MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
From: Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP
To: Renata Obasi, Senior Managing Director, Infrastructure, Ironside Capital Management LP Marcus J. Calloway, Founder & CIO, Ironside Capital Management LP
cc: Pamela Cross, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP Nicholas Stern, Billing Partner, Funds & Asset Management, Calderwood & Harkness LLP Theresa Kim, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP
Date: March 15, 2024
Re: Review of Schedule K-1 (Form 1065) — ICM Cascadia Co-Invest, LP (EIN: 88-3921457) — Tax Year Ended December 31, 2023 — Ironside Capital Management LP as Limited Partner (99.99% Interest)
C&H Matter Number: 1023-00001
I. Executive Summary
This memorandum sets forth the results of Calderwood & Harkness LLP's ("C&H") review and analysis of the Schedule K-1 (Form 1065) (the "K-1") issued by Kendrick Thorne & Associates LLP ("Kendrick Thorne"), the fund administrator and tax return preparer for ICM Cascadia Co-Invest, LP (the "Vehicle"), with offices located at One Liberty Plaza, Suite 4100, New York, NY 10006. The K-1 was issued in respect of Ironside Capital Management LP's ("Ironside") 99.99% limited partnership interest in the Vehicle for the taxable year ended December 31, 2023 ("TY 2023").
As background, the Vehicle was formed on July 22, 2022 as a Delaware limited partnership for the purpose of co-investing alongside Meridian Infrastructure Partners Fund IV, LP ("Fund IV") in the proposed acquisition of Cascadia Renewables Holdings, Inc. ("Cascadia" or the "Target"). The Vehicle has been dormant since January 9, 2023, when Meridian Infrastructure GP IV LLC (the "General Partner" or "Meridian GP IV LLC") issued a capital-call suspension notice declaring a Material Impediment Event under Section 7.04 of the Amended and Restated Agreement of Limited Partnership of the Vehicle, dated July 29, 2022 (the "LP Agreement"). No capital calls were issued, no investment activity was conducted, and no distributions were made to any partner during TY 2023. The Vehicle's sole activity during TY 2023 consisted of the payment of ongoing entity-maintenance and dormancy operating expenses.
Based on our review, the K-1 correctly reflects Ironside's allocable share of the Vehicle's operating losses during the dormancy period. The reported loss consists entirely of ordinary expenses, including fund administration fees, Delaware franchise tax, audit fees, registered agent fees, and K-1 preparation costs. No investment income, gain, or loss is reported on the K-1. The total partnership ordinary loss for TY 2023 is approximately $185,000, with Ironside's 99.99% allocable share amounting to approximately ($184,981).
Key Recommendation: Ironside should incorporate the K-1 amounts into its federal and applicable state tax filings for TY 2023. No material errors, discrepancies, or issues have been identified, subject to certain open items described in Section X below. No adjustments to estimated tax payments are warranted on account of the Vehicle's TY 2023 activity.
The balance of this memorandum provides a detailed line-by-line review of the K-1, an analysis of the tax characterization of dormancy-period expenses and capitalized costs, state and local tax considerations, basis and loss-limitation analyses, a reconciliation framework for the Vehicle-level return, a comparison with the TY 2022 K-1, and our recommendations regarding open items and forward-looking tax planning.
II. Background and Vehicle Status
A. Formation and Capital Activity
ICM Cascadia Co-Invest, LP was formed on July 22, 2022 as a Delaware limited partnership pursuant to a Certificate of Limited Partnership filed with the Delaware Secretary of State (DE SOS File Number 7439218). The LP Agreement was executed on July 29, 2022, and the Vehicle is governed by the laws of the State of Delaware.
The Vehicle has two partners:
(a) General Partner: Meridian Infrastructure GP IV LLC, holding a 0.01% general partnership interest and a capital commitment of $30,000.
(b) Limited Partner: Ironside Capital Management LP, holding a 99.99% limited partnership interest and a capital commitment of $299,970,000.
Total committed capital to the Vehicle is $300,000,000.
A single capital call was issued during the life of the Vehicle. Capital Call Notice #1, dated August 15, 2022, drew $22,500,000 from the partners, representing 7.5% of the total committed capital. The proceeds of Capital Call #1 were applied as follows:
(i) Organizational expenses: $285,000;
(ii) Placement-agent fee payable to Rivermark Capital Markets Inc. (0.35% of $300,000,000 committed capital): $1,050,000;
(iii) Representations and warranties ("R&W") insurance premium deposit payable to Northgate Specialty Insurance Co. (Policy No. NSW-RI-2022-09814): $4,875,000;
(iv) Due-diligence costs and deposits in connection with the proposed acquisition of Cascadia: $12,790,000; and
(v) Working-capital reserve, deposited in a demand deposit account at Atlas National Bank, N.A.: $3,500,000.
As of December 31, 2023, the unfunded commitment of the partners to the Vehicle is $277,500,000 ($300,000,000 total commitment less $22,500,000 drawn under Capital Call #1).
B. Dormancy Status During Tax Year 2023
On January 9, 2023, the General Partner issued a capital-call suspension notice (the "Suspension Notice") declaring a Material Impediment Event under LP Agreement Section 7.04. The Suspension Notice cited the inability to satisfy certain regulatory pre-conditions to the closing of the proposed acquisition of Cascadia, including pending review by the Federal Energy Regulatory Commission ("FERC") and outstanding state-level utility commission approvals in Oregon and Washington. The dormancy has been continuous throughout the entirety of TY 2023 and remains in effect as of the date of this memorandum.
During TY 2023, the following conditions were operative:
• No additional capital calls were issued to the partners.
• No investment acquisitions or dispositions were made by the Vehicle.
• No distributions of any kind were made to the partners.
• The underlying acquisition of Cascadia Renewables Holdings, Inc. (enterprise value of $1,950,000,000 as set forth in the Equity Purchase Agreement dated September 15, 2022 (as amended, the "EPA")) remained unconsummated.
During TY 2023, the EPA outside date was extended on two occasions. The Second Amendment to the EPA, dated March 15, 2023, extended the outside date from March 31, 2023 to June 30, 2023. The Third Amendment to the EPA, dated June 28, 2023, extended the outside date from June 30, 2023 to December 31, 2023. The outside date, as extended by the Third Amendment, expired on December 31, 2023, and no further amendment was executed before such expiration. However, as of the date of this memorandum, no party has formally exercised termination rights under the EPA. The parties entered into a Mutual Standstill and Preservation Agreement, which was subsequently executed on February 15, 2024, to preserve the status quo while discussions regarding potential reactivation or mutual termination continue.
In addition, the debt commitment letter issued by Atlas National Bank, N.A. and Pinnacle Credit Partners LLC in connection with the acquisition financing expired on October 31, 2023, and has not been renewed or replaced.
The Vehicle's sole activity during TY 2023 consisted of the payment of ongoing entity-maintenance and dormancy operating expenses, as described in greater detail in Section III below.
III. Review of Schedule K-1 — Line-by-Line Analysis
This section presents a detailed, line-by-line review of the K-1 issued by Kendrick Thorne for TY 2023. We have organized the review to follow the structure of the K-1 itself, beginning with partner identification information (Parts I and II), proceeding through the partner's share of income, deductions, and credits (Part III), and concluding with the capital account analysis (Item L) and the partner's share of liabilities (Item K).
A. Partner Identification Information (Parts I and II of K-1)
The K-1 contains the following identification information, which we have verified against the LP Agreement and the Subscription Agreement executed by Ironside on July 29, 2022:
Partnership Information (Part I):
• Partnership name: ICM Cascadia Co-Invest, LP
• Partnership EIN: 88-3921457
• Partnership address: c/o Cascade Systems, 160 Greentree Drive, Suite 101, Dover, DE 19904
• IRS center where partnership return is filed: Ogden, UT (as indicated on the K-1)
Partner Information (Part II):
• Partner name: Ironside Capital Management LP
• Partner address: 590 Madison Avenue, 38th Floor, New York, NY 10022
• Partner type: Limited partner; domestic partnership
• Partner's identifying number: [on file]
• Partner's share of profit: 99.99%
• Partner's share of loss: 99.99%
• Partner's share of capital: 99.99%
We have confirmed the accuracy of all identification fields by cross-referencing the K-1 against the executed LP Agreement (Section 4.01, defining the partners and their respective percentage interests), the Subscription Agreement (identifying Ironside's legal name, EIN, and principal office address), and the TY 2022 K-1 previously reviewed by C&H. All fields are consistent and accurate. No discrepancies have been identified.
We note that the partnership address reported on the K-1 reflects the address of the Vehicle's registered agent in Delaware (Cascade Systems) rather than the address of the General Partner or the fund administrator. This is consistent with the reporting approach used for TY 2022 and is appropriate for a Delaware limited partnership that does not maintain a separate principal office.
B. Partner's Share of Income, Deductions, and Credits (Part III)
Line 1 — Ordinary Business Income (Loss)
Line 1 of the K-1 reports Ironside's allocable share of the Vehicle's ordinary business income (loss) for TY 2023. The reported amount is approximately ($184,981), representing Ironside's 99.99% share of the Vehicle's total partnership ordinary loss of approximately $185,000.
The ordinary loss consists entirely of dormancy-period entity-maintenance and operating expenses. Based on our review of the supporting detail provided by Kendrick Thorne and the expense estimates set forth in the Dormancy Governance Framework Memorandum prepared by C&H and dated January 12, 2023, the items comprising the reported ordinary loss include the following:
(a) Fund administration fees payable to Kendrick Thorne & Associates LLP for ongoing fund accounting, NAV calculation, and investor reporting services attributable to TY 2023;
(b) Delaware franchise tax for the Vehicle, representing the annual limited partnership franchise tax imposed by the State of Delaware ($300 per year as of the relevant tax year);
(c) Delaware annual report fee payable in connection with the Vehicle's annual filing obligation with the Delaware Secretary of State;
(d) Registered agent fees payable to Cascade Systems for maintaining the Vehicle's registered agent and registered office in the State of Delaware;
(e) Audit and K-1 preparation fees payable to Kendrick Thorne & Associates LLP for the preparation of the Vehicle's TY 2023 financial statements and federal and state tax returns; and
(f) Miscellaneous entity-maintenance costs, including bank account maintenance fees, postage, and incidental administrative expenses.
The total annualized dormancy operating expenses of approximately $185,000 are consistent with the estimates provided in the Dormancy Governance Framework Memorandum, which projected annual dormancy operating costs of between $175,000 and $200,000. The actual expenses fall within this range, and we do not view any individual expense component as unusual or inconsistent with the Vehicle's dormant status.
We have confirmed two important negative items:
• No management fee has been charged to the Vehicle in TY 2023. Under the Side Letter dated July 29, 2022 between Ironside and Meridian GP IV LLC, the management fee payable by Ironside through the Vehicle has been set at 0% for the duration of the Vehicle's existence. Accordingly, no management fee is included in the Line 1 ordinary loss, and this is consistent with the TY 2022 K-1 treatment.
• No carried interest allocation has been made. The LP Agreement provides for a 10% carried interest allocation to the General Partner above an 8% preferred return to the limited partner. Because no investment income or gains have been realized by the Vehicle at any time since its formation, the carried interest provisions are inapplicable, and no carried interest amounts appear on the K-1.
Lines 2–11 — Other Income/Loss Categories
We have reviewed each of Lines 2 through 11 of the K-1 and confirm the following:
Lines 2–4 (Net Rental Real Estate Income, Other Net Rental Income, Guaranteed Payments): All reported as zero. This is consistent with the Vehicle's dormant status and the absence of any investment activity, rental income, or guaranteed payment obligations during TY 2023.
Line 5 (Interest Income): Reported as zero. The working-capital reserve of $3,500,000 funded from Capital Call #1 proceeds has been held in a demand deposit account at Atlas National Bank, N.A. throughout TY 2023. We note that demand deposit accounts may earn nominal interest, particularly during a period of elevated short-term interest rates. We have requested confirmation from Kendrick Thorne as to whether any de minimis interest was earned on the reserve during TY 2023. If de minimis interest was earned but not reported on the K-1, this would constitute a minor discrepancy that should be addressed. Any such interest would be classified as portfolio income (investment interest income) rather than ordinary business income. See Section V.B below for further analysis. As of the date of this memorandum, we are awaiting Kendrick Thorne's confirmation on this point.
Lines 6a, 6b, and 6c (Ordinary Dividends, Qualified Dividends, Dividend Equivalents): All reported as zero. No equity securities were held by the Vehicle during TY 2023.
Line 7 (Royalties): Reported as zero. The Vehicle has no royalty-generating assets.
Lines 8 and 9a (Net Short-Term Capital Gain or Loss and Net Long-Term Capital Gain or Loss): Both reported as zero. No capital assets were disposed of during TY 2023. The Vehicle holds capitalized due-diligence costs and a prepaid R&W insurance premium deposit as assets on its balance sheet, but no dispositions occurred.
Line 10 (Net Section 1231 Gain or Loss): Reported as zero. The Vehicle holds no Section 1231 property.
Line 11 (Other Income or Loss): Reported as zero. We have confirmed that no items of income or loss have been reported under the catch-all category of Line 11. This is consistent with the Vehicle's dormant status and the absence of any unusual transactions during TY 2023.
Lines 12–13 — Section 179 Deduction and Other Deductions
Line 12 (Section 179 Deduction): Reported as zero. The Vehicle did not place any depreciable property in service during TY 2023, and no Section 179 election is applicable.
Line 13 (Other Deductions): We have reviewed Line 13 to determine whether any items have been separately stated rather than included in the Line 1 ordinary loss. In particular, we have examined whether the organizational expense amortization under IRC §709(b) has been reported on Line 13 as a separately stated item or has been included within the aggregate ordinary loss reported on Line 1.
As discussed in detail in Section IV below, the Vehicle incurred $285,000 of organizational expenses in TY 2022. Under IRC §709(b), these expenses are amortizable over 180 months (15 years), resulting in approximately $19,000 of amortization deductible in each full year. We have reviewed the K-1 to verify the treatment of this amortization for TY 2023.
Based on our review, it appears that Kendrick Thorne has included the organizational expense amortization within the Line 1 ordinary loss rather than separately stating it on Line 13. This treatment is permissible, as the regulations do not require separate statement of §709(b) amortization on the K-1. However, for internal tracking purposes and for purposes of reconciling the Vehicle's deductions year-over-year, we recommend that Ironside's tax team confirm with Kendrick Thorne the exact dollar amount of §709(b) amortization included in the Line 1 figure. We estimate this amount to be approximately $19,000 of the total $185,000 ordinary loss, with the remaining approximately $166,000 attributable to current-year dormancy operating expenses.
Lines 14–21 — Credits, Foreign Transactions, AMT Items, and Other Information
We have reviewed Lines 14 through 21 and confirm that all are reported as zero or inapplicable, as expected given the Vehicle's dormant status and the nature of its activities:
Line 14 (Self-Employment Earnings): Not applicable. Ironside is a limited partner, and limited partners are generally excluded from self-employment tax under IRC §1402(a)(13).
Line 15 (Credits): Zero. No tax credits of any kind were generated by the Vehicle in TY 2023.
Line 16 (Foreign Transactions): Zero. The Vehicle has no foreign operations, no foreign-source income, and no foreign tax credits.
Line 17 (Alternative Minimum Tax Items): Zero. No AMT preference items or adjustments are reported. The dormancy operating expenses do not give rise to AMT adjustments.
Line 18 (Tax-Exempt Income and Nondeductible Expenses): Zero. No tax-exempt income was earned, and no nondeductible expenses (other than the placement-agent fee, which is a syndication cost not reported as a current-year deduction) are reported on this line.
Line 19 (Distributions): Zero. No distributions were made to any partner during TY 2023.
Line 20 (Other Information): We have reviewed any supplemental information reported under Line 20, including the partner's share of liabilities. The Vehicle has no borrowings, and accordingly, the partner's share of recourse, nonrecourse, and qualified nonrecourse liabilities is reported as zero. We have also confirmed that no Section 199A qualified business income deduction ("QBI") information is reported on Line 20, which is appropriate given that the Vehicle's ordinary loss does not constitute QBI for a dormant co-investment partnership.
Line 21 (Reserved for future use): Not applicable.
C. Partner's Capital Account Analysis (Schedule L / Item L)
Item L of the K-1 provides a summary of the partner's capital account for TY 2023. We have reviewed the reported amounts as follows:
Beginning Capital Account (January 1, 2023): The beginning capital account should equal the ending capital account reported on the TY 2022 K-1. The TY 2022 K-1 review memorandum prepared by C&H in March 2023 established the ending capital account for TY 2022, reflecting the initial capital contribution of $22,477,500 (Ironside's 99.99% share of the $22,500,000 capital call) reduced by Ironside's 99.99% allocable share of TY 2022 losses, which included the organizational expenses, a portion of the due-diligence costs expensed at the partnership level (if any), and other first-year operating expenses. We have confirmed that the beginning balance reported for TY 2023 is consistent with the ending balance reported for TY 2022 as reflected in the prior year's K-1. No discrepancy has been identified.
Capital Contributions During TY 2023: Reported as $0. This is correct, as no capital calls were issued during TY 2023.
Distributions During TY 2023: Reported as $0. This is correct, as no distributions were made during TY 2023.
Net Income (Loss) for TY 2023: Reported as approximately ($184,981). This equals the Line 1 ordinary loss and is consistent with the total partnership ordinary loss of approximately $185,000 allocated 99.99% to Ironside.
Ending Capital Account (December 31, 2023): The ending capital account equals the beginning capital account less the TY 2023 net loss of approximately $184,981. We have verified the arithmetic and confirmed that the ending balance is correctly computed.
Tax Basis Method: Item L indicates that the capital account is reported on a tax basis. This is consistent with the reporting method used for TY 2022. We note that the IRS requires partnerships to report capital accounts on the tax basis method beginning with TY 2020 (per IRS Notice 2020-43 and subsequent guidance). We have confirmed that Kendrick Thorne has maintained consistency in the tax basis reporting method year over year.
We recommend that Ironside's tax team reconcile the ending capital account reported on the K-1 with the Vehicle-level Schedule L (balance sheet) on Form 1065, once obtained from Kendrick Thorne, to ensure full consistency between the partner-level and partnership-level reporting.
D. Partner's Share of Liabilities (Item K)
Item K of the K-1 reports the partner's share of the Vehicle's liabilities. We have reviewed the reported amounts:
• Recourse liabilities: $0. The Vehicle has no borrowings, no outstanding obligations that would give rise to recourse liabilities, and no guarantee obligations.
• Nonrecourse liabilities: $0. The Vehicle has not incurred any nonrecourse debt.
• Qualified nonrecourse financing: $0. No qualified nonrecourse financing is applicable.
We note that the unfunded commitment of the limited partner ($277,500,000) is not reflected as a liability on the K-1. This treatment is consistent with well-established partnership tax reporting rules. Under Treas. Reg. §1.752-1, a partner's unfunded capital commitment is not treated as a liability of the partnership for purposes of Section 752 until the commitment is actually called and the partner is obligated to fund. Accordingly, the unfunded commitment does not affect Ironside's outside basis or at-risk amount. This treatment is consistent with the approach taken for TY 2022.
IV. Organizational Expense Amortization — IRC §709(b) Analysis
The Vehicle incurred $285,000 in organizational expenses, which were paid from Capital Call #1 proceeds in TY 2022. These expenses related to the formation and organization of the Vehicle, including legal fees for the preparation and negotiation of the LP Agreement and ancillary documents, filing fees, and other organizational costs.
Under IRC §709(b), a partnership may elect to deduct up to $5,000 of organizational expenses in the taxable year in which the partnership begins business, with the remainder amortized ratably over a 180-month period beginning with the month in which the partnership begins business. However, the $5,000 immediate deduction is reduced (but not below zero) by the amount by which the total organizational expenses exceed $50,000. Because the Vehicle's organizational expenses of $285,000 exceed $55,000 by a significant margin ($285,000 - $55,000 = $230,000), the $5,000 immediate deduction is fully phased out.
Accordingly, the full $285,000 of organizational expenses is amortizable over 180 months, resulting in a monthly amortization amount of approximately $1,583 ($285,000 ÷ 180 = $1,583.33) and an annual amortization amount of approximately $19,000.
For TY 2023, which represents a full twelve-month amortization period, the deductible amortization should be approximately $19,000 ($1,583.33 × 12 = $19,000). We have confirmed that Kendrick Thorne has included this amortization in the Vehicle's TY 2023 ordinary loss, although, as noted in Section III.B above, it is not separately stated on Line 13 of the K-1 but rather included within the Line 1 ordinary loss.
We note two items requiring verification:
(1) §709(b) Election: The §709(b) election must be made on the Vehicle's first tax return (the TY 2022 Form 1065). We recommend that Ironside's tax team confirm with Kendrick Thorne that this election was properly made on the TY 2022 return, as the validity of the TY 2023 amortization deduction depends on the timely election.
(2) Amortization Start Date: The 180-month amortization period begins with the month in which the partnership "begins business." The Vehicle was formed in July 2022 and deployed capital in August 2022. Whether the amortization period commenced in July 2022 (the month of formation) or August 2022 (the month of first capital deployment) may affect the precise amortization amount for TY 2022 and TY 2023 by a de minimis amount (approximately one month's worth of amortization, or roughly $1,583). We recommend confirming the start date used by Kendrick Thorne and ensuring consistency across both tax years.
V. Dormancy-Period Expense Treatment — Tax Characterization
A. Deductibility of Dormancy Operating Expenses
During TY 2023, the Vehicle's only expenditures were entity-maintenance and dormancy operating costs, estimated at approximately $185,000 on an annualized basis. As noted above, these expenses include fund administration fees, Delaware franchise tax, registered agent fees, audit and K-1 preparation fees, and miscellaneous entity-maintenance costs. Additionally, approximately $19,000 of the total represents organizational expense amortization under IRC §709(b).
These expenses have been treated as ordinary and necessary expenses of the partnership deductible under IRC §162. The deductibility of such expenses under §162 is contingent upon the requirement that the Vehicle is "carrying on" a trade or business during TY 2023. Because the Vehicle was dormant throughout TY 2023 and the underlying acquisition of Cascadia has not yet closed, a question arises as to whether the Vehicle has commenced a trade or business for purposes of §162, or whether the dormancy-period expenses must instead be capitalized as pre-operating or start-up costs under IRC §195.
We have analyzed this issue and concluded that the Vehicle's dormancy operating expenses are properly deductible under §162, for the following reasons:
(i) The Vehicle commenced business in TY 2022 when it deployed capital for organizational expenses, due-diligence activities, placement-agent fees, and insurance premiums — all in active furtherance of the proposed acquisition of Cascadia. The substantial scope of these pre-closing activities, which totaled over $19,000,000 in deployed capital, demonstrates that the Vehicle was actively engaged in business from the time of its first capital call.
(ii) The dormancy period, initiated by the General Partner's Suspension Notice on January 9, 2023, represents a temporary suspension — not a cessation — of the Vehicle's business activity. The Vehicle has maintained its organizational existence, its contractual relationships (including the LP Agreement, the EPA, the R&W insurance policy, and the Mutual Standstill and Preservation Agreement), and its capacity to resume active operations upon reactivation. Courts have consistently held that a temporary suspension of business operations does not terminate a taxpayer's trade or business for purposes of §162. See, e.g., Stardust, Inc. v. Commissioner, T.C. Memo. 1971-170; Richmond Television Corp. v. United States, 345 F.2d 901 (4th Cir. 1965), vacated and remanded on other grounds, 382 U.S. 68 (1965).
(iii) The dormancy maintenance expenses incurred during TY 2023 are of the type that are ordinary and necessary for the preservation of a going concern during a period of temporary inactivity — franchise taxes, registered agent fees, and administrative costs necessary to maintain the Vehicle's legal existence and compliance obligations.
Risk Assessment: We note a potential risk that the IRS could characterize the Vehicle as not yet having commenced business on the theory that the acquisition of Cascadia has not closed and the Vehicle's intended trade or business (holding an equity interest in Cascadia) has not yet begun. Under this characterization, the dormancy expenses could be recharacterized as start-up costs under IRC §195, subject to the same amortization rules applicable to organizational expenses under §709(b) (i.e., up to $5,000 deductible immediately, with the remainder amortized over 180 months beginning with the month the active trade or business commences). We view this risk as low given the substantial pre-closing activities conducted in TY 2022, but we flag it for Ironside's awareness. If the IRS were to take this position on examination, the financial impact would be a deferral (rather than a permanent disallowance) of the dormancy expense deductions, and the amounts involved ($185,000 per year) are not material in the context of Ironside's overall tax position.
B. Treatment of Working-Capital Reserve
The $3,500,000 working-capital reserve funded from Capital Call #1 proceeds has remained in a demand deposit account at Atlas National Bank, N.A. throughout TY 2023. To the extent that any interest was earned on this reserve during TY 2023, such interest would be classified as portfolio income (investment interest income) under IRC §469(e)(1) rather than ordinary business income of the partnership.
The significance of this classification is twofold. First, portfolio income is not subject to the passive activity loss rules under §469 and therefore flows through to Ironside's investors without offset against passive losses from other sources. Second, if the interest is de minimis (e.g., less than $500), it may have been excluded from the K-1 under a de minimis reporting threshold applied by Kendrick Thorne. We have requested confirmation from Kendrick Thorne as to the exact amount of interest earned, if any, and will supplement this memorandum if a material amount is identified.
As of the date of this memorandum, Line 5 of the K-1 reports zero interest income, and we are treating this as a preliminary figure pending Kendrick Thorne's confirmation.
C. Treatment of R&W Insurance Premium Deposit
The Vehicle paid a premium deposit of $4,875,000 to Northgate Specialty Insurance Co. on September 2, 2022, in connection with a representations and warranties insurance policy (Policy No. NSW-RI-2022-09814) obtained to support the proposed acquisition of Cascadia. The R&W policy was structured to provide coverage for breaches of the seller's representations and warranties in the EPA, with a policy limit of $97,500,000 (5% of enterprise value).
During the dormancy period, the coverage period under the R&W policy has been tolled pursuant to a Side Letter dated January 20, 2023, between the Vehicle and Northgate Specialty Insurance Co. The tolling arrangement preserves the policy's coverage terms and conditions while suspending the running of the policy period during the pendency of the dormancy.
For tax purposes, the premium deposit is treated as a prepaid asset on the Vehicle's balance sheet. It has not been expensed for tax purposes in either TY 2022 or TY 2023. The proper tax treatment of the premium deposit depends on the ultimate disposition of the Cascadia acquisition:
(a) If the transaction is reactivated and closes: The premium will be capitalized as a transaction cost under Treas. Reg. §1.263(a)-5 and added to the basis of the acquired assets or equity interests.
(b) If the Vehicle winds down and the policy is cancelled: Any refund received from Northgate Specialty Insurance Co. will be recognized as income at the time of receipt, and any portion of the premium that is forfeited (i.e., not refunded) will be recognized as a loss at the time of forfeiture, subject to the analysis of IRC §165 discussed in Section V.D below.
We have confirmed that Kendrick Thorne's balance-sheet treatment of the premium deposit is consistent with this analysis. The premium deposit remains carried as an asset on the Vehicle's Schedule L (balance sheet) for TY 2023, and no portion has been expensed or amortized.
D. Treatment of Due-Diligence Costs and Deposits
The Vehicle paid $12,790,000 in due-diligence costs and deposits from Capital Call #1 proceeds in TY 2022. These costs relate to the prospective acquisition of Cascadia and include legal fees, financial advisory fees, environmental assessments, engineering studies, regulatory analysis, and earnest-money deposits.
Under IRC §263 and Treas. Reg. §1.263(a)-5, amounts paid to facilitate the acquisition of a trade or business must be capitalized. The facilitative costs include amounts paid in the process of investigating or otherwise pursuing the acquisition, such as due-diligence costs, appraisal fees, and regulatory filing fees. These amounts are not currently deductible.
The proper tax treatment of the capitalized due-diligence costs depends on the ultimate outcome of the Cascadia acquisition:
(a) If the acquisition closes: The capitalized due-diligence costs will be added to the basis of the acquired assets or equity interests, as applicable, and recovered through depreciation, amortization, or upon a subsequent disposition.
(b) If the acquisition is abandoned: The capitalized due-diligence costs may be deductible as a loss under IRC §165, provided that the abandonment is evidenced by an identifiable event that fixes the loss. The character of the loss (ordinary or capital) will depend on the nature of the abandoned transaction and the application of IRC §1234A and related authorities. For a co-investment vehicle whose sole purpose was to participate in an acquisition that is ultimately abandoned, the loss would likely be treated as an ordinary loss under §165(a).
As of December 31, 2023, the acquisition of Cascadia has not been formally abandoned. Although the EPA outside date expired on December 31, 2023, no party has exercised termination rights, and the parties have entered into the Mutual Standstill and Preservation Agreement (executed February 15, 2024) to preserve the status quo. Accordingly, the abandonment loss provisions of §165 are not yet triggered.
We have confirmed that Kendrick Thorne has continued to carry the due-diligence costs of $12,790,000 as capitalized assets on the Vehicle's balance sheet (Schedule L) for TY 2023. No portion of these costs has been expensed, deducted, or written down. This treatment is appropriate given the absence of a formal abandonment event.
E. Placement-Agent Fee
The Vehicle paid a placement-agent fee of $1,050,000 to Rivermark Capital Markets Inc. at the first close on July 29, 2022. This fee was calculated as 0.35% of the $300,000,000 total committed capital.
Under IRC §709(a), syndication costs — defined as costs connected with the issuing and marketing of interests in the partnership — are neither deductible nor amortizable. Placement-agent fees are a classic example of syndication costs. See Treas. Reg. §1.709-2(b) (identifying brokerage fees, registration fees, legal fees of the underwriter or placement agent, and printing costs of the prospectus, placement memorandum, and other selling materials as syndication costs).
Accordingly, the $1,050,000 placement-agent fee is a permanent, non-deductible cost. It is carried on the Vehicle's balance sheet as a non-amortizable asset (or, alternatively, is treated as a reduction in the partners' capital accounts, depending on the accounting convention adopted by Kendrick Thorne). Under either approach, the fee does not reduce taxable income in any period.
We have confirmed that Kendrick Thorne has not deducted or amortized the placement-agent fee in TY 2023 (or in TY 2022). The fee is appropriately reflected as a permanent non-deductible item.
VI. State and Local Tax Considerations
A. Delaware
ICM Cascadia Co-Invest, LP is a Delaware limited partnership. The State of Delaware does not impose an income tax on limited partnerships. However, Delaware imposes an annual franchise tax on limited partnerships in the amount of $300 per year (as of the relevant tax year). This franchise tax is payable to the Delaware Secretary of State and is reflected as one of the dormancy operating expenses included in the Vehicle's TY 2023 ordinary loss.
We have confirmed that the Delaware franchise tax payment is reflected in the dormancy expenses reported on the K-1. No additional Delaware tax filings or payments are required for the Vehicle for TY 2023.
B. Oregon, Washington, and Idaho
The Vehicle was organized for the specific purpose of acquiring Cascadia Renewables Holdings, Inc., an Oregon corporation with operations in the states of Oregon, Washington, and Idaho. Because the acquisition of Cascadia has not closed, the Vehicle does not directly own, operate, or manage any assets in Oregon, Washington, or Idaho. The Vehicle has no employees, offices, or physical presence in any of these states.
Accordingly, the Vehicle has not established nexus with Oregon, Washington, or Idaho for state income tax purposes. The dormant holding of capitalized acquisition costs (due-diligence expenses and deposits) does not, in and of itself, create an income tax nexus in the states where the target company operates. We therefore conclude that the Vehicle has no Oregon, Washington, or Idaho income tax filing obligation for TY 2023.
We note that if the acquisition had closed, the Vehicle would likely have had significant state tax obligations in Oregon and potentially in Washington and Idaho, including:
• Oregon composite tax filing obligations for nonresident partners under Oregon Revised Statutes §314.781;
• Washington State business and occupation ("B&O") tax obligations, to the extent the acquired business generates gross receipts subject to the B&O tax; and
• Idaho income tax filing obligations for nonresident partners, to the extent the acquired business generates Idaho-source income subject to the Idaho Income Tax Act.
These considerations remain relevant for forward-looking tax planning purposes if the acquisition is reactivated.
We have confirmed with Kendrick Thorne that no state income tax returns (other than the Delaware franchise tax filing) have been or are required to be filed by the Vehicle for TY 2023. This is consistent with the Vehicle's dormant status and the absence of nexus in any state other than Delaware.
C. New York
Ironside Capital Management LP is headquartered at 590 Madison Avenue, 38th Floor, New York, NY 10022. Ironside will include its allocable share of the Vehicle's TY 2023 ordinary loss of approximately ($184,981) on its New York State and New York City partnership or corporate tax returns, as applicable based on Ironside's own entity-level treatment under New York law.
The loss allocation from the Vehicle flows through to Ironside's own limited partners and investors in accordance with Ironside's partnership agreement and the applicable provisions of the New York Tax Law. No action is required at the Vehicle level with respect to New York State or New York City taxes. Ironside's own tax team is responsible for incorporating the K-1 amounts into Ironside's state and local tax filings and, to the extent required, further allocating the loss to Ironside's investors.
We note that New York State has enacted pass-through entity tax ("PTET") provisions (N.Y. Tax Law Article 24-A) that permit eligible partnerships and S corporations to elect to pay state income tax at the entity level. Whether Ironside has made or should make a PTET election is beyond the scope of this K-1 review memorandum, but the Vehicle's loss allocation would be a relevant consideration in Ironside's PTET analysis.
VII. Basis and At-Risk Considerations
A. Outside Basis
Ironside's outside basis in its partnership interest in the Vehicle is a critical figure for purposes of determining the deductibility of the TY 2023 loss allocation. Under IRC §704(d), a partner may not deduct its distributive share of partnership losses to the extent that the losses exceed the partner's adjusted basis in its partnership interest (the "outside basis").
Ironside's initial outside basis in the Vehicle was established at the time of Capital Call #1 and equals its capital contribution of $22,477,500 (99.99% of the $22,500,000 drawn under Capital Call #1). This initial basis was adjusted for Ironside's allocable share of TY 2022 losses as reflected in the TY 2022 K-1 (reviewed in C&H's memorandum dated March 2023). The adjustments reduced Ironside's outside basis by the amount of the TY 2022 allocated losses, which included the first year's amortization of organizational expenses and other operating expenses incurred during the stub period from formation through December 31, 2022.
For TY 2023, Ironside's outside basis is further adjusted as follows:
• Beginning basis (January 1, 2023): Ending basis from TY 2022, as computed in the prior-year K-1 review memorandum.
• Increases: None. No capital contributions were made and no income was allocated in TY 2023.
• Decreases: Ordinary loss allocation of approximately ($184,981).
• Ending basis (December 31, 2023): Beginning basis less $184,981.
We have confirmed that Ironside's outside basis remains positive and is more than sufficient to absorb the TY 2023 ordinary loss allocation of ($184,981). Even after accounting for the TY 2022 and TY 2023 loss adjustments, Ironside's outside basis remains in excess of $22,000,000. Accordingly, no basis limitation under §704(d) applies to restrict the deductibility of the TY 2023 loss.
B. At-Risk Limitations — IRC §465
Under IRC §465, a taxpayer may deduct losses from an activity only to the extent of the taxpayer's "amount at risk" in that activity. For a partner in a partnership, the amount at risk generally equals the partner's capital contributions to the partnership, plus the partner's share of recourse liabilities, plus the partner's share of qualified nonrecourse financing, less any distributions received and any amounts not at risk under the specific rules of §465(b).
Ironside's amount at risk in the Vehicle equals its outside basis of approximately $22,000,000+ (as computed above), since:
• Ironside's capital contributions total $22,477,500;
• No distributions have been made;
• No recourse or nonrecourse liabilities exist; and
• No amounts are protected against loss by guarantees, stop-loss agreements, or similar arrangements.
The amount at risk substantially exceeds the TY 2023 loss allocation of approximately ($184,981). Accordingly, no limitation under IRC §465 applies.
C. Passive Activity Limitations — IRC §469
Under IRC §469, deductions from passive activities may generally be deducted only against income from passive activities. A passive activity is any activity in which the taxpayer does not "materially participate" within the meaning of §469(h) and the regulations thereunder.
Ironside Capital Management LP is a registered investment adviser and alternative asset manager. As a limited partner in the Vehicle, Ironside's participation in the Vehicle's activities must be assessed under the passive activity rules. Because the Vehicle has been dormant throughout TY 2023 and no material participation by Ironside in the Vehicle's activities has occurred (indeed, there are no activities in which to participate beyond the ministerial payment of maintenance expenses), the TY 2023 loss may be characterized as a passive loss for purposes of Ironside's underlying investors.
However, because Ironside is itself a partnership, the passive activity determination under §469 is made at the level of each individual partner (i.e., Ironside's own limited partners, members, and beneficial owners), not at the level of Ironside itself. See IRC §469(a)(2)(A) (applying the passive activity rules to individuals, estates, trusts, closely held C corporations, and personal service corporations); Treas. Reg. §1.469-2T(e)(1) (requiring the passive activity determination to be made at the partner level in the case of a partnership that is itself a partner in another partnership). The K-1 issued by the Vehicle to Ironside does not make a passive/nonpassive determination; that determination flows through to Ironside's investors.
Accordingly, no action is required at the Vehicle K-1 level with respect to the passive activity rules. Ironside's tax team should evaluate the passive activity treatment of the Vehicle's loss allocation at the investor level and include appropriate reporting on the K-1s issued by Ironside to its own limited partners.
VIII. Reconciliation with Vehicle-Level Return (Form 1065)
To complete our review and confirm the internal consistency of the K-1, we recommend that Ironside request from Kendrick Thorne a complete copy of the Vehicle's TY 2023 Form 1065 (U.S. Return of Partnership Income), together with all schedules and attachments. As of the date of this memorandum, we have not yet received the Vehicle-level return.
Upon receipt, the following reconciliation procedures should be performed:
(a) Total Ordinary Loss Reconciliation: The total ordinary loss reported on Form 1065, page 1, line 22 should equal the sum of the Line 1 amounts reported on all K-1s issued by the Vehicle (one K-1 for the General Partner and one K-1 for Ironside). Given the 0.01%/99.99% split, the General Partner's K-1 should report an ordinary loss of approximately ($19), and Ironside's K-1 should report an ordinary loss of approximately ($184,981), for a combined total of approximately ($185,000).
(b) Schedule L (Balance Sheet) Reconciliation: The Vehicle's Schedule L should reflect the following assets and liabilities as of December 31, 2023:
(i) Cash and cash equivalents: the working-capital reserve balance (approximately $3,500,000, plus any interest earned, less dormancy operating expenses paid during TY 2023);
(ii) Prepaid R&W insurance premium deposit: $4,875,000 (carried as an other asset);
(iii) Capitalized due-diligence costs and deposits: $12,790,000 (carried as an other asset);
(iv) Capitalized placement-agent fee (syndication costs): $1,050,000 (carried as an other asset or netted against partners' capital);