1003-00003 · Harrowgate Private Equity Fund IV LP · Tax

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PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

This memorandum constitutes a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and may not be disclosed, distributed, copied, or otherwise disseminated to any third party without the prior written approval of Calderwood & Harkness LLP. Any unauthorized disclosure may result in a waiver of applicable privileges.

CALDERWOOD & HARKNESS LLP Attorneys at Law

1601 Market Street, 42nd Floor Philadelphia, Pennsylvania 19103

Telephone: (215) 555-7800 Facsimile: (215) 555-7801

March 12, 2025

MEMORANDUM

FROM: Leonard Cross, Specialist Partner, Tax — Calderwood & Harkness LLP

TO: Sandra Tung, Responsible Partner, M&A — Calderwood & Harkness LLP Priya Deshmukh, Managing Partner, Fund IV — Harrowgate Capital Management IV LLC

CC: Oliver Mackenzie, Billing Partner, M&A — Calderwood & Harkness LLP Megan Chu, Lead Associate, M&A — Calderwood & Harkness LLP Thomas Eriksen, Partner, Head of FinTech — Harrowgate Capital Management IV LLC

RE: Tax Structure Analysis — Acquisition of VeloPay Systems, Inc. by Harrowgate Private Equity Fund IV LP

MATTER NO.: 1003-00003

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I. Executive Summary

The purpose of this memorandum is to analyze the federal income tax treatment of the proposed acquisition of VeloPay Systems, Inc. ("VeloPay" or the "Target"), a Delaware corporation, by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Buyer"), a Delaware limited partnership, for an aggregate purchase price of $1,900,000,000 (the "Transaction"). The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law (the "DGCL"), in which Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary of HPE Fund IV incorporated on February 24, 2025, will merge with and into VeloPay. At the effective time of the merger (the "Effective Time"), VeloPay will survive as a wholly-owned subsidiary of HPE Fund IV, and Merger Sub will cease to exist.

The aggregate merger consideration is $1,900,000,000, payable entirely in cash at a price of $20.00 per share on a fully diluted, as-converted basis across 95,000,000 fully diluted shares. The consideration will be funded through the following sources: (i) an equity contribution of $1,140,000,000 from HPE Fund IV; (ii) a $500,000,000 senior secured term loan from Tralvendo National Bank, priced at SOFR plus 375 basis points with a seven-year maturity; and (iii) a $260,000,000 senior secured revolving credit facility from Prairie State Bank, N.A., priced at SOFR plus 325 basis points with a five-year maturity, of which approximately $254,700,000 is expected to be drawn at closing. In addition, VeloPay's existing cash on hand of approximately $53,800,000 will be used to fund a portion of the transaction expenses.

Two members of VeloPay management — Nathan Aldridge and Sonia Reyes-Watkins — will roll over a combined $23,900,000 ($14,200,000 and $9,700,000, respectively) into Harrowgate Velocity Co-Invest LP, a newly formed Delaware limited partnership that will invest alongside HPE Fund IV in the surviving corporation.

Based on our analysis, we recommend that the Transaction be structured as a taxable stock acquisition for federal income tax purposes, rather than as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). We further recommend that HPE Fund IV decline to make an election under Section 338(h)(10) or Section 338(g) of the Code. Our key conclusions are as follows:

• The reverse triangular merger, as structured with all-cash consideration and only de minimis management rollover equity (representing approximately 1.26% of total deal value), does not and cannot qualify as a tax-free reorganization under any subsection of Section 368. The Transaction fails the continuity of interest requirement, and the use of a limited partnership as the acquiring entity precludes satisfaction of the "voting stock" requirement under Section 368(a)(2)(E).

• A Section 338(h)(10) election is not available because VeloPay is a standalone C corporation — it is not a member of a selling consolidated group and is not an S corporation.

• A unilateral Section 338(g) election is economically unfavorable and is not recommended. The estimated entity-level tax cost of a deemed asset sale exceeds $200 million, which substantially outweighs the present value of any incremental amortization benefit from a stepped-up basis.

• The Transaction should therefore be treated as a taxable acquisition of VeloPay stock under Section 1001 of the Code. VeloPay stockholders will recognize gain or loss on the exchange of their VeloPay shares for cash. HPE Fund IV will take a cost basis in the VeloPay stock equal to the aggregate merger consideration ($1,900,000,000), and VeloPay's assets will retain their existing (carryover) tax basis.

• VeloPay's pre-change net operating loss carryforwards ("NOLs") will be subject to the annual limitation imposed by Section 382 as a result of the ownership change occurring at closing. The estimated annual Section 382 limitation is approximately $90,250,000.

• The Section 163(j) business interest limitation may partially restrict annual deductibility of interest on the acquisition debt, and this limitation should be incorporated into the financial model.

This memorandum does not address the Section 280G parachute payment analysis or the FIRPTA and withholding tax analysis applicable to non-U.S. stockholders. Those topics are the subjects of separate companion memoranda, which are being prepared concurrently and will be circulated under separate cover.

II. Transaction Structure Overview

A. Description of the Reverse Triangular Merger

The Transaction is structured as a reverse triangular merger under Section 251 of the DGCL. The step-by-step mechanics of the merger are as follows:

1. Formation of Merger Sub. HPE Fund IV has formed Merger Sub as a Delaware corporation and wholly-owned subsidiary of HPE Fund IV. Merger Sub was incorporated on February 24, 2025, and has no assets, liabilities, or operations other than those incident to its formation and the consummation of the merger.

2. Merger of Merger Sub with and into VeloPay. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), Merger Sub will merge with and into VeloPay at the Effective Time.

3. Cash-Out of VeloPay Equity. At the Effective Time, each outstanding share of VeloPay common stock (82,400,000 shares outstanding as of the date hereof), each in-the-money stock option (7,600,000 options outstanding with a weighted average exercise price of $12.84 per share), each restricted stock unit ("RSU") (3,200,000 RSUs outstanding), and each outstanding warrant (1,800,000 warrants with an exercise price of $8.50 per share) will be converted into the right to receive the applicable cash consideration as described below.

4. VeloPay Survives. VeloPay will survive the merger as a wholly-owned subsidiary of HPE Fund IV. VeloPay will retain its corporate identity, its employer identification number (EIN 82-3019478), and all of its assets, liabilities, contracts, licenses, and permits.

5. Merger Sub Ceases to Exist. Merger Sub will cease to exist at the Effective Time. Its separate corporate existence will merge into and be continued by VeloPay as the surviving corporation.

The treatment of equity awards at closing is summarized as follows:

• Vested Stock Options: All vested, in-the-money stock options will be cancelled at the Effective Time in exchange for a cash payment equal to the per-share merger consideration ($20.00) minus the applicable exercise price, multiplied by the number of shares subject to the option (the "Option Spread Payment").

• Unvested Stock Options: Fifty percent (50%) of all unvested, in-the-money stock options will accelerate and vest at the Effective Time and will be cancelled for cash in the same manner as vested options. The remaining fifty percent (50%) of unvested options will be converted into replacement awards referencing equity interests in HPE Fund IV (or a designated affiliate thereof), with vesting to continue over a twenty-four (24) month period following the closing.

• Restricted Stock Units: All unvested RSUs (3,200,000 units) will fully accelerate and vest at the Effective Time and will be cancelled in exchange for a cash payment of $20.00 per unit.

• Warrants: All outstanding warrants (1,800,000 warrants at an exercise price of $8.50 per share) will be cancelled at the Effective Time in exchange for a cash payment of $11.50 per warrant ($20.00 per-share merger consideration minus the $8.50 exercise price), resulting in an aggregate payment of $20,700,000.

The merger consideration is 100% cash. No stock, partnership interests, or other equity of HPE Fund IV or any affiliate thereof is being distributed to VeloPay stockholders generally as part of the merger consideration. The limited rollover by Aldridge and Reyes-Watkins is structured as a separate, post-merger reinvestment and is not part of the merger consideration, as discussed in detail in Section VII below.

B. Parties and Entity Types

The principal parties to the Transaction and their relevant entity characteristics are as follows:

HPE Fund IV (Buyer). Harrowgate Private Equity Fund IV LP is a Delaware limited partnership, formed under the Delaware Revised Uniform Limited Partnership Act. Its general partner is Harrowgate Capital Management IV LLC, a Delaware limited liability company (EIN 87-4231847). HPE Fund IV's EIN is 87-4231956. As a limited partnership, HPE Fund IV is treated as a partnership for federal income tax purposes and is not subject to entity-level federal income tax. Items of income, gain, loss, deduction, and credit flow through to HPE Fund IV's partners (limited partners and the general partner) in accordance with the partnership agreement.

Merger Sub. Harrowgate Velocity Merger Sub Inc. is a Delaware corporation formed on February 24, 2025, for the sole purpose of effectuating the merger. Its EIN is 93-1847265. Its sole shareholder is HPE Fund IV. Merger Sub has no operations, employees, assets, or liabilities other than those incident to its formation and the contemplated merger. Merger Sub will cease to exist at the Effective Time.

VeloPay (Target). VeloPay Systems, Inc. is a Delaware corporation (EIN 82-3019478). VeloPay is a standalone C corporation for federal income tax purposes. It is not a member of any affiliated group filing a consolidated federal income tax return, and it has not elected S corporation status. VeloPay is a payments technology company headquartered in Austin, Texas, engaged in merchant acquiring, payment processing, and related financial technology services.

VeloPay Subsidiaries. VeloPay has five direct or indirect subsidiaries:

Harrowgate Velocity Co-Invest LP. Harrowgate Velocity Co-Invest LP is a Delaware limited partnership formed on March 14, 2025 (EIN 93-2748163). Its general partner is Harrowgate Capital Management IV LLC. The Co-Invest LP is the vehicle through which Nathan Aldridge and Sonia Reyes-Watkins will make their rollover equity investments alongside HPE Fund IV.

C. Capitalization and Consideration

VeloPay's capitalization on a fully diluted, as-converted basis is summarized as follows:

The aggregate merger consideration is $1,900,000,000. The per-share merger consideration on a fully diluted, as-converted basis is $20.00. The option and warrant consideration reflects the in-the-money spread (merger consideration per share minus the applicable exercise price).

Escrow. Of the aggregate merger consideration, $133,000,000 (representing 7% of total deal value) will be deposited at the Effective Time with Garrison Trust Company (Reference No. GT-ESC-2025-07223) as security for indemnification obligations under Article IX of the Merger Agreement. The escrow funds will be released as follows: $66,500,000 (50% of the escrow amount) will be released at twelve (12) months post-closing (approximately July 22, 2026), and the remaining balance will be released at eighteen (18) months post-closing (approximately January 22, 2027), net of any pending or unresolved indemnification claims.

Indemnification Cap. The maximum aggregate indemnification obligation of the selling stockholders under the Merger Agreement is $228,000,000, representing 12% of total deal value.

Existing Debt Payoff. At or prior to the closing, VeloPay's existing indebtedness to Meridian Commercial Credit Corp. in the principal amount of $112,000,000 (plus approximately $1,230,000 in accrued and unpaid interest) will be repaid in full at par, for a total payoff amount of approximately $113,230,000.

III. Section 368 Reorganization Qualification Analysis

A. Overview of Potentially Applicable Reorganization Provisions

Under Subchapter C of the Code, certain corporate acquisitions may qualify as tax-free "reorganizations" under Section 368(a)(1), permitting deferral of gain recognition by target stockholders who receive qualifying consideration in the transaction. The two provisions potentially applicable to a reverse triangular merger structure are:

Section 368(a)(1)(A) — Statutory Merger. A statutory merger or consolidation of a target with or into an acquiring corporation may qualify as a Type A reorganization, provided that the transaction satisfies the judicially and regulatorily developed requirements of (i) continuity of interest ("COI"), (ii) continuity of business enterprise ("COBE"), and (iii) a valid business purpose. A Type A reorganization permits the greatest flexibility in the mix of consideration (cash, stock, other property), subject to the COI requirement.

Section 368(a)(2)(E) — Reverse Triangular Merger. Section 368(a)(2)(E) extends Type A reorganization treatment to a reverse subsidiary merger — that is, a transaction in which a subsidiary of the acquiring corporation merges with and into the target, and the target survives. To qualify under Section 368(a)(2)(E), the following specific statutory requirements must be met:

(i) The target must survive the merger and hold "substantially all" of its properties and the properties of the merging subsidiary after the transaction;

(ii) Former stockholders of the target must exchange, in the aggregate, an amount of target stock constituting "control" of the target (within the meaning of Section 368(c), i.e., at least 80% of the total combined voting power and 80% of each class of nonvoting stock) solely for "voting stock" of the controlling corporation (i.e., the parent of the merging subsidiary); and

(iii) The general requirements of COI and COBE must be satisfied.

A critical feature of Section 368(a)(2)(E) is the requirement that the consideration paid to target stockholders consist of "voting stock" of the controlling corporation. This requirement is narrower than the general COI standard applicable to a Type A reorganization and imposes a specific statutory constraint on the form of consideration.

B. Continuity of Interest Requirement

The continuity of interest doctrine requires that a sufficient portion of the consideration received by target stockholders in a reorganization consist of equity of the acquiring entity, thereby ensuring that the former target stockholders maintain a continuing proprietary interest in the ongoing enterprise. Under Treasury Regulation § 1.368-1(e), the IRS has historically taken the position — and the Service's ruling guidelines confirm — that at least 40% of the total consideration (measured by value) must consist of equity of the issuing corporation (or its parent) for the COI requirement to be satisfied. While courts have in some circumstances found COI satisfied at lower percentages, the 40% threshold represents the established safe harbor for advance ruling purposes and is the standard applied in practice.

In the present Transaction, the merger consideration payable to VeloPay stockholders at the Effective Time is 100% cash. No shares of stock, no partnership interests, and no other equity securities of HPE Fund IV, Merger Sub, or any affiliate of the Buyer are being issued or distributed to VeloPay stockholders as part of the merger consideration.

The only element of equity investment by any former VeloPay equity holder is the rollover by Nathan Aldridge ($14,200,000) and Sonia Reyes-Watkins ($9,700,000) into Harrowgate Velocity Co-Invest LP. The combined rollover amount of $23,900,000 represents approximately 1.26% of the $1,900,000,000 aggregate merger consideration. This is far below the 40% threshold required for continuity of interest. Even under the most liberal judicial interpretation of the COI doctrine, a 1.26% equity component would be wholly insufficient to satisfy the requirement.

Moreover, and independently, the equity interests being acquired by Aldridge and Reyes-Watkins in the rollover are limited partnership interests in the Co-Invest LP — not shares of stock in a corporation. The COI doctrine, as applied in the context of Section 368 reorganizations, requires that target stockholders receive an equity interest in the acquiring corporation (or its corporate parent). Partnership interests do not constitute "stock" for purposes of the COI doctrine, and the receipt of partnership interests by former target stockholders does not preserve continuity of interest. See Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); Treas. Reg. § 1.368-1(e)(1).

Furthermore, Section 368(a)(2)(E) imposes the specific statutory requirement that former target stockholders exchange their target stock for "voting stock" of the "controlling corporation." HPE Fund IV is a limited partnership, not a corporation. Limited partnership interests are not "voting stock" within the meaning of Section 368(a)(2)(E) or Section 368(c). There is no corporate parent of HPE Fund IV that could serve as the "controlling corporation" for purposes of this provision. Accordingly, the Transaction cannot satisfy the "voting stock" requirement of Section 368(a)(2)(E) under any set of facts.

Conclusion: The Transaction fails the continuity of interest requirement and the "voting stock" requirement for a Section 368(a)(2)(E) reverse triangular merger reorganization. These failures are structural and inherent in the Transaction as designed — they cannot be cured without fundamentally altering the deal structure, the form of consideration, or the identity of the acquiring entity. The Transaction cannot qualify as a tax-free reorganization under any subsection of Section 368.

C. Substantially All Properties Requirement

Section 368(a)(2)(E) requires that the target, after the merger, hold "substantially all" of its properties and the properties of the merging subsidiary. The IRS has historically interpreted "substantially all" as requiring retention of at least 90% of the fair market value of net assets and at least 70% of the fair market value of gross assets of the target. See Rev. Proc. 77-37, 1977-2 C.B. 568.

In the present Transaction, VeloPay will survive the reverse triangular merger and will retain all of its pre-merger assets, liabilities, contracts, licenses, intellectual property, and other properties. No assets are being stripped from VeloPay prior to or in connection with the merger. The only property that Merger Sub brings to the transaction is the cash merger consideration contributed by HPE Fund IV, which passes through VeloPay to the former stockholders. After the Effective Time, VeloPay will hold substantially all of its historical properties.

Accordingly, the "substantially all" requirement would likely be satisfied if it were the operative issue. However, this analysis is academic only, as the Transaction independently fails the COI requirement and the "voting stock" requirement as discussed above. Satisfaction of the "substantially all" requirement alone cannot salvage a transaction that fails these other fundamental prerequisites.

D. Continuity of Business Enterprise Requirement

The COBE requirement mandates that the acquiring corporation (or the surviving entity in the case of a reverse merger) continue a significant line of the target's historic business or use a significant portion of the target's historic business assets in a business after the reorganization. See Treas. Reg. § 1.368-1(d).

HPE Fund IV intends to continue operating VeloPay's payments processing business after the closing. VeloPay's existing business lines — merchant acquiring, payment processing, fraud intelligence services, and payment gateway operations — will be maintained and expanded under HPE Fund IV's ownership. There is no plan to discontinue or dispose of VeloPay's core business or its principal business assets. Accordingly, the COBE requirement would be satisfied if it were the operative issue.

As with the "substantially all" analysis, this conclusion is moot given the failure of COI and the voting stock requirement.

E. Conclusion on Section 368

For the reasons set forth above, the reverse triangular merger as structured — with 100% cash consideration payable to VeloPay stockholders, de minimis management rollover equity (1.26% of deal value) contributed to a limited partnership vehicle rather than a corporate entity, and the use of a limited partnership (HPE Fund IV) as the acquiring entity — does not and cannot qualify as a tax-free reorganization under Section 368 of the Code. The Transaction will be treated as a taxable acquisition of VeloPay stock for federal income tax purposes.

This outcome is fully consistent with, and indeed is the preferred result for, HPE Fund IV's structuring objectives. As discussed in Section V below, taxable stock acquisition treatment provides simplicity, certainty, and clean delineation of pre-closing and post-closing tax periods, and it avoids the compliance complexities and potential uncertainties associated with reorganization treatment.

IV. Section 338(h)(10) Election Analysis

A. Overview of Section 338(h)(10)

Section 338(h)(10) of the Code, together with its implementing regulations, permits a purchasing corporation and the selling consolidated group (or S corporation shareholders, as applicable) to make a joint election to treat a "qualified stock purchase" (within the meaning of Section 338(d)(3)) as a deemed asset sale for federal income tax purposes. When a valid Section 338(h)(10) election is made, the following deemed transactions are treated as occurring:

(i) The target is deemed to have sold all of its assets in a single transaction at fair market value to an unrelated purchaser at the close of the acquisition date;

(ii) The target is then deemed to have distributed the proceeds of the deemed sale to its shareholders in complete liquidation; and

(iii) The purchasing corporation is deemed to have acquired the target's assets from a new corporation (a "new target") and placed those assets in service, with a stepped-up tax basis in each asset equal to its fair market value as of the acquisition date (allocated among the assets under the residual method prescribed in Section 338(b)(5) and Treas. Reg. § 1.338-6).

The primary benefit of a Section 338(h)(10) election to a buyer is the stepped-up basis in the target's assets. This basis step-up generates incremental depreciation and amortization deductions over the useful lives of the various asset categories — including Section 197 amortization of goodwill and other intangible assets over 15 years — which can produce substantial tax savings over the holding period. The primary cost is borne by the selling group, which must report entity-level gain on the deemed asset sale, potentially at higher effective tax rates than would apply to a stock sale (due to ordinary income character on certain asset categories such as depreciation recapture, inventory, and accounts receivable).

In the context of a private equity acquisition, a Section 338(h)(10) election is frequently the preferred structure where the target is either (i) a member of a selling consolidated group (such that the selling parent absorbs the deemed asset sale gain within its consolidated return, potentially offsetting it against other items) or (ii) an S corporation (such that the gain passes through to the S corporation shareholders, who are the selling stockholders themselves). In either case, the selling group or shareholders can be compensated through a purchase price adjustment for the incremental tax cost, and both parties benefit from the step-up.

B. Threshold Eligibility Requirements

A Section 338(h)(10) election is available only in the following limited circumstances:

(i) The target is a member of a "selling consolidated group" within the meaning of Treasury Regulation § 1.338(h)(10)-1(c)(2) — that is, the target must be a subsidiary member of an affiliated group of corporations filing a consolidated federal income tax return under Section 1501, and the common parent of that group must join in the election; or

(ii) The target is an S corporation, and all of the S corporation's shareholders join in the election.

VeloPay does not satisfy either of these conditions. VeloPay is a standalone C corporation. It is not a subsidiary member of any affiliated group filing a consolidated federal income tax return. Its shareholders are a diverse group of venture capital and private equity funds, individual founders, management equity holders, and other investors, as follows:

None of these stockholders is a corporation that holds 80% or more of VeloPay's stock, and VeloPay is not a member of any affiliated group. VeloPay has not elected S corporation status.

Conclusion: Because VeloPay is not a subsidiary member of a selling consolidated group and is not an S corporation, the Transaction is not eligible for a Section 338(h)(10) election. This conclusion is categorical and cannot be altered without a fundamental change in VeloPay's corporate status or ownership structure that is not feasible in the context of this Transaction.

C. Consideration of a Standalone Section 338(g) Election

As an alternative to Section 338(h)(10), Section 338(g) of the Code permits a purchasing corporation to unilaterally make an election (without the consent or participation of the selling stockholders) to treat its qualified stock purchase as a deemed asset acquisition. However, the practical consequences of a standalone Section 338(g) election differ materially from those of a Section 338(h)(10) election.

Under a Section 338(g) election, the target is deemed to have sold all of its assets to a new corporation at fair market value, triggering entity-level gain at the target level. Critically, however, the selling stockholders are not relieved of their own stock-sale gain — they continue to be taxed on the gain realized on the exchange of their VeloPay stock for cash, exactly as they would be in the absence of any election. The result is an economic double tax: entity-level tax on the deemed asset sale (borne by the target, and therefore ultimately by the buyer as the new owner of the target) plus stockholder-level tax on the stock sale (borne by the selling stockholders).

The purchasing corporation obtains a stepped-up basis in the target's assets, but the cost of achieving that step-up is the entity-level tax on the deemed asset sale, which is borne entirely by the buyer (since the target is now a wholly-owned subsidiary of the buyer). In most private equity acquisition contexts, this double-tax cost far exceeds the present value of the incremental depreciation and amortization deductions generated by the basis step-up.

Rough Quantification of Section 338(g) Cost:

We have performed a preliminary, illustrative analysis of the economic cost of a Section 338(g) election in this Transaction. This analysis is based on currently available information from the tax due diligence review and is subject to refinement based on final closing-date values.

The estimated entity-level tax cost of a Section 338(g) election exceeds $200 million. Even under the most favorable assumptions regarding the present value of incremental amortization deductions — approximately $120 million to $140 million over the expected holding period, discounted at an appropriate rate — the net cost of the election is estimated at $60 million to $80 million or more. This calculation does not account for state and local income taxes that would apply to the deemed asset sale, which would further increase the cost.

Conclusion: A Section 338(g) election is economically unfavorable for the Transaction. The double-tax cost substantially exceeds the present value of the incremental tax benefits. Accordingly, a Section 338(g) election is not recommended.

D. Asset Acquisition Alternative

We have also considered whether the Transaction could be restructured as a direct asset acquisition (either through an asset purchase agreement or a forward merger) in order to achieve a stepped-up tax basis in VeloPay's assets without the limitations and costs associated with Section 338 elections.

Direct Asset Purchase. A direct acquisition of VeloPay's assets (rather than its stock) would, if properly structured, result in HPE Fund IV (or a designated acquisition subsidiary) taking a cost basis in each acquired asset equal to its fair market value, allocated under the residual method of Section 1060. However, a direct asset purchase would require the negotiation and execution of an asset purchase agreement, the identification and individual transfer of all of VeloPay's assets, and — most critically from a commercial and regulatory standpoint — the assignment or novation of each of VeloPay's contracts, licenses, and permits.

VeloPay operates a payments processing business with over 14,000 merchant processing agreements, each of which would require individual consent to assignment or novation. VeloPay also holds money transmitter licenses in 47 states plus the District of Columbia, the transfer of which would require regulatory approval and, in many jurisdictions, de novo license applications by the acquiring entity. The operational disruption and regulatory risk associated with transferring these contracts and licenses is prohibitive and is wholly inconsistent with HPE Fund IV's objective of preserving business continuity through the acquisition.

Forward Merger. As an alternative to a direct asset purchase, a forward merger structure — in which VeloPay would merge into Merger Sub (with Merger Sub as the surviving entity) — could achieve a similar tax result while consolidating the transfer of assets, contracts, and liabilities into a single statutory transaction by operation of law. However, a forward merger would change the legal identity of the licensed entity. VeloPay would cease to exist, and Merger Sub would become the surviving corporation holding VeloPay's assets, contracts, and licenses by operation of law. While many contracts contain assignment-by-operation-of-law provisions that would permit this transfer, the state money transmitter licenses present a significant obstacle.

Many state regulators treat a forward merger in which the licensed entity is the non-surviving corporation as a change in the identity of the licensee, requiring re-licensing of the surviving entity. Re-licensing in 47 states plus the District of Columbia is a time-consuming and expensive process that could take twelve to eighteen months or longer to complete and would create significant regulatory and business disruption risk during the interim period. This risk is unacceptable to HPE Fund IV.

Conclusion. The reverse triangular merger structure, in which VeloPay survives as the licensed entity and retains its corporate identity, contracts, licenses, and regulatory approvals, is the appropriate structure for commercial and regulatory reasons. The loss of a stepped-up tax basis in VeloPay's assets is an acceptable trade-off for the preservation of regulatory continuity and the avoidance of the significant costs and risks associated with an asset acquisition or forward merger structure.

Recommendation: Proceed with the reverse triangular merger structure without a Section 338 election. Accept carryover basis in VeloPay's assets. Evaluate post-closing restructuring alternatives (including a potential check-the-box election) as a separate workstream after the closing, as discussed in Section XIII below.

V. Recommended Tax Treatment: Taxable Stock Acquisition

A. Characterization of the Merger for Federal Tax Purposes

Based on the analysis set forth in Sections III and IV above, the reverse triangular merger will be treated for federal income tax purposes as a taxable acquisition of VeloPay stock by HPE Fund IV. The merger does not qualify as a tax-free reorganization under Section 368, and no Section 338 election will be made. Accordingly, the Transaction is governed by the general gain or loss recognition rules of Section 1001 of the Code.

Treatment of Common Stockholders. At the Effective Time, each holder of VeloPay common stock will be treated as having sold his, her, or its VeloPay shares in exchange for the per-share merger consideration of $20.00 in cash. Each stockholder will recognize gain or loss equal to the difference between the $20.00 per-share merger consideration and the stockholder's adjusted tax basis in the VeloPay shares surrendered. The character of such gain or loss will generally be capital gain or loss — long-term if the shares were held for more than one year prior to the Effective Time, or short-term if held for one year or less.

Treatment of Stock Option Holders. Holders of vested, in-the-money stock options will receive a cash payment equal to the per-share merger consideration ($20.00) minus the applicable exercise price, multiplied by the number of shares subject to the option. To the extent the options are compensatory options (whether incentive stock options ("ISOs") under Section 422 or nonqualified stock options ("NSOs")), the cash received will be treated as ordinary compensation income under Section 83(a) of the Code. The amount of ordinary income recognized will equal the full Option Spread Payment. For holders of ISOs, the cancellation of the option for cash without exercise constitutes a "disqualifying disposition" under Section 421(b), and the spread is taxed as ordinary income rather than receiving the favorable capital gains treatment otherwise available for qualifying dispositions of ISO shares.

With respect to the 7,600,000 outstanding options, with a weighted average exercise price of $12.84 per share, the average per-option spread is $7.16 ($20.00 minus $12.84). The aggregate cash consideration payable to option holders is approximately $54,416,000.

Holders of unvested stock options that accelerate and vest at closing (50% of the unvested pool) will be treated identically to holders of vested options — ordinary compensation income upon cash-out. Holders of the remaining 50% of unvested options that are converted into HPE Fund IV replacement awards will not recognize income at the Effective Time; instead, those holders will recognize ordinary compensation income under Section 83(a) as the replacement awards vest over the 24-month post-closing vesting period.

Treatment of RSU Holders. All 3,200,000 unvested RSUs will accelerate and vest at the Effective Time and will be settled for cash at $20.00 per unit. The total cash consideration for RSU holders is $64,000,000. The settlement of RSUs for cash upon vesting is treated as ordinary compensation income under Section 83(a). The income is recognized at the Effective Time (the date of vesting and settlement) and is subject to income tax withholding and employment tax obligations under Sections 3402 and 3101–3111 of the Code.

Treatment of Warrant Holders. The 1,800,000 outstanding warrants, with an exercise price of $8.50 per share, will be cancelled at the Effective Time in exchange for a cash payment of $11.50 per warrant (the per-share merger consideration of $20.00 minus the exercise price of $8.50), for an aggregate payment of $20,700,000. Based on the results of our legal and tax due diligence, these warrants were issued in connection with financing transactions and are non-compensatory investor warrants. Accordingly, the cancellation of the warrants for cash should be treated as a sale or exchange resulting in capital gain for the warrant holders, and no income tax withholding obligation arises. The character of the gain (long-term versus short-term) depends on the holding period of each warrant holder. This characterization is subject to the FIRPTA analysis for non-U.S. warrant holders, which is addressed in the separate companion memorandum.

B. Buyer's Tax Position Post-Closing

Stock Basis. HPE Fund IV will acquire all of the outstanding stock of VeloPay in the merger. HPE Fund IV's tax basis in the VeloPay stock will equal the aggregate cost of the stock acquisition — that is, the total merger consideration of $1,900,000,000. This cost basis will be relevant in the event of a future disposition of the VeloPay stock or a future internal restructuring transaction.

No Inside Basis Step-Up. Because the Transaction is treated as a stock acquisition (and no Section 338 election is being made), VeloPay's assets will retain their existing (carryover) tax basis. VeloPay's tangible and intangible assets, including goodwill, will not be stepped up to fair market value. HPE Fund IV will not receive incremental depreciation or amortization deductions with respect to the purchase price premium embedded in the $1.9 billion acquisition price.

Survival of Tax Attributes. VeloPay's pre-existing tax attributes — including any net operating loss carryforwards, tax credit carryforwards, and other tax items — will survive the reverse triangular merger and will remain available to VeloPay as the surviving corporation. However, as discussed in detail in Section VI below, VeloPay's pre-change NOLs will become subject to the annual limitation imposed by Section 382 of the Code as a result of the ownership change occurring at the Effective Time.

Existing Debt Payoff. VeloPay's existing indebtedness of $112,000,000 in principal amount owed to Meridian Commercial Credit Corp. will be repaid at par (plus approximately $1,230,000 in accrued interest) at or immediately prior to the closing. Because the debt is being repaid at par — that is, the payoff amount equals the outstanding principal balance plus accrued interest, with no discount — no cancellation of indebtedness ("COD") income arises under Section 61(a)(12) or Section 108.

Tax Filing Status. Following the closing, VeloPay will be a wholly-owned subsidiary of HPE Fund IV. Because HPE Fund IV is a limited partnership (and not a corporation), VeloPay cannot be included in a consolidated federal income tax return with HPE Fund IV. VeloPay will file its own separate corporate federal income tax return (Form 1120) as a standalone C corporation. If a subsequent check-the-box election is made to convert VeloPay to a disregarded entity (as discussed in Section XIII), VeloPay would cease to exist as a separate taxpayer and its items would be reported on the tax return of its owner. That analysis is outside the scope of this memorandum and will be addressed in a separate post-closing workstream.

C. Advantages of Taxable Stock Acquisition Treatment for HPE Fund IV

We have considered the relative advantages and disadvantages of the various structural alternatives and conclude that taxable stock acquisition treatment is the preferred approach for the following reasons:

Simplicity and Certainty. The tax treatment of a cash-for-stock exchange is well-established and straightforward. There is no ambiguity as to whether the Transaction qualifies as a reorganization, no risk of IRS challenge to the characterization, and no compliance complexity associated with issuing continuity of interest equity or tracking the basis of exchanged shares.

Preservation of Corporate Identity, Licenses, and Contracts. The reverse triangular merger structure preserves VeloPay as the surviving corporation, maintaining its corporate identity, its EIN, and all of its assets, liabilities, contracts, and regulatory approvals. This is critical for the preservation of VeloPay's money transmitter licenses in 47 states and the District of Columbia, its merchant processing agreements (over 14,000), its intellectual property registrations, and its status under the Investment Canada Act for its Canadian subsidiary. Taxable stock acquisition treatment is fully consistent with this structural objective.

Avoidance of Double-Tax Cost. As discussed in Section IV.C above, a Section 338(g) election would impose an entity-level tax cost exceeding $200 million. Taxable stock acquisition treatment avoids this double-tax cost entirely.

Clear Taxable Event for Stockholders. VeloPay stockholders receive cash and have a straightforward taxable event — a sale of stock for cash consideration. There is no uncertainty, compliance burden, or ongoing tracking obligation associated with receipt of equity in a reorganization, and stockholders are not required to determine the fair market value of non-cash consideration for basis allocation purposes.

Clean Delineation of Tax Periods. The closing date (anticipated to be July 22, 2025) creates a clean separation between VeloPay's pre-closing and post-closing tax periods. VeloPay's short taxable year ending on the closing date will reflect operations under the selling stockholders' ownership, and its post-closing taxable year will reflect operations under HPE Fund IV's ownership. This clean break simplifies tax compliance and reduces the risk of disputes regarding the allocation of tax items between the pre-closing and post-closing periods.

Rollover Structuring. The de minimis rollover by Aldridge and Reyes-Watkins ($23,900,000 combined, representing approximately 1.26% of total deal value) is structured as a two-step transaction: first, a fully taxable cash-out of all of their VeloPay shares at $20.00 per share, followed by a separate, voluntary cash contribution to the Co-Invest LP. This two-step structure is documented as a separate reinvestment and is not part of the merger consideration. This approach avoids any argument that equity was received by Aldridge or Reyes-Watkins as part of the merger consideration, which could create COI issues or partial tax-free treatment under Section 368. The two-step approach preserves the characterization of the Transaction as a fully taxable stock acquisition with 100% cash consideration. The rollover is discussed in greater detail in Section VII below.

D. Disadvantages and Mitigation

The principal disadvantage of taxable stock acquisition treatment (without a Section 338 election) is the absence of a basis step-up in VeloPay's assets. The inside basis of VeloPay's tangible and intangible assets — including goodwill, customer relationships, developed technology, trade names, and other intangibles — will remain at their historical cost basis rather than being stepped up to reflect the $1.9 billion purchase price.

Estimated Foregone Tax Shield. The incremental amortization deductions that would be available with a stepped-up basis can be estimated as follows:

• VeloPay's total book value of assets: $689.4 million

• Estimated purchase price allocable to goodwill and other Section 197 intangibles (assuming a hypothetical asset acquisition): approximately $1.0 billion to $1.2 billion

• Annual Section 197 amortization of $1.0 billion over 15 years: approximately $66.7 million per year

• Annual tax benefit at 21% corporate rate: approximately $14.0 million per year

• Present value of the foregone tax shield over a 5–7 year holding period (Discounted at an appropriate rate): approximately $60 million to $75 million

The precise quantification of the foregone tax shield will be determined by Pendleton Hawkes & Co. (financial advisor, David Constantinou) as part of the closing-date financial model. The rough estimate of approximately $14 million per year in foregone tax benefit is significant but does not justify the cost of a Section 338(g) election (which would exceed $200 million in upfront entity-level tax cost, as analyzed in Section IV.C above).

Section 382 Limitation. VeloPay's pre-existing NOL carryforwards will become subject to the Section 382 annual limitation as a result of the ownership change at closing. This limitation restricts the annual utilization of pre-change NOLs and is discussed in detail in Section VI below.

Mitigation Strategies. Several strategies may mitigate the disadvantages of the carryover basis regime:

(a) Post-Closing Check-the-box Election. A post-closing election under Treasury Regulation § 301.7701-3 to reclassify VeloPay as a disregarded entity could create a deemed taxable liquidation of VeloPay into HPE Fund IV, potentially resulting in a stepped-up basis in VeloPay's assets. However, this transaction would trigger entity-level gain recognition at VeloPay and must be carefully modeled to determine whether the tax cost is justified. This alternative is discussed further in Section XIII and is recommended for analysis as a separate post-closing workstream.

(b) Debt Structuring. The acquisition debt (term loan and revolver) has been structured at the VeloPay level, generating interest deductions that reduce VeloPay's taxable income. While these deductions are subject to the Section 163(j) limitation discussed in Section IX, they provide meaningful tax savings during the holding period.

(c) Tuck-In Acquisitions. To the extent HPE Fund IV pursues future tuck-in acquisitions through VeloPay or its subsidiaries, the purchase price for those acquisitions (if structured as asset acquisitions) would generate Section 197 amortization deductions for separately identifiable intangible assets, producing tax benefits over the 15-year amortization period.

VI. Section 382 Limitation on Net Operating Loss Carryforwards

A. Ownership Change Analysis

Section 382 of the Code imposes an annual limitation on the use of a loss corporation's pre-change NOLs following an "ownership change." An ownership change occurs when the percentage of stock owned by one or more "5-percent shareholders" (within the meaning of Section 382(g)) increases by more than 50 percentage points over the lowest percentage owned by such shareholders during the applicable three-year testing period.

The closing of the Transaction will constitute an ownership change of VeloPay. HPE Fund IV, which currently holds 0% of VeloPay's stock, will acquire 100% of VeloPay's outstanding stock at the Effective Time. The increase in HPE Fund IV's ownership — from 0% to 100% — exceeds the 50 percentage point threshold by a wide margin. There is no question that an ownership change will occur.

As a result of the ownership change, VeloPay's pre-change NOL carryforwards will become subject to the Section 382 annual limitation. The amount of VeloPay's pre-change NOLs is currently being confirmed through the tax due diligence process and is referenced in the separate Tax Due Diligence Memorandum. For purposes of this analysis, we assume VeloPay has pre-change NOLs of a meaningful amount, consistent with the preliminary due diligence findings.

B. Calculation of Section 382 Limitation

The Section 382 annual limitation is calculated as follows:

Section 382 Limitation = Equity Value of the Loss Corporation Immediately Before the Ownership Change × Applicable Long-Term Tax-Exempt Rate

Equity Value. The "value of the old loss corporation" for Section 382 purposes is generally the fair market value of the loss corporation's stock (including preferred stock) immediately before the ownership change. See Section 382(e)(1). In the context of a cash acquisition, the merger consideration provides a direct measure of the equity value. The aggregate merger consideration of $1,900,000,000 is a reasonable proxy for the equity value of VeloPay immediately before the ownership change, subject to potential adjustments for non-business assets (if any) under Section 382(l)(4). Based on our preliminary review, VeloPay's assets are primarily operating assets, and we do not expect a material adjustment for non-business assets. This determination will be confirmed as part of the closing-date Section 382 analysis.

Long-Term Tax-Exempt Rate. The applicable long-term tax-exempt rate is published monthly by the IRS in a revenue ruling. As of the date of this memorandum, the long-term tax-exempt rate is in the range of approximately 4.50% to 5.00%. The precise rate that applies will be the rate published for the month in which the ownership change occurs — i.e., the month of closing, which is anticipated to be July 2025. We will confirm the applicable rate at that time.

Estimated Annual Section 382 Limitation. Using a mid-range estimate of 4.75% for the long-term tax-exempt rate:

Section 382 Limitation = $1,900,000,000 × 4.75% = ~$90,250,000 per year

This annual limitation caps the amount of pre-change NOLs that VeloPay may use in any single post-change taxable year to offset its taxable income. Pre-change NOLs in excess of the annual limitation carry forward to subsequent years (subject to the general NOL carryforward rules), but the annual cap applies each year.

Built-In Gain / Built-In Loss Analysis. In addition to the annual limitation, the Section 382 rules require a determination of whether VeloPay is in a "net unrealized built-in gain" ("NUBIG") position or a "net unrealized built-in loss" ("NUBIL") position as of the ownership change date.

If VeloPay is in a NUBIG position — meaning the aggregate fair market value of VeloPay's assets exceeds the aggregate adjusted tax basis of those assets — then recognized built-in gains during the five-year recognition period following the ownership change may increase the Section 382 limitation in the year recognized. This effectively allows VeloPay to use additional pre-change NOLs against recognized built-in gains, above and beyond the base annual limitation.

Conversely, if VeloPay is in a NUBIL position, recognized built-in losses during the recognition period would be treated as pre-change losses subject to the Section 382 limitation, further restricting the use of those losses.

Based on the preliminary purchase price allocation analysis, VeloPay is likely in a NUBIG position, as the $1.9 billion enterprise value significantly exceeds the aggregate adjusted tax basis of VeloPay's assets (book value of approximately $689.4 million). However, the precise NUBIG amount requires a detailed asset-by-asset analysis as of the ownership change date, which will be performed post-closing.

C. Recommendation

We recommend the following steps with respect to the Section 382 analysis:

1. Obtain Final NOL Carryforward Amounts. Request from Vance Thornbury & Co. LLP (VeloPay's independent auditor; engagement partner Robert Paulsen) and VeloPay's internal tax team final, confirmed NOL carryforward amounts as of the last day of the pre-closing taxable year, including a breakdown by year of origin and any applicable Section 382 limitations from prior ownership changes (if any).

2. Calculate Precise Section 382 Limitation. Upon confirmation of the closing date, determine the applicable long-term tax-exempt rate for the month of closing (expected July 2025) and calculate the precise annual Section 382 limitation.

3. Perform NUBIG/NUBIL Analysis. Following the closing, perform a detailed NUBIG/NUBIL analysis based on the fair market values and adjusted tax bases of VeloPay's assets as of the ownership change date. This analysis will determine whether any incremental Section 382 limitation is available with respect to recognized built-in gains during the five-year recognition period.

4. Coordinate Post-Closing Compliance. Work with Leonard Cross and the Calderwood & Harkness tax team to ensure proper post-closing compliance with Section 382, including tracking of pre-change NOL utilization, maintenance of the Section 382 limitation schedule, and preparation of any required disclosures on VeloPay's post-closing tax returns.

VII. Treatment of the Rollover Equity

A. Structure of the Rollover

Two members of VeloPay's founding management team — Nathan Aldridge (Founder and CEO) and Sonia Reyes-Watkins (Founder and CTO) — will make rollover equity investments alongside HPE Fund IV in the surviving corporation. Mr. Aldridge will roll over $14,200,000 and Ms. Reyes-Watkins will roll over $9,700,000, for a combined rollover investment of $23,900,000, into Harrowgate Velocity Co-Invest LP (the "Co-Invest LP").

The rollover is structured as a two-step transaction:

Step 1 — Merger Cash-Out. At the Effective Time, Aldridge and Reyes-Watkins will receive the full per-share merger consideration of $20.00 in cash on all of their VeloPay shares, on the same terms and conditions as all other VeloPay stockholders. Their VeloPay shares will be cancelled and converted into the right to receive cash, and they will recognize taxable gain on the exchange in the same manner as all other stockholders.

Step 2 — Cash Contribution to Co-Invest LP. Following the closing, Aldridge and Reyes-Watkins will contribute a portion of their after-tax cash proceeds to the Co-Invest LP in exchange for limited partnership interests. The Co-Invest LP will invest alongside HPE Fund IV in VeloPay (as the surviving corporation) through a combination of equity and subordinated debt instruments, as set forth in the Co-Invest LP's limited partnership agreement.

The two steps are documented in separate agreements — the Merger Agreement (governing the cash-out of all stockholders, including Aldridge and Reyes-Watkins) and the Rollover Agreement (governing the contribution to the Co-Invest LP). The Rollover Agreement is conditioned upon the closing of the merger but is a separate, voluntary reinvestment by the rollover participants.

B. Tax Treatment

Step 1 — Merger Cash-Out. The exchange of VeloPay shares for $20.00 per share in cash at the Effective Time is a fully taxable event under Section 1001. Aldridge and Reyes-Watkins will each recognize gain equal to the excess of $20.00 per share over their adjusted tax basis in the VeloPay shares surrendered. Assuming the shares were held for more than one year (which is expected given that both are founders), the gain will be long-term capital gain, eligible for the preferential federal tax rate of 20% (plus the 3.8% net investment income tax under Section 1411, if applicable).

Step 2 — Cash Contribution to Co-Invest LP. The contribution of cash by Aldridge and Reyes-Watkins to the Co-Invest LP in exchange for limited partnership interests is generally a tax-free transaction under Section 721(a) of the Code. Section 721(a) provides that no gain or loss is recognized to a partnership or any of its partners in the case of a contribution of property (including cash) to the partnership in exchange for an interest in the partnership. The contributors will take a basis in their Co-Invest LP interests equal to the cash contributed (Section 722), and the Co-Invest LP will take a basis in the contributed cash equal to its face amount (Section 723).

Step Transaction Doctrine Analysis. A critical issue in structuring the rollover is whether the IRS could collapse the two steps (cash-out at $20.00 per share, followed by cash reinvestment in the Co-Invest LP) into a single integrated transaction under the step transaction doctrine. If the steps were collapsed, the rollover participants could be viewed as having received equity interests in the Co-Invest LP (or in VeloPay itself) as part of the merger consideration, rather than cash followed by a separate reinvestment. Such a recharacterization could have several adverse consequences:

(i) It could create an argument that a portion of the merger consideration consists of equity (partnership interests), which — while still insufficient to satisfy the 40% COI threshold — could introduce ambiguity into the characterization of the Transaction;

(ii) It could result in partial tax-free treatment for the rollover participants under Section 351 or Section 721, which is inconsistent with the parties' intent; and

(iii) It could complicate the basis and holding period calculations for the rollover participants' interests in the Co-Invest LP.

We believe that the risk of step transaction collapse is low under the current structuring for the following reasons:

(a) Fixed and Unconditional Cash Consideration. The merger consideration payable to Aldridge and Reyes-Watkins is fixed at $20.00 per share in cash, on identical terms to all other VeloPay stockholders. The cash-out is unconditional and does not depend on, and is not contingent upon, the rollover.

(b) Separate Documentation. The Merger Agreement and the Rollover Agreement are separate instruments, negotiated and executed independently (though the Rollover Agreement is conditioned on the closing of the merger). The rollover is not referenced in the Merger Agreement as part of the merger consideration.

(c) Voluntary Reinvestment. The rollover is a voluntary reinvestment decision by Aldridge and Reyes-Watkins. There is no requirement in the Merger Agreement or any side letter that they reinvest any portion of their proceeds.

(d) De Minimis Amount. The combined rollover of $23,900,000 represents approximately 1.26% of the $1.9 billion aggregate deal value. The de minimis nature of the rollover further supports the treatment of the two steps as separate transactions.

Important Drafting Note. The Rollover Agreement must be carefully structured to ensure that the rollover is not treated as receipt of equity in the merger itself. The current drafting of the Rollover Agreement achieves this by requiring that Aldridge and Reyes-Watkins first receive their full cash consideration under the Merger Agreement, and then separately contribute cash to the Co-Invest LP. The agreement should not characterize the rollover as an "exchange" of VeloPay shares for Co-Invest LP interests. We have reviewed the current draft of the Rollover Agreement (prepared by Megan Chu) and are satisfied that it properly implements the two-step structure.

VIII. Treatment of Equity Awards for Tax Purposes

A. Stock Options

Vested Stock Options. All vested, in-the-money stock options will be cancelled at the Effective Time in exchange for the Option Spread Payment. There are 7,600,000 stock options outstanding with a weighted average exercise price of $12.84 per share, yielding an average per-option spread of $7.16 ($20.00 minus $12.84).

For compensatory stock options — both ISOs and NSOs — the cash received upon cancellation constitutes ordinary compensation income to the option holder under Section 83(a). VeloPay (as the employer) is required to withhold federal income tax under Section 3402 and to collect the employee's share of FICA taxes under Section 3101. VeloPay is also responsible for the employer's share of FICA taxes under Section 3111. VeloPay will receive a corresponding compensation deduction under Section 162 in the amount of the ordinary income recognized by the option holder, subject to the limitations of Section 162(m) for covered employees.

For ISOs, the cancellation of the option for cash without a qualifying exercise and holding period constitutes a "disqualifying disposition" under Section 421(b). The favorable capital gains treatment that would otherwise be available for shares acquired through a qualifying ISO exercise is forfeited, and the full spread is taxed as ordinary compensation income. There

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
This memorandum constitutes a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and may not be disclosed, distributed, copied, or otherwise disseminated to any third party without the prior written approval of Calderwood & Harkness LLP. Any unauthorized disclosure may result in a waiver of applicable privileges.
CALDERWOOD & HARKNESS LLP Attorneys at Law
1601 Market Street, 42nd Floor Philadelphia, Pennsylvania 19103
Telephone: (215) 555-7800 Facsimile: (215) 555-7801
March 12, 2025
MEMORANDUM
FROM: Leonard Cross, Specialist Partner, Tax — Calderwood & Harkness LLP
TO: Sandra Tung, Responsible Partner, M&A — Calderwood & Harkness LLP Priya Deshmukh, Managing Partner, Fund IV — Harrowgate Capital Management IV LLC
CC: Oliver Mackenzie, Billing Partner, M&A — Calderwood & Harkness LLP Megan Chu, Lead Associate, M&A — Calderwood & Harkness LLP Thomas Eriksen, Partner, Head of FinTech — Harrowgate Capital Management IV LLC
RE: Tax Structure Analysis — Acquisition of VeloPay Systems, Inc. by Harrowgate Private Equity Fund IV LP
MATTER NO.: 1003-00003
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I. Executive Summary
The purpose of this memorandum is to analyze the federal income tax treatment of the proposed acquisition of VeloPay Systems, Inc. ("VeloPay" or the "Target"), a Delaware corporation, by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Buyer"), a Delaware limited partnership, for an aggregate purchase price of $1,900,000,000 (the "Transaction"). The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law (the "DGCL"), in which Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary of HPE Fund IV incorporated on February 24, 2025, will merge with and into VeloPay. At the effective time of the merger (the "Effective Time"), VeloPay will survive as a wholly-owned subsidiary of HPE Fund IV, and Merger Sub will cease to exist.
The aggregate merger consideration is $1,900,000,000, payable entirely in cash at a price of $20.00 per share on a fully diluted, as-converted basis across 95,000,000 fully diluted shares. The consideration will be funded through the following sources: (i) an equity contribution of $1,140,000,000 from HPE Fund IV; (ii) a $500,000,000 senior secured term loan from Tralvendo National Bank, priced at SOFR plus 375 basis points with a seven-year maturity; and (iii) a $260,000,000 senior secured revolving credit facility from Prairie State Bank, N.A., priced at SOFR plus 325 basis points with a five-year maturity, of which approximately $254,700,000 is expected to be drawn at closing. In addition, VeloPay's existing cash on hand of approximately $53,800,000 will be used to fund a portion of the transaction expenses.
Two members of VeloPay management — Nathan Aldridge and Sonia Reyes-Watkins — will roll over a combined $23,900,000 ($14,200,000 and $9,700,000, respectively) into Harrowgate Velocity Co-Invest LP, a newly formed Delaware limited partnership that will invest alongside HPE Fund IV in the surviving corporation.
Based on our analysis, we recommend that the Transaction be structured as a taxable stock acquisition for federal income tax purposes, rather than as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). We further recommend that HPE Fund IV decline to make an election under Section 338(h)(10) or Section 338(g) of the Code. Our key conclusions are as follows:
• The reverse triangular merger, as structured with all-cash consideration and only de minimis management rollover equity (representing approximately 1.26% of total deal value), does not and cannot qualify as a tax-free reorganization under any subsection of Section 368. The Transaction fails the continuity of interest requirement, and the use of a limited partnership as the acquiring entity precludes satisfaction of the "voting stock" requirement under Section 368(a)(2)(E).
• A Section 338(h)(10) election is not available because VeloPay is a standalone C corporation — it is not a member of a selling consolidated group and is not an S corporation.
• A unilateral Section 338(g) election is economically unfavorable and is not recommended. The estimated entity-level tax cost of a deemed asset sale exceeds $200 million, which substantially outweighs the present value of any incremental amortization benefit from a stepped-up basis.
• The Transaction should therefore be treated as a taxable acquisition of VeloPay stock under Section 1001 of the Code. VeloPay stockholders will recognize gain or loss on the exchange of their VeloPay shares for cash. HPE Fund IV will take a cost basis in the VeloPay stock equal to the aggregate merger consideration ($1,900,000,000), and VeloPay's assets will retain their existing (carryover) tax basis.
• VeloPay's pre-change net operating loss carryforwards ("NOLs") will be subject to the annual limitation imposed by Section 382 as a result of the ownership change occurring at closing. The estimated annual Section 382 limitation is approximately $90,250,000.
• The Section 163(j) business interest limitation may partially restrict annual deductibility of interest on the acquisition debt, and this limitation should be incorporated into the financial model.
This memorandum does not address the Section 280G parachute payment analysis or the FIRPTA and withholding tax analysis applicable to non-U.S. stockholders. Those topics are the subjects of separate companion memoranda, which are being prepared concurrently and will be circulated under separate cover.
II. Transaction Structure Overview
A. Description of the Reverse Triangular Merger
The Transaction is structured as a reverse triangular merger under Section 251 of the DGCL. The step-by-step mechanics of the merger are as follows:
1. Formation of Merger Sub. HPE Fund IV has formed Merger Sub as a Delaware corporation and wholly-owned subsidiary of HPE Fund IV. Merger Sub was incorporated on February 24, 2025, and has no assets, liabilities, or operations other than those incident to its formation and the consummation of the merger.
2. Merger of Merger Sub with and into VeloPay. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), Merger Sub will merge with and into VeloPay at the Effective Time.
3. Cash-Out of VeloPay Equity. At the Effective Time, each outstanding share of VeloPay common stock (82,400,000 shares outstanding as of the date hereof), each in-the-money stock option (7,600,000 options outstanding with a weighted average exercise price of $12.84 per share), each restricted stock unit ("RSU") (3,200,000 RSUs outstanding), and each outstanding warrant (1,800,000 warrants with an exercise price of $8.50 per share) will be converted into the right to receive the applicable cash consideration as described below.
4. VeloPay Survives. VeloPay will survive the merger as a wholly-owned subsidiary of HPE Fund IV. VeloPay will retain its corporate identity, its employer identification number (EIN 82-3019478), and all of its assets, liabilities, contracts, licenses, and permits.
5. Merger Sub Ceases to Exist. Merger Sub will cease to exist at the Effective Time. Its separate corporate existence will merge into and be continued by VeloPay as the surviving corporation.
The treatment of equity awards at closing is summarized as follows:
• Vested Stock Options: All vested, in-the-money stock options will be cancelled at the Effective Time in exchange for a cash payment equal to the per-share merger consideration ($20.00) minus the applicable exercise price, multiplied by the number of shares subject to the option (the "Option Spread Payment").
• Unvested Stock Options: Fifty percent (50%) of all unvested, in-the-money stock options will accelerate and vest at the Effective Time and will be cancelled for cash in the same manner as vested options. The remaining fifty percent (50%) of unvested options will be converted into replacement awards referencing equity interests in HPE Fund IV (or a designated affiliate thereof), with vesting to continue over a twenty-four (24) month period following the closing.
• Restricted Stock Units: All unvested RSUs (3,200,000 units) will fully accelerate and vest at the Effective Time and will be cancelled in exchange for a cash payment of $20.00 per unit.
• Warrants: All outstanding warrants (1,800,000 warrants at an exercise price of $8.50 per share) will be cancelled at the Effective Time in exchange for a cash payment of $11.50 per warrant ($20.00 per-share merger consideration minus the $8.50 exercise price), resulting in an aggregate payment of $20,700,000.
The merger consideration is 100% cash. No stock, partnership interests, or other equity of HPE Fund IV or any affiliate thereof is being distributed to VeloPay stockholders generally as part of the merger consideration. The limited rollover by Aldridge and Reyes-Watkins is structured as a separate, post-merger reinvestment and is not part of the merger consideration, as discussed in detail in Section VII below.
B. Parties and Entity Types
The principal parties to the Transaction and their relevant entity characteristics are as follows:
HPE Fund IV (Buyer). Harrowgate Private Equity Fund IV LP is a Delaware limited partnership, formed under the Delaware Revised Uniform Limited Partnership Act. Its general partner is Harrowgate Capital Management IV LLC, a Delaware limited liability company (EIN 87-4231847). HPE Fund IV's EIN is 87-4231956. As a limited partnership, HPE Fund IV is treated as a partnership for federal income tax purposes and is not subject to entity-level federal income tax. Items of income, gain, loss, deduction, and credit flow through to HPE Fund IV's partners (limited partners and the general partner) in accordance with the partnership agreement.
Merger Sub. Harrowgate Velocity Merger Sub Inc. is a Delaware corporation formed on February 24, 2025, for the sole purpose of effectuating the merger. Its EIN is 93-1847265. Its sole shareholder is HPE Fund IV. Merger Sub has no operations, employees, assets, or liabilities other than those incident to its formation and the contemplated merger. Merger Sub will cease to exist at the Effective Time.
VeloPay (Target). VeloPay Systems, Inc. is a Delaware corporation (EIN 82-3019478). VeloPay is a standalone C corporation for federal income tax purposes. It is not a member of any affiliated group filing a consolidated federal income tax return, and it has not elected S corporation status. VeloPay is a payments technology company headquartered in Austin, Texas, engaged in merchant acquiring, payment processing, and related financial technology services.
VeloPay Subsidiaries. VeloPay has five direct or indirect subsidiaries:
Harrowgate Velocity Co-Invest LP. Harrowgate Velocity Co-Invest LP is a Delaware limited partnership formed on March 14, 2025 (EIN 93-2748163). Its general partner is Harrowgate Capital Management IV LLC. The Co-Invest LP is the vehicle through which Nathan Aldridge and Sonia Reyes-Watkins will make their rollover equity investments alongside HPE Fund IV.
C. Capitalization and Consideration
VeloPay's capitalization on a fully diluted, as-converted basis is summarized as follows:
The aggregate merger consideration is $1,900,000,000. The per-share merger consideration on a fully diluted, as-converted basis is $20.00. The option and warrant consideration reflects the in-the-money spread (merger consideration per share minus the applicable exercise price).
Escrow. Of the aggregate merger consideration, $133,000,000 (representing 7% of total deal value) will be deposited at the Effective Time with Garrison Trust Company (Reference No. GT-ESC-2025-07223) as security for indemnification obligations under Article IX of the Merger Agreement. The escrow funds will be released as follows: $66,500,000 (50% of the escrow amount) will be released at twelve (12) months post-closing (approximately July 22, 2026), and the remaining balance will be released at eighteen (18) months post-closing (approximately January 22, 2027), net of any pending or unresolved indemnification claims.
Indemnification Cap. The maximum aggregate indemnification obligation of the selling stockholders under the Merger Agreement is $228,000,000, representing 12% of total deal value.
Existing Debt Payoff. At or prior to the closing, VeloPay's existing indebtedness to Meridian Commercial Credit Corp. in the principal amount of $112,000,000 (plus approximately $1,230,000 in accrued and unpaid interest) will be repaid in full at par, for a total payoff amount of approximately $113,230,000.
III. Section 368 Reorganization Qualification Analysis
A. Overview of Potentially Applicable Reorganization Provisions
Under Subchapter C of the Code, certain corporate acquisitions may qualify as tax-free "reorganizations" under Section 368(a)(1), permitting deferral of gain recognition by target stockholders who receive qualifying consideration in the transaction. The two provisions potentially applicable to a reverse triangular merger structure are:
Section 368(a)(1)(A) — Statutory Merger. A statutory merger or consolidation of a target with or into an acquiring corporation may qualify as a Type A reorganization, provided that the transaction satisfies the judicially and regulatorily developed requirements of (i) continuity of interest ("COI"), (ii) continuity of business enterprise ("COBE"), and (iii) a valid business purpose. A Type A reorganization permits the greatest flexibility in the mix of consideration (cash, stock, other property), subject to the COI requirement.
Section 368(a)(2)(E) — Reverse Triangular Merger. Section 368(a)(2)(E) extends Type A reorganization treatment to a reverse subsidiary merger — that is, a transaction in which a subsidiary of the acquiring corporation merges with and into the target, and the target survives. To qualify under Section 368(a)(2)(E), the following specific statutory requirements must be met:
(i) The target must survive the merger and hold "substantially all" of its properties and the properties of the merging subsidiary after the transaction;
(ii) Former stockholders of the target must exchange, in the aggregate, an amount of target stock constituting "control" of the target (within the meaning of Section 368(c), i.e., at least 80% of the total combined voting power and 80% of each class of nonvoting stock) solely for "voting stock" of the controlling corporation (i.e., the parent of the merging subsidiary); and
(iii) The general requirements of COI and COBE must be satisfied.
A critical feature of Section 368(a)(2)(E) is the requirement that the consideration paid to target stockholders consist of "voting stock" of the controlling corporation. This requirement is narrower than the general COI standard applicable to a Type A reorganization and imposes a specific statutory constraint on the form of consideration.
B. Continuity of Interest Requirement
The continuity of interest doctrine requires that a sufficient portion of the consideration received by target stockholders in a reorganization consist of equity of the acquiring entity, thereby ensuring that the former target stockholders maintain a continuing proprietary interest in the ongoing enterprise. Under Treasury Regulation § 1.368-1(e), the IRS has historically taken the position — and the Service's ruling guidelines confirm — that at least 40% of the total consideration (measured by value) must consist of equity of the issuing corporation (or its parent) for the COI requirement to be satisfied. While courts have in some circumstances found COI satisfied at lower percentages, the 40% threshold represents the established safe harbor for advance ruling purposes and is the standard applied in practice.
In the present Transaction, the merger consideration payable to VeloPay stockholders at the Effective Time is 100% cash. No shares of stock, no partnership interests, and no other equity securities of HPE Fund IV, Merger Sub, or any affiliate of the Buyer are being issued or distributed to VeloPay stockholders as part of the merger consideration.
The only element of equity investment by any former VeloPay equity holder is the rollover by Nathan Aldridge ($14,200,000) and Sonia Reyes-Watkins ($9,700,000) into Harrowgate Velocity Co-Invest LP. The combined rollover amount of $23,900,000 represents approximately 1.26% of the $1,900,000,000 aggregate merger consideration. This is far below the 40% threshold required for continuity of interest. Even under the most liberal judicial interpretation of the COI doctrine, a 1.26% equity component would be wholly insufficient to satisfy the requirement.
Moreover, and independently, the equity interests being acquired by Aldridge and Reyes-Watkins in the rollover are limited partnership interests in the Co-Invest LP — not shares of stock in a corporation. The COI doctrine, as applied in the context of Section 368 reorganizations, requires that target stockholders receive an equity interest in the acquiring corporation (or its corporate parent). Partnership interests do not constitute "stock" for purposes of the COI doctrine, and the receipt of partnership interests by former target stockholders does not preserve continuity of interest. See Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); Treas. Reg. § 1.368-1(e)(1).
Furthermore, Section 368(a)(2)(E) imposes the specific statutory requirement that former target stockholders exchange their target stock for "voting stock" of the "controlling corporation." HPE Fund IV is a limited partnership, not a corporation. Limited partnership interests are not "voting stock" within the meaning of Section 368(a)(2)(E) or Section 368(c). There is no corporate parent of HPE Fund IV that could serve as the "controlling corporation" for purposes of this provision. Accordingly, the Transaction cannot satisfy the "voting stock" requirement of Section 368(a)(2)(E) under any set of facts.
Conclusion: The Transaction fails the continuity of interest requirement and the "voting stock" requirement for a Section 368(a)(2)(E) reverse triangular merger reorganization. These failures are structural and inherent in the Transaction as designed — they cannot be cured without fundamentally altering the deal structure, the form of consideration, or the identity of the acquiring entity. The Transaction cannot qualify as a tax-free reorganization under any subsection of Section 368.
C. Substantially All Properties Requirement
Section 368(a)(2)(E) requires that the target, after the merger, hold "substantially all" of its properties and the properties of the merging subsidiary. The IRS has historically interpreted "substantially all" as requiring retention of at least 90% of the fair market value of net assets and at least 70% of the fair market value of gross assets of the target. See Rev. Proc. 77-37, 1977-2 C.B. 568.
In the present Transaction, VeloPay will survive the reverse triangular merger and will retain all of its pre-merger assets, liabilities, contracts, licenses, intellectual property, and other properties. No assets are being stripped from VeloPay prior to or in connection with the merger. The only property that Merger Sub brings to the transaction is the cash merger consideration contributed by HPE Fund IV, which passes through VeloPay to the former stockholders. After the Effective Time, VeloPay will hold substantially all of its historical properties.
Accordingly, the "substantially all" requirement would likely be satisfied if it were the operative issue. However, this analysis is academic only, as the Transaction independently fails the COI requirement and the "voting stock" requirement as discussed above. Satisfaction of the "substantially all" requirement alone cannot salvage a transaction that fails these other fundamental prerequisites.
D. Continuity of Business Enterprise Requirement
The COBE requirement mandates that the acquiring corporation (or the surviving entity in the case of a reverse merger) continue a significant line of the target's historic business or use a significant portion of the target's historic business assets in a business after the reorganization. See Treas. Reg. § 1.368-1(d).
HPE Fund IV intends to continue operating VeloPay's payments processing business after the closing. VeloPay's existing business lines — merchant acquiring, payment processing, fraud intelligence services, and payment gateway operations — will be maintained and expanded under HPE Fund IV's ownership. There is no plan to discontinue or dispose of VeloPay's core business or its principal business assets. Accordingly, the COBE requirement would be satisfied if it were the operative issue.
As with the "substantially all" analysis, this conclusion is moot given the failure of COI and the voting stock requirement.
E. Conclusion on Section 368
For the reasons set forth above, the reverse triangular merger as structured — with 100% cash consideration payable to VeloPay stockholders, de minimis management rollover equity (1.26% of deal value) contributed to a limited partnership vehicle rather than a corporate entity, and the use of a limited partnership (HPE Fund IV) as the acquiring entity — does not and cannot qualify as a tax-free reorganization under Section 368 of the Code. The Transaction will be treated as a taxable acquisition of VeloPay stock for federal income tax purposes.
This outcome is fully consistent with, and indeed is the preferred result for, HPE Fund IV's structuring objectives. As discussed in Section V below, taxable stock acquisition treatment provides simplicity, certainty, and clean delineation of pre-closing and post-closing tax periods, and it avoids the compliance complexities and potential uncertainties associated with reorganization treatment.
IV. Section 338(h)(10) Election Analysis
A. Overview of Section 338(h)(10)
Section 338(h)(10) of the Code, together with its implementing regulations, permits a purchasing corporation and the selling consolidated group (or S corporation shareholders, as applicable) to make a joint election to treat a "qualified stock purchase" (within the meaning of Section 338(d)(3)) as a deemed asset sale for federal income tax purposes. When a valid Section 338(h)(10) election is made, the following deemed transactions are treated as occurring:
(i) The target is deemed to have sold all of its assets in a single transaction at fair market value to an unrelated purchaser at the close of the acquisition date;
(ii) The target is then deemed to have distributed the proceeds of the deemed sale to its shareholders in complete liquidation; and
(iii) The purchasing corporation is deemed to have acquired the target's assets from a new corporation (a "new target") and placed those assets in service, with a stepped-up tax basis in each asset equal to its fair market value as of the acquisition date (allocated among the assets under the residual method prescribed in Section 338(b)(5) and Treas. Reg. § 1.338-6).
The primary benefit of a Section 338(h)(10) election to a buyer is the stepped-up basis in the target's assets. This basis step-up generates incremental depreciation and amortization deductions over the useful lives of the various asset categories — including Section 197 amortization of goodwill and other intangible assets over 15 years — which can produce substantial tax savings over the holding period. The primary cost is borne by the selling group, which must report entity-level gain on the deemed asset sale, potentially at higher effective tax rates than would apply to a stock sale (due to ordinary income character on certain asset categories such as depreciation recapture, inventory, and accounts receivable).
In the context of a private equity acquisition, a Section 338(h)(10) election is frequently the preferred structure where the target is either (i) a member of a selling consolidated group (such that the selling parent absorbs the deemed asset sale gain within its consolidated return, potentially offsetting it against other items) or (ii) an S corporation (such that the gain passes through to the S corporation shareholders, who are the selling stockholders themselves). In either case, the selling group or shareholders can be compensated through a purchase price adjustment for the incremental tax cost, and both parties benefit from the step-up.
B. Threshold Eligibility Requirements
A Section 338(h)(10) election is available only in the following limited circumstances:
(i) The target is a member of a "selling consolidated group" within the meaning of Treasury Regulation § 1.338(h)(10)-1(c)(2) — that is, the target must be a subsidiary member of an affiliated group of corporations filing a consolidated federal income tax return under Section 1501, and the common parent of that group must join in the election; or
(ii) The target is an S corporation, and all of the S corporation's shareholders join in the election.
VeloPay does not satisfy either of these conditions. VeloPay is a standalone C corporation. It is not a subsidiary member of any affiliated group filing a consolidated federal income tax return. Its shareholders are a diverse group of venture capital and private equity funds, individual founders, management equity holders, and other investors, as follows:
None of these stockholders is a corporation that holds 80% or more of VeloPay's stock, and VeloPay is not a member of any affiliated group. VeloPay has not elected S corporation status.
Conclusion: Because VeloPay is not a subsidiary member of a selling consolidated group and is not an S corporation, the Transaction is not eligible for a Section 338(h)(10) election. This conclusion is categorical and cannot be altered without a fundamental change in VeloPay's corporate status or ownership structure that is not feasible in the context of this Transaction.
C. Consideration of a Standalone Section 338(g) Election
As an alternative to Section 338(h)(10), Section 338(g) of the Code permits a purchasing corporation to unilaterally make an election (without the consent or participation of the selling stockholders) to treat its qualified stock purchase as a deemed asset acquisition. However, the practical consequences of a standalone Section 338(g) election differ materially from those of a Section 338(h)(10) election.
Under a Section 338(g) election, the target is deemed to have sold all of its assets to a new corporation at fair market value, triggering entity-level gain at the target level. Critically, however, the selling stockholders are not relieved of their own stock-sale gain — they continue to be taxed on the gain realized on the exchange of their VeloPay stock for cash, exactly as they would be in the absence of any election. The result is an economic double tax: entity-level tax on the deemed asset sale (borne by the target, and therefore ultimately by the buyer as the new owner of the target) plus stockholder-level tax on the stock sale (borne by the selling stockholders).
The purchasing corporation obtains a stepped-up basis in the target's assets, but the cost of achieving that step-up is the entity-level tax on the deemed asset sale, which is borne entirely by the buyer (since the target is now a wholly-owned subsidiary of the buyer). In most private equity acquisition contexts, this double-tax cost far exceeds the present value of the incremental depreciation and amortization deductions generated by the basis step-up.
Rough Quantification of Section 338(g) Cost:
We have performed a preliminary, illustrative analysis of the economic cost of a Section 338(g) election in this Transaction. This analysis is based on currently available information from the tax due diligence review and is subject to refinement based on final closing-date values.
The estimated entity-level tax cost of a Section 338(g) election exceeds $200 million. Even under the most favorable assumptions regarding the present value of incremental amortization deductions — approximately $120 million to $140 million over the expected holding period, discounted at an appropriate rate — the net cost of the election is estimated at $60 million to $80 million or more. This calculation does not account for state and local income taxes that would apply to the deemed asset sale, which would further increase the cost.
Conclusion: A Section 338(g) election is economically unfavorable for the Transaction. The double-tax cost substantially exceeds the present value of the incremental tax benefits. Accordingly, a Section 338(g) election is not recommended.
D. Asset Acquisition Alternative
We have also considered whether the Transaction could be restructured as a direct asset acquisition (either through an asset purchase agreement or a forward merger) in order to achieve a stepped-up tax basis in VeloPay's assets without the limitations and costs associated with Section 338 elections.
Direct Asset Purchase. A direct acquisition of VeloPay's assets (rather than its stock) would, if properly structured, result in HPE Fund IV (or a designated acquisition subsidiary) taking a cost basis in each acquired asset equal to its fair market value, allocated under the residual method of Section 1060. However, a direct asset purchase would require the negotiation and execution of an asset purchase agreement, the identification and individual transfer of all of VeloPay's assets, and — most critically from a commercial and regulatory standpoint — the assignment or novation of each of VeloPay's contracts, licenses, and permits.
VeloPay operates a payments processing business with over 14,000 merchant processing agreements, each of which would require individual consent to assignment or novation. VeloPay also holds money transmitter licenses in 47 states plus the District of Columbia, the transfer of which would require regulatory approval and, in many jurisdictions, de novo license applications by the acquiring entity. The operational disruption and regulatory risk associated with transferring these contracts and licenses is prohibitive and is wholly inconsistent with HPE Fund IV's objective of preserving business continuity through the acquisition.
Forward Merger. As an alternative to a direct asset purchase, a forward merger structure — in which VeloPay would merge into Merger Sub (with Merger Sub as the surviving entity) — could achieve a similar tax result while consolidating the transfer of assets, contracts, and liabilities into a single statutory transaction by operation of law. However, a forward merger would change the legal identity of the licensed entity. VeloPay would cease to exist, and Merger Sub would become the surviving corporation holding VeloPay's assets, contracts, and licenses by operation of law. While many contracts contain assignment-by-operation-of-law provisions that would permit this transfer, the state money transmitter licenses present a significant obstacle.
Many state regulators treat a forward merger in which the licensed entity is the non-surviving corporation as a change in the identity of the licensee, requiring re-licensing of the surviving entity. Re-licensing in 47 states plus the District of Columbia is a time-consuming and expensive process that could take twelve to eighteen months or longer to complete and would create significant regulatory and business disruption risk during the interim period. This risk is unacceptable to HPE Fund IV.
Conclusion. The reverse triangular merger structure, in which VeloPay survives as the licensed entity and retains its corporate identity, contracts, licenses, and regulatory approvals, is the appropriate structure for commercial and regulatory reasons. The loss of a stepped-up tax basis in VeloPay's assets is an acceptable trade-off for the preservation of regulatory continuity and the avoidance of the significant costs and risks associated with an asset acquisition or forward merger structure.
Recommendation: Proceed with the reverse triangular merger structure without a Section 338 election. Accept carryover basis in VeloPay's assets. Evaluate post-closing restructuring alternatives (including a potential check-the-box election) as a separate workstream after the closing, as discussed in Section XIII below.
V. Recommended Tax Treatment: Taxable Stock Acquisition
A. Characterization of the Merger for Federal Tax Purposes
Based on the analysis set forth in Sections III and IV above, the reverse triangular merger will be treated for federal income tax purposes as a taxable acquisition of VeloPay stock by HPE Fund IV. The merger does not qualify as a tax-free reorganization under Section 368, and no Section 338 election will be made. Accordingly, the Transaction is governed by the general gain or loss recognition rules of Section 1001 of the Code.
Treatment of Common Stockholders. At the Effective Time, each holder of VeloPay common stock will be treated as having sold his, her, or its VeloPay shares in exchange for the per-share merger consideration of $20.00 in cash. Each stockholder will recognize gain or loss equal to the difference between the $20.00 per-share merger consideration and the stockholder's adjusted tax basis in the VeloPay shares surrendered. The character of such gain or loss will generally be capital gain or loss — long-term if the shares were held for more than one year prior to the Effective Time, or short-term if held for one year or less.
Treatment of Stock Option Holders. Holders of vested, in-the-money stock options will receive a cash payment equal to the per-share merger consideration ($20.00) minus the applicable exercise price, multiplied by the number of shares subject to the option. To the extent the options are compensatory options (whether incentive stock options ("ISOs") under Section 422 or nonqualified stock options ("NSOs")), the cash received will be treated as ordinary compensation income under Section 83(a) of the Code. The amount of ordinary income recognized will equal the full Option Spread Payment. For holders of ISOs, the cancellation of the option for cash without exercise constitutes a "disqualifying disposition" under Section 421(b), and the spread is taxed as ordinary income rather than receiving the favorable capital gains treatment otherwise available for qualifying dispositions of ISO shares.
With respect to the 7,600,000 outstanding options, with a weighted average exercise price of $12.84 per share, the average per-option spread is $7.16 ($20.00 minus $12.84). The aggregate cash consideration payable to option holders is approximately $54,416,000.
Holders of unvested stock options that accelerate and vest at closing (50% of the unvested pool) will be treated identically to holders of vested options — ordinary compensation income upon cash-out. Holders of the remaining 50% of unvested options that are converted into HPE Fund IV replacement awards will not recognize income at the Effective Time; instead, those holders will recognize ordinary compensation income under Section 83(a) as the replacement awards vest over the 24-month post-closing vesting period.
Treatment of RSU Holders. All 3,200,000 unvested RSUs will accelerate and vest at the Effective Time and will be settled for cash at $20.00 per unit. The total cash consideration for RSU holders is $64,000,000. The settlement of RSUs for cash upon vesting is treated as ordinary compensation income under Section 83(a). The income is recognized at the Effective Time (the date of vesting and settlement) and is subject to income tax withholding and employment tax obligations under Sections 3402 and 3101–3111 of the Code.
Treatment of Warrant Holders. The 1,800,000 outstanding warrants, with an exercise price of $8.50 per share, will be cancelled at the Effective Time in exchange for a cash payment of $11.50 per warrant (the per-share merger consideration of $20.00 minus the exercise price of $8.50), for an aggregate payment of $20,700,000. Based on the results of our legal and tax due diligence, these warrants were issued in connection with financing transactions and are non-compensatory investor warrants. Accordingly, the cancellation of the warrants for cash should be treated as a sale or exchange resulting in capital gain for the warrant holders, and no income tax withholding obligation arises. The character of the gain (long-term versus short-term) depends on the holding period of each warrant holder. This characterization is subject to the FIRPTA analysis for non-U.S. warrant holders, which is addressed in the separate companion memorandum.
B. Buyer's Tax Position Post-Closing
Stock Basis. HPE Fund IV will acquire all of the outstanding stock of VeloPay in the merger. HPE Fund IV's tax basis in the VeloPay stock will equal the aggregate cost of the stock acquisition — that is, the total merger consideration of $1,900,000,000. This cost basis will be relevant in the event of a future disposition of the VeloPay stock or a future internal restructuring transaction.
No Inside Basis Step-Up. Because the Transaction is treated as a stock acquisition (and no Section 338 election is being made), VeloPay's assets will retain their existing (carryover) tax basis. VeloPay's tangible and intangible assets, including goodwill, will not be stepped up to fair market value. HPE Fund IV will not receive incremental depreciation or amortization deductions with respect to the purchase price premium embedded in the $1.9 billion acquisition price.
Survival of Tax Attributes. VeloPay's pre-existing tax attributes — including any net operating loss carryforwards, tax credit carryforwards, and other tax items — will survive the reverse triangular merger and will remain available to VeloPay as the surviving corporation. However, as discussed in detail in Section VI below, VeloPay's pre-change NOLs will become subject to the annual limitation imposed by Section 382 of the Code as a result of the ownership change occurring at the Effective Time.
Existing Debt Payoff. VeloPay's existing indebtedness of $112,000,000 in principal amount owed to Meridian Commercial Credit Corp. will be repaid at par (plus approximately $1,230,000 in accrued interest) at or immediately prior to the closing. Because the debt is being repaid at par — that is, the payoff amount equals the outstanding principal balance plus accrued interest, with no discount — no cancellation of indebtedness ("COD") income arises under Section 61(a)(12) or Section 108.
Tax Filing Status. Following the closing, VeloPay will be a wholly-owned subsidiary of HPE Fund IV. Because HPE Fund IV is a limited partnership (and not a corporation), VeloPay cannot be included in a consolidated federal income tax return with HPE Fund IV. VeloPay will file its own separate corporate federal income tax return (Form 1120) as a standalone C corporation. If a subsequent check-the-box election is made to convert VeloPay to a disregarded entity (as discussed in Section XIII), VeloPay would cease to exist as a separate taxpayer and its items would be reported on the tax return of its owner. That analysis is outside the scope of this memorandum and will be addressed in a separate post-closing workstream.
C. Advantages of Taxable Stock Acquisition Treatment for HPE Fund IV
We have considered the relative advantages and disadvantages of the various structural alternatives and conclude that taxable stock acquisition treatment is the preferred approach for the following reasons:
Simplicity and Certainty. The tax treatment of a cash-for-stock exchange is well-established and straightforward. There is no ambiguity as to whether the Transaction qualifies as a reorganization, no risk of IRS challenge to the characterization, and no compliance complexity associated with issuing continuity of interest equity or tracking the basis of exchanged shares.
Preservation of Corporate Identity, Licenses, and Contracts. The reverse triangular merger structure preserves VeloPay as the surviving corporation, maintaining its corporate identity, its EIN, and all of its assets, liabilities, contracts, and regulatory approvals. This is critical for the preservation of VeloPay's money transmitter licenses in 47 states and the District of Columbia, its merchant processing agreements (over 14,000), its intellectual property registrations, and its status under the Investment Canada Act for its Canadian subsidiary. Taxable stock acquisition treatment is fully consistent with this structural objective.
Avoidance of Double-Tax Cost. As discussed in Section IV.C above, a Section 338(g) election would impose an entity-level tax cost exceeding $200 million. Taxable stock acquisition treatment avoids this double-tax cost entirely.
Clear Taxable Event for Stockholders. VeloPay stockholders receive cash and have a straightforward taxable event — a sale of stock for cash consideration. There is no uncertainty, compliance burden, or ongoing tracking obligation associated with receipt of equity in a reorganization, and stockholders are not required to determine the fair market value of non-cash consideration for basis allocation purposes.
Clean Delineation of Tax Periods. The closing date (anticipated to be July 22, 2025) creates a clean separation between VeloPay's pre-closing and post-closing tax periods. VeloPay's short taxable year ending on the closing date will reflect operations under the selling stockholders' ownership, and its post-closing taxable year will reflect operations under HPE Fund IV's ownership. This clean break simplifies tax compliance and reduces the risk of disputes regarding the allocation of tax items between the pre-closing and post-closing periods.
Rollover Structuring. The de minimis rollover by Aldridge and Reyes-Watkins ($23,900,000 combined, representing approximately 1.26% of total deal value) is structured as a two-step transaction: first, a fully taxable cash-out of all of their VeloPay shares at $20.00 per share, followed by a separate, voluntary cash contribution to the Co-Invest LP. This two-step structure is documented as a separate reinvestment and is not part of the merger consideration. This approach avoids any argument that equity was received by Aldridge or Reyes-Watkins as part of the merger consideration, which could create COI issues or partial tax-free treatment under Section 368. The two-step approach preserves the characterization of the Transaction as a fully taxable stock acquisition with 100% cash consideration. The rollover is discussed in greater detail in Section VII below.
D. Disadvantages and Mitigation
The principal disadvantage of taxable stock acquisition treatment (without a Section 338 election) is the absence of a basis step-up in VeloPay's assets. The inside basis of VeloPay's tangible and intangible assets — including goodwill, customer relationships, developed technology, trade names, and other intangibles — will remain at their historical cost basis rather than being stepped up to reflect the $1.9 billion purchase price.
Estimated Foregone Tax Shield. The incremental amortization deductions that would be available with a stepped-up basis can be estimated as follows:
• VeloPay's total book value of assets: $689.4 million
• Estimated purchase price allocable to goodwill and other Section 197 intangibles (assuming a hypothetical asset acquisition): approximately $1.0 billion to $1.2 billion
• Annual Section 197 amortization of $1.0 billion over 15 years: approximately $66.7 million per year
• Annual tax benefit at 21% corporate rate: approximately $14.0 million per year
• Present value of the foregone tax shield over a 5–7 year holding period (Discounted at an appropriate rate): approximately $60 million to $75 million
The precise quantification of the foregone tax shield will be determined by Pendleton Hawkes & Co. (financial advisor, David Constantinou) as part of the closing-date financial model. The rough estimate of approximately $14 million per year in foregone tax benefit is significant but does not justify the cost of a Section 338(g) election (which would exceed $200 million in upfront entity-level tax cost, as analyzed in Section IV.C above).
Section 382 Limitation. VeloPay's pre-existing NOL carryforwards will become subject to the Section 382 annual limitation as a result of the ownership change at closing. This limitation restricts the annual utilization of pre-change NOLs and is discussed in detail in Section VI below.
Mitigation Strategies. Several strategies may mitigate the disadvantages of the carryover basis regime:
(a) Post-Closing Check-the-box Election. A post-closing election under Treasury Regulation § 301.7701-3 to reclassify VeloPay as a disregarded entity could create a deemed taxable liquidation of VeloPay into HPE Fund IV, potentially resulting in a stepped-up basis in VeloPay's assets. However, this transaction would trigger entity-level gain recognition at VeloPay and must be carefully modeled to determine whether the tax cost is justified. This alternative is discussed further in Section XIII and is recommended for analysis as a separate post-closing workstream.
(b) Debt Structuring. The acquisition debt (term loan and revolver) has been structured at the VeloPay level, generating interest deductions that reduce VeloPay's taxable income. While these deductions are subject to the Section 163(j) limitation discussed in Section IX, they provide meaningful tax savings during the holding period.
(c) Tuck-In Acquisitions. To the extent HPE Fund IV pursues future tuck-in acquisitions through VeloPay or its subsidiaries, the purchase price for those acquisitions (if structured as asset acquisitions) would generate Section 197 amortization deductions for separately identifiable intangible assets, producing tax benefits over the 15-year amortization period.
VI. Section 382 Limitation on Net Operating Loss Carryforwards
A. Ownership Change Analysis
Section 382 of the Code imposes an annual limitation on the use of a loss corporation's pre-change NOLs following an "ownership change." An ownership change occurs when the percentage of stock owned by one or more "5-percent shareholders" (within the meaning of Section 382(g)) increases by more than 50 percentage points over the lowest percentage owned by such shareholders during the applicable three-year testing period.
The closing of the Transaction will constitute an ownership change of VeloPay. HPE Fund IV, which currently holds 0% of VeloPay's stock, will acquire 100% of VeloPay's outstanding stock at the Effective Time. The increase in HPE Fund IV's ownership — from 0% to 100% — exceeds the 50 percentage point threshold by a wide margin. There is no question that an ownership change will occur.
As a result of the ownership change, VeloPay's pre-change NOL carryforwards will become subject to the Section 382 annual limitation. The amount of VeloPay's pre-change NOLs is currently being confirmed through the tax due diligence process and is referenced in the separate Tax Due Diligence Memorandum. For purposes of this analysis, we assume VeloPay has pre-change NOLs of a meaningful amount, consistent with the preliminary due diligence findings.
B. Calculation of Section 382 Limitation
The Section 382 annual limitation is calculated as follows:
Section 382 Limitation = Equity Value of the Loss Corporation Immediately Before the Ownership Change × Applicable Long-Term Tax-Exempt Rate
Equity Value. The "value of the old loss corporation" for Section 382 purposes is generally the fair market value of the loss corporation's stock (including preferred stock) immediately before the ownership change. See Section 382(e)(1). In the context of a cash acquisition, the merger consideration provides a direct measure of the equity value. The aggregate merger consideration of $1,900,000,000 is a reasonable proxy for the equity value of VeloPay immediately before the ownership change, subject to potential adjustments for non-business assets (if any) under Section 382(l)(4). Based on our preliminary review, VeloPay's assets are primarily operating assets, and we do not expect a material adjustment for non-business assets. This determination will be confirmed as part of the closing-date Section 382 analysis.
Long-Term Tax-Exempt Rate. The applicable long-term tax-exempt rate is published monthly by the IRS in a revenue ruling. As of the date of this memorandum, the long-term tax-exempt rate is in the range of approximately 4.50% to 5.00%. The precise rate that applies will be the rate published for the month in which the ownership change occurs — i.e., the month of closing, which is anticipated to be July 2025. We will confirm the applicable rate at that time.
Estimated Annual Section 382 Limitation. Using a mid-range estimate of 4.75% for the long-term tax-exempt rate:
Section 382 Limitation = $1,900,000,000 × 4.75% = ~$90,250,000 per year
This annual limitation caps the amount of pre-change NOLs that VeloPay may use in any single post-change taxable year to offset its taxable income. Pre-change NOLs in excess of the annual limitation carry forward to subsequent years (subject to the general NOL carryforward rules), but the annual cap applies each year.
Built-In Gain / Built-In Loss Analysis. In addition to the annual limitation, the Section 382 rules require a determination of whether VeloPay is in a "net unrealized built-in gain" ("NUBIG") position or a "net unrealized built-in loss" ("NUBIL") position as of the ownership change date.
If VeloPay is in a NUBIG position — meaning the aggregate fair market value of VeloPay's assets exceeds the aggregate adjusted tax basis of those assets — then recognized built-in gains during the five-year recognition period following the ownership change may increase the Section 382 limitation in the year recognized. This effectively allows VeloPay to use additional pre-change NOLs against recognized built-in gains, above and beyond the base annual limitation.
Conversely, if VeloPay is in a NUBIL position, recognized built-in losses during the recognition period would be treated as pre-change losses subject to the Section 382 limitation, further restricting the use of those losses.
Based on the preliminary purchase price allocation analysis, VeloPay is likely in a NUBIG position, as the $1.9 billion enterprise value significantly exceeds the aggregate adjusted tax basis of VeloPay's assets (book value of approximately $689.4 million). However, the precise NUBIG amount requires a detailed asset-by-asset analysis as of the ownership change date, which will be performed post-closing.
C. Recommendation
We recommend the following steps with respect to the Section 382 analysis:
1. Obtain Final NOL Carryforward Amounts. Request from Vance Thornbury & Co. LLP (VeloPay's independent auditor; engagement partner Robert Paulsen) and VeloPay's internal tax team final, confirmed NOL carryforward amounts as of the last day of the pre-closing taxable year, including a breakdown by year of origin and any applicable Section 382 limitations from prior ownership changes (if any).
2. Calculate Precise Section 382 Limitation. Upon confirmation of the closing date, determine the applicable long-term tax-exempt rate for the month of closing (expected July 2025) and calculate the precise annual Section 382 limitation.
3. Perform NUBIG/NUBIL Analysis. Following the closing, perform a detailed NUBIG/NUBIL analysis based on the fair market values and adjusted tax bases of VeloPay's assets as of the ownership change date. This analysis will determine whether any incremental Section 382 limitation is available with respect to recognized built-in gains during the five-year recognition period.
4. Coordinate Post-Closing Compliance. Work with Leonard Cross and the Calderwood & Harkness tax team to ensure proper post-closing compliance with Section 382, including tracking of pre-change NOL utilization, maintenance of the Section 382 limitation schedule, and preparation of any required disclosures on VeloPay's post-closing tax returns.
VII. Treatment of the Rollover Equity
A. Structure of the Rollover
Two members of VeloPay's founding management team — Nathan Aldridge (Founder and CEO) and Sonia Reyes-Watkins (Founder and CTO) — will make rollover equity investments alongside HPE Fund IV in the surviving corporation. Mr. Aldridge will roll over $14,200,000 and Ms. Reyes-Watkins will roll over $9,700,000, for a combined rollover investment of $23,900,000, into Harrowgate Velocity Co-Invest LP (the "Co-Invest LP").
The rollover is structured as a two-step transaction:
Step 1 — Merger Cash-Out. At the Effective Time, Aldridge and Reyes-Watkins will receive the full per-share merger consideration of $20.00 in cash on all of their VeloPay shares, on the same terms and conditions as all other VeloPay stockholders. Their VeloPay shares will be cancelled and converted into the right to receive cash, and they will recognize taxable gain on the exchange in the same manner as all other stockholders.
Step 2 — Cash Contribution to Co-Invest LP. Following the closing, Aldridge and Reyes-Watkins will contribute a portion of their after-tax cash proceeds to the Co-Invest LP in exchange for limited partnership interests. The Co-Invest LP will invest alongside HPE Fund IV in VeloPay (as the surviving corporation) through a combination of equity and subordinated debt instruments, as set forth in the Co-Invest LP's limited partnership agreement.
The two steps are documented in separate agreements — the Merger Agreement (governing the cash-out of all stockholders, including Aldridge and Reyes-Watkins) and the Rollover Agreement (governing the contribution to the Co-Invest LP). The Rollover Agreement is conditioned upon the closing of the merger but is a separate, voluntary reinvestment by the rollover participants.
B. Tax Treatment
Step 1 — Merger Cash-Out. The exchange of VeloPay shares for $20.00 per share in cash at the Effective Time is a fully taxable event under Section 1001. Aldridge and Reyes-Watkins will each recognize gain equal to the excess of $20.00 per share over their adjusted tax basis in the VeloPay shares surrendered. Assuming the shares were held for more than one year (which is expected given that both are founders), the gain will be long-term capital gain, eligible for the preferential federal tax rate of 20% (plus the 3.8% net investment income tax under Section 1411, if applicable).
Step 2 — Cash Contribution to Co-Invest LP. The contribution of cash by Aldridge and Reyes-Watkins to the Co-Invest LP in exchange for limited partnership interests is generally a tax-free transaction under Section 721(a) of the Code. Section 721(a) provides that no gain or loss is recognized to a partnership or any of its partners in the case of a contribution of property (including cash) to the partnership in exchange for an interest in the partnership. The contributors will take a basis in their Co-Invest LP interests equal to the cash contributed (Section 722), and the Co-Invest LP will take a basis in the contributed cash equal to its face amount (Section 723).
Step Transaction Doctrine Analysis. A critical issue in structuring the rollover is whether the IRS could collapse the two steps (cash-out at $20.00 per share, followed by cash reinvestment in the Co-Invest LP) into a single integrated transaction under the step transaction doctrine. If the steps were collapsed, the rollover participants could be viewed as having received equity interests in the Co-Invest LP (or in VeloPay itself) as part of the merger consideration, rather than cash followed by a separate reinvestment. Such a recharacterization could have several adverse consequences:
(i) It could create an argument that a portion of the merger consideration consists of equity (partnership interests), which — while still insufficient to satisfy the 40% COI threshold — could introduce ambiguity into the characterization of the Transaction;
(ii) It could result in partial tax-free treatment for the rollover participants under Section 351 or Section 721, which is inconsistent with the parties' intent; and
(iii) It could complicate the basis and holding period calculations for the rollover participants' interests in the Co-Invest LP.
We believe that the risk of step transaction collapse is low under the current structuring for the following reasons:
(a) Fixed and Unconditional Cash Consideration. The merger consideration payable to Aldridge and Reyes-Watkins is fixed at $20.00 per share in cash, on identical terms to all other VeloPay stockholders. The cash-out is unconditional and does not depend on, and is not contingent upon, the rollover.
(b) Separate Documentation. The Merger Agreement and the Rollover Agreement are separate instruments, negotiated and executed independently (though the Rollover Agreement is conditioned on the closing of the merger). The rollover is not referenced in the Merger Agreement as part of the merger consideration.
(c) Voluntary Reinvestment. The rollover is a voluntary reinvestment decision by Aldridge and Reyes-Watkins. There is no requirement in the Merger Agreement or any side letter that they reinvest any portion of their proceeds.
(d) De Minimis Amount. The combined rollover of $23,900,000 represents approximately 1.26% of the $1.9 billion aggregate deal value. The de minimis nature of the rollover further supports the treatment of the two steps as separate transactions.
Important Drafting Note. The Rollover Agreement must be carefully structured to ensure that the rollover is not treated as receipt of equity in the merger itself. The current drafting of the Rollover Agreement achieves this by requiring that Aldridge and Reyes-Watkins first receive their full cash consideration under the Merger Agreement, and then separately contribute cash to the Co-Invest LP. The agreement should not characterize the rollover as an "exchange" of VeloPay shares for Co-Invest LP interests. We have reviewed the current draft of the Rollover Agreement (prepared by Megan Chu) and are satisfied that it properly implements the two-step structure.
VIII. Treatment of Equity Awards for Tax Purposes
A. Stock Options
Vested Stock Options. All vested, in-the-money stock options will be cancelled at the Effective Time in exchange for the Option Spread Payment. There are 7,600,000 stock options outstanding with a weighted average exercise price of $12.84 per share, yielding an average per-option spread of $7.16 ($20.00 minus $12.84).
For compensatory stock options — both ISOs and NSOs — the cash received upon cancellation constitutes ordinary compensation income to the option holder under Section 83(a). VeloPay (as the employer) is required to withhold federal income tax under Section 3402 and to collect the employee's share of FICA taxes under Section 3101. VeloPay is also responsible for the employer's share of FICA taxes under Section 3111. VeloPay will receive a corresponding compensation deduction under Section 162 in the amount of the ordinary income recognized by the option holder, subject to the limitations of Section 162(m) for covered employees.
For ISOs, the cancellation of the option for cash without a qualifying exercise and holding period constitutes a "disqualifying disposition" under Section 421(b). The favorable capital gains treatment that would otherwise be available for shares acquired through a qualifying ISO exercise is forfeited, and the full spread is taxed as ordinary compensation income. There

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