Paul,
I hope this finds you well. I am writing in my capacity as the specialist tax partner at Calderwood & Harkness LLP handling the management company restructuring for Ardent Capital Partners III LP. As you are generally aware, Ardent Capital is in the process of restructuring the ownership of both its general partner entity and its management company through the formation of a new holding company and an intermediate GP entity. All restructuring documents are expected to be executed on or about February 28, 2024, with the new entities (HoldCo and GP Intermediate, each described below) to be formed in Delaware on March 1, 2024.
The purpose of this email is to outline in detail the key tax reporting implications of this restructuring so that Heathrow Whitman can plan appropriately for the current and upcoming tax filing cycles. I have organized this into numbered sections for ease of reference. This is a substantial amount of detail, and I would welcome the opportunity to walk through it on a call with you and your team at your convenience.
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**1. Entity Identification**
For reference, the full list of entities involved in the restructuring is as follows:
| Entity
Please note that HoldCo and GP Intermediate will each need to be established as new taxpayer entities in your systems. Both are Delaware limited liability companies. HoldCo will be classified as a partnership for federal income tax purposes (it will have multiple members). GP Intermediate will be treated as a disregarded entity for federal income tax purposes, as its sole member will be HoldCo.
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**2. Structural Overview for Tax Purposes**
*Pre-Restructuring:* Five individual principals — Marcus Aldridge, Priya Narayanan, David Kellner, Joanna Trask, and Wei Hsiao — held direct membership interests in both the GP and the ManCo.
*Post-Restructuring:* HoldCo will become the sole member of ManCo (directly) and the sole member of GP Intermediate, which in turn will become the sole member of the GP. The five members of HoldCo following the restructuring will be:
- Marcus Aldridge — 42% - Priya Narayanan — 36% - Wei Hsiao — 14% - Elena Marchetti — 4% - Chisom Okonkwo — 4%
The contribution of existing GP and ManCo membership interests by the principals into HoldCo is intended to qualify as a tax-free contribution under IRC Section 721 (contribution to a partnership in exchange for a partnership interest). Provided the transaction is properly structured — and we believe it is — there should be no taxable event at the HoldCo formation level.
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**3. Schedule K-1 Changes**
**3.1 Ardent Capital Partners III LP (EIN 84-3291057)**
The Fund itself should see minimal K-1 changes as a result of the restructuring. The GP entity remains Ardent Capital GP III LLC — the identity of the GP is unchanged; only its upstream ownership has changed. The GP's 1.5% commitment ($42,000,000) remains the same in aggregate. The K-1 issued by the Fund to the GP should continue to reflect this commitment and the GP's allocable share of Fund income, gain, loss, deduction, and credit without interruption.
**3.2 Ardent Capital GP III LLC (EIN 84-3291063)**
- *Pre-Restructuring:* The GP issued K-1s to five individual members (Aldridge, Narayanan, Kellner, Trask, and Hsiao). - *Post-Restructuring:* The GP will issue a single K-1 to Ardent GP Intermediate LLC, its new sole member. Because GP Intermediate is a disregarded entity, all income and other tax items will flow through GP Intermediate to HoldCo. - *Transition-Year Treatment (2024):* The 2024 K-1s will need to reflect a short period before and after the restructuring effective date of February 28, 2024. Specifically, David Kellner's and Joanna Trask's allocable shares through February 28 must be reported on their individual K-1s for the pre-restructuring period.
**3.3 Ardent Capital Management LLC (EIN 84-3291070)**
- *Pre-Restructuring:* The ManCo issued K-1s to five individual members. - *Post-Restructuring:* The ManCo will issue a single K-1 to Ardent Capital Holdings LLC, its new sole member. - *Transition-Year Treatment:* The same short-period treatment as described above for the GP applies to the ManCo for 2024. - *ManCo Profit Share:* The ManCo Profit Share of approximately $17,150,000 per year (35% of the $49,000,000 annual management fee) will now flow to HoldCo for allocation among HoldCo members in accordance with their respective percentage interests.
**3.4 Ardent Capital Holdings LLC (EIN 93-1847225) — New**
- HoldCo will issue K-1s to its five members beginning in 2024 (short-period K-1s from the formation date of March 1, 2024). - Post-restructuring allocations will follow the percentages set forth in Section 2 above: Aldridge 42%, Narayanan 36%, Hsiao 14%, Marchetti 4%, Okonkwo 4%. - HoldCo is a new partnership for federal income tax purposes. An initial tax return (Form 1065) will be required for its short tax year beginning March 1, 2024 and ending December 31, 2024.
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**4. Carried Interest Reallocation**
The Fund's total carried interest is 20% of net profits, subject to an 8% preferred return and full catch-up. Accrued carry as of September 30, 2023 was $87,600,000 (not yet distributed).
Post-restructuring carry pool allocations on future appreciation are as follows: Aldridge 42%, Narayanan 36%, Hsiao 14%, Marchetti 4%, Okonkwo 4%.
The accrued carry attributable to David Kellner's vested interest and Joanna Trask's retained vested interest is carved out per the applicable separation agreements and carry retention side letters, as discussed in Section 5 below. The redistribution of the forfeited and released carry among continuing principals should be treated carefully for Section 704(b) and 704(c) purposes. We have prepared a detailed Section 704(b)/704(c) allocation analysis memorandum addressing these issues, and I am happy to share a copy with you upon request (subject to client authorization, though I expect this will be forthcoming).
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**5. Treatment of Departing Principals**
**5.1 David Kellner — Retirement effective March 31, 2024**
- *Retained Carry:* 100% of vested carried interest: $13,140,000 (15% × $87,600,000 accrued). - *Carry Escrow:* $3,942,000 (30% × $13,140,000) remains in escrow for three years post-retirement. - *Clawback Obligation:* Continues for three years post-retirement. - *Post-Restructuring Carry Distributions:* Kellner's carry distributions will be paid through GP Intermediate going forward. Heathrow Whitman should track Kellner's retained carry interest as a separate allocation layer. - *GP Commitment:* - Total: $6,300,000 (15% × $42,000,000) - Funded to date: $4,410,000 (70%) - Unfunded: $1,890,000 — to be assumed by remaining HoldCo members pro rata (see Section 6 below). - *Senior Advisor Agreement:* $350,000 per year for two years ($700,000 total). This will be ordinary compensation income to Kellner, reported on Form 1099-NEC (or Form W-2 if treated as an employee, though we expect independent contractor treatment is appropriate). The ManCo is the paying entity. - *Health Insurance Continuation:* Approximately $52,000 over 24 months (COBRA equivalent). Deductible by the ManCo. - *ManCo Economics:* Profit Share allocations to Kellner cease as of his departure date — no further ManCo profit allocation after March 31, 2024. - *2024 K-1 Treatment:* K-1s from the GP and ManCo should reflect Kellner's allocable share through the restructuring date (February 28, 2024). Thereafter, Kellner's only ongoing tax interest is his retained carry in the Fund.
**5.2 Joanna Trask — Departure effective April 15, 2024**
- *Retained Carry:* 60% of vested carried interest: $6,307,200 (60% × $10,512,000, where $10,512,000 = 12% × $87,600,000). - *Forfeited Carry:* - 40% of vested carry forfeited: $4,204,800. - 100% of unvested carry forfeited. - Characterization: Calderwood & Harkness's position is that the forfeited carry is treated as a reallocation among the continuing carry participants under the partnership agreement, rather than a reversion to the Fund. We would welcome Heathrow Whitman's input on reporting this position. - *Carry Escrow:* - New escrow amount: $1,892,160 (30% × $6,307,200). - Existing escrow balance: $3,150,000. - Partial release back to Trask: $1,257,840. - The escrow release of $1,257,840 should be treated as a return of previously escrowed amounts, not a new distribution. This should not give rise to an additional tax event if the original escrow was already included in Trask's income when accrued or distributed. - *Clawback Obligation:* Continues for two years post-departure on retained carry. - *Separation Payment:* $1,250,000 lump sum payable within 30 days of departure. Calderwood & Harkness expects this to be treated as ordinary income to Trask, likely reported on Form 1099-NEC. However, I would like to discuss with you and your team whether any portion of this payment could be characterized as a Section 736(b) payment for Trask's interest in partnership property versus a Section 736(a) payment. This distinction could be significant for both Trask and the remaining partners. - *GP Commitment:* - Total: $5,040,000 (12% × $42,000,000) - Funded: $3,528,000 (70%) - Unfunded: $1,512,000 — to be assumed by remaining HoldCo members pro rata (see Section 6 below). - *ManCo Economics:* Cease as of departure. - *2024 K-1 Treatment:* Same transition-year approach as Kellner — allocable share reported through the restructuring date.
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**6. GP Commitment Reallocation**
The combined unfunded GP commitment of the two departing principals totals $3,402,000 ($1,890,000 from Kellner + $1,512,000 from Trask). This amount will be assumed by the remaining HoldCo members pro rata based on their post-restructuring percentages:
| Member
This assumption of unfunded commitment should be reflected in the capital account tracking for each HoldCo member's indirect GP interest.
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**7. New Entity-Level Tax Filings Required**
- *Ardent Capital Holdings LLC (EIN 93-1847225):* Form 1065 for its short tax year beginning March 1, 2024 through December 31, 2024. We will need to consider whether any elections should be made in the initial return — for example, a Section 754 election, if appropriate. We can discuss this further. - *Ardent GP Intermediate LLC (EIN 93-1847231):* As a disregarded entity, no separate federal income tax return is required. All activity will be reported on HoldCo's return. - *Existing Entities (Fund, GP, ManCo):* Each continues filing as before. However, the 2024 returns for the GP and ManCo will need to reflect the change in membership mid-year, as discussed in Section 3 above.
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**8. Section 704(b) and 704(c) Considerations**
The formation of HoldCo involves contributions of GP and ManCo interests that may have built-in gain or loss. The HoldCo LLC agreement provides for the remedial allocation method under Section 704(c).
For context, the unrealized value of the Fund portfolio as of September 30, 2023 was approximately $2,330,000,000 against invested capital of $1,880,000,000. The built-in gain attributable to the GP's carried interest and capital account will need to be tracked at the HoldCo level.
As noted above, we have prepared a detailed Section 704(b)/704(c) analysis memorandum and I am happy to provide a copy to you upon request.
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**9. Timing and Coordination**
The key dates for your planning purposes are as follows:
- Restructuring documents executed: February 28, 2024 - Delaware entity formations (HoldCo and GP Intermediate): March 1, 2024 - Kellner effective retirement: March 31, 2024 - Trask effective departure: April 15, 2024
I would respectfully request that Heathrow Whitman coordinate with our team at Calderwood & Harkness on the preparation of 2024 K-1s for all affected entities to ensure consistency across the filing positions. We are happy to review drafts and provide input at any stage.
Additionally, please note that Pemberton Hale LLP (Victoria Langford) remains fund counsel for routine operations and may separately communicate with you regarding ongoing portfolio-level tax matters. Our role at Calderwood & Harkness is limited to the restructuring and the related tax structuring and compliance coordination.
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**10. Next Steps**
I have not attached any documents to this email, but I am prepared to share the following upon request and with client authorization:
- Section 704(b)/704(c) Allocation Analysis Memorandum - Ardent Capital Holdings LLC — LLC Agreement - Amended and Restated Carried Interest Allocation Agreement
I would welcome the opportunity to schedule a call with you and your team to walk through these items in more detail. Please let me know your availability over the next week or so, and I will coordinate on our end with Nick Stern and Owen Fischer, who are also working on this matter.
Marcus Aldridge is copied on this email for client awareness.
Thank you, Paul, and please do not hesitate to reach out with any questions in the interim.
Best regards,
**Sylvia Hartwell** Partner, Tax Calderwood & Harkness LLP One Vanderbilt Avenue, 44th Floor New York, NY 10017 T: (212) 507-4833 E: shartwell@calderwoodharkness.com
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