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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION

This memorandum is a privileged and confidential attorney-client communication. It is not intended for distribution to or reliance by any third party. Any disclosure, copying, or distribution of this memorandum or the information contained herein is strictly prohibited without the prior written consent of Calderwood & Harkness LLP.

FROM: Garrett Simmons, Lead Associate, Tax Leila Nazari, Working Associate, Tax Calderwood & Harkness LLP 555 California Street, Suite 4200 San Francisco, CA 94104

TO: Sylvia Hartwell, Responsible Partner, Tax Calderwood & Harkness LLP

CC: Leonard Cross, Billing Partner, Tax Calderwood & Harkness LLP

DATE: August 8, 2025

RE: State Tax Nexus and Withholding Analysis — Pinnacle Continuation Vehicle LP

ENGAGEMENT REFERENCE: 1002-00005 / Matter No. 117443.00001

CLIENT: Pinnacle Capital Management LLC (EIN 82-6140538)

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I. Executive Summary

This memorandum presents our analysis of the state-level income tax obligations of Pinnacle Continuation Vehicle LP ("PCV" or the "CV") and its investors across the five key jurisdictions implicated by the CV transaction: California, Delaware, Texas, Colorado, and New York. This analysis is intended to inform the structuring and documentation of the CV, including specific provisions to be incorporated into the CV's limited partnership agreement (the "LPA"), and to ensure that the GP and its counsel are positioned to manage multi-state tax compliance obligations from inception.

Transaction Context. As discussed in our comprehensive Tax Structure Memorandum delivered concurrently with this memo, Pinnacle Venture Fund II LP (EIN 84-3291067), a Delaware limited partnership (the "Fund II"), is forming PCV as a new Delaware limited partnership to serve as a continuation vehicle holding concentrated stakes in three portfolio companies: (i) Luminos Systems Inc., a Delaware corporation headquartered in San Francisco, California; (ii) ClearArc Software Inc., a Delaware corporation headquartered in Austin, Texas; and (iii) Vectral Cloud Inc., a Delaware corporation headquartered in Denver, Colorado. The CV's total capitalization is projected at approximately $1.074 billion, comprising approximately $680 million from rolling limited partners of Fund II, $380 million of new capital from Garrison Secondaries Fund IV LP as the lead secondary buyer, and approximately $14 million of GP co-investment.

Investor Base. The investor base of the CV spans multiple jurisdictions and investor types, each presenting distinct state tax considerations. The GP entities — principally Pinnacle Capital Management LLC, headquartered at 2100 Sand Hill Road, Menlo Park, California 94025 — are California-based, creating California nexus for the CV as a threshold matter. U.S. tax-exempt investors, including Meridian Public Employees' Retirement System (committing $125 million) and Ashford University Endowment (committing $50 million), will invest through PCV Domestic blocker Inc., a proposed Delaware C-corporation. A non-U.S. investor, Sovereign Capital Partners (Cayman) Ltd. (committing $75 million), will invest through PCV International Holdings Ltd., a proposed Cayman Islands exempted company. Garrison Secondaries Fund IV LP, domiciled at 399 Park Avenue, 22nd Floor, New York, New York 10022, is committing $380 million of new capital. Various other limited partners of Fund II, including Redstone Family Office LLC, are either rolling into the CV or cashing out in the secondary transaction.

Key Findings. Our analysis yields the following principal conclusions:

(a) California presents the most significant state tax exposure for the CV and its investors. California does not conform to Internal Revenue Code ("IRC") Section 1202, rendering the qualified small business stock ("QSBS") gain exclusion unavailable for California income tax purposes. Moreover, California taxes capital gains at ordinary income rates, with a top marginal rate of 13.3%. For the Luminos Systems position alone, this could result in up to approximately $73.6 million of California tax exposure on the $553.5 million of built-in gain attributable to California-resident investors.

(b) Colorado imposes a flat 4.4% income tax on Colorado-source income and requires pass-through entity withholding for nonresident partners. Colorado does, however, conform to IRC Section 1202, which may benefit investors upon disposition of the Vectral Cloud position once the five-year holding period is satisfied in March 2026.

(c) Texas imposes no individual income tax, eliminating individual-level Texas tax exposure for partners of the CV. However, the Texas margin tax (franchise tax) may apply to the CV or blocker entities if they are deemed to be "doing business in Texas" by virtue of the CV's ownership of ClearArc Software shares, though the exposure is likely minimal for a passive investment vehicle.

(d) Delaware imposes no state-level income tax on LP income allocated to non-resident limited partners of a Delaware partnership. Delaware does impose modest annual franchise tax obligations ($300 per year for limited partnerships and LLCs), and PCV Domestic blocker Inc. will be subject to the Delaware corporate franchise tax regime.

(e) New York source income analysis is critical for Garrison Secondaries Fund IV LP and any other New York-domiciled investors. Based on our analysis, the CV is unlikely to generate New York-source income, as none of the portfolio companies are located in New York, and GP activities are conducted from California. However, any GP management or investment advisory activities occurring in New York could create nexus, and Garrison's own pass-through entity tax considerations should be addressed by its counsel.

Recommendations. Based on the analysis set forth in this memorandum, we recommend the following actions:

(1) The CV should file composite state tax returns in California and Colorado on behalf of nonresident individual LPs, with appropriate authority granted in the LPA.

(2) The LPA should include robust withholding provisions authorizing the GP to withhold and remit state income taxes on behalf of nonresident partners in California, Colorado, and any other jurisdiction imposing withholding requirements.

(3) The GP should evaluate available pass-through entity tax ("PTET") elections where beneficial, particularly if the CV generates income sourced to states that have enacted such elective regimes.

(4) Careful sourcing analysis should be performed for gain on portfolio company dispositions, particularly with respect to California's potential assertion that gains realized by a California-managed partnership constitute California-source income allocable to all partners, including nonresidents.

(5) These provisions and recommendations should be coordinated with Hawthorne Reid LLP, which is drafting the CV LPA.

Each of these recommendations is discussed in greater detail in the sections that follow.

II. Scope and Background

A. Engagement Context

Calderwood & Harkness LLP was engaged on July 15, 2025 as tax counsel to Pinnacle Capital Management LLC in connection with the fund-level tax structuring of the CV transaction. Our engagement encompasses both federal and state tax analysis, tax-related provisions for the CV's organizational documents, and coordination with counsel to the GP and to transaction counterparties on tax matters.

This memorandum supplements the comprehensive Tax Structure Memorandum delivered concurrently (the "Federal Memo"), which addresses federal income tax considerations including, among other topics, the Section 721 contribution mechanics, Section 704(c) allocation methodologies, Section 1202 QSBS eligibility analysis, disguised sale risk under Section 707, and UBTI structuring for tax-exempt investors. This memorandum focuses exclusively on state and local tax matters implicated by the CV transaction across the five key jurisdictions identified above.

Hawthorne Reid LLP (Vanessa Liu, Partner, 2000 University Avenue, Suite 500, Palo Alto, California 94303) has been retained to draft the CV LPA and related organizational documents. We understand that Ms. Liu's team has prepared an initial draft of the LPA and that our team will be providing a markup of the tax-related provisions. The withholding, composite return, and state tax provisions recommended herein should be coordinated into the LPA draft through that process. We further understand that Whitfield & Calloway LLP (Douglas Whitfield, Partner, 280 Park Avenue, 30th Floor, New York, New York 10017) is serving as counsel to Garrison Secondaries Fund IV LP and its GP, Garrison Capital Advisors LLC, and that Andover & Strauss LLP (Patricia Clemons, Audit Partner, 350 South Grand Avenue, Suite 2600, Los Angeles, California 90071) serves as the independent auditor for Fund II and is expected to serve as auditor for the CV.

B. Transaction Summary (State Tax Perspective)

From a state tax perspective, the CV transaction involves the following principal steps relevant to this analysis:

Contribution of Portfolio Company Shares. Pinnacle Venture Fund II LP will contribute its portfolio company shares to PCV in a transaction intended to qualify for non-recognition treatment under IRC Section 721. The aggregate fair market value ("FMV") of the contributed portfolio is approximately $1.34 billion, against an aggregate original cost basis of approximately $138 million, resulting in aggregate unrealized built-in gain of approximately $1.202 billion. The portfolio company breakdown, along with key nexus implications, is as follows:

State conformity with IRC Section 721 is assessed in Section IX below. As a preliminary matter, we note that all five analyzed jurisdictions either conform to Section 721 or do not impose a relevant income tax that would apply to the contribution, meaning the contribution should not trigger state-level gain recognition.

Capitalization and Investor Base. The CV will be capitalized as follows:

• Rolling limited partners from Fund II: approximately $680 million

• Garrison Secondaries Fund IV LP (new capital): $380 million

• GP co-investment (Pinnacle Capital Management LLC and affiliates): approximately $14 million

• Total: approximately $1.074 billion

Key Investors by State Nexus. The following investors and their state nexus are particularly relevant to this analysis:

• GP Principals — Marcus Aldren (Managing Partner), Diana Tsao (Partner), and Rafael Montoya (Partner) are all residents of the State of California and conduct GP activities from Pinnacle Capital Management LLC's offices at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025.

• Garrison Secondaries Fund IV LP — Domiciled in Delaware with its principal office at 399 Park Avenue, 22nd Floor, New York, New York 10022. Garrison Capital Advisors LLC (Mitchell Adler, Partner) serves as Garrison's GP. Garrison is committing $380 million of new capital, representing approximately 35.4% of the CV's total capitalization.

• Tax-Exempt Investors — Meridian Public Employees' Retirement System ($125 million) and Ashford University Endowment ($50 million) will invest through PCV Domestic blocker Inc., a proposed Delaware C-corporation designed to shield these investors from unrelated business taxable income ("UBTI"). Their state tax obligations are primarily a function of the blocker's state nexus and filing obligations, discussed in Section VIII.B below.

• Non-U.S. Investor — Sovereign Capital Partners (Cayman) Ltd. ($75 million) will invest through PCV International Holdings Ltd., a proposed Cayman Islands exempted company, designed to prevent effectively connected income ("ECI") at the partnership level. State tax considerations for this entity are discussed in Section VIII.B below.

• Redstone Family Office LLC — Cashing out of its Fund II position and not rolling into the CV. No CV-level state tax analysis is required for Redstone, though state tax consequences of its Fund II redemption should be addressed separately as part of the broader transaction tax analysis.

C. Assumptions and Limitations

This analysis is based on the following assumptions and is subject to the following limitations:

1. Our analysis is based on current state tax laws, regulations, and publicly available administrative guidance as of August 2025. State tax laws are subject to change by legislation, regulation, or judicial decision, and any such changes could materially affect the conclusions reached herein.

2. This memorandum does not address local (city or county) tax obligations, including, without limitation, the San Francisco payroll expense tax, the Austin municipal property tax, or the Denver occupational privilege tax, except where specifically noted. A separate analysis of local tax obligations may be warranted depending on the nature and extent of the CV's activities in these jurisdictions.

3. We assume that the CV will be treated as a partnership for federal income tax purposes and that all relevant states will respect the federal classification. Each of the five analyzed jurisdictions generally conforms to federal entity classification rules, and we are not aware of any basis on which a state would treat the CV differently from its federal classification.

4. We assume that the factual representations provided by Pinnacle Capital Management LLC and its representatives regarding the structure, capitalization, and operations of the CV and its portfolio companies are complete and accurate. Our analysis may need to be revised if the underlying facts change materially.

5. Dollar amounts, valuations, ownership percentages, and investor commitments referenced in this memorandum are based on information provided by Pinnacle Capital Management LLC and reflect current projections as of the date of this memorandum. Final amounts may differ upon closing.

III. California

A. Overview of California Nexus

California presents the most significant state tax exposure for the CV and its investors, for several reasons. First, the GP of the CV — Pinnacle CV Partners LLC, acting through its managing member, Pinnacle Capital Management LLC — is headquartered in California, at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025. The GP principals (Marcus Aldren, Diana Tsao, and Rafael Montoya) are all California residents who conduct substantially all GP management and investment advisory activities from the Menlo Park office. Under California law, a partnership is treated as having California nexus if its general partner or managing member conducts business in California or if the partnership derives income from California sources. Cal. Rev. & Tax. Code §§ 17951, 18535. Accordingly, the CV will have California nexus from inception by virtue of the GP's California-based activities.

Second, Luminos Systems Inc. — the CV's largest single portfolio holding, with an FMV of $612 million representing approximately 45.7% of the total portfolio value — is headquartered at 500 Folsom Street, 14th Floor, San Francisco, California 94105. The CV's 24.7% fully diluted ownership interest in Luminos, combined with the GP's California-based management activities relating to the Luminos investment (including board participation and regular oversight), reinforces the CV's California nexus and raises significant questions regarding the sourcing of gain upon a future disposition of the Luminos position.

Third, the GP principals are California residents and will be subject to California income tax on their allocable shares of CV income regardless of source. For non-California investors, however, the extent of California tax exposure depends on the sourcing analysis discussed in Section III.C below.

For all of these reasons, California is the jurisdiction of primary concern from a state tax perspective, and we address it first and in the greatest detail.

B. Nonconformity with Section 1202 (QSBS)

Perhaps the single most significant state tax issue for the CV and its investors is California's nonconformity with IRC Section 1202, which provides for the exclusion from gross income of gain realized on the sale or exchange of qualified small business stock ("QSBS"). As detailed in our Federal Memo, two of the three portfolio companies — Luminos Systems Inc. and ClearArc Software Inc. — currently satisfy the requirements for QSBS treatment at the federal level, and Vectral Cloud Inc. is expected to satisfy the five-year holding period requirement in March 2026. At the federal level, Section 1202(a)(1) permits eligible taxpayers to exclude from gross income 100% of the gain recognized on the sale or exchange of QSBS acquired after September 27, 2010 and held for more than five years, subject to the per-issuer gain limitation of the greater of $10 million or ten times the taxpayer's adjusted basis in the stock.

California's Position. California has not enacted legislation conforming to IRC Section 1202. The California Revenue and Taxation Code does not provide for a QSBS exclusion, and the Franchise Tax Board ("FTB") has consistently confirmed that gain from the sale of QSBS is fully taxable for California income tax purposes. See Cal. Rev. & Tax. Code § 17024.5 (California's selective IRC conformity provision, which does not incorporate Section 1202). This position has been maintained through multiple legislative sessions despite periodic proposals to adopt partial conformity.

Practical Effect. The consequence of California's nonconformity is that even where LPs qualify for the federal Section 1202 exclusion — which could be substantial given the magnitude of the built-in gains — California will tax 100% of the realized gain at ordinary income rates. California does not provide a preferential rate for long-term capital gains; all capital gains are taxed as ordinary income. The top marginal individual income tax rate in California is 13.3%, which includes the 1% mental health services surcharge imposed on taxable income exceeding $1 million under Cal. Rev. & Tax. Code § 17043.

To illustrate the magnitude of the exposure, consider the following analysis for the Luminos Systems position:

• Federal QSBS Exclusion Potential: For eligible taxpayers, the Section 1202 exclusion on a per-issuer basis is the greater of $10 million or ten times the taxpayer's adjusted basis in the QSBS. The CV's aggregate cost basis in Luminos is $58.5 million, yielding a per-taxpayer exclusion ceiling of up to $585 million (10 × $58.5 million), subject to allocation among partners under applicable partnership allocation rules and the per-taxpayer nature of the Section 1202 limitation. The aggregate unrealized gain on the Luminos position is $553.5 million.

• California Tax Exposure: Because California does not recognize the Section 1202 exclusion, California-resident investors would owe California income tax on their full allocable share of the gain. At the 13.3% top rate, the aggregate California tax exposure on the $553.5 million of built-in Luminos gain — assuming full California sourcing for resident investors — could be as high as approximately $73.6 million (13.3% × $553.5 million).

• ClearArc Software: Similar analysis applies. The CV's aggregate cost basis in ClearArc is $37.4 million, yielding a federal per-taxpayer exclusion ceiling of up to $374 million (10 × $37.4 million). The aggregate unrealized gain on ClearArc is $430.6 million. California would tax 100% of any realized gain, potentially generating up to approximately $57.3 million in California tax liability (13.3% × $430.6 million) for California-resident investors.

• Vectral Cloud: The Vectral Cloud QSBS holding period has not yet been satisfied (expected March 2026). This means that at both the federal and state levels, a disposition of Vectral Cloud before March 2026 would not qualify for Section 1202 treatment. After March 2026, federal QSBS treatment may be available, but California would continue to disallow the exclusion.

The total aggregate California tax exposure across all three portfolio companies, for California-resident investors, could exceed $130 million in the event of full dispositions. This is the single largest state tax risk factor in the CV transaction and should be prominently disclosed in the CV's offering materials.

Legislative Watch. We note that proposals to adopt partial conformity with Section 1202 have been introduced in the California Legislature in prior sessions. As of the date of this memorandum, no such legislation has been enacted or is pending in the current 2025 legislative session. We will continue to monitor developments in this area and will advise promptly if there is any change in California's position.

C. Sourcing of Partnership Income — Portfolio Company Gains

A critical question for non-California investors in the CV is whether gain on the sale or disposition of portfolio company shares by the CV constitutes California-source income allocable to such non-California investors.

General Rule — Intangible Personal Property. Under the California Revenue and Taxation Code, gain from the sale of intangible personal property — including stock — is generally sourced to the domicile or commercial domicile of the seller. For individual taxpayers, this means that a nonresident individual's gain from the sale of stock is generally not California-source income, provided the gain is not attributable to a California trade or business. Cal. Rev. & Tax. Code § 17952.

Partnership Income — FTB's Aggressive Position. However, the sourcing of partnership income presents a more complex picture. California law provides that a nonresident partner's share of partnership income is California-source income to the extent the partnership derives income from California sources. Cal. Rev. & Tax. Code § 17951. The FTB has taken the position in certain audits and rulings that where a partnership is managed from California, gains realized by the partnership from the sale of intangible personal property may be treated as income from a California trade or business, and therefore California-source income, allocable to all partners — including nonresidents.

This position is grounded in the theory that the partnership's business — including its investment management and disposition activities — is conducted in California if the GP's management functions are performed in California. Under this theory, the income is not merely passive income from the sale of intangible property (which would be sourced to the partner's domicile under Section 17952) but rather income from the active conduct of a trade or business in California through the partnership.

Judicial and Administrative Guidance. California case law and FTB rulings in this area are not entirely settled. The FTB's position has been challenged by taxpayers, and there is tension between Section 17952 (sourcing intangible income to domicile) and Section 17951 (sourcing partnership income to the state where the partnership's business is conducted). The California Court of Appeal's decision in Valentino v. Franchise Tax Board (2001) 87 Cal.App.4th 1284 addressed certain aspects of the sourcing of partnership income to nonresident partners, but the interplay between the "trade or business" sourcing rule and the intangible income rule remains an area of evolving interpretation.

Market-Based Sourcing vs. Cost-of-Performance. For taxable years beginning on or after January 1, 2013, California transitioned to a "market-based sourcing" regime for apportioning business income of multistate businesses. Under market-based sourcing, sales of services and intangibles are sourced to the location of the customer or market. However, the application of market-based sourcing to investment partnership income — particularly to gains from the sale of portfolio company stock — is not straightforward. The FTB's regulations under Cal. Code Regs. tit. 18, § 25136-2 provide some guidance, but the rules were primarily designed for operating businesses, and their application to investment partnerships remains uncertain.

Implications for Non-California LPs. For non-California limited partners such as Garrison Secondaries Fund IV LP (New York) and other rolling LPs domiciled outside California, the sourcing determination is critical:

• If gains from the CV's disposition of portfolio company shares are treated as California-source income, Garrison and other nonresident LPs would have California filing obligations and exposure to California's 13.3% rate on their allocable shares of such gains.

• If the gains are treated as non-California-source intangible income, nonresident LPs would generally not be subject to California tax on such gains (subject to the credit mechanism of their home states).

Apportionment Analysis. Even if the FTB asserts that the CV's gain is California-source business income, an apportionment analysis may reduce the share of income attributable to California. Only one of the CV's three portfolio companies — Luminos Systems — is headquartered in California. ClearArc Software is in Texas, and Vectral Cloud is in Colorado. If the CV's income is apportioned based on the location of its portfolio company operations (or based on the relative values of its holdings), California's apportioned share would be less than 100%. Based on relative FMV, the California-apportioned share might be approximately 45.7% ($612 million Luminos FMV ÷ $1.34 billion total portfolio FMV), though the precise apportionment methodology would depend on the applicable factors and their weighting.

Recommendation. Given the uncertainty in California sourcing law and the FTB's aggressive posture, we recommend that the CV take a conservative approach in its compliance and disclosure:

(i) The CV should assume, for withholding and tax distribution purposes, that gains from the Luminos disposition are California-source income allocable to all partners, and should consider whether gains from ClearArc and Vectral Cloud dispositions may also be characterized as California-source to the extent the GP's management activities in connection with those investments are conducted in California.

(ii) The CV's offering materials should disclose to all investors the potential for California tax exposure on gains from portfolio company dispositions, regardless of the investor's state of domicile.

(iii) The CV should preserve the argument that gains from the sale of stock — as intangible personal property — should be sourced to each partner's domicile under Section 17952, and should be prepared to contest the FTB's position if necessary.

D. California Withholding Requirements

California imposes mandatory withholding on distributions of California-source income to nonresident partners of pass-through entities. Under Cal. Rev. & Tax. Code § 18662 and FTB guidance, pass-through entities — including limited partnerships such as the CV — must withhold California income tax on California-source income allocated to nonresident members, partners, and shareholders.

The applicable withholding rate is the highest marginal rate for the type of taxpayer: currently 12.3% for nonresident individuals (before the mental health services surcharge), and 13.3% for income over $1 million (including the 1% surcharge). For corporate nonresident partners, the withholding rate is 8.84%, corresponding to the California corporate income tax rate.

The withholding obligation applies to each payment or distribution of California-source income made by the pass-through entity. The entity must file and remit withholding on Form 592 (Resident and Nonresident Withholding Statement) or Form 592-PTE (Pass-Through Entity Annual Withholding Return), depending on the applicable filing method.

LPA Provisions. The CV LPA should include provisions expressly authorizing the GP to withhold and remit California state tax on behalf of nonresident partners, and to deduct withheld amounts from distributions otherwise payable to such partners. These provisions should also specify that withheld amounts will be treated as distributions to the affected partners for purposes of the LPA's distribution waterfall.

blocker Entities. PCV Domestic blocker Inc. (proposed Delaware C-corporation) and PCV International Holdings Ltd. (proposed Cayman Islands exempted company) may also be subject to California corporate income tax on California-source income flowing through the CV. PCV Domestic blocker Inc. would be subject to the California corporate income tax rate of 8.84% on its apportioned California-source income. PCV International Holdings Ltd., as a foreign corporation with California-source income, would be subject to California corporate income tax at 8.84% to the extent it has California nexus or derives California-source income. The withholding obligation of the CV extends to these entities as well, to the extent they are treated as nonresident partners receiving California-source income.

E. Composite Return Filing

California permits the filing of composite (group) nonresident returns on behalf of nonresident partners of a pass-through entity. Under FTB guidance, a partnership may file a group nonresident return (Form 540NR, group filing) on behalf of "qualified nonresident individuals" who meet certain requirements, including that the only California-source income of such individuals is the income from the partnership.

Recommendation. We recommend that the CV file composite California returns on behalf of nonresident individual LPs who meet the eligibility criteria for group filing. This approach simplifies compliance for nonresident LPs, reduces the administrative burden on the GP, and ensures timely remittance of California tax obligations. The LPA should include provisions authorizing the GP to file composite California returns on behalf of eligible nonresident individual LPs, with an opt-out mechanism for LPs who prefer to file individual California returns. LPs who elect to opt out should be required to provide written notice and agree to file their own California nonresident returns.

It should be noted that composite filing is generally available only for individual nonresident LPs, not for entity LPs (such as Garrison Secondaries Fund IV LP). Entity LPs with California filing obligations will need to file their own California returns.

F. Section 721 Conformity

California generally conforms to federal partnership provisions, including IRC Section 721, which provides for non-recognition of gain or loss on the contribution of property to a partnership in exchange for a partnership interest. Cal. Rev. & Tax. Code § 17024.5(a) (selective conformity to IRC); Cal. Rev. & Tax. Code § 17851 et seq. (California partnership provisions generally following federal rules).

Accordingly, the Section 721 contribution of portfolio company shares from Fund II to the CV should be treated as a non-recognition event for California income tax purposes. No gain or loss should be recognized by Fund II, the CV, or any partner at the time of the contribution.

California also conforms to the disguised sale provisions of IRC Section 707(a)(2)(B), meaning that the same federal analysis of disguised sale risk (discussed in the Federal Memo) applies at the California state level. As discussed in the Federal Memo, we have concluded that the Section 721 contribution, as structured, should not be recharacterized as a disguised sale under Section 707, and this conclusion holds for California purposes as well.

IV. Delaware

A. Formation State — No State Income Tax on LP Income

PCV will be formed as a Delaware limited partnership under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101 et seq. Pinnacle CV Partners LLC, the general partner of the CV, will be formed as a Delaware limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq.

Delaware does not impose state-level income tax on LP income allocated to non-resident limited partners of a Delaware partnership. This is a foundational reason why Delaware is the preferred formation jurisdiction for investment partnerships. Delaware's income tax applies only to Delaware-resident individuals and to corporations doing business in Delaware; it does not reach through the partnership to tax nonresident limited partners on their distributive shares of partnership income simply because the partnership is formed in Delaware.

Moreover, Delaware does not impose income tax on entities organized in Delaware if they do not conduct business in Delaware. Delaware provides a statutory "safe harbor" for holding companies, investment vehicles, and similar entities that are incorporated or organized in Delaware but maintain no physical presence, employees, or operational activities in the state. So long as PCV does not conduct business activities in Delaware beyond maintaining its registered agent and organizational filings, it should not be subject to Delaware corporate or personal income tax.

PCV Domestic blocker Inc. will be formed as a Delaware C-corporation to serve as the investment vehicle for U.S. tax-exempt investors (Meridian Public Employees' Retirement System and Ashford University Endowment). Delaware will impose its corporate income tax — at a flat rate of 8.7% — on the blocker only if the blocker has nexus in Delaware beyond mere incorporation. Because PCV Domestic blocker Inc. is expected to be a passive holding company with no Delaware employees, offices, or operational activities, it should not be subject to Delaware corporate income tax on this basis. However, the blocker's Delaware franchise tax obligations are addressed below.

B. Annual Franchise Tax

Although Delaware imposes no income tax on the CV or its limited partners, all Delaware entities are subject to annual franchise tax obligations, as follows:

• Delaware Limited Partnerships (PCV): Annual tax of $300 per year, due by June 1 of each year. The partnership must file an annual report with the Delaware Secretary of State.

• Delaware LLCs (Pinnacle CV Partners LLC): Annual tax of $300 per year, due by June 1 of each year. No annual report filing is required for LLCs, but the annual franchise tax must be paid to maintain good standing.

• Delaware C-Corporations (PCV Domestic blocker Inc.): Subject to the Delaware corporate franchise tax, which is calculated using either the authorized shares method or the assumed par value capital method, whichever results in a lower tax. An annual report must be filed with the Delaware Division of Corporations by March 1 of each year. The minimum franchise tax for a corporation is $175 per year, but the actual tax will depend on the blocker's authorized shares, par value, and assets. For a blocker entity with substantial assets ($175 million in aggregate investor commitments flowing through it), the franchise tax under the assumed par value capital method could be significant if not carefully managed through appropriate capitalization structure. We recommend consulting with Delaware counsel regarding the optimal authorized shares and par value structure to minimize the annual franchise tax.

All Delaware entities formed in connection with the CV transaction require the maintenance of a registered agent in Delaware. We understand that Pacific Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801, currently serves as the registered agent for Fund II and will serve in the same capacity for PCV and the other new Delaware entities. The Delaware LP file number for Fund II is DE-LP-2019-04817. New file numbers will be assigned for PCV, Pinnacle CV Partners LLC, and PCV Domestic blocker Inc. upon filing of the respective formation documents with the Delaware Secretary of State.

C. Other Delaware Considerations

Delaware does not impose a sales or use tax, and does not impose a personal property tax that would be relevant to the CV's operations. There are no Delaware withholding obligations on partnership distributions to nonresident LPs, as Delaware does not tax such distributions.

In summary, Delaware's role in the CV structure is limited to serving as the formation jurisdiction. The annual franchise tax obligations are modest and administrative in nature, and Delaware should not impose any material tax burden on the CV or its investors.

V. Texas

A. Overview — No Individual Income Tax

ClearArc Software Inc. (EIN 83-5519274), the CV's second-largest portfolio holding, is headquartered at 1201 Lake Austin Blvd, Suite 600, Austin, Texas 78703, under the leadership of its CEO, Jonathan Hargrove. The CV holds a 31.2% fully diluted ownership interest in ClearArc, with an FMV of $468 million, a cost basis of $37.4 million, and unrealized built-in gain of $430.6 million. ClearArc's Texas headquarters creates a connection between the CV and the State of Texas that must be assessed for potential Texas tax implications.

The most significant feature of Texas's tax landscape, from the perspective of the CV and its investors, is that Texas does not impose an individual income tax. Article VIII, Section 24-a of the Texas Constitution prohibits the imposition of a state income tax on individuals unless approved by Texas voters in a statewide referendum. Accordingly, individual partners of the CV — regardless of whether they are Texas residents — will not owe Texas individual income tax on any income sourced to Texas, including gain from the future disposition of the ClearArc position. This eliminates the most significant category of state tax exposure for individual investors with respect to the Texas nexus.

B. Texas Margin Tax (Franchise Tax)

Although Texas does not impose an individual income tax, it does impose a margin tax (also referred to as the Texas franchise tax) on entities "doing business in Texas." The margin tax applies to corporations, limited partnerships, limited liability companies, and certain other legal entities with sufficient Texas nexus. Tex. Tax Code § 171.001 et seq.

Nexus Analysis. The threshold question is whether PCV has sufficient nexus with Texas to be subject to the Texas margin tax. The CV's primary connection to Texas is its ownership of a 31.2% fully diluted stake in ClearArc Software Inc. Under Texas law, an entity has nexus if it has "physical presence" in Texas or if it "has Texas nexus under the applicable legal standard" for doing business in the state. Tex. Tax Code § 171.001.

Passive ownership of stock in a Texas corporation, without more, may not constitute "doing business in Texas" for purposes of the margin tax. The Texas Comptroller's office has generally held that a mere ownership interest in a Texas entity does not, by itself, create Texas nexus for the owner. However, if the CV — through its GP — exercises significant management or operational control over ClearArc from Texas, or if GP personnel are regularly present in Texas for fund management activities related to the ClearArc investment (including board meetings, operational reviews, or strategic planning sessions conducted in Texas), nexus could be established.

We recommend that the GP assess the extent of its Texas-based activities relating to ClearArc. If the GP's Texas activities are limited to occasional board meetings and do not rise to the level of a regular or systematic course of business conduct in Texas, the CV may have a strong position that it does not have Texas margin tax nexus. However, to the extent that GP personnel travel to Austin with regularity and engage in management or advisory activities at ClearArc's offices, the risk of establishing Texas nexus increases.

Margin Tax Mechanics. If the CV is determined to have Texas nexus, the margin tax is imposed at the following rates:

• 0.375% for entities primarily engaged in retail or wholesale trade

• 0.75% for all other entities

The tax is imposed on the entity's "taxable margin," which is the lesser of: (a) 70% of total revenue; (b) total revenue minus cost of goods sold; or (c) total revenue minus compensation. Additionally, entities with total revenue of $2.47 million or less (for 2025) are not required to pay the tax, though they may still have a filing obligation.

For a passive investment vehicle like the CV, the margin tax exposure is likely minimal. The CV's "total revenue" for Texas margin tax purposes would need to be carefully analyzed, but investment income (such as dividends and capital gains from portfolio company dispositions) may be excludable from total revenue under certain provisions of the Texas Tax Code, and the cost-of-goods-sold or compensation deductions would likely reduce the taxable margin substantially. Nevertheless, the filing obligation — even if the tax owed is zero or de minimis — should be monitored.

blocker Consideration. PCV Domestic blocker Inc. (Delaware C-corporation): If the blocker is treated as a direct or indirect owner of ClearArc shares and derives Texas-source income, it may also have Texas margin tax obligations as a "taxable entity" under the Texas Tax Code. The margin tax analysis for the blocker would follow the same framework described above.

C. Texas Withholding

Texas has no individual income tax withholding regime applicable to partnerships or other pass-through entities. Because Texas does not impose an individual income tax, there is no obligation for the CV to withhold Texas taxes on distributions to partners. No composite return filing is required or available in Texas for pass-through entity partners.

In summary, Texas presents a comparatively low state tax risk for the CV and its investors. The individual income tax absence eliminates the most significant potential exposure, and the margin tax risk is likely minimal for a passive investment partnership. The primary compliance item is monitoring Texas margin tax filing obligations, which may require a no-tax-due or information filing even if no margin tax is owed.

VI. Colorado

A. Overview — Flat Income Tax Rate

Vectral Cloud Inc. (EIN 85-1102847), the CV's third portfolio company, is headquartered at 700 17th Street, Suite 2200, Denver, Colorado 80202, under the leadership of its CEO, Elena Kowalski. The CV holds an 18.9% fully diluted ownership interest in Vectral Cloud, with an FMV of $260 million, a cost basis of $42.1 million, and unrealized built-in gain of $217.9 million.

Colorado imposes a flat income tax rate of 4.4% (effective for the 2025 tax year, as adjusted by recent legislation reducing the rate from prior levels) on Colorado-source taxable income. This rate applies equally to individuals, trusts, and estates. Colo. Rev. Stat. § 39-22-104. For nonresident individuals, Colorado-source income includes income derived from sources within Colorado, including the nonresident's distributive share of income from a Colorado partnership, S corporation, or other pass-through entity to the extent that such income is attributable to Colorado sources. Colo. Rev. Stat. § 39-22-109.

While Colorado's 4.4% rate is significantly lower than California's 13.3% rate, the Colorado exposure is nonetheless meaningful given the $217.9 million of built-in gain in the Vectral Cloud position and the CV's potential Colorado nexus.

B. Nexus and Sourcing Analysis

The CV's ownership of Vectral Cloud shares creates a connection to Colorado, and the extent to which that connection rises to the level of Colorado nexus depends on the nature and scope of the CV's activities relating to the Vectral Cloud investment.

Nexus Determination. Under Colorado law, a partnership is treated as doing business in Colorado if it conducts activities in Colorado that constitute a trade or business or if it derives income from Colorado sources. The CV's ownership of Vectral Cloud stock and the GP's management and oversight activities related to Vectral Cloud — including board participation, strategic advising, and periodic on-site management involvement — may be sufficient to establish Colorado nexus. If the GP's activities relating to Vectral Cloud involve regular travel to Denver, attendance at Vectral Cloud board meetings in Colorado, or other substantive management engagement within the state, Colorado nexus is likely present.

Sourcing of Gain on Disposition. Assuming Colorado nexus is established, the key question is whether gain on a future disposition of Vectral Cloud shares by the CV constitutes Colorado-source income allocable to nonresident partners. Under Colorado law, gain from the sale of a partnership interest or from the sale of assets (including stock) held by a partnership is generally sourced using an apportionment-based approach if the selling entity has Colorado nexus. The Colorado Department of Revenue applies sourcing rules that look to the location of the partnership's business activities and the situs of the assets generating the income.

For gain from the sale of stock in a Colorado-headquartered company by a partnership with Colorado nexus, the gain is likely to be treated as Colorado-source income, at least in part, and allocable to all partners (including nonresidents) based on their distributive shares. Colorado's 4.4% flat rate would apply to such Colorado-source income.

Quantification. If the full $217.9 million of built-in gain on Vectral Cloud is treated as Colorado-source income upon disposition, the aggregate Colorado tax exposure would be approximately $9.6 million (4.4% × $217.9 million), allocated among all partners based on their distributive shares. This figure represents the maximum Colorado exposure; the actual exposure may be lower if apportionment reduces the Colorado-source share.

C. Pass-Through Entity Withholding

Colorado requires pass-through entities to withhold Colorado income tax at the rate of 4.4% on Colorado-source income allocated to nonresident partners, unless the nonresident partner files a Colorado income tax return or provides a written agreement to do so. Colo. Rev. Stat. § 39-22-601(6). The withholding obligation is mandatory and applies to each distribution or allocation of Colorado-source income to a nonresident partner.

The CV LPA should include provisions expressly authorizing the GP to withhold Colorado state tax at the applicable rate on behalf of nonresident partners allocated Colorado-source income. As with the California withholding provisions, withheld amounts should be treated as distributions to the affected partners for purposes of the LPA's distribution waterfall.

Form DR 0108. Colorado provides Form DR 0108 (Nonresident Partner or Shareholder Agreement), which a nonresident partner may execute to agree to file a Colorado income tax return and timely pay any Colorado tax owed. If a nonresident partner submits a properly executed DR 0108 to the CV (as the pass-through entity), the CV's obligation to withhold Colorado tax on that partner's share of Colorado-source income is relieved. The LPA should contemplate the use of DR 0108 forms and provide a mechanism for nonresident partners to submit such forms in lieu of mandatory withholding.

D. Composite Return Filing

Colorado permits the filing of composite returns on behalf of nonresident individual partners of a pass-through entity. Under Colorado Department of Revenue guidance, a partnership may file a composite return (Form DR 0106) on behalf of qualified nonresident individual partners, with the partnership paying the Colorado tax on behalf of the included partners. This approach simplifies compliance for nonresident individual LPs and reduces the administrative burden on the GP.

We recommend that the CV file composite Colorado returns on behalf of nonresident individual LPs who are eligible for composite filing. The LPA should include provisions authorizing the GP to file composite returns and to withhold and remit Colorado tax on behalf of participating partners. LPs who prefer to file individual Colorado returns should have the ability to opt out of the composite filing arrangement by providing written notice and agreeing to file their own Colorado returns.

As with California, composite filing is generally available only for individual nonresident partners and may not be available for entity LPs such as Garrison Secondaries Fund IV LP, which would need to file its own Colorado return if it has Colorado-source income.

E. Colorado Conformity with Federal Partnership Provisions

Colorado generally conforms to federal partnership tax provisions, including IRC Sections 721, 704(b), and 704(c). This means that the Section 721 contribution of portfolio company shares from Fund II to the CV should be treated as a non-recognition event for Colorado income tax purposes, and the allocation provisions under Section 704(b) and the Section 704(c) remedial allocation method (or other method selected) should be respected at the Colorado state level.

Section 1202 Conformity. Importantly, Colorado generally conforms to IRC Section 1202 at the state level, in contrast to California's nonconformity. This is a favorable development for the CV's investors with respect to the Vectral Cloud position. Once the five-year holding period is satisfied — which we understand is anticipated to occur in March 2026 — eligible taxpayers should be able to claim the QSBS exclusion for Colorado income tax purposes, effectively eliminating Colorado income tax on qualifying gain from the disposition of Vectral Cloud stock.

However, until the holding period is satisfied, any disposition of Vectral Cloud stock would not qualify for QSBS treatment at either the federal or Colorado level. The draft Tax Protection Agreement (addressed in the Federal Memo) includes a covenant that the GP will not dispose of the Vectral Cloud position before the five-year holding period is satisfied in March 2026. This covenant is important not only for federal tax purposes but also because it preserves the potential for Colorado QSBS treatment. In the event that the covenant is breached or waived and an early disposition occurs, the full gain on the Vectral Cloud position would be subject to Colorado income tax at 4.4% (in addition to other applicable taxes), without the benefit of the QSBS exclusion.

VII. New York

A. Relevance — Garrison Secondaries Fund IV LP

New York state tax analysis is relevant to the CV transaction primarily because of the participation of Garrison Secondaries Fund IV LP, which is committing $380 million of new capital as the lead secondary buyer. Garrison's principal office is located at 399 Park Avenue, 22nd Floor, New York, New York 10022. Garrison Capital Advisors LLC, Garrison's general partner, is managed by Mitchell Adler (Partner) from the same New York office. Garrison is represented by Whitfield & Calloway LLP (Douglas Whitfield, Partner, 280 Park Avenue, 30th Floor, New York, New York 10017).

Garrison's commitment of $380 million represents approximately 35.4% of the CV's total projected capitalization of $1.074 billion, making Garrison the single largest investor in the CV. Given this substantial capital commitment and Garrison's New York domicile, the New York tax treatment of income flowing from the CV to Garrison — and from Garrison to its own underlying limited partners — is of significant importance.

B. New York Source Income Analysis

Under New York Tax Law §§ 631 and 632, a nonresident individual's New York-source income includes income from a New York business, trade, or profession. For partnerships, a nonresident partner's New York-source income includes the partner's distributive share of partnership income to the extent derived from New York sources. N.Y. Tax Law § 631(b)(1)(A). An entity partner's New York-source income follows a parallel analysis under the New York corporate franchise tax (N.Y. Tax Law Art. 9-A).

Analysis of CV Activities. PCV will not be domiciled in New York, and its GP activities will be conducted principally from Pinnacle Capital Management LLC's office in Menlo Park, California. The three portfolio companies held by the CV are located in California (Luminos Systems), Texas (ClearArc Software), and Colorado (Vectral Cloud) — none in New York. The CV will not maintain an office in New York, and the GP does not intend to conduct management or investment advisory activities from New York.

Based on these facts, gains from the CV's dispositions of portfolio company shares should generally not constitute New York-source income. The CV does not derive income from a New York trade or business, and the portfolio company operations are entirely outside New York. Accordingly, PCV should not have New York filing obligations, and income allocated from the CV to its partners should not be treated as New York-source income.

Caveats — New York Nexus-Creating Activities. The foregoing conclusion is premised on the assumption that the GP does not conduct material management or investment advisory activities in New York. If any GP personnel conduct substantive fund management activities in New York — including attending board meetings of portfolio companies, conducting investor meetings, or engaging in deal sourcing or negotiation activities from New York — this could create a basis for New York to assert nexus and to treat a portion of the CV's income as New York-source.

We recommend that the GP implement policies to minimize New York-based activities. To the extent that GP personnel travel to New York for meetings with Garrison or other New York-based counterparties, such meetings should be kept to a reasonable frequency and should not involve the conduct of active management or investment advisory functions in New York. Records should be maintained documenting the location of all material GP management activities.

C. Garrison's Own Tax Obligations

Garrison Secondaries Fund IV LP is itself a Delaware limited partnership with its principal office in New York. As a partnership doing business in New York, Garrison is treated as a New York partnership for purposes of its own investors' state tax obligations. Income flowing from PCV to Garrison, and then from Garrison to its underlying limited partners, will be sourced at the Garrison-LP level based on the nature and source of the income at each tier.

Specifically, if the income flowing from PCV to Garrison is not New York-source income (as we have concluded above), then Garrison's nonresident LPs should not be allocated New York-source income from the CV investment based solely on the PCV-tier analysis. However, Garrison's own New York-based management activities may cause Garrison itself to be treated as conducting a trade or business in New York, with the result that all of Garrison's income — including income from the CV investment — may be treated as New York-source income allocable to Garrison's nonresident LPs. This is a function of Garrison's own activities and structure.

This analysis is primarily a Garrison internal matter and is outside the scope of our engagement as counsel to Pinnacle Capital Management LLC. We note this issue here for completeness and because it is relevant to Garrison's underwriting of the CV investment. Whitfield & Calloway LLP should be advising Garrison on these considerations, and we recommend that this issue be flagged during the LP diligence process.

D. New York Pass-Through Entity Tax (PTET) Election

Effective for tax years beginning on or after January 1, 2021, New York enacted an elective pass-through entity tax ("PTET") that allows eligible partnerships and S corporations to elect to pay state income tax at the entity level. N.Y. Tax Law §§ 860–862. Partners and shareholders of an electing entity receive a corresponding credit on their individual New York state income tax returns, effectively shifting the state tax burden from the individual level to the entity level. This mechanism provides a workaround to the federal $10,000 limitation on the deductibility of state and local taxes imposed by IRC Section 164(b)(6), because the PTET is imposed on the entity rather than on the individual, and is deductible by the entity as a business expense.

Relevance to PCV. If PCV were to generate New York-source income, the PTET election could potentially be relevant for PCV itself. However, as analyzed in Section VII.B above, PCV is unlikely to generate New York-source income. Accordingly, a PCV-level New York PTET election is not anticipated to be necessary or advantageous.

Relevance to Garrison. More practically, if Garrison Secondaries Fund IV LP makes a New York PTET election for its own fund (as many New York-based partnerships have elected to do following the enactment of the PTET regime), the income flowing from PCV to Garrison would be included in Garrison's PTET calculation. The PTET election and its implications for Garrison and its underlying LPs are matters for Garrison's own tax advisors.

Recommendation. We recommend that this issue be flagged for Douglas Whitfield at Whitfield & Calloway LLP during the LP diligence process. The CV's offering materials and side letter negotiations should not include representations regarding the availability or effect of a New York PTET election at the CV level, given that PCV is not expected to generate New York-source income.

E. New York Withholding

New York requires pass-through entities to withhold New York state income tax on New York-source income allocated to nonresident partners at the highest applicable rate. N.Y. Tax Law § 658(c). The withholding rate for nonresident individual partners is the highest New York State marginal income tax rate (currently 10.9%).

Given our analysis that PCV is unlikely to generate New York-source income, the mandatory New York withholding obligation should not apply to the CV. However, as a protective measure, the LPA should include a general withholding provision broad enough to cover any future New York filing obligations that may arise if facts or circumstances change — for example, if the GP begins conducting management activities in New York or if a portfolio company establishes a New York presence.

VIII. Other State Considerations

A. States of LP Domicile

The CV's investor base includes limited partners who may be domiciled in states other than California, Delaware, Texas, Colorado, and New York. While a comprehensive analysis of every potential state of LP domicile is beyond the scope of this memorandum, the following general principles should be noted:

Under general state tax principles, resident individuals are taxed by their state of domicile on their worldwide income — that is, on all income from whatever source derived. Most states allow a credit for income taxes paid to other states on income that is also subject to tax in the state of domicile, thereby mitigating (but not always eliminating) double taxation. Thus, a California-resident LP who is subject to California tax on California-source income from the CV, and who is also subject to (for example) Colorado tax on Colorado-source income from the CV, would generally receive a California credit for the Colorado taxes paid.

However, the credit mechanism does not always fully offset the state tax burden, particularly where the state of domicile imposes a higher rate than the source state. For California-resident LPs, the 13.3% California rate exceeds the 4.4% Colorado rate, so Colorado taxes would be fully creditable against the California liability. But for LPs domiciled in low-tax or no-tax states (such as Texas, Florida, or Nevada), there is no home-state income tax against which to credit California or Colorado taxes, resulting in a net state tax cost.

The CV LPA should include a general catch-all provision authorizing the GP to withhold and remit state taxes as required by any applicable state jurisdiction, not limited to California and Colorado. This provision should be drafted broadly enough to accommodate future changes in state tax law and to cover states of LP domicile that may impos

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
This memorandum is a privileged and confidential attorney-client communication. It is not intended for distribution to or reliance by any third party. Any disclosure, copying, or distribution of this memorandum or the information contained herein is strictly prohibited without the prior written consent of Calderwood & Harkness LLP.
FROM: Garrett Simmons, Lead Associate, Tax Leila Nazari, Working Associate, Tax Calderwood & Harkness LLP 555 California Street, Suite 4200 San Francisco, CA 94104
TO: Sylvia Hartwell, Responsible Partner, Tax Calderwood & Harkness LLP
CC: Leonard Cross, Billing Partner, Tax Calderwood & Harkness LLP
DATE: August 8, 2025
RE: State Tax Nexus and Withholding Analysis — Pinnacle Continuation Vehicle LP
ENGAGEMENT REFERENCE: 1002-00005 / Matter No. 117443.00001
CLIENT: Pinnacle Capital Management LLC (EIN 82-6140538)
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I. Executive Summary
This memorandum presents our analysis of the state-level income tax obligations of Pinnacle Continuation Vehicle LP ("PCV" or the "CV") and its investors across the five key jurisdictions implicated by the CV transaction: California, Delaware, Texas, Colorado, and New York. This analysis is intended to inform the structuring and documentation of the CV, including specific provisions to be incorporated into the CV's limited partnership agreement (the "LPA"), and to ensure that the GP and its counsel are positioned to manage multi-state tax compliance obligations from inception.
Transaction Context. As discussed in our comprehensive Tax Structure Memorandum delivered concurrently with this memo, Pinnacle Venture Fund II LP (EIN 84-3291067), a Delaware limited partnership (the "Fund II"), is forming PCV as a new Delaware limited partnership to serve as a continuation vehicle holding concentrated stakes in three portfolio companies: (i) Luminos Systems Inc., a Delaware corporation headquartered in San Francisco, California; (ii) ClearArc Software Inc., a Delaware corporation headquartered in Austin, Texas; and (iii) Vectral Cloud Inc., a Delaware corporation headquartered in Denver, Colorado. The CV's total capitalization is projected at approximately $1.074 billion, comprising approximately $680 million from rolling limited partners of Fund II, $380 million of new capital from Garrison Secondaries Fund IV LP as the lead secondary buyer, and approximately $14 million of GP co-investment.
Investor Base. The investor base of the CV spans multiple jurisdictions and investor types, each presenting distinct state tax considerations. The GP entities — principally Pinnacle Capital Management LLC, headquartered at 2100 Sand Hill Road, Menlo Park, California 94025 — are California-based, creating California nexus for the CV as a threshold matter. U.S. tax-exempt investors, including Meridian Public Employees' Retirement System (committing $125 million) and Ashford University Endowment (committing $50 million), will invest through PCV Domestic blocker Inc., a proposed Delaware C-corporation. A non-U.S. investor, Sovereign Capital Partners (Cayman) Ltd. (committing $75 million), will invest through PCV International Holdings Ltd., a proposed Cayman Islands exempted company. Garrison Secondaries Fund IV LP, domiciled at 399 Park Avenue, 22nd Floor, New York, New York 10022, is committing $380 million of new capital. Various other limited partners of Fund II, including Redstone Family Office LLC, are either rolling into the CV or cashing out in the secondary transaction.
Key Findings. Our analysis yields the following principal conclusions:
(a) California presents the most significant state tax exposure for the CV and its investors. California does not conform to Internal Revenue Code ("IRC") Section 1202, rendering the qualified small business stock ("QSBS") gain exclusion unavailable for California income tax purposes. Moreover, California taxes capital gains at ordinary income rates, with a top marginal rate of 13.3%. For the Luminos Systems position alone, this could result in up to approximately $73.6 million of California tax exposure on the $553.5 million of built-in gain attributable to California-resident investors.
(b) Colorado imposes a flat 4.4% income tax on Colorado-source income and requires pass-through entity withholding for nonresident partners. Colorado does, however, conform to IRC Section 1202, which may benefit investors upon disposition of the Vectral Cloud position once the five-year holding period is satisfied in March 2026.
(c) Texas imposes no individual income tax, eliminating individual-level Texas tax exposure for partners of the CV. However, the Texas margin tax (franchise tax) may apply to the CV or blocker entities if they are deemed to be "doing business in Texas" by virtue of the CV's ownership of ClearArc Software shares, though the exposure is likely minimal for a passive investment vehicle.
(d) Delaware imposes no state-level income tax on LP income allocated to non-resident limited partners of a Delaware partnership. Delaware does impose modest annual franchise tax obligations ($300 per year for limited partnerships and LLCs), and PCV Domestic blocker Inc. will be subject to the Delaware corporate franchise tax regime.
(e) New York source income analysis is critical for Garrison Secondaries Fund IV LP and any other New York-domiciled investors. Based on our analysis, the CV is unlikely to generate New York-source income, as none of the portfolio companies are located in New York, and GP activities are conducted from California. However, any GP management or investment advisory activities occurring in New York could create nexus, and Garrison's own pass-through entity tax considerations should be addressed by its counsel.
Recommendations. Based on the analysis set forth in this memorandum, we recommend the following actions:
(1) The CV should file composite state tax returns in California and Colorado on behalf of nonresident individual LPs, with appropriate authority granted in the LPA.
(2) The LPA should include robust withholding provisions authorizing the GP to withhold and remit state income taxes on behalf of nonresident partners in California, Colorado, and any other jurisdiction imposing withholding requirements.
(3) The GP should evaluate available pass-through entity tax ("PTET") elections where beneficial, particularly if the CV generates income sourced to states that have enacted such elective regimes.
(4) Careful sourcing analysis should be performed for gain on portfolio company dispositions, particularly with respect to California's potential assertion that gains realized by a California-managed partnership constitute California-source income allocable to all partners, including nonresidents.
(5) These provisions and recommendations should be coordinated with Hawthorne Reid LLP, which is drafting the CV LPA.
Each of these recommendations is discussed in greater detail in the sections that follow.
II. Scope and Background
A. Engagement Context
Calderwood & Harkness LLP was engaged on July 15, 2025 as tax counsel to Pinnacle Capital Management LLC in connection with the fund-level tax structuring of the CV transaction. Our engagement encompasses both federal and state tax analysis, tax-related provisions for the CV's organizational documents, and coordination with counsel to the GP and to transaction counterparties on tax matters.
This memorandum supplements the comprehensive Tax Structure Memorandum delivered concurrently (the "Federal Memo"), which addresses federal income tax considerations including, among other topics, the Section 721 contribution mechanics, Section 704(c) allocation methodologies, Section 1202 QSBS eligibility analysis, disguised sale risk under Section 707, and UBTI structuring for tax-exempt investors. This memorandum focuses exclusively on state and local tax matters implicated by the CV transaction across the five key jurisdictions identified above.
Hawthorne Reid LLP (Vanessa Liu, Partner, 2000 University Avenue, Suite 500, Palo Alto, California 94303) has been retained to draft the CV LPA and related organizational documents. We understand that Ms. Liu's team has prepared an initial draft of the LPA and that our team will be providing a markup of the tax-related provisions. The withholding, composite return, and state tax provisions recommended herein should be coordinated into the LPA draft through that process. We further understand that Whitfield & Calloway LLP (Douglas Whitfield, Partner, 280 Park Avenue, 30th Floor, New York, New York 10017) is serving as counsel to Garrison Secondaries Fund IV LP and its GP, Garrison Capital Advisors LLC, and that Andover & Strauss LLP (Patricia Clemons, Audit Partner, 350 South Grand Avenue, Suite 2600, Los Angeles, California 90071) serves as the independent auditor for Fund II and is expected to serve as auditor for the CV.
B. Transaction Summary (State Tax Perspective)
From a state tax perspective, the CV transaction involves the following principal steps relevant to this analysis:
Contribution of Portfolio Company Shares. Pinnacle Venture Fund II LP will contribute its portfolio company shares to PCV in a transaction intended to qualify for non-recognition treatment under IRC Section 721. The aggregate fair market value ("FMV") of the contributed portfolio is approximately $1.34 billion, against an aggregate original cost basis of approximately $138 million, resulting in aggregate unrealized built-in gain of approximately $1.202 billion. The portfolio company breakdown, along with key nexus implications, is as follows:
State conformity with IRC Section 721 is assessed in Section IX below. As a preliminary matter, we note that all five analyzed jurisdictions either conform to Section 721 or do not impose a relevant income tax that would apply to the contribution, meaning the contribution should not trigger state-level gain recognition.
Capitalization and Investor Base. The CV will be capitalized as follows:
• Rolling limited partners from Fund II: approximately $680 million
• Garrison Secondaries Fund IV LP (new capital): $380 million
• GP co-investment (Pinnacle Capital Management LLC and affiliates): approximately $14 million
• Total: approximately $1.074 billion
Key Investors by State Nexus. The following investors and their state nexus are particularly relevant to this analysis:
• GP Principals — Marcus Aldren (Managing Partner), Diana Tsao (Partner), and Rafael Montoya (Partner) are all residents of the State of California and conduct GP activities from Pinnacle Capital Management LLC's offices at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025.
• Garrison Secondaries Fund IV LP — Domiciled in Delaware with its principal office at 399 Park Avenue, 22nd Floor, New York, New York 10022. Garrison Capital Advisors LLC (Mitchell Adler, Partner) serves as Garrison's GP. Garrison is committing $380 million of new capital, representing approximately 35.4% of the CV's total capitalization.
• Tax-Exempt Investors — Meridian Public Employees' Retirement System ($125 million) and Ashford University Endowment ($50 million) will invest through PCV Domestic blocker Inc., a proposed Delaware C-corporation designed to shield these investors from unrelated business taxable income ("UBTI"). Their state tax obligations are primarily a function of the blocker's state nexus and filing obligations, discussed in Section VIII.B below.
• Non-U.S. Investor — Sovereign Capital Partners (Cayman) Ltd. ($75 million) will invest through PCV International Holdings Ltd., a proposed Cayman Islands exempted company, designed to prevent effectively connected income ("ECI") at the partnership level. State tax considerations for this entity are discussed in Section VIII.B below.
• Redstone Family Office LLC — Cashing out of its Fund II position and not rolling into the CV. No CV-level state tax analysis is required for Redstone, though state tax consequences of its Fund II redemption should be addressed separately as part of the broader transaction tax analysis.
C. Assumptions and Limitations
This analysis is based on the following assumptions and is subject to the following limitations:
1. Our analysis is based on current state tax laws, regulations, and publicly available administrative guidance as of August 2025. State tax laws are subject to change by legislation, regulation, or judicial decision, and any such changes could materially affect the conclusions reached herein.
2. This memorandum does not address local (city or county) tax obligations, including, without limitation, the San Francisco payroll expense tax, the Austin municipal property tax, or the Denver occupational privilege tax, except where specifically noted. A separate analysis of local tax obligations may be warranted depending on the nature and extent of the CV's activities in these jurisdictions.
3. We assume that the CV will be treated as a partnership for federal income tax purposes and that all relevant states will respect the federal classification. Each of the five analyzed jurisdictions generally conforms to federal entity classification rules, and we are not aware of any basis on which a state would treat the CV differently from its federal classification.
4. We assume that the factual representations provided by Pinnacle Capital Management LLC and its representatives regarding the structure, capitalization, and operations of the CV and its portfolio companies are complete and accurate. Our analysis may need to be revised if the underlying facts change materially.
5. Dollar amounts, valuations, ownership percentages, and investor commitments referenced in this memorandum are based on information provided by Pinnacle Capital Management LLC and reflect current projections as of the date of this memorandum. Final amounts may differ upon closing.
III. California
A. Overview of California Nexus
California presents the most significant state tax exposure for the CV and its investors, for several reasons. First, the GP of the CV — Pinnacle CV Partners LLC, acting through its managing member, Pinnacle Capital Management LLC — is headquartered in California, at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025. The GP principals (Marcus Aldren, Diana Tsao, and Rafael Montoya) are all California residents who conduct substantially all GP management and investment advisory activities from the Menlo Park office. Under California law, a partnership is treated as having California nexus if its general partner or managing member conducts business in California or if the partnership derives income from California sources. Cal. Rev. & Tax. Code §§ 17951, 18535. Accordingly, the CV will have California nexus from inception by virtue of the GP's California-based activities.
Second, Luminos Systems Inc. — the CV's largest single portfolio holding, with an FMV of $612 million representing approximately 45.7% of the total portfolio value — is headquartered at 500 Folsom Street, 14th Floor, San Francisco, California 94105. The CV's 24.7% fully diluted ownership interest in Luminos, combined with the GP's California-based management activities relating to the Luminos investment (including board participation and regular oversight), reinforces the CV's California nexus and raises significant questions regarding the sourcing of gain upon a future disposition of the Luminos position.
Third, the GP principals are California residents and will be subject to California income tax on their allocable shares of CV income regardless of source. For non-California investors, however, the extent of California tax exposure depends on the sourcing analysis discussed in Section III.C below.
For all of these reasons, California is the jurisdiction of primary concern from a state tax perspective, and we address it first and in the greatest detail.
B. Nonconformity with Section 1202 (QSBS)
Perhaps the single most significant state tax issue for the CV and its investors is California's nonconformity with IRC Section 1202, which provides for the exclusion from gross income of gain realized on the sale or exchange of qualified small business stock ("QSBS"). As detailed in our Federal Memo, two of the three portfolio companies — Luminos Systems Inc. and ClearArc Software Inc. — currently satisfy the requirements for QSBS treatment at the federal level, and Vectral Cloud Inc. is expected to satisfy the five-year holding period requirement in March 2026. At the federal level, Section 1202(a)(1) permits eligible taxpayers to exclude from gross income 100% of the gain recognized on the sale or exchange of QSBS acquired after September 27, 2010 and held for more than five years, subject to the per-issuer gain limitation of the greater of $10 million or ten times the taxpayer's adjusted basis in the stock.
California's Position. California has not enacted legislation conforming to IRC Section 1202. The California Revenue and Taxation Code does not provide for a QSBS exclusion, and the Franchise Tax Board ("FTB") has consistently confirmed that gain from the sale of QSBS is fully taxable for California income tax purposes. See Cal. Rev. & Tax. Code § 17024.5 (California's selective IRC conformity provision, which does not incorporate Section 1202). This position has been maintained through multiple legislative sessions despite periodic proposals to adopt partial conformity.
Practical Effect. The consequence of California's nonconformity is that even where LPs qualify for the federal Section 1202 exclusion — which could be substantial given the magnitude of the built-in gains — California will tax 100% of the realized gain at ordinary income rates. California does not provide a preferential rate for long-term capital gains; all capital gains are taxed as ordinary income. The top marginal individual income tax rate in California is 13.3%, which includes the 1% mental health services surcharge imposed on taxable income exceeding $1 million under Cal. Rev. & Tax. Code § 17043.
To illustrate the magnitude of the exposure, consider the following analysis for the Luminos Systems position:
• Federal QSBS Exclusion Potential: For eligible taxpayers, the Section 1202 exclusion on a per-issuer basis is the greater of $10 million or ten times the taxpayer's adjusted basis in the QSBS. The CV's aggregate cost basis in Luminos is $58.5 million, yielding a per-taxpayer exclusion ceiling of up to $585 million (10 × $58.5 million), subject to allocation among partners under applicable partnership allocation rules and the per-taxpayer nature of the Section 1202 limitation. The aggregate unrealized gain on the Luminos position is $553.5 million.
• California Tax Exposure: Because California does not recognize the Section 1202 exclusion, California-resident investors would owe California income tax on their full allocable share of the gain. At the 13.3% top rate, the aggregate California tax exposure on the $553.5 million of built-in Luminos gain — assuming full California sourcing for resident investors — could be as high as approximately $73.6 million (13.3% × $553.5 million).
• ClearArc Software: Similar analysis applies. The CV's aggregate cost basis in ClearArc is $37.4 million, yielding a federal per-taxpayer exclusion ceiling of up to $374 million (10 × $37.4 million). The aggregate unrealized gain on ClearArc is $430.6 million. California would tax 100% of any realized gain, potentially generating up to approximately $57.3 million in California tax liability (13.3% × $430.6 million) for California-resident investors.
• Vectral Cloud: The Vectral Cloud QSBS holding period has not yet been satisfied (expected March 2026). This means that at both the federal and state levels, a disposition of Vectral Cloud before March 2026 would not qualify for Section 1202 treatment. After March 2026, federal QSBS treatment may be available, but California would continue to disallow the exclusion.
The total aggregate California tax exposure across all three portfolio companies, for California-resident investors, could exceed $130 million in the event of full dispositions. This is the single largest state tax risk factor in the CV transaction and should be prominently disclosed in the CV's offering materials.
Legislative Watch. We note that proposals to adopt partial conformity with Section 1202 have been introduced in the California Legislature in prior sessions. As of the date of this memorandum, no such legislation has been enacted or is pending in the current 2025 legislative session. We will continue to monitor developments in this area and will advise promptly if there is any change in California's position.
C. Sourcing of Partnership Income — Portfolio Company Gains
A critical question for non-California investors in the CV is whether gain on the sale or disposition of portfolio company shares by the CV constitutes California-source income allocable to such non-California investors.
General Rule — Intangible Personal Property. Under the California Revenue and Taxation Code, gain from the sale of intangible personal property — including stock — is generally sourced to the domicile or commercial domicile of the seller. For individual taxpayers, this means that a nonresident individual's gain from the sale of stock is generally not California-source income, provided the gain is not attributable to a California trade or business. Cal. Rev. & Tax. Code § 17952.
Partnership Income — FTB's Aggressive Position. However, the sourcing of partnership income presents a more complex picture. California law provides that a nonresident partner's share of partnership income is California-source income to the extent the partnership derives income from California sources. Cal. Rev. & Tax. Code § 17951. The FTB has taken the position in certain audits and rulings that where a partnership is managed from California, gains realized by the partnership from the sale of intangible personal property may be treated as income from a California trade or business, and therefore California-source income, allocable to all partners — including nonresidents.
This position is grounded in the theory that the partnership's business — including its investment management and disposition activities — is conducted in California if the GP's management functions are performed in California. Under this theory, the income is not merely passive income from the sale of intangible property (which would be sourced to the partner's domicile under Section 17952) but rather income from the active conduct of a trade or business in California through the partnership.
Judicial and Administrative Guidance. California case law and FTB rulings in this area are not entirely settled. The FTB's position has been challenged by taxpayers, and there is tension between Section 17952 (sourcing intangible income to domicile) and Section 17951 (sourcing partnership income to the state where the partnership's business is conducted). The California Court of Appeal's decision in Valentino v. Franchise Tax Board (2001) 87 Cal.App.4th 1284 addressed certain aspects of the sourcing of partnership income to nonresident partners, but the interplay between the "trade or business" sourcing rule and the intangible income rule remains an area of evolving interpretation.
Market-Based Sourcing vs. Cost-of-Performance. For taxable years beginning on or after January 1, 2013, California transitioned to a "market-based sourcing" regime for apportioning business income of multistate businesses. Under market-based sourcing, sales of services and intangibles are sourced to the location of the customer or market. However, the application of market-based sourcing to investment partnership income — particularly to gains from the sale of portfolio company stock — is not straightforward. The FTB's regulations under Cal. Code Regs. tit. 18, § 25136-2 provide some guidance, but the rules were primarily designed for operating businesses, and their application to investment partnerships remains uncertain.
Implications for Non-California LPs. For non-California limited partners such as Garrison Secondaries Fund IV LP (New York) and other rolling LPs domiciled outside California, the sourcing determination is critical:
• If gains from the CV's disposition of portfolio company shares are treated as California-source income, Garrison and other nonresident LPs would have California filing obligations and exposure to California's 13.3% rate on their allocable shares of such gains.
• If the gains are treated as non-California-source intangible income, nonresident LPs would generally not be subject to California tax on such gains (subject to the credit mechanism of their home states).
Apportionment Analysis. Even if the FTB asserts that the CV's gain is California-source business income, an apportionment analysis may reduce the share of income attributable to California. Only one of the CV's three portfolio companies — Luminos Systems — is headquartered in California. ClearArc Software is in Texas, and Vectral Cloud is in Colorado. If the CV's income is apportioned based on the location of its portfolio company operations (or based on the relative values of its holdings), California's apportioned share would be less than 100%. Based on relative FMV, the California-apportioned share might be approximately 45.7% ($612 million Luminos FMV ÷ $1.34 billion total portfolio FMV), though the precise apportionment methodology would depend on the applicable factors and their weighting.
Recommendation. Given the uncertainty in California sourcing law and the FTB's aggressive posture, we recommend that the CV take a conservative approach in its compliance and disclosure:
(i) The CV should assume, for withholding and tax distribution purposes, that gains from the Luminos disposition are California-source income allocable to all partners, and should consider whether gains from ClearArc and Vectral Cloud dispositions may also be characterized as California-source to the extent the GP's management activities in connection with those investments are conducted in California.
(ii) The CV's offering materials should disclose to all investors the potential for California tax exposure on gains from portfolio company dispositions, regardless of the investor's state of domicile.
(iii) The CV should preserve the argument that gains from the sale of stock — as intangible personal property — should be sourced to each partner's domicile under Section 17952, and should be prepared to contest the FTB's position if necessary.
D. California Withholding Requirements
California imposes mandatory withholding on distributions of California-source income to nonresident partners of pass-through entities. Under Cal. Rev. & Tax. Code § 18662 and FTB guidance, pass-through entities — including limited partnerships such as the CV — must withhold California income tax on California-source income allocated to nonresident members, partners, and shareholders.
The applicable withholding rate is the highest marginal rate for the type of taxpayer: currently 12.3% for nonresident individuals (before the mental health services surcharge), and 13.3% for income over $1 million (including the 1% surcharge). For corporate nonresident partners, the withholding rate is 8.84%, corresponding to the California corporate income tax rate.
The withholding obligation applies to each payment or distribution of California-source income made by the pass-through entity. The entity must file and remit withholding on Form 592 (Resident and Nonresident Withholding Statement) or Form 592-PTE (Pass-Through Entity Annual Withholding Return), depending on the applicable filing method.
LPA Provisions. The CV LPA should include provisions expressly authorizing the GP to withhold and remit California state tax on behalf of nonresident partners, and to deduct withheld amounts from distributions otherwise payable to such partners. These provisions should also specify that withheld amounts will be treated as distributions to the affected partners for purposes of the LPA's distribution waterfall.
blocker Entities. PCV Domestic blocker Inc. (proposed Delaware C-corporation) and PCV International Holdings Ltd. (proposed Cayman Islands exempted company) may also be subject to California corporate income tax on California-source income flowing through the CV. PCV Domestic blocker Inc. would be subject to the California corporate income tax rate of 8.84% on its apportioned California-source income. PCV International Holdings Ltd., as a foreign corporation with California-source income, would be subject to California corporate income tax at 8.84% to the extent it has California nexus or derives California-source income. The withholding obligation of the CV extends to these entities as well, to the extent they are treated as nonresident partners receiving California-source income.
E. Composite Return Filing
California permits the filing of composite (group) nonresident returns on behalf of nonresident partners of a pass-through entity. Under FTB guidance, a partnership may file a group nonresident return (Form 540NR, group filing) on behalf of "qualified nonresident individuals" who meet certain requirements, including that the only California-source income of such individuals is the income from the partnership.
Recommendation. We recommend that the CV file composite California returns on behalf of nonresident individual LPs who meet the eligibility criteria for group filing. This approach simplifies compliance for nonresident LPs, reduces the administrative burden on the GP, and ensures timely remittance of California tax obligations. The LPA should include provisions authorizing the GP to file composite California returns on behalf of eligible nonresident individual LPs, with an opt-out mechanism for LPs who prefer to file individual California returns. LPs who elect to opt out should be required to provide written notice and agree to file their own California nonresident returns.
It should be noted that composite filing is generally available only for individual nonresident LPs, not for entity LPs (such as Garrison Secondaries Fund IV LP). Entity LPs with California filing obligations will need to file their own California returns.
F. Section 721 Conformity
California generally conforms to federal partnership provisions, including IRC Section 721, which provides for non-recognition of gain or loss on the contribution of property to a partnership in exchange for a partnership interest. Cal. Rev. & Tax. Code § 17024.5(a) (selective conformity to IRC); Cal. Rev. & Tax. Code § 17851 et seq. (California partnership provisions generally following federal rules).
Accordingly, the Section 721 contribution of portfolio company shares from Fund II to the CV should be treated as a non-recognition event for California income tax purposes. No gain or loss should be recognized by Fund II, the CV, or any partner at the time of the contribution.
California also conforms to the disguised sale provisions of IRC Section 707(a)(2)(B), meaning that the same federal analysis of disguised sale risk (discussed in the Federal Memo) applies at the California state level. As discussed in the Federal Memo, we have concluded that the Section 721 contribution, as structured, should not be recharacterized as a disguised sale under Section 707, and this conclusion holds for California purposes as well.
IV. Delaware
A. Formation State — No State Income Tax on LP Income
PCV will be formed as a Delaware limited partnership under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101 et seq. Pinnacle CV Partners LLC, the general partner of the CV, will be formed as a Delaware limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq.
Delaware does not impose state-level income tax on LP income allocated to non-resident limited partners of a Delaware partnership. This is a foundational reason why Delaware is the preferred formation jurisdiction for investment partnerships. Delaware's income tax applies only to Delaware-resident individuals and to corporations doing business in Delaware; it does not reach through the partnership to tax nonresident limited partners on their distributive shares of partnership income simply because the partnership is formed in Delaware.
Moreover, Delaware does not impose income tax on entities organized in Delaware if they do not conduct business in Delaware. Delaware provides a statutory "safe harbor" for holding companies, investment vehicles, and similar entities that are incorporated or organized in Delaware but maintain no physical presence, employees, or operational activities in the state. So long as PCV does not conduct business activities in Delaware beyond maintaining its registered agent and organizational filings, it should not be subject to Delaware corporate or personal income tax.
PCV Domestic blocker Inc. will be formed as a Delaware C-corporation to serve as the investment vehicle for U.S. tax-exempt investors (Meridian Public Employees' Retirement System and Ashford University Endowment). Delaware will impose its corporate income tax — at a flat rate of 8.7% — on the blocker only if the blocker has nexus in Delaware beyond mere incorporation. Because PCV Domestic blocker Inc. is expected to be a passive holding company with no Delaware employees, offices, or operational activities, it should not be subject to Delaware corporate income tax on this basis. However, the blocker's Delaware franchise tax obligations are addressed below.
B. Annual Franchise Tax
Although Delaware imposes no income tax on the CV or its limited partners, all Delaware entities are subject to annual franchise tax obligations, as follows:
• Delaware Limited Partnerships (PCV): Annual tax of $300 per year, due by June 1 of each year. The partnership must file an annual report with the Delaware Secretary of State.
• Delaware LLCs (Pinnacle CV Partners LLC): Annual tax of $300 per year, due by June 1 of each year. No annual report filing is required for LLCs, but the annual franchise tax must be paid to maintain good standing.
• Delaware C-Corporations (PCV Domestic blocker Inc.): Subject to the Delaware corporate franchise tax, which is calculated using either the authorized shares method or the assumed par value capital method, whichever results in a lower tax. An annual report must be filed with the Delaware Division of Corporations by March 1 of each year. The minimum franchise tax for a corporation is $175 per year, but the actual tax will depend on the blocker's authorized shares, par value, and assets. For a blocker entity with substantial assets ($175 million in aggregate investor commitments flowing through it), the franchise tax under the assumed par value capital method could be significant if not carefully managed through appropriate capitalization structure. We recommend consulting with Delaware counsel regarding the optimal authorized shares and par value structure to minimize the annual franchise tax.
All Delaware entities formed in connection with the CV transaction require the maintenance of a registered agent in Delaware. We understand that Pacific Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801, currently serves as the registered agent for Fund II and will serve in the same capacity for PCV and the other new Delaware entities. The Delaware LP file number for Fund II is DE-LP-2019-04817. New file numbers will be assigned for PCV, Pinnacle CV Partners LLC, and PCV Domestic blocker Inc. upon filing of the respective formation documents with the Delaware Secretary of State.
C. Other Delaware Considerations
Delaware does not impose a sales or use tax, and does not impose a personal property tax that would be relevant to the CV's operations. There are no Delaware withholding obligations on partnership distributions to nonresident LPs, as Delaware does not tax such distributions.
In summary, Delaware's role in the CV structure is limited to serving as the formation jurisdiction. The annual franchise tax obligations are modest and administrative in nature, and Delaware should not impose any material tax burden on the CV or its investors.
V. Texas
A. Overview — No Individual Income Tax
ClearArc Software Inc. (EIN 83-5519274), the CV's second-largest portfolio holding, is headquartered at 1201 Lake Austin Blvd, Suite 600, Austin, Texas 78703, under the leadership of its CEO, Jonathan Hargrove. The CV holds a 31.2% fully diluted ownership interest in ClearArc, with an FMV of $468 million, a cost basis of $37.4 million, and unrealized built-in gain of $430.6 million. ClearArc's Texas headquarters creates a connection between the CV and the State of Texas that must be assessed for potential Texas tax implications.
The most significant feature of Texas's tax landscape, from the perspective of the CV and its investors, is that Texas does not impose an individual income tax. Article VIII, Section 24-a of the Texas Constitution prohibits the imposition of a state income tax on individuals unless approved by Texas voters in a statewide referendum. Accordingly, individual partners of the CV — regardless of whether they are Texas residents — will not owe Texas individual income tax on any income sourced to Texas, including gain from the future disposition of the ClearArc position. This eliminates the most significant category of state tax exposure for individual investors with respect to the Texas nexus.
B. Texas Margin Tax (Franchise Tax)
Although Texas does not impose an individual income tax, it does impose a margin tax (also referred to as the Texas franchise tax) on entities "doing business in Texas." The margin tax applies to corporations, limited partnerships, limited liability companies, and certain other legal entities with sufficient Texas nexus. Tex. Tax Code § 171.001 et seq.
Nexus Analysis. The threshold question is whether PCV has sufficient nexus with Texas to be subject to the Texas margin tax. The CV's primary connection to Texas is its ownership of a 31.2% fully diluted stake in ClearArc Software Inc. Under Texas law, an entity has nexus if it has "physical presence" in Texas or if it "has Texas nexus under the applicable legal standard" for doing business in the state. Tex. Tax Code § 171.001.
Passive ownership of stock in a Texas corporation, without more, may not constitute "doing business in Texas" for purposes of the margin tax. The Texas Comptroller's office has generally held that a mere ownership interest in a Texas entity does not, by itself, create Texas nexus for the owner. However, if the CV — through its GP — exercises significant management or operational control over ClearArc from Texas, or if GP personnel are regularly present in Texas for fund management activities related to the ClearArc investment (including board meetings, operational reviews, or strategic planning sessions conducted in Texas), nexus could be established.
We recommend that the GP assess the extent of its Texas-based activities relating to ClearArc. If the GP's Texas activities are limited to occasional board meetings and do not rise to the level of a regular or systematic course of business conduct in Texas, the CV may have a strong position that it does not have Texas margin tax nexus. However, to the extent that GP personnel travel to Austin with regularity and engage in management or advisory activities at ClearArc's offices, the risk of establishing Texas nexus increases.
Margin Tax Mechanics. If the CV is determined to have Texas nexus, the margin tax is imposed at the following rates:
• 0.375% for entities primarily engaged in retail or wholesale trade
• 0.75% for all other entities
The tax is imposed on the entity's "taxable margin," which is the lesser of: (a) 70% of total revenue; (b) total revenue minus cost of goods sold; or (c) total revenue minus compensation. Additionally, entities with total revenue of $2.47 million or less (for 2025) are not required to pay the tax, though they may still have a filing obligation.
For a passive investment vehicle like the CV, the margin tax exposure is likely minimal. The CV's "total revenue" for Texas margin tax purposes would need to be carefully analyzed, but investment income (such as dividends and capital gains from portfolio company dispositions) may be excludable from total revenue under certain provisions of the Texas Tax Code, and the cost-of-goods-sold or compensation deductions would likely reduce the taxable margin substantially. Nevertheless, the filing obligation — even if the tax owed is zero or de minimis — should be monitored.
blocker Consideration. PCV Domestic blocker Inc. (Delaware C-corporation): If the blocker is treated as a direct or indirect owner of ClearArc shares and derives Texas-source income, it may also have Texas margin tax obligations as a "taxable entity" under the Texas Tax Code. The margin tax analysis for the blocker would follow the same framework described above.
C. Texas Withholding
Texas has no individual income tax withholding regime applicable to partnerships or other pass-through entities. Because Texas does not impose an individual income tax, there is no obligation for the CV to withhold Texas taxes on distributions to partners. No composite return filing is required or available in Texas for pass-through entity partners.
In summary, Texas presents a comparatively low state tax risk for the CV and its investors. The individual income tax absence eliminates the most significant potential exposure, and the margin tax risk is likely minimal for a passive investment partnership. The primary compliance item is monitoring Texas margin tax filing obligations, which may require a no-tax-due or information filing even if no margin tax is owed.
VI. Colorado
A. Overview — Flat Income Tax Rate
Vectral Cloud Inc. (EIN 85-1102847), the CV's third portfolio company, is headquartered at 700 17th Street, Suite 2200, Denver, Colorado 80202, under the leadership of its CEO, Elena Kowalski. The CV holds an 18.9% fully diluted ownership interest in Vectral Cloud, with an FMV of $260 million, a cost basis of $42.1 million, and unrealized built-in gain of $217.9 million.
Colorado imposes a flat income tax rate of 4.4% (effective for the 2025 tax year, as adjusted by recent legislation reducing the rate from prior levels) on Colorado-source taxable income. This rate applies equally to individuals, trusts, and estates. Colo. Rev. Stat. § 39-22-104. For nonresident individuals, Colorado-source income includes income derived from sources within Colorado, including the nonresident's distributive share of income from a Colorado partnership, S corporation, or other pass-through entity to the extent that such income is attributable to Colorado sources. Colo. Rev. Stat. § 39-22-109.
While Colorado's 4.4% rate is significantly lower than California's 13.3% rate, the Colorado exposure is nonetheless meaningful given the $217.9 million of built-in gain in the Vectral Cloud position and the CV's potential Colorado nexus.
B. Nexus and Sourcing Analysis
The CV's ownership of Vectral Cloud shares creates a connection to Colorado, and the extent to which that connection rises to the level of Colorado nexus depends on the nature and scope of the CV's activities relating to the Vectral Cloud investment.
Nexus Determination. Under Colorado law, a partnership is treated as doing business in Colorado if it conducts activities in Colorado that constitute a trade or business or if it derives income from Colorado sources. The CV's ownership of Vectral Cloud stock and the GP's management and oversight activities related to Vectral Cloud — including board participation, strategic advising, and periodic on-site management involvement — may be sufficient to establish Colorado nexus. If the GP's activities relating to Vectral Cloud involve regular travel to Denver, attendance at Vectral Cloud board meetings in Colorado, or other substantive management engagement within the state, Colorado nexus is likely present.
Sourcing of Gain on Disposition. Assuming Colorado nexus is established, the key question is whether gain on a future disposition of Vectral Cloud shares by the CV constitutes Colorado-source income allocable to nonresident partners. Under Colorado law, gain from the sale of a partnership interest or from the sale of assets (including stock) held by a partnership is generally sourced using an apportionment-based approach if the selling entity has Colorado nexus. The Colorado Department of Revenue applies sourcing rules that look to the location of the partnership's business activities and the situs of the assets generating the income.
For gain from the sale of stock in a Colorado-headquartered company by a partnership with Colorado nexus, the gain is likely to be treated as Colorado-source income, at least in part, and allocable to all partners (including nonresidents) based on their distributive shares. Colorado's 4.4% flat rate would apply to such Colorado-source income.
Quantification. If the full $217.9 million of built-in gain on Vectral Cloud is treated as Colorado-source income upon disposition, the aggregate Colorado tax exposure would be approximately $9.6 million (4.4% × $217.9 million), allocated among all partners based on their distributive shares. This figure represents the maximum Colorado exposure; the actual exposure may be lower if apportionment reduces the Colorado-source share.
C. Pass-Through Entity Withholding
Colorado requires pass-through entities to withhold Colorado income tax at the rate of 4.4% on Colorado-source income allocated to nonresident partners, unless the nonresident partner files a Colorado income tax return or provides a written agreement to do so. Colo. Rev. Stat. § 39-22-601(6). The withholding obligation is mandatory and applies to each distribution or allocation of Colorado-source income to a nonresident partner.
The CV LPA should include provisions expressly authorizing the GP to withhold Colorado state tax at the applicable rate on behalf of nonresident partners allocated Colorado-source income. As with the California withholding provisions, withheld amounts should be treated as distributions to the affected partners for purposes of the LPA's distribution waterfall.
Form DR 0108. Colorado provides Form DR 0108 (Nonresident Partner or Shareholder Agreement), which a nonresident partner may execute to agree to file a Colorado income tax return and timely pay any Colorado tax owed. If a nonresident partner submits a properly executed DR 0108 to the CV (as the pass-through entity), the CV's obligation to withhold Colorado tax on that partner's share of Colorado-source income is relieved. The LPA should contemplate the use of DR 0108 forms and provide a mechanism for nonresident partners to submit such forms in lieu of mandatory withholding.
D. Composite Return Filing
Colorado permits the filing of composite returns on behalf of nonresident individual partners of a pass-through entity. Under Colorado Department of Revenue guidance, a partnership may file a composite return (Form DR 0106) on behalf of qualified nonresident individual partners, with the partnership paying the Colorado tax on behalf of the included partners. This approach simplifies compliance for nonresident individual LPs and reduces the administrative burden on the GP.
We recommend that the CV file composite Colorado returns on behalf of nonresident individual LPs who are eligible for composite filing. The LPA should include provisions authorizing the GP to file composite returns and to withhold and remit Colorado tax on behalf of participating partners. LPs who prefer to file individual Colorado returns should have the ability to opt out of the composite filing arrangement by providing written notice and agreeing to file their own Colorado returns.
As with California, composite filing is generally available only for individual nonresident partners and may not be available for entity LPs such as Garrison Secondaries Fund IV LP, which would need to file its own Colorado return if it has Colorado-source income.
E. Colorado Conformity with Federal Partnership Provisions
Colorado generally conforms to federal partnership tax provisions, including IRC Sections 721, 704(b), and 704(c). This means that the Section 721 contribution of portfolio company shares from Fund II to the CV should be treated as a non-recognition event for Colorado income tax purposes, and the allocation provisions under Section 704(b) and the Section 704(c) remedial allocation method (or other method selected) should be respected at the Colorado state level.
Section 1202 Conformity. Importantly, Colorado generally conforms to IRC Section 1202 at the state level, in contrast to California's nonconformity. This is a favorable development for the CV's investors with respect to the Vectral Cloud position. Once the five-year holding period is satisfied — which we understand is anticipated to occur in March 2026 — eligible taxpayers should be able to claim the QSBS exclusion for Colorado income tax purposes, effectively eliminating Colorado income tax on qualifying gain from the disposition of Vectral Cloud stock.
However, until the holding period is satisfied, any disposition of Vectral Cloud stock would not qualify for QSBS treatment at either the federal or Colorado level. The draft Tax Protection Agreement (addressed in the Federal Memo) includes a covenant that the GP will not dispose of the Vectral Cloud position before the five-year holding period is satisfied in March 2026. This covenant is important not only for federal tax purposes but also because it preserves the potential for Colorado QSBS treatment. In the event that the covenant is breached or waived and an early disposition occurs, the full gain on the Vectral Cloud position would be subject to Colorado income tax at 4.4% (in addition to other applicable taxes), without the benefit of the QSBS exclusion.
VII. New York
A. Relevance — Garrison Secondaries Fund IV LP
New York state tax analysis is relevant to the CV transaction primarily because of the participation of Garrison Secondaries Fund IV LP, which is committing $380 million of new capital as the lead secondary buyer. Garrison's principal office is located at 399 Park Avenue, 22nd Floor, New York, New York 10022. Garrison Capital Advisors LLC, Garrison's general partner, is managed by Mitchell Adler (Partner) from the same New York office. Garrison is represented by Whitfield & Calloway LLP (Douglas Whitfield, Partner, 280 Park Avenue, 30th Floor, New York, New York 10017).
Garrison's commitment of $380 million represents approximately 35.4% of the CV's total projected capitalization of $1.074 billion, making Garrison the single largest investor in the CV. Given this substantial capital commitment and Garrison's New York domicile, the New York tax treatment of income flowing from the CV to Garrison — and from Garrison to its own underlying limited partners — is of significant importance.
B. New York Source Income Analysis
Under New York Tax Law §§ 631 and 632, a nonresident individual's New York-source income includes income from a New York business, trade, or profession. For partnerships, a nonresident partner's New York-source income includes the partner's distributive share of partnership income to the extent derived from New York sources. N.Y. Tax Law § 631(b)(1)(A). An entity partner's New York-source income follows a parallel analysis under the New York corporate franchise tax (N.Y. Tax Law Art. 9-A).
Analysis of CV Activities. PCV will not be domiciled in New York, and its GP activities will be conducted principally from Pinnacle Capital Management LLC's office in Menlo Park, California. The three portfolio companies held by the CV are located in California (Luminos Systems), Texas (ClearArc Software), and Colorado (Vectral Cloud) — none in New York. The CV will not maintain an office in New York, and the GP does not intend to conduct management or investment advisory activities from New York.
Based on these facts, gains from the CV's dispositions of portfolio company shares should generally not constitute New York-source income. The CV does not derive income from a New York trade or business, and the portfolio company operations are entirely outside New York. Accordingly, PCV should not have New York filing obligations, and income allocated from the CV to its partners should not be treated as New York-source income.
Caveats — New York Nexus-Creating Activities. The foregoing conclusion is premised on the assumption that the GP does not conduct material management or investment advisory activities in New York. If any GP personnel conduct substantive fund management activities in New York — including attending board meetings of portfolio companies, conducting investor meetings, or engaging in deal sourcing or negotiation activities from New York — this could create a basis for New York to assert nexus and to treat a portion of the CV's income as New York-source.
We recommend that the GP implement policies to minimize New York-based activities. To the extent that GP personnel travel to New York for meetings with Garrison or other New York-based counterparties, such meetings should be kept to a reasonable frequency and should not involve the conduct of active management or investment advisory functions in New York. Records should be maintained documenting the location of all material GP management activities.
C. Garrison's Own Tax Obligations
Garrison Secondaries Fund IV LP is itself a Delaware limited partnership with its principal office in New York. As a partnership doing business in New York, Garrison is treated as a New York partnership for purposes of its own investors' state tax obligations. Income flowing from PCV to Garrison, and then from Garrison to its underlying limited partners, will be sourced at the Garrison-LP level based on the nature and source of the income at each tier.
Specifically, if the income flowing from PCV to Garrison is not New York-source income (as we have concluded above), then Garrison's nonresident LPs should not be allocated New York-source income from the CV investment based solely on the PCV-tier analysis. However, Garrison's own New York-based management activities may cause Garrison itself to be treated as conducting a trade or business in New York, with the result that all of Garrison's income — including income from the CV investment — may be treated as New York-source income allocable to Garrison's nonresident LPs. This is a function of Garrison's own activities and structure.
This analysis is primarily a Garrison internal matter and is outside the scope of our engagement as counsel to Pinnacle Capital Management LLC. We note this issue here for completeness and because it is relevant to Garrison's underwriting of the CV investment. Whitfield & Calloway LLP should be advising Garrison on these considerations, and we recommend that this issue be flagged during the LP diligence process.
D. New York Pass-Through Entity Tax (PTET) Election
Effective for tax years beginning on or after January 1, 2021, New York enacted an elective pass-through entity tax ("PTET") that allows eligible partnerships and S corporations to elect to pay state income tax at the entity level. N.Y. Tax Law §§ 860–862. Partners and shareholders of an electing entity receive a corresponding credit on their individual New York state income tax returns, effectively shifting the state tax burden from the individual level to the entity level. This mechanism provides a workaround to the federal $10,000 limitation on the deductibility of state and local taxes imposed by IRC Section 164(b)(6), because the PTET is imposed on the entity rather than on the individual, and is deductible by the entity as a business expense.
Relevance to PCV. If PCV were to generate New York-source income, the PTET election could potentially be relevant for PCV itself. However, as analyzed in Section VII.B above, PCV is unlikely to generate New York-source income. Accordingly, a PCV-level New York PTET election is not anticipated to be necessary or advantageous.
Relevance to Garrison. More practically, if Garrison Secondaries Fund IV LP makes a New York PTET election for its own fund (as many New York-based partnerships have elected to do following the enactment of the PTET regime), the income flowing from PCV to Garrison would be included in Garrison's PTET calculation. The PTET election and its implications for Garrison and its underlying LPs are matters for Garrison's own tax advisors.
Recommendation. We recommend that this issue be flagged for Douglas Whitfield at Whitfield & Calloway LLP during the LP diligence process. The CV's offering materials and side letter negotiations should not include representations regarding the availability or effect of a New York PTET election at the CV level, given that PCV is not expected to generate New York-source income.
E. New York Withholding
New York requires pass-through entities to withhold New York state income tax on New York-source income allocated to nonresident partners at the highest applicable rate. N.Y. Tax Law § 658(c). The withholding rate for nonresident individual partners is the highest New York State marginal income tax rate (currently 10.9%).
Given our analysis that PCV is unlikely to generate New York-source income, the mandatory New York withholding obligation should not apply to the CV. However, as a protective measure, the LPA should include a general withholding provision broad enough to cover any future New York filing obligations that may arise if facts or circumstances change — for example, if the GP begins conducting management activities in New York or if a portfolio company establishes a New York presence.
VIII. Other State Considerations
A. States of LP Domicile
The CV's investor base includes limited partners who may be domiciled in states other than California, Delaware, Texas, Colorado, and New York. While a comprehensive analysis of every potential state of LP domicile is beyond the scope of this memorandum, the following general principles should be noted:
Under general state tax principles, resident individuals are taxed by their state of domicile on their worldwide income — that is, on all income from whatever source derived. Most states allow a credit for income taxes paid to other states on income that is also subject to tax in the state of domicile, thereby mitigating (but not always eliminating) double taxation. Thus, a California-resident LP who is subject to California tax on California-source income from the CV, and who is also subject to (for example) Colorado tax on Colorado-source income from the CV, would generally receive a California credit for the Colorado taxes paid.
However, the credit mechanism does not always fully offset the state tax burden, particularly where the state of domicile imposes a higher rate than the source state. For California-resident LPs, the 13.3% California rate exceeds the 4.4% Colorado rate, so Colorado taxes would be fully creditable against the California liability. But for LPs domiciled in low-tax or no-tax states (such as Texas, Florida, or Nevada), there is no home-state income tax against which to credit California or Colorado taxes, resulting in a net state tax cost.
The CV LPA should include a general catch-all provision authorizing the GP to withhold and remit state taxes as required by any applicable state jurisdiction, not limited to California and Colorado. This provision should be drafted broadly enough to accommodate future changes in state tax law and to cover states of LP domicile that may impos

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