), we recommend proceeding with the Cayman Islands formation. The branch profits tax exposure, while significant, should be modeled and communicated transparently to Sovereign Capital as part of the overall tax leakage analysis.
VI. Corporate-Level Tax Leakage Analysis
A. Federal Corporate Tax on blocker Income
The principal economic cost of the blocker structure is the corporate-level income tax imposed on each blocker entity's allocable share of CV income. Both PCV Domestic blocker Inc. and PCV International Holdings Ltd. will be subject to U.S. federal corporate income tax at the rate of 21% on all income allocated to them from the CV, including capital gains recognized upon the exit or disposition of the three portfolio company interests.
The aggregate unrealized built-in gain in the CV's portfolio is $1.202 billion. The proportionate share of this built-in gain that will be allocated to each blocker entity is a function of: (i) the blocker's relative ownership interest in the CV; and (ii) the operation of Section 704(c) of the Code, which governs the allocation of pre-contribution built-in gain among the partners of a partnership that receives a contribution of appreciated property.
As discussed more fully in Section VIII below and in the companion Section 704(c) Allocation Methodology Memo, the recommended remedial allocation method under Section 704(c) is designed to allocate pre-contribution built-in gain to the contributing (rolling) partners, and not to new investors (such as Garrison Secondaries Fund IV LP) who are investing fresh capital in the CV. This is a critical distinction. Meridian, Ashford, and Sovereign Capital are all rolling their existing Fund II interests into the CV. Their pro-rata shares of the $1.202 billion built-in gain will be allocated to them — through the respective blocker entities — under Section 704(c). In contrast, Garrison, as a new secondary buyer contributing fresh capital, will not bear any Section 704(c) built-in gain allocations.
The relative shares of the rolling LP pool attributable to each blocker investor are as follows:
•  Domestic blocker (Meridian + Ashford): $175 million of $680 million total rolling LP capital = approximately 25.7% of the rolling LP pool.
•  Offshore blocker (Sovereign Capital): $75 million of $680 million total rolling LP capital = approximately 11.0% of the rolling LP pool.
For purposes of the blocker entities' proportionate share of the CV (and the aggregate capitalization), the relevant percentages are:
•  Domestic blocker: $175 million of $1.074 billion total CV capitalization = approximately 16.3%.
•  Offshore blocker: $75 million of $1.074 billion total CV capitalization = approximately 7.0%.
However, for purposes of built-in gain allocation under Section 704(c), the relevant metric is the blocker's share of the rolling LP pool, because only rolling LP capital bears the built-in gain. New capital from Garrison and the GP co-invest does not bear any portion of the pre-existing built-in gain.
B. Quantifying Tax Leakage
Based on the foregoing analysis, we estimate the federal corporate tax leakage attributable to each blocker entity as follows:
PCV Domestic blocker Inc. Meridian and Ashford collectively represent $175 million of the $680 million rolling LP pool. Their proportionate share of the $1.202 billion aggregate built-in gain is calculated as:
($175M / $680M) × $1.202B ≈ $309.2 million of built-in gain
At the 21% federal corporate income tax rate, the estimated federal tax leakage on the Domestic blocker's share of realized built-in gain is approximately:
$309.2M × 21% ≈ $64.9 million
PCV International Holdings Ltd. Sovereign Capital represents $75 million of the $680 million rolling LP pool. Its proportionate share of the $1.202 billion aggregate built-in gain is calculated as:
($75M / $680M) × $1.202B ≈ $132.6 million of built-in gain
At the 21% federal corporate income tax rate, the estimated federal tax leakage on the Offshore blocker's share of realized built-in gain is approximately:
$132.6M × 21% ≈ $27.8 million
In addition, PCV International Holdings Ltd. will be subject to the 30% branch profits tax on its effectively connected earnings and profits to the extent distributed or deemed distributed to Sovereign Capital. If the full after-tax earnings ($132.6M − $27.8M = $104.8M) were repatriated, the branch profits tax would be approximately:
$104.8M × 30% × (tax leakage applicable to the built-in gain portion only, net of corporate tax) ≈ approximately $22.3 million (assuming full repatriation of after-tax built-in gain earnings, with adjustments for the U.S. tax already paid and certain timing mechanics under Section 884)
The actual branch profits tax liability will depend on the timing and amount of distributions, as well as the Offshore blocker's ability to increase its "U.S. net equity" to defer the branch profits tax. This requires year-by-year modeling that should be prepared in coordination with Andover & Strauss LLP.
Total Estimated Federal-Level Tax Leakage. The combined estimated federal-level tax leakage across both blocker entities is approximately $92.7 million (Domestic blocker: $64.9M; Offshore blocker: $27.8M), plus the branch profits tax exposure for the Offshore blocker of approximately $22.3 million, for a potential total of approximately $115.0 million if all built-in gain is realized and all after-tax earnings are distributed.
Comparison to Direct Investment. Despite the significant magnitude of this tax leakage, the blocker structure remains strongly preferable to direct investment for each of the affected investors. If Meridian and Ashford were to invest directly without a blocker, their share of any UBTI-generating income (particularly debt-financed income) would be taxed at rates up to the maximum individual rate of 37% (the rate applicable to UBTI for tax-exempt entities), and could jeopardize their tax-exempt status if not properly managed. For Sovereign Capital, direct investment without a blocker would expose it to ECI taxation at the 21% corporate rate (which is the same rate imposed on the Offshore blocker) plus filing obligations, potential penalties for late or missed filings, and the administrative burden of maintaining ongoing U.S. tax compliance. The branch profits tax is the incremental cost of the Offshore blocker structure, but this is the well-understood and accepted price of the ECI and FIRPTA protection it provides.
C. Mitigation Strategies
We have considered several strategies to mitigate the tax leakage associated with the blocker structures:
Timing of Portfolio Company Exits. To the extent the CV is able to time the exit of portfolio company positions to maximize the holding period and minimize taxable income in any single year, the cash flow burden of corporate-level tax can be managed. However, we note that C-corporations are subject to a flat 21% federal income tax rate regardless of whether income is characterized as ordinary income or long-term capital gain; unlike individual taxpayers, corporate taxpayers do not benefit from a preferential long-term capital gains rate. Accordingly, the character of gain (long-term vs. short-term) does not directly affect the magnitude of the Domestic blocker's federal income tax liability. For the Offshore blocker, the same analysis applies with respect to the corporate-level tax, though the timing of distributions can affect the incurrence of branch profits tax.
Avoidance of Accumulated Earnings Tax (Section 531). Section 531 imposes a 20% accumulated earnings tax on the "accumulated taxable income" of a corporation (other than certain personal holding companies and other exempt entities) that retains earnings in excess of the reasonable needs of the business for the purpose of avoiding income tax at the shareholder level. To avoid this additional tax, both blocker entities should adopt and implement a dividend distribution policy that provides for the regular distribution of after-tax earnings to shareholders. Alternatively, if earnings are to be retained, the blocker's board of directors should document specific, bona fide business reasons for the retention (e.g., anticipated follow-on capital calls from the CV, payment of operating expenses, or the establishment of reserves for tax liabilities).
Liquidation Planning. At the end of the CV's term, each blocker entity should be liquidated and its remaining assets (net of all tax liabilities) distributed to the respective shareholders. The tax consequences of the blocker liquidation to the shareholders — including the recognition of gain or loss on the surrender of stock in the liquidating blocker entity — must be carefully planned and coordinated with the investors' tax counsel. For the tax-exempt investors (Meridian and Ashford), liquidating distributions from the Domestic blocker should generally be treated as a return of capital and/or capital gain from the disposition of corporate stock, which is excluded from UBTI under Section 512(b)(5). For Sovereign Capital, the liquidation of the Offshore blocker will be an offshore transaction not subject to U.S. taxation (assuming the stock of the Offshore blocker is not itself a USRPI).
State Tax Exposure. State-level income tax leakage is an additional consideration. PCV Domestic blocker Inc., as a Delaware corporation, is not subject to Delaware state corporate income tax on income not derived from Delaware sources. However, the Domestic blocker may have nexus in California (Pinnacle's headquarters are in Menlo Park; Luminos Systems is headquartered in San Francisco), Texas (ClearArc Software is headquartered in Austin, which is subject to the Texas franchise/margin tax), and Colorado (Vectral Cloud is headquartered in Denver; Colorado corporate income tax rate of 4.4%). The state-level tax exposure of both blocker entities is addressed in detail in the companion State Tax Nexus and Withholding Analysis Memo and must be factored into the overall tax leakage projections provided to the blocker investors.
VII. Capitalization and Governance of blocker Entities
A. PCV Domestic blocker Inc.
Capital Structure. We recommend that PCV Domestic blocker Inc. adopt a simple authorized capital structure consisting of a single class of common stock. Unless Meridian and Ashford require different economic or liquidation preferences — for example, if one investor requires a senior claim on distributions in a downside scenario — a single-class common stock structure is the most administratively efficient and equitable approach, as both investors have identical UBTI-blocking needs and are investing for the same purpose.
If, upon further discussion with the investors, it is determined that a more complex capital structure is required (e.g., preferred stock with a liquidation preference for one investor and common stock for the other), we can accommodate this, but we recommend against introducing unnecessary structural complexity.
Share Allocation. Shares of common stock will be allocated pro rata to capital commitments:
•  Meridian Public Employees' Retirement System: $125 million / $175 million = 71.4%
•  Ashford University Endowment: $50 million / $175 million = 28.6%
Board of Directors. The board of directors of PCV Domestic blocker Inc. should consist of three members. We recommend two alternative board composition models for consideration by the investors:
Option A: Two directors designated by Meridian (as the majority shareholder) and one director designated by Ashford. This approach reflects the relative economic interests of the shareholders and gives Meridian, as the holder of approximately 71% of the equity, effective control of the board.
Option B: One director designated by Meridian, one director designated by Ashford, and one independent director designated by the GP (Pinnacle CV Partners LLC). This approach provides Ashford with greater representation relative to its economic interest and introduces an element of independent governance oversight.
We recommend discussing both options with the investors and determining their preferences prior to finalization of the bylaws and shareholders' agreement.
Officers. The Domestic blocker's officers should be minimal to reduce administrative burden: a President and a Treasurer, both designated by the GP (Pinnacle CV Partners LLC), unless the investors prefer to designate their own officers. The officers will be responsible for executing documents on behalf of the Domestic blocker, including the CV subscription agreement and annual tax filings.
Administrative Matters. PCV Domestic blocker Inc. will be subject to the following ongoing administrative requirements:
•  Annual Delaware franchise tax filing and payment (estimated cost: $400–$200,000 per year depending on the entity's authorized shares and total gross assets; we recommend minimizing authorized shares to reduce the franchise tax);
•  Annual U.S. federal income tax return (Form 1120), to be prepared by Andover & Strauss LLP (Patricia Clemons);
•  Annual audited financial statements, to be prepared by Andover & Strauss LLP;
•  Maintenance of corporate books and records, including minutes of board meetings and shareholder consents; and
•  Beneficial ownership reporting under the Corporate Transparency Act (Form BOI), to the extent applicable.
Bylaws and Shareholders' Agreement. The bylaws (or a separate shareholders' agreement between Meridian and Ashford) should include the following provisions:
•  Information rights: each shareholder shall have the right to receive quarterly financial statements, annual audited financial statements, and copies of all tax returns filed by the Domestic blocker;
•  Consent rights: material transactions by the Domestic blocker (including the incurrence of indebtedness, amendments to the Certificate of Incorporation, changes to the authorized capital structure, and the merger, dissolution, or liquidation of the blocker) shall require the approval of shareholders holding at least 75% of the outstanding shares (which, under the current allocation, would require the consent of Meridian);
•  Minority protections: certain enumerated actions shall require the approval of each shareholder, regardless of its percentage interest, including amendments to the shareholders' agreement, changes to the dividend distribution policy, and transactions with affiliates; and
•  Restrictions on transfer: shares in the Domestic blocker shall not be transferable without the consent of the other shareholder(s) and compliance with applicable securities laws.
B. PCV International Holdings Ltd.
Capital Structure. PCV International Holdings Ltd. will have a single class of authorized ordinary shares, all of which will be held by Sovereign Capital Partners (Cayman) Ltd., the sole shareholder. The simplicity of a single-shareholder offshore blocker significantly reduces the governance complexity relative to the multi-shareholder Domestic blocker.
Board of Directors. The board of directors of PCV International Holdings Ltd. should consist of two to three directors. We recommend that at least one director be designated by Sovereign Capital (Kenneth Fong, Managing Director) and at least one be designated by the GP (Pinnacle CV Partners LLC). If a third director is appointed, the third seat may be filled by a Cayman Islands-resident director, which may be beneficial for economic substance purposes (discussed below).
Administrative Matters. PCV International Holdings Ltd. will be subject to the following ongoing administrative requirements:
•  Annual Cayman Islands government fees and filings (estimated annual cost: CI$2,568 to CI$4,280 depending on the authorized share capital);
•  IRS Form 8832 (Entity Classification Election) — to be filed upon formation to elect corporate classification for U.S. federal tax purposes;
•  Annual U.S. federal income tax return (Form 1120-F, U.S. Income Tax Return of a Foreign Corporation) — to be prepared by Andover & Strauss LLP to report the Offshore blocker's allocable share of ECI from the CV;
•  IRS Form W-8BEN-E — to be provided to the CV annually (or upon a change in circumstances) to establish the Offshore blocker's status as a foreign corporation and claim any applicable withholding exemptions or reduced rates;
•  Maintenance of corporate books and records, including minutes of board meetings and shareholder resolutions;
•  Annual audited financial statements (to the extent required by the investors or Cayman Islands regulations); and
•  Compliance with Cayman Islands anti-money laundering regulations and beneficial ownership reporting requirements.
Economic Substance Requirements. Under the International Tax Co-operation (Economic Substance) Act (as revised) of the Cayman Islands, a "relevant entity" conducting a "relevant activity" in the Cayman Islands must demonstrate adequate economic substance in the jurisdiction. Pure equity holding companies are subject to a reduced economic substance test, requiring only that the entity: (i) comply with all applicable filing requirements under the Companies Act; (ii) have adequate human resources and premises in the Cayman Islands for holding and managing equity participations; and (iii) maintain its books and records in the Cayman Islands. For a special-purpose blocker entity such as PCV International Holdings Ltd., this is a relatively light standard that can be satisfied through the use of a registered office and the appointment of Cayman-resident directors. Hawthorne Reid LLP and Cayman local counsel should confirm compliance with these requirements at the time of formation.
Corporate Transparency Act Reporting. PCV International Holdings Ltd. may be required to file a beneficial ownership information report (Form BOI) under the U.S. Corporate Transparency Act if it meets the definition of a "reporting company" under that statute. Although foreign entities are generally subject to the reporting requirements only if they are registered to do business in the United States (by filing a document with a secretary of state or similar office), the status of this reporting obligation should be confirmed by counsel.
VIII. Interaction with Section 704(c) Allocations and Built-In Gain
A. Impact of Remedial Method on blocker Investors
The companion Section 704(c) Allocation Methodology Memo, being prepared by Leila Nazari of this office, recommends the adoption of the remedial allocation method under Treas. Reg. § 1.704-3(d) for the $1.202 billion of aggregate built-in gain on the three portfolio company interests contributed from Fund II to the CV in the Section 721 non-recognition transaction.
Under Section 704(c) of the Code, a partnership that receives a contribution of property must