1023-00001 · Ironside Capital Management LP · Formation/Tax

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of Ironside Capital Management LP and its authorized representatives. Any disclosure, copying, distribution, or use of the contents of this memorandum by any person other than the intended recipients is strictly prohibited.

From: Sylvia Hartwell, Specialist Partner, Tax Calderwood & Harkness LLP 125 Broad Street, 44th Floor New York, NY 10004

To: Ironside Capital Management LP Tax Team c/o Marcus J. Calloway, Founder & Chief Investment Officer and Renata Obasi, Senior Managing Director, Infrastructure 590 Madison Avenue, 38th Floor New York, NY 10022

Date: July 20, 2022

Re: Tax Structuring Analysis — ICM Cascadia Co-Invest, LP (Co-Investment Vehicle for Acquisition of Cascadia Renewables Holdings, Inc.)

C&H Matter No.: 1023-00001

Reviewed by: Pamela Cross, Responsible Partner, Funds & Asset Management

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I. Executive Summary

This memorandum has been prepared at the request of the Ironside Capital Management LP ("Ironside") Tax Team to analyze the United States federal, state, and local income tax treatment of the proposed co-investment vehicle, ICM Cascadia Co-Invest, LP (the "Vehicle" or "Co-Invest"), a Delaware limited partnership being organized to co-invest alongside Meridian Infrastructure Partners Fund IV, LP ("Fund IV") in the acquisition of one hundred percent (100%) of the outstanding equity of Cascadia Renewables Holdings, Inc. ("Cascadia"), an Oregon corporation. The analysis addresses all material U.S. tax considerations relevant to Ironside's participation as the sole limited partner in the Vehicle.

The Vehicle is to be formed as a Delaware limited partnership with Meridian Infrastructure GP IV LLC ("Meridian GP" or the "General Partner"), a Delaware limited liability company, as general partner holding a 0.01% partnership interest with a capital commitment of $30,000, and Ironside Capital Management LP (the "Limited Partner") as the sole limited partner holding a 99.99% partnership interest with a capital commitment of $299,970,000. The total committed capital to the Vehicle is $300,000,000.

Upon formation and funding, the Vehicle will hold a 28.57% equity interest ($300,000,000 of $1,050,000,000 in total equity) in Cascadia Acquisition Corp. ("AcquisitionCo"), a newly formed Delaware corporation that will serve as the acquisition subsidiary. Fund IV will hold the remaining 71.43% equity interest ($750,000,000 of $1,050,000,000). AcquisitionCo will, in turn, acquire 100% of the outstanding equity of Cascadia Renewables Holdings, Inc. from the existing shareholders.

This memorandum addresses the following key tax topics:

(a) Partnership classification of the Vehicle under the federal "check-the-box" regulations and related considerations;

(b) Tax treatment of the acquisition structure, specifically the equity acquisition of an Oregon C corporation through a Delaware acquisition subsidiary;

(c) The allocation provisions of the limited partnership agreement, including the carried interest and preferred return mechanics, and whether such allocations satisfy the requirements of Section 704(b) of the Internal Revenue Code of 1986, as amended (the "Code");

(d) Carried interest characterization under Section 1061 of the Code, including the three-year holding period requirement applicable to "applicable partnership interests" and the capital interest safe harbor;

(e) State and local tax considerations in Delaware, Oregon, Washington, Idaho, New York, and Massachusetts;

(f) Analysis of unrelated business taxable income ("UBTI") under Sections 511 through 514 of the Code for any tax-exempt investors in Ironside's underlying fund vehicles; and

(g) Federal and state withholding and reporting obligations applicable to the Vehicle and its partners.

Based on the analysis set forth herein, our overall conclusion is that the proposed structure is tax-efficient and achieves Ironside's principal tax-structuring objectives. The use of a Delaware limited partnership as the co-investment vehicle, investing through a Delaware C corporation (AcquisitionCo) that acquires the target Oregon C corporation, provides an appropriate balance of pass-through taxation at the Vehicle level, corporate-level blocking of state operating income taxes and UBTI, and long-term capital gain treatment for Ironside on any eventual disposition of AcquisitionCo stock. Certain areas require ongoing monitoring, particularly the Section 1061 holding-period rules applicable to the General Partner's carried interest and the potential Oregon composite return and withholding obligations that may arise in connection with any disposition of AcquisitionCo stock.

II. Background and Transaction Structure

A. The Co-Investment Vehicle

ICM Cascadia Co-Invest, LP is a Delaware limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. ("DRULPA"). The Certificate of Limited Partnership is planned for filing with the Delaware Secretary of State, and we note that such filing was subsequently completed on July 22, 2022, with the Delaware Secretary of State assigning File No. 7439218. An Employer Identification Number has been applied for and was subsequently assigned by the Internal Revenue Service as EIN 88-3921457.

The partners of the Vehicle are as follows:

The Vehicle's registered agent in Delaware is Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, Delaware 19904. The Vehicle's principal purpose is to co-invest alongside Fund IV in the acquisition of 100% of the outstanding equity of Cascadia Renewables Holdings, Inc.

The Vehicle's limited partnership agreement (the "LP Agreement") is expected to be executed concurrently with the closing of the first capital call and will contain the economic terms, allocation provisions, and governance mechanics described in greater detail in Sections IV and V of this memorandum.

B. The Acquisition Structure

The acquisition of Cascadia is being structured as a stock purchase through a newly formed Delaware corporation, Cascadia Acquisition Corp. AcquisitionCo will be jointly owned by Fund IV and the Vehicle in the following proportions:

• Fund IV: 71.43% equity interest ($750,000,000)

• ICM Cascadia Co-Invest, LP: 28.57% equity interest ($300,000,000)

AcquisitionCo will acquire 100% of the outstanding common stock of Cascadia Renewables Holdings, Inc., an Oregon corporation, from the existing selling shareholders. The selling shareholders and their respective ownership percentages are as follows:

• Timberline Growth Equity Fund III, LP: 62% of outstanding Cascadia common stock

• Weir Family Trust: 18% of outstanding Cascadia common stock

• Management Rollover Pool: 20% of outstanding Cascadia common stock, with approximately 50% of such amount (representing approximately 10% of total outstanding equity) expected to be rolled over into AcquisitionCo by participating members of Cascadia's management team

The agreed-upon enterprise value of Cascadia is $1,950,000,000. The equity value is approximately $1,050,000,000, representing the enterprise value less approximately $900,000,000 of net debt at the Cascadia level. The implied EV/EBITDA multiple is approximately 14.1x, based on Cascadia's fiscal year 2021 EBITDA of $138,000,000 as reported in the audited financial statements prepared by Halstead & Greer LLP. Cascadia's fiscal year 2021 revenue was $487,000,000.

Cascadia's operations consist of a portfolio of renewable energy and water infrastructure assets, including fourteen (14) hydroelectric facilities, six (6) wind farms, and three (3) water-treatment concessions, located primarily in Oregon with additional operations in Washington and Idaho. These assets generate revenue under long-term power purchase agreements, capacity contracts, and water-treatment concession agreements with public and private counterparties.

C. Sources and Uses

The financing structure for the acquisition is summarized in the table below:

Sources of Funds:

Uses of Funds:

The senior secured term loan of $975,000,000 in the aggregate is being provided at the AcquisitionCo level (or at a subsidiary of AcquisitionCo) and is not a liability of the Vehicle. Atlas National Bank, N.A. serves as lead arranger and administrative agent for the $650,000,000 tranche, while Pinnacle Credit Partners LLC is providing the $325,000,000 tranche. The $150,000,000 revolving credit facility is expected to remain undrawn at the closing of the acquisition and is available for working-capital purposes at the operating company level.

D. Economic Terms of the Co-Invest Vehicle

The economic terms of the Vehicle, as reflected in the LP Agreement and the Side Letter between Ironside and Meridian GP IV LLC, are as follows:

Management Fee. No management fee is payable by the Vehicle to the General Partner or to Meridian Infrastructure Partners IV Management LLC or any affiliated management company. This arrangement is documented in the Side Letter between Ironside and Meridian GP IV LLC, which waives the management fee in recognition of the co-investment nature of the Vehicle and Ironside's status as a significant capital partner. The absence of a management fee is customary in co-investment vehicles organized alongside a main fund vehicle.

Carried Interest. The General Partner is entitled to a carried interest equal to 10% of the Vehicle's net profits, payable only after the Limited Partner has received an 8% per annum preferred return on its invested capital, compounded quarterly. By comparison, Fund IV provides for a 20% carried interest to Meridian GP IV LLC. The reduced 10% carry applicable to the Vehicle reflects the co-investment structure and the absence of a management fee, consistent with market practice for institutional co-investment vehicles in the infrastructure sector.

Capital Calls. As of the date of this memorandum, no capital has been called from the partners. The first capital call of $22,500,000 (representing 7.5% of total committed capital) is anticipated for August 2022. The anticipated application of the first capital call proceeds is as follows:

The tax treatment of each of these items is analyzed in detail in Section VI of this memorandum.

III. Partnership Classification Analysis

A. Federal Tax Classification — "Check-the-box" Regulations

A threshold question in the analysis of any partnership-structured investment vehicle is whether the entity will be classified as a partnership for federal income tax purposes. Classification as a partnership is essential to achieving the pass-through treatment that underlies the Vehicle's tax-structuring rationale.

ICM Cascadia Co-Invest, LP is a domestic entity organized as a limited partnership under DRULPA. Under Treasury Regulations § 301.7701-3(a), a domestic "eligible entity" — that is, a business entity that is not classified as a corporation under § 301.7701-2(b) — may elect its classification for federal tax purposes. A domestic eligible entity with two or more members is classified by default as a partnership if no affirmative election is made to be treated as an association taxable as a corporation. A domestic eligible entity with a single member is disregarded as an entity separate from its owner by default.

The Vehicle has two members: Meridian Infrastructure GP IV LLC, as general partner, and Ironside Capital Management LP, as limited partner. The Vehicle is organized as a limited partnership under state law and is not a corporation, joint-stock company, insurance company, organization registered under federal or state banking law, or any other entity included in the "per se corporation" list set forth in Treasury Regulations § 301.7701-2(b)(1) through (8). Accordingly, the Vehicle is an eligible entity with two or more members, and its default classification under the check-the-box regulations is as a partnership.

No affirmative election to be treated as an association taxable as a corporation is contemplated, and no such election should be filed. The default partnership classification is appropriate and optimal for the Vehicle, as it permits the flow-through of income, gain, loss, deduction, and credit to the partners without an entity-level federal income tax, while preserving the limited liability protections afforded by DRULPA.

We recommend that Ironside and Meridian GP IV LLC confirm that no inadvertent Form 8832 election is filed for the Vehicle and that the partnership classification is monitored in the event of any future change in the Vehicle's member composition (for example, if the General Partner were to withdraw and be replaced, or if a new partner were admitted).

B. Partnership vs. Disregarded Entity Considerations

Because Ironside holds a 99.99% interest in the Vehicle and the General Partner holds only a 0.01% interest, it is appropriate to confirm that the Vehicle will be treated as a partnership (rather than as a disregarded entity of Ironside) for federal income tax purposes. If the General Partner's interest were disregarded for tax purposes — that is, if the General Partner were treated as not having a bona fide ownership interest in the Vehicle — the Vehicle could be treated as having a single owner (Ironside) and would be classified as a disregarded entity by default under Treasury Regulations § 301.7701-3(b)(1)(ii).

We do not believe this result is appropriate on the facts of this transaction. The General Partner's interest, while numerically small at 0.01%, is supported by substantial economic substance and meaningful economic rights. Specifically:

(i) The General Partner has made a bona fide capital commitment of $30,000, which represents a real economic investment that is at risk.

(ii) The General Partner is entitled to a 10% carried interest on the Vehicle's net profits above the 8% per annum preferred return to the Limited Partner. This carried interest represents a meaningful profit allocation that gives the General Partner a substantial economic stake in the Vehicle's performance. The carried interest is not a nominal or de minimis economic right; in a successful transaction, the carried interest could amount to tens of millions of dollars.

(iii) The General Partner has full management and investment authority over the Vehicle under the LP Agreement, including the authority to make investment decisions, call and deploy capital, negotiate the terms of the acquisition, and manage the Vehicle's day-to-day operations.

(iv) The General Partner bears fiduciary duties to the Limited Partner under DRULPA and the LP Agreement.

Taken together, these factors establish that Meridian GP IV LLC is a bona fide member of the Vehicle with real economic rights, management authority, and economic risk. The 0.01% capital interest, combined with the 10% carried interest and full management authority, is not de minimis for tax purposes. The Vehicle will accordingly be classified as a partnership — not as a disregarded entity — for federal income tax purposes.

C. Treatment of Cascadia Acquisition Corp.

Cascadia Acquisition Corp. is a newly formed Delaware corporation. As a corporation organized under the laws of a state of the United States, AcquisitionCo is a "per se" corporation within the meaning of Treasury Regulations § 301.7701-2(b)(1) and is treated as a C corporation for federal income tax purposes. No election under Subchapter S of the Code is contemplated for AcquisitionCo, nor would such an election be available given that AcquisitionCo's shareholders include entities (Fund IV and the Vehicle) that are not eligible S corporation shareholders.

The acquisition of Cascadia is structured as a stock purchase — that is, AcquisitionCo will acquire 100% of the outstanding common stock of Cascadia from the selling shareholders in exchange for cash (and, with respect to the management rollover participants, a combination of cash and equity in AcquisitionCo). The transaction is not structured as an asset acquisition, and no election under Section 338(h)(10) or Section 336(e) of the Code is contemplated at this time.

The consequences of this structuring decision are as follows:

Tax Basis in Cascadia Stock. AcquisitionCo's tax basis in the Cascadia stock will equal the purchase price paid for such stock. There will be no step-up in the tax basis of Cascadia's underlying assets (including its hydroelectric facilities, wind farms, water-treatment concessions, and other assets) to fair market value. Cascadia will retain its existing tax basis in its assets, its existing depreciation and amortization schedules, and its existing net operating loss carryforwards (if any, subject to Section 382 limitations arising from the ownership change).

Dividends from Cascadia to AcquisitionCo. Following the acquisition, Cascadia will be a wholly owned subsidiary of AcquisitionCo. Dividends paid by Cascadia to AcquisitionCo will be eligible for the 100% dividends-received deduction under Section 243(a)(3) of the Code, because AcquisitionCo will own 100% of the outstanding stock of Cascadia (well in excess of the 80% ownership threshold required for the 100% deduction). As a result, dividends received by AcquisitionCo from Cascadia should not generate federal income tax at the AcquisitionCo level.

Distributions from AcquisitionCo to the Vehicle. Distributions made by AcquisitionCo to the Vehicle (as a shareholder of AcquisitionCo) will be treated as follows for federal income tax purposes: (a) to the extent of AcquisitionCo's current and accumulated earnings and profits ("E&P"), such distributions will be treated as dividends; (b) to the extent distributions exceed AcquisitionCo's E&P, they will be treated as a return of capital, reducing the Vehicle's basis in its AcquisitionCo stock; and (c) to the extent distributions exceed both E&P and the Vehicle's stock basis, they will be treated as capital gain.

The distinction between these categories is relevant because dividends are generally taxable as ordinary income to the Vehicle's partners (though qualified dividends may be eligible for preferential rates at the individual partner level), while return-of-capital distributions reduce basis without current tax, and capital gain distributions are taxable at capital gains rates (subject to the holding period of the underlying stock).

IV. Allocation Provisions and Distributive Share Analysis

A. General Allocation Framework

The LP Agreement provides for allocations of income, gain, loss, deduction, and credit among the partners in accordance with their respective interests in the Vehicle. The fundamental requirement for the validity of partnership allocations for federal income tax purposes is set forth in Section 704(b) of the Code, which provides that a partner's distributive share of income, gain, loss, deduction, or credit shall be determined by the partnership agreement, provided that the allocation has "substantial economic effect." If an allocation does not have substantial economic effect, the partner's distributive share is determined in accordance with the partner's interest in the partnership, taking into account all facts and circumstances (the "partners' interest in the partnership" or "PIP" test).

The Treasury Regulations under Section 704(b) establish a two-part safe harbor for determining whether an allocation has substantial economic effect. To satisfy the "economic effect" prong, the partnership agreement must provide for:

(i) Maintenance of capital accounts for each partner in accordance with Treasury Regulations § 1.704-1(b)(2)(iv);

(ii) Liquidating distributions made in accordance with positive capital account balances; and

(iii) Either (a) an unconditional obligation by each partner to restore any deficit in its capital account upon liquidation of the partnership (a "deficit restoration obligation" or "DRO"), or (b) a "qualified income offset" ("QIO") provision that allocates income to any partner with an unexpected deficit in its capital account.

The LP Agreement is expected to include each of these provisions. Specifically, the LP Agreement will provide for the maintenance of capital accounts in accordance with the rules of Treasury Regulations § 1.704-1(b)(2)(iv), including appropriate adjustments for contributions, distributions, allocations of income and loss, and revaluations. Liquidating distributions will be made in accordance with positive capital account balances. The LP Agreement will include either a deficit restoration obligation or a qualified income offset provision (or both) as necessary to satisfy the economic effect safe harbor.

In addition, the LP Agreement is expected to include the standard regulatory allocations required by Treasury Regulations § 1.704-2, including:

• A minimum gain chargeback provision, which allocates income to a partner in the event of a net decrease in partnership minimum gain attributable to nonrecourse liabilities;

• A partner nonrecourse debt minimum gain chargeback provision, which operates similarly with respect to partner nonrecourse debt; and

• An allocation of nonrecourse deductions in accordance with the partners' interests in the partnership.

These regulatory allocations are mechanical in nature and are designed to ensure that allocations of income, gain, loss, and deduction associated with nonrecourse debt comply with the requirements of Section 704(b). While the Vehicle does not currently contemplate incurring partnership-level indebtedness, inclusion of these provisions is standard practice and is advisable as a protective measure.

To satisfy the "substantiality" prong of the substantial economic effect test, the allocation must have a reasonable possibility of affecting the dollar amounts to be received by the partners, independent of tax consequences. The allocations contemplated by the LP Agreement — which track the economic waterfall described in Section IV.B below — are designed to reflect the parties' intended economic arrangement and should satisfy the substantiality requirement.

B. Preferred Return and Carry Waterfall

The economic waterfall under the LP Agreement governs the distribution of the Vehicle's net proceeds and the corresponding allocation of income, gain, loss, deduction, and credit. The waterfall operates as follows:

Step 1 — Return of Contributed Capital. First, 100% of available proceeds are distributed to the Limited Partner (Ironside) until the Limited Partner has received distributions equal to its aggregate capital contributions (i.e., $299,970,000 if fully funded, or such lesser amount as has actually been called and contributed).

Step 2 — Preferred Return. Second, 100% of available proceeds are distributed to the Limited Partner until the Limited Partner has received a cumulative preferred return equal to 8% per annum on its invested capital, compounded quarterly. The preferred return accrues from the date of each capital contribution and is calculated on a compounded basis using the quarterly compounding convention.

Step 3 — General Partner Catch-Up. Third, 100% of available proceeds are distributed to the General Partner (Meridian GP IV LLC) until the General Partner has received cumulative distributions equal to 10/90ths (approximately 11.11%) of the cumulative preferred return and profits distributed to the Limited Partner in Step 2 above, such that the General Partner's cumulative share of profits (exclusive of the return of capital in Step 1) equals 10% of total cumulative profits distributed.

Step 4 — Remaining Profits Split. Fourth, all remaining available proceeds are distributed 10% to the General Partner (as carried interest) and 90% to the Limited Partner.

Tax allocations are designed to track these economic allocations to the maximum extent permissible under Section 704(b) and the Treasury Regulations thereunder. The carried interest allocation to the General Partner in Steps 3 and 4 represents a profits interest in the Vehicle and is subject to the Section 1061 analysis discussed in Section V below.

It is critical that the LP Agreement be drafted to ensure that the tax allocation provisions satisfy the substantial economic effect safe harbor, particularly with respect to the targeted allocations of income and gain to the General Partner in connection with the carried interest. To the extent the tax allocations deviate from pro rata capital account allocations — as they will in the catch-up and carry tiers — the allocations must nonetheless be supported by corresponding economic entitlements and reflected in the capital account maintenance provisions. We have reviewed the draft LP Agreement and believe that the allocation provisions, as currently drafted, are consistent with the requirements of Section 704(b), subject to final confirmation upon execution of the LP Agreement.

C. Section 704(c) Considerations

Section 704(c) of the Code requires that, when a partner contributes property with a built-in gain or built-in loss to a partnership, income, gain, loss, and deduction with respect to such property must be allocated among the partners so as to take into account the variation between the contributing partner's adjusted tax basis in the property and the property's fair market value at the time of contribution.

At the Vehicle level, both the General Partner and the Limited Partner are contributing cash (not appreciated or depreciated property) to the Vehicle. The Vehicle, in turn, will contribute cash to AcquisitionCo in exchange for AcquisitionCo stock. Because the contributions to the Vehicle consist solely of cash, and the Vehicle's acquisition of AcquisitionCo stock is a purchase for cash at fair market value, Section 704(c) is not directly implicated at the Vehicle level. There is no built-in gain or built-in loss in the contributed assets.

However, at the AcquisitionCo level, Section 704(c) principles may become relevant if management rollover equity is admitted at a different tax basis than fair market value. The management rollover participants are expected to contribute Cascadia stock (or exchange Cascadia stock for AcquisitionCo equity) in a transaction that may result in carryover or substituted basis for the management participants. If the management rollover equity is reflected at AcquisitionCo with a tax basis different from fair market value, and if AcquisitionCo is treated as a partnership for any purpose (which it would not be, as it is a C corporation), Section 704(c) would apply. Because AcquisitionCo is a C corporation, Section 704(c) does not apply directly at the AcquisitionCo level. Nevertheless, we recommend monitoring AcquisitionCo's organizational documents and shareholders' agreement for appropriate tax allocation provisions to ensure that any tax consequences of the management rollover are properly reflected.

V. Carried Interest Characterization — Section 1061 Analysis

A. Overview of Section 1061

Section 1061 of the Code, enacted as part of the Tax Cuts and Jobs Act of 2017 (Pub. L. No. 115-97), imposes a modified holding period requirement on certain long-term capital gain allocable to holders of "applicable partnership interests" ("APIs"). Under the general capital gains rules, long-term capital gain treatment requires a holding period of more than one year (Section 1222). Section 1061 overrides this general rule for APIs by providing that long-term capital gain with respect to an API is recharacterized as short-term capital gain to the extent such gain is attributable to assets held for three years or less.

An "applicable partnership interest" is defined under Section 1061(c)(1) as any interest in a partnership that is transferred to (or held by) a taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any "applicable trade or business." An "applicable trade or business" is defined under Section 1061(c)(2) as any activity conducted on a regular, continuous, and substantial basis that consists, in whole or in part, of raising or returning capital, and either investing in (or disposing of) specified assets, or developing specified assets. "Specified assets" include securities, commodities, real estate held for rental or investment, cash or cash equivalents, and options or derivative contracts with respect to any of the foregoing.

The Treasury Department issued final regulations under Section 1061 in January 2021 (T.D. 9945, 86 Fed. Reg. 5450), which provide detailed guidance on the application of these rules, including the identification of APIs, the "capital interest" exception, and the mechanics of the three-year holding period recharacterization.

B. Application to ICM Co-Invest Carried Interest

The application of Section 1061 to the Vehicle requires analysis of each partner's interest separately.

Meridian GP IV LLC (General Partner). The General Partner's interest in the Vehicle consists of two components: (i) a 0.01% capital interest, representing the General Partner's $30,000 capital commitment, and (ii) a 10% carried interest (profits interest) on the Vehicle's net profits above the 8% preferred return to the Limited Partner. The General Partner's interest in the Vehicle is held in connection with the performance of substantial investment management services by Meridian and its affiliates in an applicable trade or business (the business of raising capital and investing in infrastructure assets on behalf of Fund IV and its co-investment vehicles). Accordingly, the General Partner's carried interest constitutes an applicable partnership interest subject to Section 1061.

This means that, with respect to the General Partner's share of long-term capital gain from the Vehicle, such gain will be recharacterized as short-term capital gain to the extent the gain is attributable to assets of the Vehicle (or lower-tier partnerships or entities) that have been held for three years or less at the time of the disposition giving rise to the gain.

Ironside Capital Management LP (Limited Partner). Ironside's 99.99% limited partnership interest in the Vehicle is not an applicable partnership interest. Ironside's interest was not transferred to Ironside in connection with the performance of services by Ironside in an applicable trade or business. Rather, Ironside's interest represents a capital commitment by a limited partner and co-investor, acquired in exchange for a substantial capital contribution of $299,970,000. Section 1061 does not apply to partnership interests held by investors who contribute capital and do not receive their interests in connection with the performance of services.

Accordingly, the three-year holding period requirement of Section 1061 applies exclusively to the General Partner's carried interest allocation and does not affect Ironside's share of long-term capital gain from the Vehicle. Ironside's share of long-term capital gain should qualify for standard long-term capital gain treatment under Section 1222, subject to the general requirement that the underlying assets (AcquisitionCo stock) be held by the Vehicle for more than one year.

C. Implications for Transaction Timeline

The practical implications of Section 1061 depend on the anticipated holding period of the Vehicle's investment in AcquisitionCo stock. Given that infrastructure investments typically have hold periods of five to ten years, and given the nature of Cascadia's long-dated assets (hydroelectric facilities, wind farms, and water-treatment concessions with multi-decade useful lives and long-term contractual revenue streams), we expect that the Vehicle will hold its AcquisitionCo stock for well in excess of three years before any disposition.

If the Vehicle holds its AcquisitionCo stock for more than three years before any disposition, Section 1061 will not limit the General Partner's carried interest. All long-term capital gain allocable to the General Partner's carried interest will qualify for long-term capital gain treatment without recharacterization.

However, if a disposition of AcquisitionCo stock occurs within three years of the Vehicle's acquisition, the General Partner's share of gains attributable to assets held for three years or less would be recharacterized as short-term capital gain. This recharacterization would affect only the General Partner's carried interest allocation; it would not affect Ironside's allocations, which are not subject to Section 1061.

We recommend that the transaction timeline and any potential partial dispositions or recapitalizations be monitored with Section 1061 in mind, particularly during the first three years following the closing of the acquisition.

D. Capital Interest Safe Harbor

The final regulations under Section 1061 provide a safe harbor for "capital interests" held by taxpayers who also hold applicable partnership interests. Under Treasury Regulations § 1.1061-3(c), a partner's share of long-term capital gain attributable to a "capital interest" in a partnership is not subject to recharacterization under Section 1061. A capital interest is defined as an interest in the partnership that would give the holder a share of partnership capital if the partnership were to liquidate immediately after the interest was acquired.

The General Partner's 0.01% capital interest in the Vehicle ($30,000 capital commitment) represents a capital interest within the meaning of this safe harbor. The General Partner contributed $30,000 in exchange for its 0.01% capital interest, and this capital interest would entitle the General Partner to a $30,000 share of partnership capital upon an immediate liquidation. Accordingly, long-term capital gain allocable to the General Partner's capital interest (as distinct from its carried interest) is not subject to recharacterization under Section 1061.

Only the General Partner's carried interest — the 10% profits interest on net profits above the 8% preferred return — is subject to Section 1061 analysis. We recommend that the LP Agreement clearly delineate the General Partner's capital interest and profits interest for Section 1061 reporting purposes, and that any tax-related side letters or supplemental agreements confirm this delineation. Clear delineation will facilitate accurate reporting on the Vehicle's Form 1065 and the General Partner's Schedule K-1.

VI. Tax Treatment of Specific Capital Call Items

The first capital call of $22,500,000 anticipated for August 2022 will fund several categories of expenditures, each of which has a distinct tax treatment. We analyze each category below.

A. Organizational Expenses ($285,000)

The Vehicle expects to incur approximately $285,000 in organizational expenses, including legal fees for the preparation and filing of the Certificate of Limited Partnership and the LP Agreement, fees for the preparation of tax identification applications, and related formation costs. These expenses are organizational expenses within the meaning of Section 709(b) of the Code and Treasury Regulations § 1.709-2(a).

Under Section 709(b)(1), a partnership may elect to deduct up to $5,000 of organizational expenses in the taxable year in which the partnership begins business, provided that the total organizational expenses do not exceed $50,000. If total organizational expenses exceed $50,000 but do not exceed $55,000, the $5,000 deduction is reduced dollar-for-dollar by the amount by which total organizational expenses exceed $50,000. If total organizational expenses exceed $55,000, no immediate deduction is available. Any organizational expenses not deductible in the first year are amortized ratably over the 180-month period beginning with the month in which the partnership begins business.

The Vehicle's organizational expenses of $285,000 are well below the $50,000 threshold, so the full $5,000 immediate deduction is available. The remaining $280,000 of organizational expenses will be amortized ratably over 180 months (15 years) beginning in the month in which the Vehicle begins business. Assuming the Vehicle begins business in August 2022 upon the first capital call, the monthly amortization amount for the remaining organizational expenses would be approximately $1,556 per month ($280,000 ÷ 180 months).

The election under Section 709(b) is deemed made by the partnership on a timely filed return for the first taxable year in which the partnership begins business, and no separate election statement is required. However, we recommend that Kendrick Thorne & Associates LLP, as the Vehicle's fund administrator and tax preparer, confirm the election on the Vehicle's initial Form 1065.

B. Placement-Agent Fee ($1,050,000)

The Vehicle will pay a placement-agent fee of $1,050,000 to Rivermark Capital Markets Inc., calculated as 0.35% of the Vehicle's $300,000,000 committed capital. The placement-agent fee is compensation to Rivermark for services rendered in connection with the marketing and sale of limited partnership interests in the Vehicle to investors (in this case, to Ironside).

Under Section 709(a) of the Code, "syndication costs" — defined as costs incurred in connection with the issuing and marketing of partnership interests, including brokerage fees, registration fees, legal fees for securities advice, and printing and communication costs related to the offering — are neither deductible nor amortizable. Syndication costs must be permanently capitalized. This treatment applies regardless of whether the partnership is ultimately organized and regardless of whether the partnership interests are successfully sold.

The placement-agent fee of $1,050,000 is a syndication cost within the meaning of Section 709(a) and Treasury Regulations § 1.709-2(b). It was incurred in connection with Rivermark's services in marketing and placing the Vehicle's limited partnership interests. Accordingly, this amount must be permanently capitalized by the Vehicle. It cannot be deducted currently, amortized over time, or recovered upon liquidation or abandonment of the Vehicle.

For Ironside's purposes, the permanently capitalized placement-agent fee will be reflected as a component of the Vehicle's capital accounts and will effectively reduce the amount of capital available for investment and distribution. The fee will not generate a current or future tax deduction for Ironside or the Vehicle.

C. R&W Insurance Premium Deposit ($4,875,000)

The Vehicle will pay a premium deposit of $4,875,000 to Northgate Specialty Insurance Co. for a representations and warranties insurance policy (Policy No. NSW-RI-2022-09814) with a coverage limit of $195,000,000 (representing approximately 10% of the $1,950,000,000 enterprise value) at a rate of 2.5% of the coverage limit.

The R&W insurance policy provides coverage to the buyer (AcquisitionCo) against losses arising from breaches of the selling shareholders' representations and warranties in the stock purchase agreement. The policy is an integral component of the acquisition transaction and is directly related to the purchase and sale of Cascadia stock.

The tax treatment of the R&W insurance premium depends on its characterization. The premium could theoretically be treated as either (a) a cost of the acquisition, capitalized as part of the purchase price basis in AcquisitionCo/Cascadia stock, or (b) an insurance expense potentially deductible under Section 162. However, because the R&W policy is purchased in direct connection with the acquisition of stock and insures against risks inherent in the acquisition transaction (breaches of seller representations regarding the condition, operations, and financial position of the target company), the premium is properly treated as a transaction cost that facilitates the acquisition of property within the meaning of Treasury Regulations § 1.263(a)-5.

Accordingly, the R&W insurance premium of $4,875,000 should be capitalized under Section 263 of the Code as part of the cost of acquiring AcquisitionCo stock. The premium will be allocated between Fund IV (71.43%) and the Vehicle (28.57%) in accordance with the Co-Investment Allocation Agreement, with the Vehicle's share being approximately $1,393,125 ($4,875,000 × 28.57%). This amount will be added to the Vehicle's tax basis in its AcquisitionCo stock.

D. Due-Diligence Costs and Deposits ($12,790,000)

The Vehicle's share of due-diligence costs and deposits is estimated at $12,790,000. These costs include legal, accounting, environmental, and technical due-diligence fees and related deposits, including but not limited to the following:

• Fees to Clearwater Environmental Consulting Inc. for Phase I and Phase II environmental site assessments of Cascadia's hydroelectric facilities and wind farm sites;

• Fees to Halstead & Greer LLP for quality of earnings analysis, audit procedures, and tax advisory services in connection with the acquisition;

• Legal fees to Calderwood & Harkness LLP and other counsel for transaction structuring, contract negotiation, regulatory review, and related services;

• Engineering and technical due-diligence fees for assessment of Cascadia's infrastructure assets; and

• Deposits required under the letter of intent and exclusivity agreement with the selling shareholders.

Under Treasury Regulations § 1.263(a)-5, amounts paid to facilitate the acquisition of a trade or business (including the acquisition of stock in a corporation that conducts a trade or business) must be capitalized. Costs that "facilitate" an acquisition include costs incurred in the process of investigating and pursuing the acquisition after a decision to acquire has been made, including costs of due diligence, appraisal, negotiation, documentation, and closing.

However, the regulations draw a distinction between "investigatory costs" and "facilitative costs." Costs incurred to determine whether to acquire a target — that is, costs incurred before a final decision to pursue the acquisition has been made — may in certain circumstances be currently deductible as ordinary and necessary business expenses under Section 162, or as investment expenses under Section 212, rather than capitalized. This distinction was further refined by Revenue Ruling 99-23, which provided guidance on the treatment of investigatory and facilitative costs in the context of acquisitions.

The distinction between investigatory and facilitative costs is fact-intensive and depends on the stage at which each cost was incurred relative to the decision to proceed with the acquisition. We recommend that the Vehicle maintain contemporaneous records distinguishing between costs incurred in the investigatory phase (before a final decision to acquire was made) and costs incurred in the facilitative phase (after the decision to acquire). This distinction is particularly important in the event the acquisition is abandoned, as discussed in Section X of this memorandum.

Assuming the acquisition is consummated, all due-diligence costs and deposits — whether investigatory or facilitative — will be capitalized as part of the cost of acquiring AcquisitionCo stock under Section 263. The capitalized amounts will be allocated between Fund IV and the Vehicle in accordance with the Co-Investment Allocation Agreement.

E. Working-Capital Reserve ($3,500,000)

The Vehicle will fund a working-capital reserve of $3,500,000, which will be held in cash or cash-equivalent investments pending deployment. The contribution of cash to the working-capital reserve does not itself generate any tax consequence. Cash contributed to the Vehicle increases the contributing partner's capital account and adjusted basis in its partnership interest, but does not give rise to income, gain, loss, or deduction at the time of contribution.

Any interest income, money market returns, or other investment income earned on the working-capital reserve will be taxable to the partners through the Vehicle's allocations under Section 704(b). Such income will be allocated to the partners in accordance with their respective partnership interests (99.99% to Ironside and 0.01% to the General Partner) and will be reported on each partner's Schedule K-1.

If the working-capital reserve is ultimately used to pay deductible expenses (such as legal fees, accounting fees, or other ordinary and necessary business expenses of the Vehicle), the corresponding deductions will flow through to the partners at that time. If the reserve (or any portion thereof) is returned to the partners as a distribution, the distribution will be treated as a return of capital under Section 731, reducing the receiving partner's adjusted basis in its partnership interest. A distribution of cash is not taxable to the receiving partner except to the extent the cash distributed exceeds the partner's adjusted basis in its partnership interest.

VII. State and Local Tax Analysis

A. Delaware. The State of Delaware does not impose an income tax on limited partnerships or on the partners of limited partnerships with respect to income derived from sources outside Delaware. Because the Vehicle is a Delaware limited partnership whose sole investment activity is the ownership of AcquisitionCo stock — an investment in an Oregon-based infrastructure company — the Vehicle does not conduct business operations in Delaware and does not generate Delaware-source income.

Delaware does, however, impose an annual limited partnership tax of $300 per year on all limited partnerships formed or registered in Delaware, regardless of whether the partnership conducts business in the state. This annual tax is included in the Vehicle's estimated dormancy operating expenses of approximately $185,000 per year and must be paid by June 1 of each year following the year of formation. Failure to pay the annual tax may result in the cancellation of the Vehicle's Certificate of Limited Partnership.

There are no Delaware personal income tax implications for Ironside (itself a Delaware limited partnership) with respect to partnership income not sourced to Delaware. Similarly, there are no Delaware income tax implications for the General Partner (Meridian GP IV LLC, also a Delaware entity) with respect to income from the Vehicle that is not sourced to Delaware.

B. Oregon. Oregon is the primary state of concern for the Vehicle's state and local tax analysis because Cascadia Renewables Holdings, Inc. is an Oregon corporation with operations principally located in Oregon. Cascadia's infrastructure portfolio includes fourteen (14) hydroelectric facilities and a significant portion of its six (6) wind farms and three (3) water-treatment concessions located in the State of Oregon.

Corporate-Level Tax. Following the acquisition, AcquisitionCo will own 100% of Cascadia. AcquisitionCo is a Delaware C corporation that will be required to file Oregon corporate income tax returns (and potentially Oregon corporate excise tax returns) based on Cascadia's Oregon-source income. Oregon imposes a corporate excise tax on C corporations doing business in Oregon at the following rates:

• 6.6% on the first $1,000,000 of Oregon taxable income; and

• 7.6% on Oregon taxable income in excess of $1,000,000.

Oregon uses an apportionment formula to determine the share of a multistate corporation's income that is subject to Oregon tax. Because Cascadia operates primarily in Oregon, a substantial portion of its income will be apportioned to Oregon and subject to these rates.

Pass-Through Implications for the Vehicle and Its Partners. For the Vehicle, which is a pass-through entity for federal and state tax purposes, the critical question is whether Oregon will assert that the Vehicle is "doing business" in Oregon by reason of its ownership of AcquisitionCo, a C corporation that in turn owns Cascadia.

Under Oregon law, the C corporation structure generally "Blocks" the pass-through of Oregon-source income to the Vehicle's partners. Oregon does not "look through" a C corporation to treat its shareholders as conducting business in the state. Because the Vehicle's sole investment is its ownership of AcquisitionCo stock — and all of Cascadia's operations are conducted through Cascadia (a separate C corporation and a subsidiary of AcquisitionCo) — Oregon-source operating income should be taxed at the AcquisitionCo/Cascadia level and should not flow through to the Vehicle or its partners.

Oregon Composite Return and Withholding. Oregon's composite return and withholding requirements may apply to nonresident partners of a partnership that has Oregon-source income. In the ordinary course, the C corporation blocker at the AcquisitionCo level should prevent the Vehicle from being treated as having Oregon-source income from Cascadia's operations.

However, upon a disposition of AcquisitionCo stock, the Vehicle may recognize gain that could be treated as Oregon-source income to the extent the gain derives its value from Oregon assets. Oregon may assert that gain from the sale of stock in a corporation whose value is primarily attributable to Oregon assets constitutes Oregon-source income. In such event, Oregon may require the Vehicle to withhold on the share of Oregon-source gain allocable to nonresident partners or to file a composite return on behalf of such partners. This issue should be analyzed in detail at the time of any disposition of AcquisitionCo stock.

Oregon SB 1567 (2022). We note that Oregon SB 1567, the regulatory statute cited by the Portland Metropolitan Water District in connection with the renegotiation of certain water-treatment concession agreements, is primarily a regulatory and environmental statute and does not directly impose new tax obligations on the Vehicle or its partners. We will monitor SB 1567 for any indirect tax implications, including any provisions that could affect Cascadia's operating economics or the valuation of its water-treatment concession assets.

C. Washington State

The State of Washington does not impose a state income tax on individuals or businesses. Washington does, however, impose a Business & Occupation ("B&O") tax on the gross receipts of businesses operating in the state. The B&O tax is a privilege tax measured by the value of products, gross proceeds of sales, or gross income of the business, depending on the nature of the activity.

Cascadia has wind farm operations in Washington, and the B&O tax applies at the operating entity level (i.e., at the Cascadia subsidiary level or at the specific project company level). The B&O tax is a cost borne at the operating level and does not create a direct pass-through tax obligation for the Vehicle or Ironside. Because Washington does not impose an income tax, the Vehicle's partners will not be subject to Washington state income tax on their share of income from the Vehicle, even if the Vehicle is treated as having Washington-source income.

D. Idaho. Idaho imposes a corporate income tax at a rate of 6.0% (as of 2022) on income attributable to Idaho. Cascadia has operations in Idaho, and the Idaho corporate income tax applies at the Cascadia subsidiary level. As with Oregon, the C corporation structure at AcquisitionCo blocks the pass-through of Idaho-source operating income to the Vehicle and its partners.

However, upon an eventual disposition of AcquisitionCo stock, Idaho may assert that gain from the sale of stock in a corporation with Idaho operations is Idaho-source income. Idaho's treatment of gain from the disposition of stock in a company with Idaho operations is fact-specific and may depend on whether Idaho applies market-based sourcing, property-based sourcing, or other methodologies to determine the source of gain from stock dispositions.

We recommend monitoring Idaho's tax treatment of gain on stock dispositions and analyzing the issue in detail at the time of any disposition event. If Idaho does assert taxing jurisdiction over a portion of the gain, the Vehicle may be required to withhold on the Idaho-source component of the gain allocable to nonresident partners.

E. New York

Ironside Capital Management LP is headquartered at 590 Madison Avenue, 38th Floor, New York, NY 10022. New York State and the City of New York impose income taxes on entities and individuals that conduct business in, derive income from, or are resident in New York.

Vehicle-Level Analysis. The Vehicle itself is managed by Meridian GP IV LLC, which is headquartered in Boston, Massachusetts, not in New York. The Vehicle's sole investment activity is the ownership of AcquisitionCo stock, representing a passive investment in an Oregon-based infrastructure company. The Vehicle does not maintain an office in New York, does not have employees in New York, and does not conduct business operations in New York.

Accordingly, the Vehicle's activities should not generate New York-source income. The income of the Vehicle — consisting of dividends from AcquisitionCo and capital gain on the eventual disposition of AcquisitionCo stock — derives from an investment in an Oregon-based company and is managed from Boston, Massachusetts. The Vehicle does not have sufficient nexus with New York to subject its income to New York taxation at the Vehicle level.

Ironside-Level Analysis. The analysis is different at the Ironside level. Ironside is a Delaware limited partnership that conducts its investment management activities from its offices at 590 Madison Avenue, New York. Ironside's own activities in New York — managing its investment portfolio, making investment decisions, and overseeing its fund vehicles — may cause Ironside's share of income from the Vehicle to be subject to New York State and City income tax at the Ironside level.

The critical question is whether the income from the Vehicle qualifies for New York's investment management safe harbor provisions. Under Section 631(b)(2) of the New York Tax Law and related provisions, income from investment management activities may be exempt from New York-source income treatment in certain circumstances. The investment-manager exemption was designed to prevent New York from asserting taxing jurisdiction over investment income solely because the investment manager is located in New York, provided certain conditions are met. We recommend that Ironside analyze the applicability of this exemption in coordination with its own tax advisors.

F. Massachusetts. Meridian Infrastructure GP IV LLC, the General Partner of the Vehicle, is managed from its offices at 200 Clarendon Street, Suite 4200, Boston, Massachusetts 02116. Massachusetts may assert taxing jurisdiction over the Vehicle's income to the extent management activities are conducted in Massachusetts.

However, the C corporation blocker at the AcquisitionCo level should shield the partners from direct Massachusetts pass-through tax on Cascadia's operating income. Massachusetts would not have a basis for asserting that the Vehicle's partners are conducting business in Massachusetts merely because the Vehicle is managed from Massachusetts, provided that the income in question is passive investment income (dividends and capital gains) and not business income earned through Massachusetts operations.

Management fees or carried interest allocated to the General Partner could have Massachusetts sourcing implications, as the General Partner provides its investment management services from Massachusetts. This issue primarily affects Meridian GP IV LLC rather than Ironside. Ironside's exposure to Massachusetts tax is limited to the extent, if any, that Massachusetts asserts nexus over the Vehicle based on the General Partner's management activity in the state. We believe Ironside's Massachusetts tax exposure is minimal under the current structure but recommend monitoring for any Massachusetts nexus assertions based on the General Partner's management activities.

VIII. UBTI Analysis

A. Relevance to Ironside

Ironside Capital Management LP manages approximately $14.8 billion in assets across equity long/short, credit, and infrastructure strategies. Ironside's infrastructure strategy manages approximately $3.2 billion across three separate fund vehicles. To the extent Ironside's underlying investor base includes tax-exempt entities — such as endowments, foundations, pension funds, sovereign wealth funds, and other organizations described in Section 501(a) of the Code — the analysis of unrelated business taxable income ("UBTI") is directly relevant.

Tax-exempt organizations are generally exempt from federal income tax under Section 501(a) of the Code. However, under Sections 511 through 514, a tax-exempt organization is subject to tax on its UBTI — that is, income derived from an "unrelated trade or business" regularly carried on by the organization, as well as income from "debt-financed property." The UBTI rules are designed to prevent tax-exempt organizations from enjoying an unfair competitive advantage over taxable entities by conducting commercial activities through tax-exempt structures.

To the extent any of Ironside's underlying investors are tax-exempt entities that invest in the Vehicle (directly or indirectly through Ironside's fund vehicles), the structure of the Vehicle and the acquisition must be analyzed to determine whether the Vehicle's income could constitute UBTI for such investors.

B. Debt-Financed Property — Section 514

The most significant UBTI risk in leveraged acquisition transactions arises under Section 514 of the Code, which provides that income from "debt-financed property" is UBTI. Property is "debt-financed" if there is "acquisition indebtedness" with respect to such property at any time during the taxable year. Acquisition indebtedness is defined as the unpaid amount of indebtedness incurred in acquiring or improving property, or indebtedness that would not have been incurred but for the acquisition of the property.

The acquisition of Cascadia involves $975,000,000 in acquisition debt: a $650,000,000 senior secured term loan from Atlas National Bank, N.A. and a $325,000,000 senior secured term loan from Pinnacle Credit Partners LLC. This debt is incurred at the AcquisitionCo level (or at a subsidiary of AcquisitionCo) to finance the purchase of Cascadia stock. It is not partnership-level indebtedness of the Vehicle.

The critical question for UBTI purposes is whether the acquisition debt at AcquisitionCo creates "acquisition indebtedness" at the Vehicle level. If the Vehicle itself were leveraged — that is, if the Vehicle had borrowed funds to acquire its AcquisitionCo stock — the AcquisitionCo stock held by the Vehicle would be "debt-financed property," and income from such property (including dividends and capital gains) would be UBTI to the extent of the leverage ratio.

However, AcquisitionCo is a C corporation, and the corporate entity generally blocks the attribution of debt to the Vehicle's partners for UBTI purposes. Dividends received by the Vehicle from AcquisitionCo are not debt-financed income at the Vehicle level because the debt is at the AcquisitionCo level, not at the Vehicle level. The Vehicle's investment in AcquisitionCo stock is not encumbered by acquisition indebtedness at the Vehicle level.

Furthermore, no Vehicle-level debt is currently contemplated. The Vehicle does not intend to incur a subscription credit facility, capital call line, or any other indebtedness. If the Vehicle were to incur any such indebtedness in the future — for example, a short-term capital call facility to bridge capital calls to investors — such borrowing could create UBTI exposure for tax-exempt partners. We strongly recommend that no Vehicle-level debt be incurred without prior tax analysis, and that any such borrowing be structured carefully to minimize UBTI exposure.

Conclusion. The C corporation blocker structure at the AcquisitionCo level effectively shields tax-exempt investors from UBTI arising from

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of Ironside Capital Management LP and its authorized representatives. Any disclosure, copying, distribution, or use of the contents of this memorandum by any person other than the intended recipients is strictly prohibited.
From: Sylvia Hartwell, Specialist Partner, Tax Calderwood & Harkness LLP 125 Broad Street, 44th Floor New York, NY 10004
To: Ironside Capital Management LP Tax Team c/o Marcus J. Calloway, Founder & Chief Investment Officer and Renata Obasi, Senior Managing Director, Infrastructure 590 Madison Avenue, 38th Floor New York, NY 10022
Date: July 20, 2022
Re: Tax Structuring Analysis — ICM Cascadia Co-Invest, LP (Co-Investment Vehicle for Acquisition of Cascadia Renewables Holdings, Inc.)
C&H Matter No.: 1023-00001
Reviewed by: Pamela Cross, Responsible Partner, Funds & Asset Management
Right-click to update Table of Contents
I. Executive Summary
This memorandum has been prepared at the request of the Ironside Capital Management LP ("Ironside") Tax Team to analyze the United States federal, state, and local income tax treatment of the proposed co-investment vehicle, ICM Cascadia Co-Invest, LP (the "Vehicle" or "Co-Invest"), a Delaware limited partnership being organized to co-invest alongside Meridian Infrastructure Partners Fund IV, LP ("Fund IV") in the acquisition of one hundred percent (100%) of the outstanding equity of Cascadia Renewables Holdings, Inc. ("Cascadia"), an Oregon corporation. The analysis addresses all material U.S. tax considerations relevant to Ironside's participation as the sole limited partner in the Vehicle.
The Vehicle is to be formed as a Delaware limited partnership with Meridian Infrastructure GP IV LLC ("Meridian GP" or the "General Partner"), a Delaware limited liability company, as general partner holding a 0.01% partnership interest with a capital commitment of $30,000, and Ironside Capital Management LP (the "Limited Partner") as the sole limited partner holding a 99.99% partnership interest with a capital commitment of $299,970,000. The total committed capital to the Vehicle is $300,000,000.
Upon formation and funding, the Vehicle will hold a 28.57% equity interest ($300,000,000 of $1,050,000,000 in total equity) in Cascadia Acquisition Corp. ("AcquisitionCo"), a newly formed Delaware corporation that will serve as the acquisition subsidiary. Fund IV will hold the remaining 71.43% equity interest ($750,000,000 of $1,050,000,000). AcquisitionCo will, in turn, acquire 100% of the outstanding equity of Cascadia Renewables Holdings, Inc. from the existing shareholders.
This memorandum addresses the following key tax topics:
(a) Partnership classification of the Vehicle under the federal "check-the-box" regulations and related considerations;
(b) Tax treatment of the acquisition structure, specifically the equity acquisition of an Oregon C corporation through a Delaware acquisition subsidiary;
(c) The allocation provisions of the limited partnership agreement, including the carried interest and preferred return mechanics, and whether such allocations satisfy the requirements of Section 704(b) of the Internal Revenue Code of 1986, as amended (the "Code");
(d) Carried interest characterization under Section 1061 of the Code, including the three-year holding period requirement applicable to "applicable partnership interests" and the capital interest safe harbor;
(e) State and local tax considerations in Delaware, Oregon, Washington, Idaho, New York, and Massachusetts;
(f) Analysis of unrelated business taxable income ("UBTI") under Sections 511 through 514 of the Code for any tax-exempt investors in Ironside's underlying fund vehicles; and
(g) Federal and state withholding and reporting obligations applicable to the Vehicle and its partners.
Based on the analysis set forth herein, our overall conclusion is that the proposed structure is tax-efficient and achieves Ironside's principal tax-structuring objectives. The use of a Delaware limited partnership as the co-investment vehicle, investing through a Delaware C corporation (AcquisitionCo) that acquires the target Oregon C corporation, provides an appropriate balance of pass-through taxation at the Vehicle level, corporate-level blocking of state operating income taxes and UBTI, and long-term capital gain treatment for Ironside on any eventual disposition of AcquisitionCo stock. Certain areas require ongoing monitoring, particularly the Section 1061 holding-period rules applicable to the General Partner's carried interest and the potential Oregon composite return and withholding obligations that may arise in connection with any disposition of AcquisitionCo stock.
II. Background and Transaction Structure
A. The Co-Investment Vehicle
ICM Cascadia Co-Invest, LP is a Delaware limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. ("DRULPA"). The Certificate of Limited Partnership is planned for filing with the Delaware Secretary of State, and we note that such filing was subsequently completed on July 22, 2022, with the Delaware Secretary of State assigning File No. 7439218. An Employer Identification Number has been applied for and was subsequently assigned by the Internal Revenue Service as EIN 88-3921457.
The partners of the Vehicle are as follows:
The Vehicle's registered agent in Delaware is Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, Delaware 19904. The Vehicle's principal purpose is to co-invest alongside Fund IV in the acquisition of 100% of the outstanding equity of Cascadia Renewables Holdings, Inc.
The Vehicle's limited partnership agreement (the "LP Agreement") is expected to be executed concurrently with the closing of the first capital call and will contain the economic terms, allocation provisions, and governance mechanics described in greater detail in Sections IV and V of this memorandum.
B. The Acquisition Structure
The acquisition of Cascadia is being structured as a stock purchase through a newly formed Delaware corporation, Cascadia Acquisition Corp. AcquisitionCo will be jointly owned by Fund IV and the Vehicle in the following proportions:
•  Fund IV: 71.43% equity interest ($750,000,000)
•  ICM Cascadia Co-Invest, LP: 28.57% equity interest ($300,000,000)
AcquisitionCo will acquire 100% of the outstanding common stock of Cascadia Renewables Holdings, Inc., an Oregon corporation, from the existing selling shareholders. The selling shareholders and their respective ownership percentages are as follows:
•  Timberline Growth Equity Fund III, LP: 62% of outstanding Cascadia common stock
•  Weir Family Trust: 18% of outstanding Cascadia common stock
•  Management Rollover Pool: 20% of outstanding Cascadia common stock, with approximately 50% of such amount (representing approximately 10% of total outstanding equity) expected to be rolled over into AcquisitionCo by participating members of Cascadia's management team
The agreed-upon enterprise value of Cascadia is $1,950,000,000. The equity value is approximately $1,050,000,000, representing the enterprise value less approximately $900,000,000 of net debt at the Cascadia level. The implied EV/EBITDA multiple is approximately 14.1x, based on Cascadia's fiscal year 2021 EBITDA of $138,000,000 as reported in the audited financial statements prepared by Halstead & Greer LLP. Cascadia's fiscal year 2021 revenue was $487,000,000.
Cascadia's operations consist of a portfolio of renewable energy and water infrastructure assets, including fourteen (14) hydroelectric facilities, six (6) wind farms, and three (3) water-treatment concessions, located primarily in Oregon with additional operations in Washington and Idaho. These assets generate revenue under long-term power purchase agreements, capacity contracts, and water-treatment concession agreements with public and private counterparties.
C. Sources and Uses
The financing structure for the acquisition is summarized in the table below:
Sources of Funds:
Uses of Funds:
The senior secured term loan of $975,000,000 in the aggregate is being provided at the AcquisitionCo level (or at a subsidiary of AcquisitionCo) and is not a liability of the Vehicle. Atlas National Bank, N.A. serves as lead arranger and administrative agent for the $650,000,000 tranche, while Pinnacle Credit Partners LLC is providing the $325,000,000 tranche. The $150,000,000 revolving credit facility is expected to remain undrawn at the closing of the acquisition and is available for working-capital purposes at the operating company level.
D. Economic Terms of the Co-Invest Vehicle
The economic terms of the Vehicle, as reflected in the LP Agreement and the Side Letter between Ironside and Meridian GP IV LLC, are as follows:
Management Fee. No management fee is payable by the Vehicle to the General Partner or to Meridian Infrastructure Partners IV Management LLC or any affiliated management company. This arrangement is documented in the Side Letter between Ironside and Meridian GP IV LLC, which waives the management fee in recognition of the co-investment nature of the Vehicle and Ironside's status as a significant capital partner. The absence of a management fee is customary in co-investment vehicles organized alongside a main fund vehicle.
Carried Interest. The General Partner is entitled to a carried interest equal to 10% of the Vehicle's net profits, payable only after the Limited Partner has received an 8% per annum preferred return on its invested capital, compounded quarterly. By comparison, Fund IV provides for a 20% carried interest to Meridian GP IV LLC. The reduced 10% carry applicable to the Vehicle reflects the co-investment structure and the absence of a management fee, consistent with market practice for institutional co-investment vehicles in the infrastructure sector.
Capital Calls. As of the date of this memorandum, no capital has been called from the partners. The first capital call of $22,500,000 (representing 7.5% of total committed capital) is anticipated for August 2022. The anticipated application of the first capital call proceeds is as follows:
The tax treatment of each of these items is analyzed in detail in Section VI of this memorandum.
III. Partnership Classification Analysis
A. Federal Tax Classification — "Check-the-box" Regulations
A threshold question in the analysis of any partnership-structured investment vehicle is whether the entity will be classified as a partnership for federal income tax purposes. Classification as a partnership is essential to achieving the pass-through treatment that underlies the Vehicle's tax-structuring rationale.
ICM Cascadia Co-Invest, LP is a domestic entity organized as a limited partnership under DRULPA. Under Treasury Regulations § 301.7701-3(a), a domestic "eligible entity" — that is, a business entity that is not classified as a corporation under § 301.7701-2(b) — may elect its classification for federal tax purposes. A domestic eligible entity with two or more members is classified by default as a partnership if no affirmative election is made to be treated as an association taxable as a corporation. A domestic eligible entity with a single member is disregarded as an entity separate from its owner by default.
The Vehicle has two members: Meridian Infrastructure GP IV LLC, as general partner, and Ironside Capital Management LP, as limited partner. The Vehicle is organized as a limited partnership under state law and is not a corporation, joint-stock company, insurance company, organization registered under federal or state banking law, or any other entity included in the "per se corporation" list set forth in Treasury Regulations § 301.7701-2(b)(1) through (8). Accordingly, the Vehicle is an eligible entity with two or more members, and its default classification under the check-the-box regulations is as a partnership.
No affirmative election to be treated as an association taxable as a corporation is contemplated, and no such election should be filed. The default partnership classification is appropriate and optimal for the Vehicle, as it permits the flow-through of income, gain, loss, deduction, and credit to the partners without an entity-level federal income tax, while preserving the limited liability protections afforded by DRULPA.
We recommend that Ironside and Meridian GP IV LLC confirm that no inadvertent Form 8832 election is filed for the Vehicle and that the partnership classification is monitored in the event of any future change in the Vehicle's member composition (for example, if the General Partner were to withdraw and be replaced, or if a new partner were admitted).
B. Partnership vs. Disregarded Entity Considerations
Because Ironside holds a 99.99% interest in the Vehicle and the General Partner holds only a 0.01% interest, it is appropriate to confirm that the Vehicle will be treated as a partnership (rather than as a disregarded entity of Ironside) for federal income tax purposes. If the General Partner's interest were disregarded for tax purposes — that is, if the General Partner were treated as not having a bona fide ownership interest in the Vehicle — the Vehicle could be treated as having a single owner (Ironside) and would be classified as a disregarded entity by default under Treasury Regulations § 301.7701-3(b)(1)(ii).
We do not believe this result is appropriate on the facts of this transaction. The General Partner's interest, while numerically small at 0.01%, is supported by substantial economic substance and meaningful economic rights. Specifically:
(i) The General Partner has made a bona fide capital commitment of $30,000, which represents a real economic investment that is at risk.
(ii) The General Partner is entitled to a 10% carried interest on the Vehicle's net profits above the 8% per annum preferred return to the Limited Partner. This carried interest represents a meaningful profit allocation that gives the General Partner a substantial economic stake in the Vehicle's performance. The carried interest is not a nominal or de minimis economic right; in a successful transaction, the carried interest could amount to tens of millions of dollars.
(iii) The General Partner has full management and investment authority over the Vehicle under the LP Agreement, including the authority to make investment decisions, call and deploy capital, negotiate the terms of the acquisition, and manage the Vehicle's day-to-day operations.
(iv) The General Partner bears fiduciary duties to the Limited Partner under DRULPA and the LP Agreement.
Taken together, these factors establish that Meridian GP IV LLC is a bona fide member of the Vehicle with real economic rights, management authority, and economic risk. The 0.01% capital interest, combined with the 10% carried interest and full management authority, is not de minimis for tax purposes. The Vehicle will accordingly be classified as a partnership — not as a disregarded entity — for federal income tax purposes.
C. Treatment of Cascadia Acquisition Corp.
Cascadia Acquisition Corp. is a newly formed Delaware corporation. As a corporation organized under the laws of a state of the United States, AcquisitionCo is a "per se" corporation within the meaning of Treasury Regulations § 301.7701-2(b)(1) and is treated as a C corporation for federal income tax purposes. No election under Subchapter S of the Code is contemplated for AcquisitionCo, nor would such an election be available given that AcquisitionCo's shareholders include entities (Fund IV and the Vehicle) that are not eligible S corporation shareholders.
The acquisition of Cascadia is structured as a stock purchase — that is, AcquisitionCo will acquire 100% of the outstanding common stock of Cascadia from the selling shareholders in exchange for cash (and, with respect to the management rollover participants, a combination of cash and equity in AcquisitionCo). The transaction is not structured as an asset acquisition, and no election under Section 338(h)(10) or Section 336(e) of the Code is contemplated at this time.
The consequences of this structuring decision are as follows:
Tax Basis in Cascadia Stock. AcquisitionCo's tax basis in the Cascadia stock will equal the purchase price paid for such stock. There will be no step-up in the tax basis of Cascadia's underlying assets (including its hydroelectric facilities, wind farms, water-treatment concessions, and other assets) to fair market value. Cascadia will retain its existing tax basis in its assets, its existing depreciation and amortization schedules, and its existing net operating loss carryforwards (if any, subject to Section 382 limitations arising from the ownership change).
Dividends from Cascadia to AcquisitionCo. Following the acquisition, Cascadia will be a wholly owned subsidiary of AcquisitionCo. Dividends paid by Cascadia to AcquisitionCo will be eligible for the 100% dividends-received deduction under Section 243(a)(3) of the Code, because AcquisitionCo will own 100% of the outstanding stock of Cascadia (well in excess of the 80% ownership threshold required for the 100% deduction). As a result, dividends received by AcquisitionCo from Cascadia should not generate federal income tax at the AcquisitionCo level.
Distributions from AcquisitionCo to the Vehicle. Distributions made by AcquisitionCo to the Vehicle (as a shareholder of AcquisitionCo) will be treated as follows for federal income tax purposes: (a) to the extent of AcquisitionCo's current and accumulated earnings and profits ("E&P"), such distributions will be treated as dividends; (b) to the extent distributions exceed AcquisitionCo's E&P, they will be treated as a return of capital, reducing the Vehicle's basis in its AcquisitionCo stock; and (c) to the extent distributions exceed both E&P and the Vehicle's stock basis, they will be treated as capital gain.
The distinction between these categories is relevant because dividends are generally taxable as ordinary income to the Vehicle's partners (though qualified dividends may be eligible for preferential rates at the individual partner level), while return-of-capital distributions reduce basis without current tax, and capital gain distributions are taxable at capital gains rates (subject to the holding period of the underlying stock).
IV. Allocation Provisions and Distributive Share Analysis
A. General Allocation Framework
The LP Agreement provides for allocations of income, gain, loss, deduction, and credit among the partners in accordance with their respective interests in the Vehicle. The fundamental requirement for the validity of partnership allocations for federal income tax purposes is set forth in Section 704(b) of the Code, which provides that a partner's distributive share of income, gain, loss, deduction, or credit shall be determined by the partnership agreement, provided that the allocation has "substantial economic effect." If an allocation does not have substantial economic effect, the partner's distributive share is determined in accordance with the partner's interest in the partnership, taking into account all facts and circumstances (the "partners' interest in the partnership" or "PIP" test).
The Treasury Regulations under Section 704(b) establish a two-part safe harbor for determining whether an allocation has substantial economic effect. To satisfy the "economic effect" prong, the partnership agreement must provide for:
(i) Maintenance of capital accounts for each partner in accordance with Treasury Regulations § 1.704-1(b)(2)(iv);
(ii) Liquidating distributions made in accordance with positive capital account balances; and
(iii) Either (a) an unconditional obligation by each partner to restore any deficit in its capital account upon liquidation of the partnership (a "deficit restoration obligation" or "DRO"), or (b) a "qualified income offset" ("QIO") provision that allocates income to any partner with an unexpected deficit in its capital account.
The LP Agreement is expected to include each of these provisions. Specifically, the LP Agreement will provide for the maintenance of capital accounts in accordance with the rules of Treasury Regulations § 1.704-1(b)(2)(iv), including appropriate adjustments for contributions, distributions, allocations of income and loss, and revaluations. Liquidating distributions will be made in accordance with positive capital account balances. The LP Agreement will include either a deficit restoration obligation or a qualified income offset provision (or both) as necessary to satisfy the economic effect safe harbor.
In addition, the LP Agreement is expected to include the standard regulatory allocations required by Treasury Regulations § 1.704-2, including:
•  A minimum gain chargeback provision, which allocates income to a partner in the event of a net decrease in partnership minimum gain attributable to nonrecourse liabilities;
•  A partner nonrecourse debt minimum gain chargeback provision, which operates similarly with respect to partner nonrecourse debt; and
•  An allocation of nonrecourse deductions in accordance with the partners' interests in the partnership.
These regulatory allocations are mechanical in nature and are designed to ensure that allocations of income, gain, loss, and deduction associated with nonrecourse debt comply with the requirements of Section 704(b). While the Vehicle does not currently contemplate incurring partnership-level indebtedness, inclusion of these provisions is standard practice and is advisable as a protective measure.
To satisfy the "substantiality" prong of the substantial economic effect test, the allocation must have a reasonable possibility of affecting the dollar amounts to be received by the partners, independent of tax consequences. The allocations contemplated by the LP Agreement — which track the economic waterfall described in Section IV.B below — are designed to reflect the parties' intended economic arrangement and should satisfy the substantiality requirement.
B. Preferred Return and Carry Waterfall
The economic waterfall under the LP Agreement governs the distribution of the Vehicle's net proceeds and the corresponding allocation of income, gain, loss, deduction, and credit. The waterfall operates as follows:
Step 1 — Return of Contributed Capital. First, 100% of available proceeds are distributed to the Limited Partner (Ironside) until the Limited Partner has received distributions equal to its aggregate capital contributions (i.e., $299,970,000 if fully funded, or such lesser amount as has actually been called and contributed).
Step 2 — Preferred Return. Second, 100% of available proceeds are distributed to the Limited Partner until the Limited Partner has received a cumulative preferred return equal to 8% per annum on its invested capital, compounded quarterly. The preferred return accrues from the date of each capital contribution and is calculated on a compounded basis using the quarterly compounding convention.
Step 3 — General Partner Catch-Up. Third, 100% of available proceeds are distributed to the General Partner (Meridian GP IV LLC) until the General Partner has received cumulative distributions equal to 10/90ths (approximately 11.11%) of the cumulative preferred return and profits distributed to the Limited Partner in Step 2 above, such that the General Partner's cumulative share of profits (exclusive of the return of capital in Step 1) equals 10% of total cumulative profits distributed.
Step 4 — Remaining Profits Split. Fourth, all remaining available proceeds are distributed 10% to the General Partner (as carried interest) and 90% to the Limited Partner.
Tax allocations are designed to track these economic allocations to the maximum extent permissible under Section 704(b) and the Treasury Regulations thereunder. The carried interest allocation to the General Partner in Steps 3 and 4 represents a profits interest in the Vehicle and is subject to the Section 1061 analysis discussed in Section V below.
It is critical that the LP Agreement be drafted to ensure that the tax allocation provisions satisfy the substantial economic effect safe harbor, particularly with respect to the targeted allocations of income and gain to the General Partner in connection with the carried interest. To the extent the tax allocations deviate from pro rata capital account allocations — as they will in the catch-up and carry tiers — the allocations must nonetheless be supported by corresponding economic entitlements and reflected in the capital account maintenance provisions. We have reviewed the draft LP Agreement and believe that the allocation provisions, as currently drafted, are consistent with the requirements of Section 704(b), subject to final confirmation upon execution of the LP Agreement.
C. Section 704(c) Considerations
Section 704(c) of the Code requires that, when a partner contributes property with a built-in gain or built-in loss to a partnership, income, gain, loss, and deduction with respect to such property must be allocated among the partners so as to take into account the variation between the contributing partner's adjusted tax basis in the property and the property's fair market value at the time of contribution.
At the Vehicle level, both the General Partner and the Limited Partner are contributing cash (not appreciated or depreciated property) to the Vehicle. The Vehicle, in turn, will contribute cash to AcquisitionCo in exchange for AcquisitionCo stock. Because the contributions to the Vehicle consist solely of cash, and the Vehicle's acquisition of AcquisitionCo stock is a purchase for cash at fair market value, Section 704(c) is not directly implicated at the Vehicle level. There is no built-in gain or built-in loss in the contributed assets.
However, at the AcquisitionCo level, Section 704(c) principles may become relevant if management rollover equity is admitted at a different tax basis than fair market value. The management rollover participants are expected to contribute Cascadia stock (or exchange Cascadia stock for AcquisitionCo equity) in a transaction that may result in carryover or substituted basis for the management participants. If the management rollover equity is reflected at AcquisitionCo with a tax basis different from fair market value, and if AcquisitionCo is treated as a partnership for any purpose (which it would not be, as it is a C corporation), Section 704(c) would apply. Because AcquisitionCo is a C corporation, Section 704(c) does not apply directly at the AcquisitionCo level. Nevertheless, we recommend monitoring AcquisitionCo's organizational documents and shareholders' agreement for appropriate tax allocation provisions to ensure that any tax consequences of the management rollover are properly reflected.
V. Carried Interest Characterization — Section 1061 Analysis
A. Overview of Section 1061
Section 1061 of the Code, enacted as part of the Tax Cuts and Jobs Act of 2017 (Pub. L. No. 115-97), imposes a modified holding period requirement on certain long-term capital gain allocable to holders of "applicable partnership interests" ("APIs"). Under the general capital gains rules, long-term capital gain treatment requires a holding period of more than one year (Section 1222). Section 1061 overrides this general rule for APIs by providing that long-term capital gain with respect to an API is recharacterized as short-term capital gain to the extent such gain is attributable to assets held for three years or less.
An "applicable partnership interest" is defined under Section 1061(c)(1) as any interest in a partnership that is transferred to (or held by) a taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any "applicable trade or business." An "applicable trade or business" is defined under Section 1061(c)(2) as any activity conducted on a regular, continuous, and substantial basis that consists, in whole or in part, of raising or returning capital, and either investing in (or disposing of) specified assets, or developing specified assets. "Specified assets" include securities, commodities, real estate held for rental or investment, cash or cash equivalents, and options or derivative contracts with respect to any of the foregoing.
The Treasury Department issued final regulations under Section 1061 in January 2021 (T.D. 9945, 86 Fed. Reg. 5450), which provide detailed guidance on the application of these rules, including the identification of APIs, the "capital interest" exception, and the mechanics of the three-year holding period recharacterization.
B. Application to ICM Co-Invest Carried Interest
The application of Section 1061 to the Vehicle requires analysis of each partner's interest separately.
Meridian GP IV LLC (General Partner). The General Partner's interest in the Vehicle consists of two components: (i) a 0.01% capital interest, representing the General Partner's $30,000 capital commitment, and (ii) a 10% carried interest (profits interest) on the Vehicle's net profits above the 8% preferred return to the Limited Partner. The General Partner's interest in the Vehicle is held in connection with the performance of substantial investment management services by Meridian and its affiliates in an applicable trade or business (the business of raising capital and investing in infrastructure assets on behalf of Fund IV and its co-investment vehicles). Accordingly, the General Partner's carried interest constitutes an applicable partnership interest subject to Section 1061.
This means that, with respect to the General Partner's share of long-term capital gain from the Vehicle, such gain will be recharacterized as short-term capital gain to the extent the gain is attributable to assets of the Vehicle (or lower-tier partnerships or entities) that have been held for three years or less at the time of the disposition giving rise to the gain.
Ironside Capital Management LP (Limited Partner). Ironside's 99.99% limited partnership interest in the Vehicle is not an applicable partnership interest. Ironside's interest was not transferred to Ironside in connection with the performance of services by Ironside in an applicable trade or business. Rather, Ironside's interest represents a capital commitment by a limited partner and co-investor, acquired in exchange for a substantial capital contribution of $299,970,000. Section 1061 does not apply to partnership interests held by investors who contribute capital and do not receive their interests in connection with the performance of services.
Accordingly, the three-year holding period requirement of Section 1061 applies exclusively to the General Partner's carried interest allocation and does not affect Ironside's share of long-term capital gain from the Vehicle. Ironside's share of long-term capital gain should qualify for standard long-term capital gain treatment under Section 1222, subject to the general requirement that the underlying assets (AcquisitionCo stock) be held by the Vehicle for more than one year.
C. Implications for Transaction Timeline
The practical implications of Section 1061 depend on the anticipated holding period of the Vehicle's investment in AcquisitionCo stock. Given that infrastructure investments typically have hold periods of five to ten years, and given the nature of Cascadia's long-dated assets (hydroelectric facilities, wind farms, and water-treatment concessions with multi-decade useful lives and long-term contractual revenue streams), we expect that the Vehicle will hold its AcquisitionCo stock for well in excess of three years before any disposition.
If the Vehicle holds its AcquisitionCo stock for more than three years before any disposition, Section 1061 will not limit the General Partner's carried interest. All long-term capital gain allocable to the General Partner's carried interest will qualify for long-term capital gain treatment without recharacterization.
However, if a disposition of AcquisitionCo stock occurs within three years of the Vehicle's acquisition, the General Partner's share of gains attributable to assets held for three years or less would be recharacterized as short-term capital gain. This recharacterization would affect only the General Partner's carried interest allocation; it would not affect Ironside's allocations, which are not subject to Section 1061.
We recommend that the transaction timeline and any potential partial dispositions or recapitalizations be monitored with Section 1061 in mind, particularly during the first three years following the closing of the acquisition.
D. Capital Interest Safe Harbor
The final regulations under Section 1061 provide a safe harbor for "capital interests" held by taxpayers who also hold applicable partnership interests. Under Treasury Regulations § 1.1061-3(c), a partner's share of long-term capital gain attributable to a "capital interest" in a partnership is not subject to recharacterization under Section 1061. A capital interest is defined as an interest in the partnership that would give the holder a share of partnership capital if the partnership were to liquidate immediately after the interest was acquired.
The General Partner's 0.01% capital interest in the Vehicle ($30,000 capital commitment) represents a capital interest within the meaning of this safe harbor. The General Partner contributed $30,000 in exchange for its 0.01% capital interest, and this capital interest would entitle the General Partner to a $30,000 share of partnership capital upon an immediate liquidation. Accordingly, long-term capital gain allocable to the General Partner's capital interest (as distinct from its carried interest) is not subject to recharacterization under Section 1061.
Only the General Partner's carried interest — the 10% profits interest on net profits above the 8% preferred return — is subject to Section 1061 analysis. We recommend that the LP Agreement clearly delineate the General Partner's capital interest and profits interest for Section 1061 reporting purposes, and that any tax-related side letters or supplemental agreements confirm this delineation. Clear delineation will facilitate accurate reporting on the Vehicle's Form 1065 and the General Partner's Schedule K-1.
VI. Tax Treatment of Specific Capital Call Items
The first capital call of $22,500,000 anticipated for August 2022 will fund several categories of expenditures, each of which has a distinct tax treatment. We analyze each category below.
A. Organizational Expenses ($285,000)
The Vehicle expects to incur approximately $285,000 in organizational expenses, including legal fees for the preparation and filing of the Certificate of Limited Partnership and the LP Agreement, fees for the preparation of tax identification applications, and related formation costs. These expenses are organizational expenses within the meaning of Section 709(b) of the Code and Treasury Regulations § 1.709-2(a).
Under Section 709(b)(1), a partnership may elect to deduct up to $5,000 of organizational expenses in the taxable year in which the partnership begins business, provided that the total organizational expenses do not exceed $50,000. If total organizational expenses exceed $50,000 but do not exceed $55,000, the $5,000 deduction is reduced dollar-for-dollar by the amount by which total organizational expenses exceed $50,000. If total organizational expenses exceed $55,000, no immediate deduction is available. Any organizational expenses not deductible in the first year are amortized ratably over the 180-month period beginning with the month in which the partnership begins business.
The Vehicle's organizational expenses of $285,000 are well below the $50,000 threshold, so the full $5,000 immediate deduction is available. The remaining $280,000 of organizational expenses will be amortized ratably over 180 months (15 years) beginning in the month in which the Vehicle begins business. Assuming the Vehicle begins business in August 2022 upon the first capital call, the monthly amortization amount for the remaining organizational expenses would be approximately $1,556 per month ($280,000 ÷ 180 months).
The election under Section 709(b) is deemed made by the partnership on a timely filed return for the first taxable year in which the partnership begins business, and no separate election statement is required. However, we recommend that Kendrick Thorne & Associates LLP, as the Vehicle's fund administrator and tax preparer, confirm the election on the Vehicle's initial Form 1065.
B. Placement-Agent Fee ($1,050,000)
The Vehicle will pay a placement-agent fee of $1,050,000 to Rivermark Capital Markets Inc., calculated as 0.35% of the Vehicle's $300,000,000 committed capital. The placement-agent fee is compensation to Rivermark for services rendered in connection with the marketing and sale of limited partnership interests in the Vehicle to investors (in this case, to Ironside).
Under Section 709(a) of the Code, "syndication costs" — defined as costs incurred in connection with the issuing and marketing of partnership interests, including brokerage fees, registration fees, legal fees for securities advice, and printing and communication costs related to the offering — are neither deductible nor amortizable. Syndication costs must be permanently capitalized. This treatment applies regardless of whether the partnership is ultimately organized and regardless of whether the partnership interests are successfully sold.
The placement-agent fee of $1,050,000 is a syndication cost within the meaning of Section 709(a) and Treasury Regulations § 1.709-2(b). It was incurred in connection with Rivermark's services in marketing and placing the Vehicle's limited partnership interests. Accordingly, this amount must be permanently capitalized by the Vehicle. It cannot be deducted currently, amortized over time, or recovered upon liquidation or abandonment of the Vehicle.
For Ironside's purposes, the permanently capitalized placement-agent fee will be reflected as a component of the Vehicle's capital accounts and will effectively reduce the amount of capital available for investment and distribution. The fee will not generate a current or future tax deduction for Ironside or the Vehicle.
C. R&W Insurance Premium Deposit ($4,875,000)
The Vehicle will pay a premium deposit of $4,875,000 to Northgate Specialty Insurance Co. for a representations and warranties insurance policy (Policy No. NSW-RI-2022-09814) with a coverage limit of $195,000,000 (representing approximately 10% of the $1,950,000,000 enterprise value) at a rate of 2.5% of the coverage limit.
The R&W insurance policy provides coverage to the buyer (AcquisitionCo) against losses arising from breaches of the selling shareholders' representations and warranties in the stock purchase agreement. The policy is an integral component of the acquisition transaction and is directly related to the purchase and sale of Cascadia stock.
The tax treatment of the R&W insurance premium depends on its characterization. The premium could theoretically be treated as either (a) a cost of the acquisition, capitalized as part of the purchase price basis in AcquisitionCo/Cascadia stock, or (b) an insurance expense potentially deductible under Section 162. However, because the R&W policy is purchased in direct connection with the acquisition of stock and insures against risks inherent in the acquisition transaction (breaches of seller representations regarding the condition, operations, and financial position of the target company), the premium is properly treated as a transaction cost that facilitates the acquisition of property within the meaning of Treasury Regulations § 1.263(a)-5.
Accordingly, the R&W insurance premium of $4,875,000 should be capitalized under Section 263 of the Code as part of the cost of acquiring AcquisitionCo stock. The premium will be allocated between Fund IV (71.43%) and the Vehicle (28.57%) in accordance with the Co-Investment Allocation Agreement, with the Vehicle's share being approximately $1,393,125 ($4,875,000 × 28.57%). This amount will be added to the Vehicle's tax basis in its AcquisitionCo stock.
D. Due-Diligence Costs and Deposits ($12,790,000)
The Vehicle's share of due-diligence costs and deposits is estimated at $12,790,000. These costs include legal, accounting, environmental, and technical due-diligence fees and related deposits, including but not limited to the following:
•  Fees to Clearwater Environmental Consulting Inc. for Phase I and Phase II environmental site assessments of Cascadia's hydroelectric facilities and wind farm sites;
•  Fees to Halstead & Greer LLP for quality of earnings analysis, audit procedures, and tax advisory services in connection with the acquisition;
•  Legal fees to Calderwood & Harkness LLP and other counsel for transaction structuring, contract negotiation, regulatory review, and related services;
•  Engineering and technical due-diligence fees for assessment of Cascadia's infrastructure assets; and
•  Deposits required under the letter of intent and exclusivity agreement with the selling shareholders.
Under Treasury Regulations § 1.263(a)-5, amounts paid to facilitate the acquisition of a trade or business (including the acquisition of stock in a corporation that conducts a trade or business) must be capitalized. Costs that "facilitate" an acquisition include costs incurred in the process of investigating and pursuing the acquisition after a decision to acquire has been made, including costs of due diligence, appraisal, negotiation, documentation, and closing.
However, the regulations draw a distinction between "investigatory costs" and "facilitative costs." Costs incurred to determine whether to acquire a target — that is, costs incurred before a final decision to pursue the acquisition has been made — may in certain circumstances be currently deductible as ordinary and necessary business expenses under Section 162, or as investment expenses under Section 212, rather than capitalized. This distinction was further refined by Revenue Ruling 99-23, which provided guidance on the treatment of investigatory and facilitative costs in the context of acquisitions.
The distinction between investigatory and facilitative costs is fact-intensive and depends on the stage at which each cost was incurred relative to the decision to proceed with the acquisition. We recommend that the Vehicle maintain contemporaneous records distinguishing between costs incurred in the investigatory phase (before a final decision to acquire was made) and costs incurred in the facilitative phase (after the decision to acquire). This distinction is particularly important in the event the acquisition is abandoned, as discussed in Section X of this memorandum.
Assuming the acquisition is consummated, all due-diligence costs and deposits — whether investigatory or facilitative — will be capitalized as part of the cost of acquiring AcquisitionCo stock under Section 263. The capitalized amounts will be allocated between Fund IV and the Vehicle in accordance with the Co-Investment Allocation Agreement.
E. Working-Capital Reserve ($3,500,000)
The Vehicle will fund a working-capital reserve of $3,500,000, which will be held in cash or cash-equivalent investments pending deployment. The contribution of cash to the working-capital reserve does not itself generate any tax consequence. Cash contributed to the Vehicle increases the contributing partner's capital account and adjusted basis in its partnership interest, but does not give rise to income, gain, loss, or deduction at the time of contribution.
Any interest income, money market returns, or other investment income earned on the working-capital reserve will be taxable to the partners through the Vehicle's allocations under Section 704(b). Such income will be allocated to the partners in accordance with their respective partnership interests (99.99% to Ironside and 0.01% to the General Partner) and will be reported on each partner's Schedule K-1.
If the working-capital reserve is ultimately used to pay deductible expenses (such as legal fees, accounting fees, or other ordinary and necessary business expenses of the Vehicle), the corresponding deductions will flow through to the partners at that time. If the reserve (or any portion thereof) is returned to the partners as a distribution, the distribution will be treated as a return of capital under Section 731, reducing the receiving partner's adjusted basis in its partnership interest. A distribution of cash is not taxable to the receiving partner except to the extent the cash distributed exceeds the partner's adjusted basis in its partnership interest.
VII. State and Local Tax Analysis
A. Delaware.  The State of Delaware does not impose an income tax on limited partnerships or on the partners of limited partnerships with respect to income derived from sources outside Delaware. Because the Vehicle is a Delaware limited partnership whose sole investment activity is the ownership of AcquisitionCo stock — an investment in an Oregon-based infrastructure company — the Vehicle does not conduct business operations in Delaware and does not generate Delaware-source income.
Delaware does, however, impose an annual limited partnership tax of $300 per year on all limited partnerships formed or registered in Delaware, regardless of whether the partnership conducts business in the state. This annual tax is included in the Vehicle's estimated dormancy operating expenses of approximately $185,000 per year and must be paid by June 1 of each year following the year of formation. Failure to pay the annual tax may result in the cancellation of the Vehicle's Certificate of Limited Partnership.
There are no Delaware personal income tax implications for Ironside (itself a Delaware limited partnership) with respect to partnership income not sourced to Delaware. Similarly, there are no Delaware income tax implications for the General Partner (Meridian GP IV LLC, also a Delaware entity) with respect to income from the Vehicle that is not sourced to Delaware.
B. Oregon.  Oregon is the primary state of concern for the Vehicle's state and local tax analysis because Cascadia Renewables Holdings, Inc. is an Oregon corporation with operations principally located in Oregon. Cascadia's infrastructure portfolio includes fourteen (14) hydroelectric facilities and a significant portion of its six (6) wind farms and three (3) water-treatment concessions located in the State of Oregon.
Corporate-Level Tax. Following the acquisition, AcquisitionCo will own 100% of Cascadia. AcquisitionCo is a Delaware C corporation that will be required to file Oregon corporate income tax returns (and potentially Oregon corporate excise tax returns) based on Cascadia's Oregon-source income. Oregon imposes a corporate excise tax on C corporations doing business in Oregon at the following rates:
•  6.6% on the first $1,000,000 of Oregon taxable income; and
•  7.6% on Oregon taxable income in excess of $1,000,000.
Oregon uses an apportionment formula to determine the share of a multistate corporation's income that is subject to Oregon tax. Because Cascadia operates primarily in Oregon, a substantial portion of its income will be apportioned to Oregon and subject to these rates.
Pass-Through Implications for the Vehicle and Its Partners. For the Vehicle, which is a pass-through entity for federal and state tax purposes, the critical question is whether Oregon will assert that the Vehicle is "doing business" in Oregon by reason of its ownership of AcquisitionCo, a C corporation that in turn owns Cascadia.
Under Oregon law, the C corporation structure generally "Blocks" the pass-through of Oregon-source income to the Vehicle's partners. Oregon does not "look through" a C corporation to treat its shareholders as conducting business in the state. Because the Vehicle's sole investment is its ownership of AcquisitionCo stock — and all of Cascadia's operations are conducted through Cascadia (a separate C corporation and a subsidiary of AcquisitionCo) — Oregon-source operating income should be taxed at the AcquisitionCo/Cascadia level and should not flow through to the Vehicle or its partners.
Oregon Composite Return and Withholding. Oregon's composite return and withholding requirements may apply to nonresident partners of a partnership that has Oregon-source income. In the ordinary course, the C corporation blocker at the AcquisitionCo level should prevent the Vehicle from being treated as having Oregon-source income from Cascadia's operations.
However, upon a disposition of AcquisitionCo stock, the Vehicle may recognize gain that could be treated as Oregon-source income to the extent the gain derives its value from Oregon assets. Oregon may assert that gain from the sale of stock in a corporation whose value is primarily attributable to Oregon assets constitutes Oregon-source income. In such event, Oregon may require the Vehicle to withhold on the share of Oregon-source gain allocable to nonresident partners or to file a composite return on behalf of such partners. This issue should be analyzed in detail at the time of any disposition of AcquisitionCo stock.
Oregon SB 1567 (2022). We note that Oregon SB 1567, the regulatory statute cited by the Portland Metropolitan Water District in connection with the renegotiation of certain water-treatment concession agreements, is primarily a regulatory and environmental statute and does not directly impose new tax obligations on the Vehicle or its partners. We will monitor SB 1567 for any indirect tax implications, including any provisions that could affect Cascadia's operating economics or the valuation of its water-treatment concession assets.
C. Washington State
The State of Washington does not impose a state income tax on individuals or businesses. Washington does, however, impose a Business & Occupation ("B&O") tax on the gross receipts of businesses operating in the state. The B&O tax is a privilege tax measured by the value of products, gross proceeds of sales, or gross income of the business, depending on the nature of the activity.
Cascadia has wind farm operations in Washington, and the B&O tax applies at the operating entity level (i.e., at the Cascadia subsidiary level or at the specific project company level). The B&O tax is a cost borne at the operating level and does not create a direct pass-through tax obligation for the Vehicle or Ironside. Because Washington does not impose an income tax, the Vehicle's partners will not be subject to Washington state income tax on their share of income from the Vehicle, even if the Vehicle is treated as having Washington-source income.
D. Idaho.  Idaho imposes a corporate income tax at a rate of 6.0% (as of 2022) on income attributable to Idaho. Cascadia has operations in Idaho, and the Idaho corporate income tax applies at the Cascadia subsidiary level. As with Oregon, the C corporation structure at AcquisitionCo blocks the pass-through of Idaho-source operating income to the Vehicle and its partners.
However, upon an eventual disposition of AcquisitionCo stock, Idaho may assert that gain from the sale of stock in a corporation with Idaho operations is Idaho-source income. Idaho's treatment of gain from the disposition of stock in a company with Idaho operations is fact-specific and may depend on whether Idaho applies market-based sourcing, property-based sourcing, or other methodologies to determine the source of gain from stock dispositions.
We recommend monitoring Idaho's tax treatment of gain on stock dispositions and analyzing the issue in detail at the time of any disposition event. If Idaho does assert taxing jurisdiction over a portion of the gain, the Vehicle may be required to withhold on the Idaho-source component of the gain allocable to nonresident partners.
E. New York
Ironside Capital Management LP is headquartered at 590 Madison Avenue, 38th Floor, New York, NY 10022. New York State and the City of New York impose income taxes on entities and individuals that conduct business in, derive income from, or are resident in New York.
Vehicle-Level Analysis. The Vehicle itself is managed by Meridian GP IV LLC, which is headquartered in Boston, Massachusetts, not in New York. The Vehicle's sole investment activity is the ownership of AcquisitionCo stock, representing a passive investment in an Oregon-based infrastructure company. The Vehicle does not maintain an office in New York, does not have employees in New York, and does not conduct business operations in New York.
Accordingly, the Vehicle's activities should not generate New York-source income. The income of the Vehicle — consisting of dividends from AcquisitionCo and capital gain on the eventual disposition of AcquisitionCo stock — derives from an investment in an Oregon-based company and is managed from Boston, Massachusetts. The Vehicle does not have sufficient nexus with New York to subject its income to New York taxation at the Vehicle level.
Ironside-Level Analysis. The analysis is different at the Ironside level. Ironside is a Delaware limited partnership that conducts its investment management activities from its offices at 590 Madison Avenue, New York. Ironside's own activities in New York — managing its investment portfolio, making investment decisions, and overseeing its fund vehicles — may cause Ironside's share of income from the Vehicle to be subject to New York State and City income tax at the Ironside level.
The critical question is whether the income from the Vehicle qualifies for New York's investment management safe harbor provisions. Under Section 631(b)(2) of the New York Tax Law and related provisions, income from investment management activities may be exempt from New York-source income treatment in certain circumstances. The investment-manager exemption was designed to prevent New York from asserting taxing jurisdiction over investment income solely because the investment manager is located in New York, provided certain conditions are met. We recommend that Ironside analyze the applicability of this exemption in coordination with its own tax advisors.
F. Massachusetts.  Meridian Infrastructure GP IV LLC, the General Partner of the Vehicle, is managed from its offices at 200 Clarendon Street, Suite 4200, Boston, Massachusetts 02116. Massachusetts may assert taxing jurisdiction over the Vehicle's income to the extent management activities are conducted in Massachusetts.
However, the C corporation blocker at the AcquisitionCo level should shield the partners from direct Massachusetts pass-through tax on Cascadia's operating income. Massachusetts would not have a basis for asserting that the Vehicle's partners are conducting business in Massachusetts merely because the Vehicle is managed from Massachusetts, provided that the income in question is passive investment income (dividends and capital gains) and not business income earned through Massachusetts operations.
Management fees or carried interest allocated to the General Partner could have Massachusetts sourcing implications, as the General Partner provides its investment management services from Massachusetts. This issue primarily affects Meridian GP IV LLC rather than Ironside. Ironside's exposure to Massachusetts tax is limited to the extent, if any, that Massachusetts asserts nexus over the Vehicle based on the General Partner's management activity in the state. We believe Ironside's Massachusetts tax exposure is minimal under the current structure but recommend monitoring for any Massachusetts nexus assertions based on the General Partner's management activities.
VIII. UBTI Analysis
A. Relevance to Ironside
Ironside Capital Management LP manages approximately $14.8 billion in assets across equity long/short, credit, and infrastructure strategies. Ironside's infrastructure strategy manages approximately $3.2 billion across three separate fund vehicles. To the extent Ironside's underlying investor base includes tax-exempt entities — such as endowments, foundations, pension funds, sovereign wealth funds, and other organizations described in Section 501(a) of the Code — the analysis of unrelated business taxable income ("UBTI") is directly relevant.
Tax-exempt organizations are generally exempt from federal income tax under Section 501(a) of the Code. However, under Sections 511 through 514, a tax-exempt organization is subject to tax on its UBTI — that is, income derived from an "unrelated trade or business" regularly carried on by the organization, as well as income from "debt-financed property." The UBTI rules are designed to prevent tax-exempt organizations from enjoying an unfair competitive advantage over taxable entities by conducting commercial activities through tax-exempt structures.
To the extent any of Ironside's underlying investors are tax-exempt entities that invest in the Vehicle (directly or indirectly through Ironside's fund vehicles), the structure of the Vehicle and the acquisition must be analyzed to determine whether the Vehicle's income could constitute UBTI for such investors.
B. Debt-Financed Property — Section 514
The most significant UBTI risk in leveraged acquisition transactions arises under Section 514 of the Code, which provides that income from "debt-financed property" is UBTI. Property is "debt-financed" if there is "acquisition indebtedness" with respect to such property at any time during the taxable year. Acquisition indebtedness is defined as the unpaid amount of indebtedness incurred in acquiring or improving property, or indebtedness that would not have been incurred but for the acquisition of the property.
The acquisition of Cascadia involves $975,000,000 in acquisition debt: a $650,000,000 senior secured term loan from Atlas National Bank, N.A. and a $325,000,000 senior secured term loan from Pinnacle Credit Partners LLC. This debt is incurred at the AcquisitionCo level (or at a subsidiary of AcquisitionCo) to finance the purchase of Cascadia stock. It is not partnership-level indebtedness of the Vehicle.
The critical question for UBTI purposes is whether the acquisition debt at AcquisitionCo creates "acquisition indebtedness" at the Vehicle level. If the Vehicle itself were leveraged — that is, if the Vehicle had borrowed funds to acquire its AcquisitionCo stock — the AcquisitionCo stock held by the Vehicle would be "debt-financed property," and income from such property (including dividends and capital gains) would be UBTI to the extent of the leverage ratio.
However, AcquisitionCo is a C corporation, and the corporate entity generally blocks the attribution of debt to the Vehicle's partners for UBTI purposes. Dividends received by the Vehicle from AcquisitionCo are not debt-financed income at the Vehicle level because the debt is at the AcquisitionCo level, not at the Vehicle level. The Vehicle's investment in AcquisitionCo stock is not encumbered by acquisition indebtedness at the Vehicle level.
Furthermore, no Vehicle-level debt is currently contemplated. The Vehicle does not intend to incur a subscription credit facility, capital call line, or any other indebtedness. If the Vehicle were to incur any such indebtedness in the future — for example, a short-term capital call facility to bridge capital calls to investors — such borrowing could create UBTI exposure for tax-exempt partners. We strongly recommend that no Vehicle-level debt be incurred without prior tax analysis, and that any such borrowing be structured carefully to minimize UBTI exposure.
Conclusion. The C corporation blocker structure at the AcquisitionCo level effectively shields tax-exempt investors from UBTI arising from

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