PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / TAX ADVISOR PRIVILEGE
CALDERWOOD & HARKNESS LLP 555 California Street, Suite 4200 San Francisco, California 94104 Telephone: (415) 555-7800 Facsimile: (415) 555-7801
Engagement Reference No.: 1002-00005 Matter No.: 117443.00001
[DATE] (Target Final Close Date: October 31, 2025)
Pinnacle Capital Management LLC 2100 Sand Hill Road, Suite 340 Menlo Park, California 94025
Attention: Marcus Aldren, Founder & Managing Partner
Pinnacle Venture Fund II LP (a Delaware limited partnership) c/o Pinnacle Capital Partners II LLC (its general partner) 2100 Sand Hill Road, Suite 340 Menlo Park, California 94025
Re: U.S. Federal Income Tax Opinion — Section 721 Non-Recognition Treatment of the Contribution of Portfolio Company Interests by Pinnacle Venture Fund II LP to Pinnacle Continuation Vehicle LP
Ladies and Gentlemen:
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I. INTRODUCTION AND ENGAGEMENT CONTEXT
A. Engagement Identification
Calderwood & Harkness LLP ("Calderwood & Harkness," "we," "us," or "our") has been engaged as tax counsel to Pinnacle Capital Management LLC ("Pinnacle Mgmt" or the "Management Company"), the management company of Pinnacle Venture Fund II LP, a Delaware limited partnership ("Fund II"), in connection with the structuring and formation of Pinnacle Continuation Vehicle LP (the "CV"), a Delaware limited partnership to be formed with Pinnacle CV Partners LLC, a Delaware limited liability company to be formed, as its general partner (the "CV GP"). This engagement was opened on July 15, 2025, and this opinion letter is being delivered in connection with, and as a condition precedent to, the closing of the CV transaction described herein.
B. Purpose of the Opinion
This letter sets forth the opinion of Calderwood & Harkness LLP regarding the U.S. federal income tax treatment of the contribution by Fund II of its equity interests in three portfolio companies — Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc. (each as defined and described more fully below, and collectively, the "Portfolio Companies") — to the CV in exchange for limited partnership interests in the CV (the "Contribution"). This opinion is being delivered to the addressees in connection with the closing of the CV transaction, and may be relied upon by the addressees for the purposes of the Contribution as set forth herein.
Specifically, we have been asked to opine on: (i) whether the Contribution qualifies for non-recognition treatment under Section 721(a) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the basis consequences to the contributing partners under Section 722 of the Code; (iii) the basis consequences to the CV in the contributed property under Section 723 of the Code; (iv) the holding period consequences under Section 1223(1) of the Code; and (v) whether the Contribution will be recharacterized as a disguised sale under Section 707(a)(2)(B) of the Code and the Treasury Regulations promulgated thereunder.
C. Scope Limitation
This opinion addresses only the U.S. federal income tax consequences of the Contribution under the Code. Unless expressly stated otherwise, all references to "Sections" herein are references to sections of the Code, and all references to "Treasury Regulations" are to the Treasury Regulations promulgated thereunder.
This opinion does not address state, local, or non-U.S. tax consequences of the Contribution. Specifically, and without limitation, this opinion does not address the income tax treatment of the Contribution under the laws of California, Delaware, Texas, Colorado, New York, or any other state, territory, or foreign jurisdiction.
This opinion does not address the tax consequences to any individual limited partner of Fund II or the CV, including without limitation the treatment of the transaction under Section 1202 of the Code (relating to qualified small business stock), Section 1061 of the Code (relating to carried interest and applicable partnership interests), or any other provision of the Code that may apply based on the particular facts and circumstances of any individual partner. Those matters are addressed in separate memoranda prepared by this firm and delivered to the addressees under separate cover.
This opinion does not address securities law, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any other non-tax legal matters.
II. SUMMARY OF THE TRANSACTION
A. Fund II Background
Pinnacle Venture Fund II LP is a Delaware limited partnership (EIN: 84-3291067; Delaware Limited Partnership File No. DE-LP-2019-04817) formed in 2019 for the purpose of making venture capital and growth equity investments in technology companies. Fund II had its final close in December 2019 (the "Vintage Date").
Fund II's general partner is Pinnacle Capital Partners II LLC, a Delaware limited liability company (EIN: 84-3291104) (the "Fund II GP"). Fund II's management company is Pinnacle Capital Management LLC, a Delaware limited liability company (EIN: 82-6140538), with its principal office located at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025.
Fund II has total committed capital of Eight Hundred Seventy-Five Million Dollars ($875,000,000), of which Eight Hundred Thirty-One Million Two Hundred Fifty Thousand Dollars ($831,250,000), representing approximately ninety-five percent (95%) of total commitments, has been called and funded as of the date hereof. As of June 30, 2025, Fund II has a gross net asset value ("NAV") of approximately One Billion Eight Hundred Twenty Million Dollars ($1,820,000,000) and a net NAV of approximately One Billion Five Hundred Sixty Million Dollars ($1,560,000,000), based on audited and interim financial statements prepared by Andover & Strauss LLP, the fund's independent auditors.
B. The Portfolio Companies
Fund II holds equity interests in three Delaware C-corporations (collectively, the "Portfolio Companies"), each of which is described below:
1. Luminos Systems Inc.
Luminos Systems Inc. ("Luminos") is a Delaware C-corporation (EIN: 47-8823156), headquartered at 500 Folsom Street, 14th Floor, San Francisco, California 94105. Luminos operates an AI-powered revenue operations platform designed for enterprise SaaS companies. The company's Chief Executive Officer is Priya Venkatesh.
Fund II holds an ownership interest in Luminos representing 24.7% of Luminos on a fully diluted basis. Fund II initially invested in Luminos as part of the company's Series B financing round in the first quarter of 2020, and subsequently made an additional investment in the company's Series C financing round. Fund II's aggregate adjusted tax basis in its Luminos equity interests is Fifty-Eight Million Five Hundred Thousand Dollars ($58,500,000), representing the aggregate cost of its Series B and Series C investments.
Based on the independent 409A valuation report prepared by Kessler Pratt LLP as of June 30, 2025, which determined an enterprise value for Luminos of approximately Two Billion Four Hundred Eighty Million Dollars ($2,480,000,000), the fair market value of Fund II's stake in Luminos as of June 30, 2025 is approximately Six Hundred Twelve Million Dollars ($612,000,000).
The built-in gain attributable to Fund II's Luminos equity interests is therefore approximately Five Hundred Fifty-Three Million Five Hundred Thousand Dollars ($553,500,000), representing the excess of the fair market value of such interests ($612,000,000) over Fund II's adjusted tax basis therein ($58,500,000).
2. ClearArc Software Inc.
ClearArc Software Inc. ("ClearArc") is a Delaware C-corporation (EIN: 83-5519274), headquartered at 1201 Lake Austin Blvd, Suite 600, Austin, Texas 78703. ClearArc provides a cloud-native compliance and audit automation platform for financial services companies. The company's Chief Executive Officer is Jonathan Hargrove.
Fund II holds an ownership interest in ClearArc representing 31.2% of ClearArc on a fully diluted basis. Fund II served as the lead investor in ClearArc's Series A financing round in the second quarter of 2020, and made an additional investment in the company's Series B financing round. Fund II's aggregate adjusted tax basis in its ClearArc equity interests is Thirty-Seven Million Four Hundred Thousand Dollars ($37,400,000), representing the aggregate cost of its Series A and Series B investments.
Based on the independent 409A valuation report prepared by Kessler Pratt LLP as of June 30, 2025, which determined an enterprise value for ClearArc of approximately One Billion Five Hundred Million Dollars ($1,500,000,000), the fair market value of Fund II's stake in ClearArc as of June 30, 2025 is approximately Four Hundred Sixty-Eight Million Dollars ($468,000,000).
The built-in gain attributable to Fund II's ClearArc equity interests is therefore approximately Four Hundred Thirty Million Six Hundred Thousand Dollars ($430,600,000), representing the excess of the fair market value of such interests ($468,000,000) over Fund II's adjusted tax basis therein ($37,400,000).
3. Vectral Cloud Inc.
Vectral Cloud Inc. ("Vectral") is a Delaware C-corporation (EIN: 85-1102847), headquartered at 700 17th Street, Suite 2200, Denver, Colorado 80202. Vectral provides a multi-cloud infrastructure orchestration and FinOps platform. The company's Chief Executive Officer is Elena Kowalski.
Fund II holds an ownership interest in Vectral representing 18.9% of Vectral on a fully diluted basis. Fund II invested in Vectral as part of the company's Series B financing round in March 2021. Fund II's adjusted tax basis in its Vectral equity interests is Forty-Two Million One Hundred Thousand Dollars ($42,100,000), representing the cost of its Series B investment.
Based on the independent 409A valuation report prepared by Kessler Pratt LLP as of June 30, 2025, which determined an enterprise value for Vectral of approximately One Billion Three Hundred Seventy-Six Million Dollars ($1,376,000,000), the fair market value of Fund II's stake in Vectral as of June 30, 2025 is approximately Two Hundred Sixty Million Dollars ($260,000,000).
The built-in gain attributable to Fund II's Vectral equity interests is therefore approximately Two Hundred Seventeen Million Nine Hundred Thousand Dollars ($217,900,000), representing the excess of the fair market value of such interests ($260,000,000) over Fund II's adjusted tax basis therein ($42,100,000).
4. Aggregate Portfolio Company Figures
The following table summarizes the aggregate figures for the Portfolio Company interests to be contributed to the CV:
The aggregate fair market value of the Portfolio Company interests is One Billion Three Hundred Forty Million Dollars ($1,340,000,000). The aggregate adjusted tax basis is One Hundred Thirty-Eight Million Dollars ($138,000,000). The aggregate built-in gain is One Billion Two Hundred Two Million Dollars ($1,202,000,000). The implied gross multiple on invested capital ("MOIC") on the contributed interests is approximately 9.71×.
C. The Continuation Vehicle
Pinnacle Continuation Vehicle LP (the "CV") is a Delaware limited partnership to be formed in connection with the closing of the transactions described herein. The CV's general partner will be Pinnacle CV Partners LLC (the "CV GP"), a Delaware limited liability company also to be formed in connection with the closing. The CV is structured as a GP-led secondary transaction (commonly referred to as a "continuation vehicle" or "continuation fund") designed to hold the three Portfolio Company interests transferred from Fund II. The CV will provide Fund II's limited partners with a liquidity opportunity while enabling continued ownership and value creation in the Portfolio Companies under the direction of Pinnacle Mgmt's investment team.
D. Description of the Contribution
The Contribution transaction will be consummated substantially as follows:
Step 1: Fund II Contribution. Fund II will contribute its equity interests in each of Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc. to the CV. This contribution will comprise all of Fund II's equity interests in each such Portfolio Company.
Step 2: Rolling Limited Partners. In exchange for the Contribution, the rolling limited partners of Fund II — that is, those limited partners that have elected to retain their economic exposure to the Portfolio Companies by "rolling" their interests into the CV — will receive limited partnership interests in the CV. The rolling limited partners represent approximately Six Hundred Eighty Million Dollars ($680,000,000) in aggregate NAV.
Step 3: Garrison Capital Contribution. Concurrently with the Contribution, Garrison Secondaries Fund IV LP ("Garrison"), a Delaware limited partnership acting as the lead secondary buyer in the CV transaction, will contribute Three Hundred Eighty Million Dollars ($380,000,000) of new capital to the CV. Garrison is represented by Whitfield & Calloway LLP (Douglas Whitfield, Partner).
Step 4: Liquidity for Cashing-Out Limited Partners. Those limited partners of Fund II that have elected to receive liquidity (the "cashing-out limited partners"), representing approximately Two Hundred Eighty Million Dollars ($280,000,000) in aggregate NAV, will receive cash funded from Garrison's capital commitment. It is important to note that the cashing-out limited partners are not contributing any assets to the CV; rather, they are disposing of their Fund II interests in a separate transaction and will not become partners in the CV.
Step 5: CV GP Co-Investment. The CV GP will make a co-investment of Fourteen Million Dollars ($14,000,000) in the CV, aligning the general partner's economic interest with those of the limited partners.
Step 6: Total CV Capitalization. The total capitalization of the CV at closing will be approximately One Billion Seventy-Four Million Dollars ($1,074,000,000), consisting of:
(a) $680,000,000 in rolling limited partner interests;
(b) $380,000,000 in new capital from Garrison;
(c) $14,000,000 in CV GP co-investment.
The CV will also establish approximately One Hundred Million Dollars ($100,000,000) in follow-on reserves, calculated as the excess of Garrison's $380,000,000 commitment over the $280,000,000 liquidity pool allocated to cashing-out limited partners.
blocker Entities. Certain capital will be routed through blocker entities interposed for the benefit of tax-exempt U.S. limited partners and non-U.S. limited partners:
(i) PCV Domestic blocker Inc., a Delaware C-corporation, will be interposed for the benefit of tax-exempt U.S. limited partners, including the Meridian Public Employees' Retirement System (approximately $125,000,000) and the Ashford University Endowment (approximately $50,000,000); and
(ii) PCV International Holdings Ltd., a Cayman Islands exempted company, will be interposed for the benefit of non-U.S. limited partners, including Sovereign Capital Partners (Cayman) Ltd. (approximately $75,000,000).
In total, approximately Two Hundred Fifty Million Dollars ($250,000,000), representing approximately 23.3% of CV capitalization, will be invested through blocker entities. As noted in Section I.C above, the tax treatment of these blocker entities is not addressed in this opinion.
E. Proposed CV Economic Terms
The principal economic terms of the CV are as follows:
Management Fee: 1.25% per annum, calculated on the NAV of the CV.
Carried Interest: 15% of net profits over a 7% annual preferred return, calculated on a European-style (whole-fund) waterfall basis.
Term: Five (5) years from the final close of the CV, subject to two one-year extensions at the discretion of the CV GP.
III. DOCUMENTS AND MATERIALS REVIEWED
In rendering this opinion, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the following documents and materials:
A. Organizational Documents
1. Certificate of Limited Partnership of Pinnacle Venture Fund II LP, as filed with the Secretary of State of the State of Delaware (File No. DE-LP-2019-04817).
2. Amended and Restated Limited Partnership Agreement of Pinnacle Venture Fund II LP, dated as of December 2019, by and among Pinnacle Capital Partners II LLC, as general partner, and the limited partners party thereto (the "Fund II LPA").
3. Draft Limited Partnership Agreement of Pinnacle Continuation Vehicle LP (the "CV LPA"), prepared by Hawthorne Reid LLP (Vanessa Liu, Partner), as reviewed, commented upon, and marked up by this firm.
4. Draft Certificate of Formation of Pinnacle CV Partners LLC, to be filed with the Secretary of State of the State of Delaware.
B. Transaction Documents
5. Contribution Agreement, by and among Pinnacle Venture Fund II LP, Pinnacle Continuation Vehicle LP, and Pinnacle CV Partners LLC (draft) (the "Contribution Agreement").
6. Term Sheet between Pinnacle Venture Fund II LP and Garrison Secondaries Fund IV LP, setting forth the principal terms and conditions of Garrison's investment in the CV.
7. Draft Tax Protection Agreement, by and among Pinnacle Continuation Vehicle LP, Pinnacle CV Partners LLC, and certain rolling limited partners of Fund II (the "Tax Protection Agreement").
8. LP election forms distributed to the limited partners of Fund II, together with the election summary prepared by the Fund II GP (LP election deadline: September 15, 2025).
C. Valuation and Financial Materials
9. Independent valuation report and fairness opinion prepared by Kessler Pratt LLP (David Kessler, Managing Partner), dated September 22, 2025, relating to the fair market value of the Portfolio Company interests (the "Kessler Pratt Valuation").
10. Audited financial statements of Pinnacle Venture Fund II LP as of and for the fiscal year ended December 31, 2024, and unaudited interim financial statements of Fund II as of June 30, 2025, each prepared by Andover & Strauss LLP (Patricia Clemons, Audit Partner).
11. Section 409A valuations for each of Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc., as of June 30, 2025, prepared by Kessler Pratt LLP.
D. Tax Documents
12. Fund II Schedule K-1s (IRS Form 1065, Schedule K-1) for relevant tax years.
13. U.S. federal income tax returns of Pinnacle Venture Fund II LP (IRS Form 1065), prepared by Andover & Strauss LLP, for the taxable years ended December 31, 2020 through December 31, 2024.
14. Fund II's existing partnership agreement tax provisions, including the provisions of the Fund II LPA relating to Section 704(b) book allocations, Section 704(c) allocations with respect to contributed or revalued property, and the maintenance of capital accounts.
E. Other Materials
15. Certificates and representations provided by the CV GP and the Fund II GP regarding the transaction, including the draft Closing Tax Certificate to be executed and delivered at closing (the "Closing Tax Certificate").
16. Such other documents, records, certificates, memoranda, and materials as we have deemed relevant and necessary for purposes of this opinion.
We have assumed, with your consent and without independent verification, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies, and the accuracy and completeness of all records and documents made available to us.
IV. ASSUMPTIONS
In rendering this opinion, we have relied upon the following assumptions. If any of these assumptions is or becomes incorrect, incomplete, or misleading in any material respect, the opinions expressed herein may be adversely affected.
A. Factual Assumptions
1. All documents reviewed by us in connection with the rendering of this opinion are genuine, and all signatures thereon are authentic.
2. All factual representations and statements made by the parties in the transaction documents and in certificates delivered to us (including, without limitation, the Closing Tax Certificate) are true, correct, and complete in all material respects as of the date hereof and will continue to be true, correct, and complete as of the closing date.
3. The Contribution will be consummated in accordance with the terms described in the transaction documents and as summarized in Section II above, without material modification, amendment, or waiver of any term or condition thereof.
4. Pinnacle Venture Fund II LP is, and has at all times since its formation been, properly classified as a partnership for U.S. federal income tax purposes within the meaning of Section 761(a) of the Code and Treasury Regulations Section 301.7701-3, and has not elected to be excluded from the application of Subchapter K of the Code.
5. Pinnacle Continuation Vehicle LP will be properly classified as a partnership for U.S. federal income tax purposes within the meaning of Section 761(a) of the Code and Treasury Regulations Section 301.7701-3, and will not elect to be treated as a corporation or an association taxable as a corporation.
6. Neither the CV GP nor any person related to the CV GP (within the meaning of Section 267(b) or Section 707(b)(1) of the Code) has made, or will make, an election under Treasury Regulations Section 301.7701-3 (a "check-the-box" election) that would cause the CV to be classified as other than a partnership for U.S. federal income tax purposes.
7. Fund II holds valid legal and beneficial title to the equity interests in each of the Portfolio Companies, free and clear of any liens, pledges, security interests, encumbrances, or other restrictions that would affect the tax analysis set forth herein. The equity interests in each Portfolio Company are freely transferable to the CV, subject to applicable transfer restrictions under the respective Portfolio Company organizational documents and applicable securities laws.
8. Each of Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc. is, and has at all times since its formation been, properly classified as a C-corporation for U.S. federal income tax purposes.
9. No Portfolio Company has undergone any reorganization (within the meaning of Section 368 of the Code), conversion, merger, consolidation, or change in entity classification that would affect the adjusted tax basis, holding period, or other tax attributes of Fund II's equity interests in such Portfolio Company.
10. Fund II has an adjusted tax basis in the contributed Portfolio Company interests as represented by the Fund II GP and set forth in the Closing Tax Certificate, as follows:
(a) Luminos Systems Inc.: $58,500,000;
(b) ClearArc Software Inc.: $37,400,000;
(c) Vectral Cloud Inc.: $42,100,000;
(d) Aggregate: $138,000,000.
B. Assumptions Relating to Disguised Sale Analysis
In addition to the foregoing factual assumptions, the following assumptions are material to our opinion regarding the application of the disguised sale rules under Section 707(a)(2)(B) of the Code:
1. Fund II has no liabilities that will be assumed by, or transferred to, the CV in connection with the Contribution, other than as specifically disclosed in the transaction documents reviewed by us. For the avoidance of doubt, the CV is not assuming any indebtedness, guarantee obligations, or other liabilities of Fund II as part of the Contribution.
2. The rolling limited partners of Fund II are not receiving, and will not receive, any cash, property, or other consideration in connection with the Contribution, other than limited partnership interests in the CV. No side payments, fee waivers, expense reimbursements, or other economic benefits are being provided to the rolling limited partners in connection with or as part of the Contribution, other than as expressly set forth in the CV LPA.
3. There is no binding commitment, understanding, arrangement, or plan — whether written or oral, express or implied — for the CV to distribute cash or other property to Fund II or to the rolling limited partners within two years of the Contribution, other than:
(a) tax distributions made in accordance with the tax distribution provisions of the CV LPA, which are designed to enable the partners to satisfy their respective income tax obligations attributable to allocations of CV taxable income; and
(b) distributions arising from the ordinary operations of the CV consistent with its stated investment objectives, including distributions of dividends, if any, received from the Portfolio Companies and distributions of proceeds from any disposition of Portfolio Company interests occurring in the ordinary course of the CV's investment activities.
4. The Contribution is not part of a plan or arrangement pursuant to which a transfer and a related distribution, when taken together, would constitute a sale or exchange within the meaning of Section 707(a)(2)(B) of the Code and Treasury Regulations Sections 1.707-3 through 1.707-5.
5. No liabilities of the CV are being allocated to the contributing partners in a manner designed, intended, or expected to create a disguised sale or to circumvent the purposes of Section 707(a)(2)(B) of the Code and the Treasury Regulations promulgated thereunder.
6. To the extent any partnership liabilities of the CV are allocable to the rolling limited partners for purposes of Section 752 of the Code, such liabilities constitute "qualified liabilities" within the meaning of Treasury Regulations Section 1.707-5(a)(6).
C. General Assumptions
1. The applicable provisions of the Code, the Treasury Regulations, published administrative pronouncements of the Internal Revenue Service (the "IRS"), and judicial decisions existing as of the date hereof will not be changed, amended, modified, or interpreted in a manner that would adversely affect the conclusions set forth herein, and any such changes, amendments, modifications, or interpretations will not be applied retroactively to the Contribution.
2. No ruling has been sought from, or issued by, the IRS with respect to any aspect of the Contribution or any other matter addressed in this opinion. The opinion expressed herein is not binding on the IRS or any court, and no assurance can be given that the IRS will not challenge the positions taken herein or that a court would sustain such positions if challenged.
V. APPLICABLE LAW
A. Section 721(a) — Non-Recognition of Gain or Loss on Contribution to a Partnership
Section 721(a) of the Code provides the foundational non-recognition rule governing contributions of property to partnerships. In pertinent part, Section 721(a) provides:
"No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership."
This non-recognition rule applies irrespective of the amount of built-in gain or loss inherent in the contributed property. Thus, even where, as here, the aggregate built-in gain in the contributed property is substantial — approximately $1.202 billion — Section 721(a) operates to defer the recognition of such gain until a subsequent taxable disposition of either the contributed property by the partnership or the partnership interest by the contributing partner.
The legislative purpose underlying Section 721(a) is to facilitate the formation of, and contributions to, partnerships by removing the tax cost that would otherwise attend the transfer of appreciated property. Congress recognized that a contribution of property to a partnership in exchange for a partnership interest is not an appropriate occasion for the imposition of tax, because the contributing partner merely changes the form of ownership without cashing out the economic appreciation inherent in the contributed property. See H.R. Rep. No. 83-1337, at 66 (1954); S. Rep. No. 83-1622, at 94 (1954).
Treasury Regulations Section 1.721-1(a) confirms that Section 721(a) applies to contributions of property to a partnership regardless of whether the contributing partner receives a general or limited partnership interest. The regulation further provides that the non-recognition rule applies to contributions by existing partners as well as contributions made in connection with the formation of the partnership. In the present case, the Contribution involves both the formation of a new partnership (the CV) and the contribution of property (the Portfolio Company interests) by Fund II, acting on behalf of its rolling limited partners, in exchange for limited partnership interests in the CV. The transaction squarely falls within the scope of Section 721(a).
Section 721(b) Exception — Investment Companies. Section 721(b) provides an exception to the general non-recognition rule of Section 721(a) for contributions to an "investment company" (as defined in Section 351(e)(1)). Under Section 351(e)(1) and Treasury Regulations Section 1.351-1(c)(1), a transfer is treated as a transfer to an investment company if: (i) the transfer results, directly or indirectly, in the diversification of the transferors' interests, and (ii) the transferee is a regulated investment company, a real estate investment trust, or a corporation more than 80% of the value of whose assets consist of certain specified types of property held for investment, including money, stocks, securities, and other evidences of indebtedness.
We have analyzed whether the CV could be characterized as an "investment company" within the meaning of Section 721(b) and have concluded that it should not. The Portfolio Companies are operating companies engaged in active business operations — specifically, Luminos operates an AI-powered revenue operations platform, ClearArc provides cloud-native compliance and audit automation software, and Vectral operates a multi-cloud infrastructure orchestration and FinOps platform. The equity interests in the Portfolio Companies are not "readily marketable stocks or securities" within the meaning of Section 351(e)(1), as none of the Portfolio Companies is publicly traded, and the interests held by Fund II are restricted securities subject to contractual transfer restrictions. Moreover, the CV is not being formed for the purpose of holding a diversified portfolio of passive investment assets; rather, the CV is designed to hold and actively manage a concentrated portfolio of three operating companies with the objective of long-term value creation.
Accordingly, we believe that the Section 721(b) exception does not apply to the Contribution.
B. Section 722 — Basis of Contributing Partner's Interest
Section 722 of the Code provides the basis rule for a contributing partner's partnership interest. Section 722 states:
"The basis of an interest in a partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution, increased by the amount (if any) of gain recognized under section 721(b) to the contributing partner at such time."
Applied to the Contribution, Section 722 provides that the rolling limited partners' basis in their respective CV limited partnership interests will equal their respective shares of Fund II's adjusted tax basis in the contributed Portfolio Company interests (and any other property contributed), as determined under the provisions of the CV LPA and the applicable provisions of the Code and Treasury Regulations governing partnership allocations. Because no gain is recognized under Section 721(b) (as discussed above), there is no adjustment to basis on account of recognized gain.
The effect of Section 722 is to preserve the built-in gain inherent in the contributed Portfolio Company interests at the partner level. The rolling limited partners' basis in their CV interests will reflect a carryover of the basis previously attributable to the contributed property, ensuring that the pre-contribution gain of approximately $1.202 billion remains subject to tax when the rolling limited partners ultimately dispose of their CV interests or when the CV disposes of the contributed Portfolio Company interests.
C. Section 723 — Basis of Property Contributed to Partnership
Section 723 of the Code provides the corresponding basis rule for the partnership's basis in contributed property. Section 723 states:
"The basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution, increased by the amount (if any) of gain recognized under section 721(b) to the contributing partner at such time."
Applied to the Contribution, Section 723 provides that the CV will take a "carryover" basis in each contributed Portfolio Company interest equal to Fund II's adjusted tax basis in such interest immediately prior to the Contribution. Specifically:
(a) Luminos Systems Inc.: $58,500,000;
(b) ClearArc Software Inc.: $37,400,000;
(c) Vectral Cloud Inc.: $42,100,000;
(d) Aggregate: $138,000,000.
Because no gain is recognized under Section 721(b), there is no adjustment to the CV's basis in the contributed Portfolio Company interests. The CV's aggregate basis of $138,000,000 in Portfolio Company interests valued at $1,340,000,000 will give rise to significant Section 704(c) built-in gain that must be allocated in accordance with the methodology adopted in the CV LPA (discussed in Section V.G below).
D. Section 1223(1) — Tacking of Holding Period
Section 1223(1) of the Code provides that, in determining the period for which a person has held property, there shall be included the period for which such property was held by any other person, if the property has the same basis in whole or in part in the hands of the person as it would have in the hands of such other person. Because the CV's basis in the contributed Portfolio Company interests is determined under Section 723 by reference to Fund II's basis (a substituted basis), the CV's holding period in each contributed Portfolio Company interest includes Fund II's holding period in such interest.
Accordingly:
(a) The CV's holding period in the Luminos Systems Inc. equity interests will include Fund II's holding period commencing in the first quarter of 2020 (the date of Fund II's initial Series B investment);
(b) The CV's holding period in the ClearArc Software Inc. equity interests will include Fund II's holding period commencing in the second quarter of 2020 (the date of Fund II's initial Series A investment);
(c) The CV's holding period in the Vectral Cloud Inc. equity interests will include Fund II's holding period commencing in March 2021 (the date of Fund II's Series B investment).
Similarly, to the extent the rolling limited partners receive CV limited partnership interests with a basis determined by reference to their basis in Fund II interests under Section 722 (which in turn reflects Fund II's basis in the contributed property), the rolling limited partners' holding period in their CV interests will include their holding period in the contributed Fund II interests, pursuant to the principles of Section 1223(1).
Each of the contributed Portfolio Company interests has been held for more than one year as of the anticipated closing date of October 31, 2025, which is relevant for purposes of determining long-term capital gain treatment under Section 1222 of the Code upon any future disposition of such interests by the CV.
E. Section 707(a)(2)(B) — Disguised Sales
Section 707(a)(2)(B) of the Code provides that, under regulations prescribed by the Secretary of the Treasury, if a partner transfers property to a partnership and there is a related direct or indirect transfer of money or other property by the partnership to such partner, and when viewed together the transfers are properly characterized as a sale or exchange of property, then such transfers shall be treated as a transaction between the partnership and a person who is not a partner. In other words, what is nominally structured as a contribution and distribution may be recharacterized as a taxable sale.
Treasury Regulations Section 1.707-3(b)(1) provides the general rule that a transfer of property by a partner to a partnership and a transfer of money or other consideration by the partnership to the partner constitute a sale of property, in whole or in part, by the partner to the partnership if, based on all the facts and circumstances, the transfer of money or other consideration would not have been made but for the transfer of property, and in cases in which the transfers are not made simultaneously, the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations.
Treasury Regulations Section 1.707-3(c) establishes a rebuttable presumption that applies when a transfer of property by a partner to a partnership and a transfer of money or other consideration by the partnership to the partner occur within a two-year period. In such cases, the transfers are presumed to be a sale unless the facts and circumstances clearly establish otherwise. Conversely, Treasury Regulations Section 1.707-3(d) provides that if the transfers occur more than two years apart, the transfers are presumed not to be a sale unless the facts and circumstances clearly establish otherwise.
Treasury Regulations Section 1.707-3(b)(2) identifies ten factors to be considered in determining whether a transfer and a distribution, when viewed together, constitute a sale. These factors include, among others: (i) whether the timing and amount of the distribution are determinable with reasonable certainty at the time of the contribution; (ii) whether the contributing partner has a legally enforceable right to the distribution; (iii) whether the distribution is designed to effect a sale of the property; (iv) the extent to which the distribution is made in proportion to the partner's interest in partnership profits; and (v) whether the distribution is funded by borrowings or other proceeds not attributable to partnership operations.
Application to the Contribution. We have analyzed the facts of the Contribution against the disguised sale framework and have concluded that the Contribution should not be recharacterized as a disguised sale, for the following reasons:
First, the rolling limited partners are receiving only limited partnership interests in the CV in exchange for the Contribution. They are not receiving cash, marketable securities, notes, or any other form of boot or additional consideration. The receipt of a partnership interest in exchange for contributed property is precisely the transaction contemplated by Section 721(a), and the receipt of such an interest does not, standing alone, implicate the disguised sale rules.
Second, the cash received by the cashing-out limited partners of Fund II (approximately $280,000,000) is funded by Garrison's new capital commitment to the CV, not by the CV distributing proceeds of contributed assets. Critically, the cashing-out limited partners are not contributing to the CV. They are selling their Fund II interests and will not become partners in the CV. The cash paid to cashing-out limited partners flows from Fund II's distribution of the sale proceeds, not from the CV. Accordingly, the cash liquidity provided to cashing-out limited partners does not constitute a transfer of money or property by the CV to a contributing partner within the meaning of Section 707(a)(2)(B).
Third, there is no binding or implied commitment, understanding, or plan for the CV to liquidate any Portfolio Company interest or to distribute proceeds of contributed assets to the rolling limited partners within two years of the Contribution. The CV is intended to be a long-term holding vehicle with a five-year term (plus two one-year extensions), and the transaction documents contain no provisions requiring or contemplating any such distributions.
Fourth, tax distributions to be made under the CV LPA are ordinary-course distributions designed to enable partners to satisfy their income tax obligations and do not constitute disguised sale consideration. Treasury Regulations Section 1.707-4(b) provides a safe harbor for "guaranteed payments for capital" and certain preferred returns, and the tax distribution provisions of the CV LPA are consistent with customary market practice for venture capital continuation vehicles and do not constitute the type of determinable distributions that would give rise to disguised sale treatment.
Fifth, the timing and structure of the transaction are consistent with a bona fide contribution to a partnership. The rolling limited partners are accepting meaningful entrepreneurial risk with respect to the future performance of the Portfolio Companies held by the CV. The value of their CV limited partnership interests will fluctuate based on the performance of the underlying Portfolio Company investments, and there is no guarantee of return of capital or any minimum distribution amount.
F. Section 707(a)(2)(B) — Debt-Financed Distributions and Liability Shifts
Treasury Regulations Section 1.707-5 addresses the treatment of liabilities in the context of the disguised sale analysis. Under these regulations, if a partnership incurs a liability and distributes the proceeds of such liability to a contributing partner, the distribution may be treated as part of a disguised sale to the extent the distribution exceeds the contributing partner's allocable share of the liability under Section 752.
We have analyzed whether any allocation of CV-level liabilities under Section 752 could create disguised sale treatment in connection with the Contribution and have concluded that no such risk exists. Specifically:
(a) There are no material liabilities being shifted to or assumed by the CV in connection with the Contribution. Fund II is not transferring any indebtedness, guarantee obligations, or other liabilities to the CV as part of the transaction.
(b) To the extent the CV incurs liabilities following the closing — for example, a subscription credit facility or other working capital facility — such liabilities will be incurred in the ordinary course of the CV's operations and are not being incurred as part of, or in connection with, the Contribution. Accordingly, any distributions funded by such post-closing liabilities would not be treated as part of the Contribution transaction for disguised sale purposes.
(c) As an additional safeguard, to the extent any partnership liabilities of the CV are allocable to the rolling limited partners for purposes of Section 752, we have assumed (as set forth in Section IV.B.6 above) that such liabilities constitute "qualified liabilities" within the meaning of Treasury Regulations Section 1.707-5(a)(6). Qualified liabilities include liabilities that were incurred in the ordinary course of the trade or business in which property transferred to the partnership was used, liabilities that were not incurred in anticipation of the transfer of property to the partnership, and certain other categories of liabilities described in the regulations. The assumption by the CV of any qualified liabilities would not be treated as part of a disguised sale under Treasury Regulations Section 1.707-5(a)(5).
G. Section 704(c) — Allocations with Respect to Contributed Property
Section 704(c)(1)(A) of the Code provides that income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the adjusted tax basis of the property to the partnership and its fair market value at the time of contribution. The purpose of Section 704(c) is to prevent the shifting of pre-contribution gain or loss from the contributing partner to the non-contributing partners.
In the context of the Contribution, the aggregate built-in gain in the contributed Portfolio Company interests is approximately $1,202,000,000. This built-in gain must be allocated under Section 704(c) to ensure that, upon any future disposition of the contributed Portfolio Company interests by the CV, the pre-contribution gain is allocated to the rolling limited partners (the successor-in-interest to Fund II, the contributing partner), and is not shifted to the new partners (principally Garrison and its affiliates).
The CV LPA, as drafted and reviewed by this firm, adopts the remedial allocation method described in Treasury Regulations Section 1.704-3(d). Under the remedial allocation method, the partnership creates notional tax items to eliminate distortions caused by the ceiling rule. This is the most taxpayer-favorable of the three permissible methods described in Treasury Regulations Section 1.704-3 (traditional method, traditional method with curative allocations, and remedial allocation method) and provides the most complete protection against the shifting of pre-contribution gain to non-contributing partners.
A detailed analysis of the Section 704(c) allocation methodology, including the specific application of the remedial allocation method to each contributed Portfolio Company interest and the interaction of Section 704(c) with the economic waterfall provisions of the CV LPA, is set forth in a separate Section 704(c) Allocation Methodology Memorandum prepared by this firm and delivered to the addressees under separate cover.
For purposes of this opinion, the selection of the Section 704(c) allocation method does not affect the analysis under Section 721(a), and the non-recognition treatment described herein applies regardless of the allocation method selected.
VI. OPINION
Based upon and subject to the assumptions, qualifications, and limitations set forth in this opinion letter, and based upon our analysis of the applicable provisions of the Code, Treasury Regulations, published administrative pronouncements of the IRS, and relevant judicial authorities, we are of the following opinions:
A. Primary Opinion — Section 721(a) Non-Recognition
It is our opinion that the Contribution of Fund II's interests in Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc. to Pinnacle Continuation Vehicle LP, in exchange for limited partnership interests in the CV, should constitute a contribution of property to a partnership in exchange for an interest in the partnership within the meaning of Section 721(a) of the Code, and accordingly, no gain or loss should be recognized by Fund II, the rolling limited partners (in their capacity as successor contributors), or the CV as a result of the Contribution.
We use the word "should" in the preceding sentence to indicate that, in our view, the Contribution will more likely than not qualify for non-recognition treatment under Section 721(a), and we have a high degree of confidence in that conclusion. However, we have not issued a "will" opinion because there is limited direct IRS guidance specifically addressing the application of Section 721(a) to GP-led continuation vehicle transactions of the type described herein, and the IRS could potentially take a contrary position. We are not aware of any published ruling, regulation, or judicial decision that would support such a contrary position, and we believe that the weight of authority and the legislative purpose of Section 721(a) strongly support the conclusion that the Contribution qualifies for non-recognition treatment.
This opinion addresses only the partnership-level contribution and does not address the U.S. federal income tax consequences to individual limited partners arising from their specific circumstances, including without limitation the consequences of the election by individual limited partners to roll into the CV or to cash out of Fund II.
B. Opinion on Basis — Section 722 (Contributing Partners)
It is our opinion that, under Section 722 of the Code, the basis of each rolling limited partner's interest in Pinnacle Continuation Vehicle LP should equal such partner's allocable share of Fund II's adjusted basis in the contributed Portfolio Company interests (and any other contributed property), as determined under the CV limited partnership agreement and the applicable provisions of the Code and Treasury Regulations governing the allocation of partnership basis among partners. Because no gain should be recognized under Section 721(b) (for the reasons set forth in Section V.A above), there should be no adjustment to the rolling limited partners' basis in their CV interests on account of recognized gain.
C. Opinion on Basis — Section 723 (Partnership Property)
It is our opinion that, under Section 723 of the Code, the CV's adjusted tax basis in the contributed Portfolio Company interests should equal Fund II's adjusted tax basis in such interests immediately prior to the Contribution, as follows:
(a) Luminos Systems Inc.: $58,500,000;
(b) ClearArc Software Inc.: $37,400,000;
(c) Vectral Cloud Inc.: $42,100,000;
(d) Aggregate: $138,000,000.
Because no gain should be recognized under Section 721(b), there should be no adjustment to the CV's basis in the contributed Portfolio Company interests on account of recognized gain. The CV will hold the contributed Portfolio Company interests with a carryover basis, and the difference between such basis ($138,000,000) and the fair market value of such interests ($1,340,000,000 as of June 30, 2025) — representing approximately $1,202,000,000 of aggregate built-in gain — will be subject to the Section 704(c) allocation rules as described in Section V.G above and in the separate Section 704(c) Allocation Methodology Memorandum.
D. Opinion on Holding Period — Section 1223(1)
It is our opinion that, under Section 1223(1) of the Code, the CV's holding period in each contributed Portfolio Company interest should include Fund II's holding period in such interest. Specifically:
(a) The CV's holding period in the Luminos Systems Inc. equity interests should include the period commencing in the first quarter of 2020;
(b) The CV's holding period in the ClearArc Software Inc. equity interests should include the period commencing in the second quarter of 2020;
(c) The CV's holding period in the Vectral Cloud Inc. equity interests should include the period commencing in March 2021.
As of the anticipated closing date of October 31, 2025, each of the contributed Portfolio Company interests will have been held for more than one year, satisfying the long-term capital gain holding period requirement under Section 1222 of the Code.
E. Opinion on Disguised Sale — Section 707(a)(2)(B)