1023-00001 · Ironside Capital Management LP · Wind-Down & Reactivation

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 125 Broad Street, 44th Floor New York, NY 10004 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com

MEMORANDUM

I. Executive Summary and Purpose

This memorandum updates our prior tax structuring analysis dated July 15, 2022, as well as the supplemental K-1 review memoranda prepared in connection with the federal and state partnership tax returns of ICM Cascadia Co-Invest, LP (the "Vehicle") for tax years 2022 and 2023 (dated March 17, 2023, and March 22, 2024, respectively). We have prepared this updated analysis at the request of Marcus J. Calloway and Renata Obasi in light of the two distinct paths now confronting Ironside Capital Management LP ("Ironside") with respect to the Vehicle: (a) reactivation of the underlying transaction and the co-investment vehicle (the "Reactivation Scenario"), or (b) wind-down and liquidation of the Vehicle (the "Wind-Down Scenario").

By way of background, the Vehicle — ICM Cascadia Co-Invest, LP (EIN 88-3921457; Delaware Secretary of State File No. 7439218) — has been dormant since January 9, 2023, when Meridian Infrastructure Partners LP ("Meridian") suspended all transaction-related activities following the enactment of Oregon SB 1567 and the resulting renegotiation of the Bull Run Filtration Project concession between Cascadia Renewables Holdings, Inc. ("Cascadia") and the Portland Metropolitan Water District. The 18-month wind-down election right provided under Section 7.04(c) of the Amended and Restated Agreement of Limited Partnership of ICM Cascadia Co-Invest, LP, dated July 22, 2022 (the "LP Agreement"), ripened on July 9, 2024. As of the date of this memorandum, Ironside has not exercised that election.

On September 1, 2024, Meridian circulated a reactivation feasibility memorandum (the "Meridian Reactivation Memo") to the limited partners of Meridian Infrastructure Partners Fund IV, LP ("Fund IV") and to Ironside in its capacity as the sole limited partner of the Vehicle. That memorandum outlined the potential for reviving the Cascadia acquisition on revised terms, reflecting a tentative revised concession framework that was reached on June 30, 2024, between Cascadia and the Portland Metropolitan Water District. The revised concession framework has not yet been finalized and remains subject to further negotiation and regulatory approval.

This memorandum addresses the federal and state income tax consequences of each of the two scenarios for Ironside in its capacity as the 99.99% limited partner in the Vehicle. Specifically, we analyze: (i) the treatment of the Vehicle as a continuing partnership versus a liquidating partnership; (ii) the classification and deductibility of previously incurred expenses — including organizational expenses, the placement-agent fee, the representations-and-warranties insurance premium deposit, due-diligence costs, and dormancy-period operating expenses; (iii) gain and loss recognition upon liquidation or, alternatively, the basis adjustments that would accompany reactivation and further capital deployment; (iv) state and local tax considerations in Delaware, Oregon, Washington, Idaho, and New York; (v) the implications for unrelated business taxable income ("UBTI") with respect to tax-exempt investors upstream in Ironside's fund structure; (vi) carried interest and IRC §1061 considerations; and (vii) potential restructuring considerations if the economics of the underlying Cascadia transaction change materially from the terms originally agreed.

We emphasize at the outset that the tax analysis in this memorandum is necessarily preliminary in certain respects, particularly with regard to the Reactivation Scenario, where the revised transaction economics are not yet finalized. We recommend that this analysis be revisited and updated once Ironside has made a determination regarding its preferred path, and once additional information regarding the revised concession framework and financing terms becomes available. We remain available to model specific scenarios and to coordinate with Ironside's internal tax team and with Kendrick Thorne & Associates LLP ("KTA"), the Vehicle's fund administrator and tax preparer, as the decision-making process proceeds.

II. Background: Vehicle Structure and Tax Classification

A. Entity Overview

ICM Cascadia Co-Invest, LP is a Delaware limited partnership formed on July 22, 2022, pursuant to a Certificate of Limited Partnership filed with the Delaware Secretary of State (File No. 7439218) and the LP Agreement entered into as of the same date. The Vehicle was organized for the specific purpose of co-investing alongside Fund IV in the proposed acquisition of Cascadia Renewables Holdings, Inc., an Oregon corporation engaged in the development, ownership, and operation of renewable energy and water infrastructure assets in the Pacific Northwest.

The Vehicle's partners and their respective interests are as follows:

Meridian Infrastructure GP IV LLC (the "General Partner" or "Meridian GP") serves as the general partner of the Vehicle and is responsible for the management and conduct of the Vehicle's business, subject to the terms and conditions of the LP Agreement. Meridian GP is an affiliate of Meridian Infrastructure Partners LP, the sponsor of Fund IV.

Ironside Capital Management LP is a Delaware limited partnership that serves as the sole limited partner of the Vehicle. Ironside is a registered investment adviser with the U.S. Securities and Exchange Commission and, as of its most recent Form ADV filing, reported total regulatory assets under management of approximately $14.8 billion. Ironside's principal office is located at 590 Madison Avenue, 38th Floor, New York, NY 10022.

For federal income tax purposes, the Vehicle is classified as a partnership. No election has been made, or is currently contemplated, under Treasury Regulation §301.7701-3 to treat the Vehicle as an association taxable as a corporation. The Vehicle's Employer Identification Number is 88-3921457.

The Vehicle's fund administrator and tax return preparer is Kendrick Thorne & Associates LLP, located at One Liberty Plaza, Suite 4100, New York, NY 10006. KTA has prepared the Vehicle's federal and state partnership tax returns (Form 1065 and applicable state returns) for tax years 2022 and 2023 and has issued the corresponding Schedules K-1 to Ironside and Meridian GP in each of those years.

B. Capital Contributions and Current Financial Position

Since its formation, the Vehicle has made a single capital call. On August 15, 2022, the General Partner issued a capital call notice pursuant to Section 3.02(a) of the LP Agreement, calling $22,500,000 in aggregate capital contributions from the partners (representing 7.5% of the total $300,000,000 committed capital). Ironside's share of this capital call was $22,497,750 (99.99%), and Meridian GP's share was $2,250 (0.01%).

The proceeds of this capital call were applied as follows:

The Vehicle's unfunded capital commitment as of the date of this memorandum is $277,500,000 ($277,497,225 attributable to Ironside; $2,775 attributable to Meridian GP).

During the dormancy period (from approximately January 9, 2023, to the present), the Vehicle has continued to incur operating expenses at an estimated annual rate of approximately $185,000. These dormancy-period expenses consist principally of fund administration fees paid to KTA, fees paid to the Vehicle's Delaware registered agent (Cascade Systems, 160 Greentree Drive, Suite 101, Dover, DE 19904), Delaware annual franchise tax ($300 per year for a Delaware limited partnership), annual audit fees, and K-1 preparation costs. These expenses have been funded from the working-capital reserve.

We note that the Vehicle is not subject to a management fee. Pursuant to a side letter between Ironside and Meridian GP dated July 29, 2022 (the "Side Letter"), the standard management fee that would otherwise be payable under the LP Agreement was waived in its entirety in consideration of Ironside's commitment to co-invest on the terms set forth in the Co-Investment Allocation Agreement.

The carried interest structure applicable to the Vehicle provides for a 10% carried interest allocation to Meridian GP above an 8% preferred return to Ironside, with the preferred return compounded on a quarterly basis. This carried interest rate is reduced from the 20% carried interest applicable to Fund IV's main partnership, reflecting the co-investment economics negotiated between Ironside and Meridian.

C. Underlying Transaction Economics (for Reference)

For context and reference in connection with the tax analysis that follows, we summarize below the key economics of the proposed Cascadia acquisition as originally agreed prior to the dormancy period. We understand that these economics may change materially in a Reactivation Scenario, and we address the tax implications of potential changes in Section X below.

The target of the proposed acquisition is Cascadia Renewables Holdings, Inc., an Oregon corporation. Cascadia's principal assets include renewable energy generation facilities and water infrastructure concessions in Oregon, Washington, and Idaho, including the Bull Run Filtration Project concession with the Portland Metropolitan Water District, which generates annual revenue of approximately $64 million (subject to the ongoing renegotiation described above).

The key financial parameters of the originally proposed acquisition were as follows:

The proposed acquisition was to be financed in part with a $975 million senior secured term loan (with Atlas National Bank, N.A., committing $650 million and Pinnacle Credit Partners LLC committing $325 million) and a $150 million revolving credit facility. The debt financing commitment letter expired on October 31, 2023, and no replacement commitment has been obtained as of the date of this memorandum. In any Reactivation Scenario, new debt financing would need to be arranged, and the terms and structure of such financing could have material tax implications (as discussed in Sections VI and X.C below).

The proposed acquisition was to be effected through Cascadia Acquisition Corp., a newly formed Delaware corporation, which would serve as the direct acquisition vehicle. The Vehicle and Fund IV would contribute their respective equity commitments to Cascadia Acquisition Corp. (or a holding entity above it), which would in turn acquire 100% of the outstanding equity of Cascadia.

III. Federal Income Tax Analysis — Scenario A: Reactivation

A. Treatment of Vehicle as Continuing Partnership

If Ironside determines to pursue the Reactivation Scenario, the Vehicle would continue in existence as a partnership for federal income tax purposes. The resumption of active operations and the deployment of capital toward the Cascadia acquisition would not constitute a termination or deemed termination of the partnership under IRC §708. We note that the technical termination rule formerly contained in IRC §708(b)(1)(B), which treated a partnership as terminated upon the sale or exchange of 50% or more of the total interest in partnership capital and profits within a 12-month period, was repealed by the Tax Cuts and Jobs Act of 2017, effective for partnership taxable years beginning after December 31, 2017. Accordingly, there is no risk that a change in the composition of the Vehicle's partnership or a restructuring of interests would inadvertently trigger a deemed termination.

As a continuing partnership, all previously incurred expenses that remain on the Vehicle's books — including organizational expenditures, capitalized transaction costs, deposits, and the R&W insurance premium deposit — would continue to be treated in accordance with their original classification. Specifically:

(a) Organizational expenses that have been or are being amortized under IRC §709(b) would continue to be amortized over the original 180-month amortization period, beginning with the month in which the partnership commenced business (to the extent the partnership has been deemed to have "begun business" for purposes of §709(b));

(b) Capitalized transaction costs (including due-diligence costs and deposits) would continue to be carried on the Vehicle's books as capitalized expenditures and would be allocated to the basis of the acquired assets upon closing of the Cascadia acquisition; and

(c) The R&W insurance premium deposit would be treated as a capitalized cost of the proposed acquisition, to be allocated and amortized or deducted as appropriate upon closing.

Ironside's outside basis in its partnership interest in the Vehicle is currently approximately $22,497,750 (its contributed capital), reduced by its allocable share of deductions for dormancy-period operating expenses claimed by the Vehicle on its partnership returns for tax years 2022, 2023, and 2024 (estimated at approximately 99.99% × $462,500 cumulative dormancy expenses through mid-2024, or approximately $462,454 in cumulative allocated deductions), and further adjusted for any organizational expense amortization deductions allocated to Ironside in those years. We refer to our K-1 review memoranda dated March 17, 2023, and March 22, 2024, for the specific allocation amounts reflected on Ironside's Schedules K-1 for tax years 2022 and 2023, respectively. The precise outside basis as of the date of reactivation will need to be confirmed with KTA in connection with the preparation of the Vehicle's tax year 2024 return.

Critically, no taxable event is triggered by the mere reactivation of the Vehicle or the resumption of capital deployment activities. Reactivation is simply a continuation of the Vehicle's operations, and the resumption of capital calls would increase Ironside's outside basis on a dollar-for-dollar basis as additional contributions are made.

B. Capital Calls and Basis Adjustments Upon Reactivation

If the Reactivation Scenario proceeds, the General Partner would issue additional capital call notices to fund the Vehicle's equity contribution to the Cascadia acquisition and related transaction costs. The maximum additional amount that could be called is the remaining $277,500,000 unfunded commitment ($277,497,225 attributable to Ironside).

Each additional capital contribution made by Ironside to the Vehicle would increase Ironside's outside basis in its partnership interest under IRC §722, which provides that the basis of a contributing partner's interest in a partnership is increased by the amount of money contributed. This is a straightforward mechanical adjustment and would be computed and documented by KTA in the ordinary course.

However, if the economics of the Cascadia transaction change as a result of the revised concession framework — for example, if the enterprise value of Cascadia is reduced from the original $1,950,000,000, resulting in a lower equity requirement — the amount of capital actually called by the General Partner may be less than the full unfunded commitment. In such case, Ironside's outside basis would increase only by the amount of additional capital actually contributed.

Any change in the amount of equity required could also affect the allocation provisions contained in the LP Agreement and the Co-Investment Allocation Agreement dated July 22, 2022, between Fund IV and the Vehicle. Under the Co-Investment Allocation Agreement, the Vehicle is entitled to co-invest 28.57% of the total equity commitment alongside Fund IV (71.43%). If the total equity requirement is reduced, the parties would need to determine whether the co-invest allocation percentage remains constant (resulting in a proportionate reduction in both Fund IV's and the Vehicle's commitments) or whether one party's commitment is reduced disproportionately. We discuss the tax implications of changes to the co-invest allocation in Section X.A below.

C. Carried Interest Considerations

The Vehicle's LP Agreement provides for a carried interest allocation of 10% to Meridian GP above an 8% preferred return to Ironside, with the preferred return compounded quarterly. This carried interest is an "applicable partnership interest" within the meaning of IRC §1061, as added by the Tax Cuts and Jobs Act of 2017.

Under IRC §1061(a), net long-term capital gain with respect to an applicable partnership interest is treated as short-term capital gain (and thus taxed at ordinary income rates) to the extent such gain is attributable to assets held for less than three years. This three-year holding period requirement applies in lieu of the standard one-year holding period for long-term capital gain treatment under IRC §1222.

In the Reactivation Scenario, the holding period for purposes of IRC §1061 would begin upon the Vehicle's acquisition of equity in Cascadia (i.e., the closing date of the acquisition). The dormancy period does not create an applicable-partnership-interest issue in itself, because no investment has yet been made and no gain has been recognized. The mere existence of the carried interest arrangement during the dormancy period does not trigger §1061 consequences.

We note that the preferred return (8% compounded quarterly) accrues from the date of actual capital deployment — that is, from the date the Vehicle's capital is invested in Cascadia equity — and not from the dormancy period or from the date of the Vehicle's formation. Accordingly, the dormancy period does not affect the calculation of the preferred return hurdle or the point at which the carried interest begins to accrue economically.

From a planning perspective, if Ironside anticipates a holding period of less than three years for the Cascadia investment, the IRC §1061 three-year holding period would recharacterize any long-term capital gain allocable to the GP's carried interest as short-term capital gain. While this is primarily a concern for Meridian GP (as the carried interest holder), it could indirectly affect the overall Vehicle economics and the timing and amount of distributions to Ironside, to the extent the GP's tax position influences the GP's preferences regarding the timing of an exit or disposition of the Cascadia investment.

D. Impact of Potential Restructuring on Tax Treatment

The Meridian Reactivation Memo suggests that, depending on the outcome of the revised concession framework negotiations, Meridian may propose structural changes to the acquisition. These could include a revised equity split between Fund IV and the Vehicle, a modified co-invest allocation, or the formation of a new acquisition entity to replace or supplement Cascadia Acquisition Corp.

We address below the principal tax considerations that would arise in connection with each of these potential structural changes.

Contribution of Existing Assets to a Restructured Vehicle. If a restructured transaction requires the formation of a new co-investment vehicle, the Vehicle's existing assets — consisting primarily of cash (the working-capital reserve, net of expenses), the R&W insurance policy rights, and any recoverable due-diligence deposits — could be contributed to the new vehicle. Under IRC §721(a), no gain or loss is recognized by a partnership or any of its partners upon the contribution of property to a partnership in exchange for an interest in the partnership. Accordingly, if the Vehicle's assets are contributed to a new partnership (or if Ironside's interest in the Vehicle is contributed to a new partnership), such contribution would generally be a non-recognition event, provided it is properly structured.

Similarly, if a new co-investment vehicle is formed as a corporation (for example, a new acquisition subsidiary), a contribution of assets by the Vehicle to the new corporation could qualify for non-recognition treatment under IRC §351, provided the Vehicle (together with any other transferors) controls the new corporation immediately after the exchange. Control for purposes of §351 is defined as ownership of stock possessing at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock.

Transfer of Ironside's Partnership Interest. If Ironside transfers its interest in the Vehicle to a new co-investment vehicle (rather than the Vehicle itself contributing its assets), the transfer could take the form of a contribution of the partnership interest to the new vehicle. Under IRC §721, the contribution of a partnership interest to another partnership is generally a non-recognition event. However, care must be taken to ensure that the transfer does not result in a deemed exchange of the partnership interest for consideration other than a partnership interest in the new vehicle, which could trigger gain or loss recognition under IRC §741.

Disguised Sale Concerns. Particular caution is warranted if, in connection with a restructuring, Ironside receives distributions from the existing Vehicle contemporaneously with, or in anticipation of, contributions to a new vehicle. Under IRC §707(a)(2)(B) and the Treasury Regulations thereunder (Treas. Reg. §1.707-3 through §1.707-6), transfers of property by a partner to a partnership and related distributions from the partnership to the partner may be recharacterized as a disguised sale of property if, when viewed together, the transfers are more properly characterized as a sale or exchange. The regulations establish a two-year presumption: if a partner contributes property to a partnership and receives a distribution within two years of the contribution (or vice versa), the transactions are presumed to be a disguised sale unless the facts and circumstances clearly establish otherwise.

To avoid disguised sale characterization, any transition from the existing Vehicle to a new vehicle should be carefully sequenced and documented. We recommend that any distributions from the existing Vehicle and contributions to a new vehicle be separated by a reasonable period of time and that the transactions be documented as independent business decisions, supported by contemporaneous business justifications unrelated to one another. We are available to advise on the structuring and documentation of any such transition.

E. FERC Re-Filing and Regulatory Cost Allocation

The proposed Cascadia acquisition was subject to approval by the Federal Energy Regulatory Commission ("FERC") under Section 203 of the Federal Power Act (16 U.S.C. §824b). FERC approval was sought in Docket No. EC22-143-000, and a conditional order was issued on February 10, 2023. However, the FERC approval lapsed on June 15, 2024, due to the failure to consummate the transaction within the time period specified in the FERC order. In any Reactivation Scenario, a new Section 203 application would need to be filed with FERC, which would entail additional legal, regulatory, and consulting costs.

In addition, the Oregon Public Utility Commission ("OPUC") proceedings in Docket No. UM-2287, which related to the transfer of Cascadia's regulated utility assets, were stayed at the request of the parties on February 15, 2023. Un-staying those proceedings — and potentially supplementing or amending the application to reflect the revised concession framework and transaction economics — would entail additional regulatory costs.

The costs of the FERC re-filing and the OPUC proceedings would need to be analyzed for proper tax characterization. Depending on the nature of the specific costs, they may be treated as (i) organizational expenses of the Vehicle (to the extent they relate to the formation and structuring of the acquisition), (ii) capitalized transaction costs (to the extent they are incident to and directly facilitate the acquisition of Cascadia), or (iii) investment-related expenses (to the extent they relate to ongoing due diligence and analysis). The characterization of these costs will affect whether they are amortizable, capitalizable, or currently deductible, and should be determined on an item-by-item basis in coordination with KTA.

Under the Co-Investment Allocation Agreement, transaction costs are generally allocated between Fund IV and the Vehicle on a pro rata basis in proportion to their respective equity commitments — 71.43% to Fund IV and 28.57% to the Vehicle. Any regulatory re-filing costs would be subject to this allocation, and the Vehicle's 28.57% share would be reflected on the Vehicle's tax return and allocated to Ironside on its Schedule K-1.

IV. Federal Income Tax Analysis — Scenario B: Wind-Down and Liquidation

A. Triggering the Wind-Down

Under Section 7.04(c) of the LP Agreement, Ironside, as the sole limited partner holding more than 50% of the limited partnership interests, has the right to elect a wind-down of the Vehicle if the Vehicle has been dormant for a continuous period of 18 months or more. The dormancy period began on January 9, 2023, and the 18-month threshold was reached on July 9, 2024. Ironside's wind-down election right is therefore currently exercisable.

If Ironside elects to wind down the Vehicle, the General Partner would be required to undertake an orderly wind-down of the Vehicle's affairs, including (i) the payment or provision for all liabilities and obligations of the Vehicle, (ii) the recovery or disposition of all assets of the Vehicle (including any recoverable deposits and the R&W insurance policy), (iii) the distribution of remaining assets to the partners in accordance with the distribution waterfall set forth in Section 5.01 of the LP Agreement, and (iv) the filing of a Certificate of Cancellation with the Delaware Secretary of State.

The wind-down process would result in the return of uncommitted capital to Ironside. We emphasize that the return of uncommitted capital is not a taxable event, because unfunded capital commitments are not treated as capital contributions for tax purposes. Ironside's unfunded commitment of $277,497,225 has not been contributed to the Vehicle and therefore has no tax basis or tax consequence. The only amounts with tax significance are the $22,497,750 actually contributed by Ironside and the cumulative tax deductions and amortization allocated to Ironside during the Vehicle's existence.

B. Classification of Previously Incurred Expenses

The tax treatment of the Vehicle's previously incurred expenses is the central analytical question in the Wind-Down Scenario. Each category of expense is addressed below.

Organizational Expenses ($285,000). Organizational expenses of a partnership are defined in IRC §709(b)(3) as expenditures that are (i) incident to the creation of the partnership, (ii) chargeable to a capital account, and (iii) of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amortizable over such life. Under IRC §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 (reduced dollar-for-dollar for organizational expenses exceeding $50,000) and to amortize the remainder ratably over a 180-month period beginning with the month in which the partnership begins business.

A threshold question is whether the Vehicle ever "began business" for purposes of IRC §709(b). The commencement of business for a partnership is generally the date on which the partnership first engages in the activities for which it was organized. In the case of an investment partnership organized to acquire a specific target, there is authority for the position that the partnership begins business when it commences its investment activities — which could include performing due diligence and incurring expenses preparatory to the acquisition. However, other authority suggests that a partnership formed to acquire a specific asset does not begin business until the acquisition is consummated.

If the Vehicle is treated as having begun business (by virtue of its due-diligence and preparatory activities in 2022), then the organizational expenses have been subject to the §709(b) amortization election, and the Vehicle would have claimed approximately $285,000 × (number of months from business commencement through wind-down / 180) in cumulative amortization deductions. The unamortized balance at the time of wind-down would be deductible as a loss upon liquidation of the Vehicle under IRC §165.

If the Vehicle is treated as never having begun business, then the organizational expenses would not have been subject to the §709(b) election and would not have been amortized. In that case, the full $285,000 would be deductible as a loss upon liquidation under IRC §165, on the theory that the expenditures, having been capitalized, become worthless upon the termination of the partnership.

In either case, the organizational expenses would give rise to an ordinary deduction upon wind-down, either as the unamortized balance of §709(b) amortization or as an abandonment/worthlessness loss under §165.

Placement-Agent Fee ($1,050,000). The proper characterization of the $1,050,000 fee paid to Rivermark Capital Markets Inc. is a significant issue in the Wind-Down Scenario. Under IRC §709(a), syndication expenses — defined as expenditures connected with the issuing and marketing of interests in the partnership — are neither deductible nor amortizable. Unlike organizational expenses, for which a statutory amortization election is available, syndication expenses must be capitalized and receive no tax benefit during the life of the partnership. Importantly, the IRS has consistently taken the position that syndication expenses are not deductible even upon the termination or liquidation of a partnership. See, e.g., Treas. Reg. §1.709-2(b) (listing examples of syndication costs, including brokerage fees, registration fees, legal fees of the underwriter, and printing costs of the prospectus or placement memorandum).

The question is whether the Rivermark fee is properly classified as a syndication expense or as a transaction-advisory fee that should be treated as a capitalized cost of the proposed acquisition. If Rivermark's services were directed toward "selling" or "marketing" interests in the Vehicle to Ironside or other potential co-investors, the fee would be a syndication expense and would be permanently non-deductible — even upon wind-down. This would result in a loss of $1,050,000 in potential tax benefit.

However, if Rivermark's services were more properly characterized as advisory services related to the structuring and negotiation of the co-investment arrangement — rather than the marketing or sale of partnership interests — the fee could potentially be classified as a capitalized transaction cost under IRC §263, which would become deductible as an abandonment loss upon the termination of the transaction (as discussed below in connection with due-diligence costs). We recommend a detailed review of the Rivermark engagement letter and the scope of services actually performed to determine the appropriate classification. This is a fact-specific inquiry, and the distinction between syndication services and advisory services is often contested by the IRS.

This is a significant tax risk in the Wind-Down Scenario. If the placement-agent fee is classified as a syndication expense, Ironside would permanently lose the $1,050,000 deduction. We recommend that Ironside obtain and preserve documentation of the specific services performed by Rivermark, with a view toward supporting the position that the fee is a capitalized transaction cost rather than a syndication expense, if that position is supportable on the facts.

R&W Insurance Premium Deposit ($4,875,000). The Vehicle paid a premium deposit of $4,875,000 to Northgate Specialty Insurance Co. on September 2, 2022, for a representations-and-warranties insurance policy (Policy No. NSW-RI-2022-09814) with a coverage limit of $195 million (representing 10% of the $1,950,000,000 enterprise value). The policy was bound on September 1, 2022, and is currently in tolling status pursuant to a side letter between the Vehicle and Northgate Specialty dated January 20, 2023. The policy is governed by Connecticut law.

The tax treatment of the R&W insurance premium deposit upon wind-down depends on whether the deposit is recoverable (in whole or in part) from Northgate Specialty. We understand that the Side Letter provides for a tolling of the policy during the dormancy period but does not expressly address the refundability of the premium deposit upon termination of the policy. This is a contractual question that should be resolved with Northgate Specialty before the wind-down election is formally exercised.

(a) If the premium deposit is fully non-refundable, the entire $4,875,000 would be treated as a loss upon abandonment of the transaction. The character of this loss — ordinary versus capital — depends on the proper classification of the premium deposit. We recommend treating the premium as an ordinary business expense (insurance cost) that was capitalized in anticipation of the acquisition, in which case the loss upon abandonment would be an ordinary loss under IRC §165.

(b) If the premium deposit is partially refundable, the non-refunded portion would be treated as a loss upon abandonment (as described above), and the refunded portion would be returned to the Vehicle as cash, reducing the aggregate loss recognized by the Vehicle upon liquidation.

(c) If the premium deposit is fully refundable, the full $4,875,000 would be returned to the Vehicle as cash and distributed to the partners as part of the liquidating distribution. No loss would be recognized with respect to the premium deposit itself.

We strongly recommend that Ironside and the General Partner engage with Northgate Specialty to determine the recoverability of the premium deposit before any wind-down election is made, as the outcome will materially affect the tax consequences and the net cash proceeds available for distribution to Ironside.

Due-Diligence Costs and Deposits ($12,790,000). The Vehicle incurred $12,790,000 in due-diligence costs and deposits in connection with the proposed Cascadia acquisition. These costs include legal fees, financial advisory fees, technical and engineering studies, environmental assessments, regulatory analysis, and earnest money or exclusivity deposits paid to Cascadia or its shareholders.

Under IRC §263 and the regulations thereunder, costs that are incurred in connection with the acquisition of a trade or business — including investigatory costs, legal and accounting fees, and other costs that "facilitate" the acquisition — must be capitalized as part of the cost of the acquisition. See Treas. Reg. §1.263(a)-5 (requiring capitalization of amounts paid to facilitate an acquisition of a trade or business). These capitalized costs are added to the basis of the acquired assets and recovered through depreciation, amortization, or upon disposition of the acquired assets.

However, if the proposed acquisition is abandoned — that is, if the taxpayer makes a definitive decision not to consummate the transaction — the capitalized costs become deductible as a loss in the year of abandonment. See Rev. Rul. 73-580, 1973-2 C.B. 86 (holding that expenditures incurred in investigating the acquisition of a specific business that is subsequently abandoned are deductible as a loss in the year the project is abandoned); see also Rev. Rul. 77-254, 1977-2 C.B. 63 (applying the same principle to abandoned capital projects).

The abandonment must be evidenced by an "identifiable event" — a concrete act or occurrence that demonstrates the taxpayer's decision to abandon the transaction. In the Wind-Down Scenario, the formal exercise of the wind-down election by Ironside under Section 7.04(c) of the LP Agreement would constitute such an identifiable event. We recommend that the wind-down election be documented in writing, with a clear statement that the Vehicle is abandoning the proposed Cascadia acquisition, to establish the identifiable event for purposes of the abandonment loss deduction.

The character of the abandonment loss for capitalized transaction costs is ordinary. Under Rev. Rul. 73-580, the loss deduction arises under IRC §165(a), which permits a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." Because the capitalized transaction costs do not constitute a "capital asset" or "property used in the trade or business" (within the meaning of IRC §1221 or §1231), the loss is not subject to the capital loss limitations and is deductible as an ordinary loss.

This is a significant tax benefit in the Wind-Down Scenario: the $12,790,000 in capitalized due-diligence costs and deposits would be deductible as an ordinary loss in the year of the wind-down election, subject to the Vehicle's ability to demonstrate the identifiable-event requirement and the proper capitalization of the underlying costs.

Working-Capital Reserve ($3,500,000). The working-capital reserve represents cash held by the Vehicle that has not been deployed toward the acquisition or other capital expenditures. During the dormancy period, a portion of the working-capital reserve has been used to fund the Vehicle's ongoing operating expenses (estimated at approximately $185,000 per year, or approximately $462,500 cumulatively through mid-2024). The remaining balance of the working-capital reserve (approximately $3,037,500, subject to adjustment for additional dormancy expenses through the date of actual wind-down) would be distributed to Ironside as part of the liquidating distribution.

The distribution of cash to Ironside in the course of the Vehicle's liquidation does not give rise to gain or loss to the extent the amount of cash distributed does not exceed Ironside's outside basis in its partnership interest. See IRC §731(a)(1) (no gain recognized on distribution of money by a partnership to a partner except to the extent the amount of money distributed exceeds the adjusted basis of the partner's interest). Given that Ironside's outside basis (approximately $22,035,296, subject to adjustments described herein) is expected to substantially exceed the amount of cash available for distribution, no gain would be recognized on the distribution of the working-capital reserve.

C. Loss Recognition Upon Liquidation

Upon the complete liquidation of the Vehicle, Ironside would recognize a loss to the extent its outside basis in its partnership interest exceeds the amount of cash and the fair market value of property received in the liquidating distribution. Under IRC §731(a)(2), a loss is recognized by a partner upon the liquidation of a partnership interest only if the distribution consists solely of money, unrealized receivables (as defined in IRC §751(c)), and inventory (as defined in IRC §751(d)). Because the Vehicle's assets at wind-down are expected to consist primarily (or entirely) of cash and receivables (e.g., any right to recover the R&W insurance deposit), this requirement is expected to be satisfied.

The loss recognized by Ironside upon liquidation would be a capital loss. Under IRC §731(a)(2), the loss is treated as a loss from the sale or exchange of the partnership interest, which is a capital asset in the hands of Ironside. Because Ironside has held its partnership interest for more than one year (since July 22, 2022), the loss would be a long-term capital loss, subject to the capital loss limitation rules under IRC §1211 and §1212.

Estimated Loss Computation. The approximate loss that Ironside would recognize upon liquidation of the Vehicle can be estimated as follows, subject to the significant caveats noted below:

The net loss figure is subject to adjustment depending on (i) the recoverability of the R&W insurance premium deposit, (ii) the recoverability of any portion of the due-diligence deposits, (iii) the characterization of the placement-agent fee (syndication expense vs. capitalized transaction cost), (iv) the precise amount of dormancy expenses through the date of liquidation, and (v) any organizational expense amortization deductions already claimed.

We note that a portion of this loss may be recognized as an ordinary loss (through the Vehicle-level deductions for abandoned transaction costs and organizational expenses under IRC §165, as discussed in Section IV.B above), and a portion may be recognized as a capital loss (upon the liquidation of Ironside's partnership interest under IRC §731(a)(2)). The interplay between these two categories of loss is discussed in Section IV.D below.

D. Character of Losses

The character of the losses recognized in the Wind-Down Scenario is an important consideration for Ironside, given the different tax treatment of ordinary losses and capital losses. We summarize below the expected character of each category of loss:

(a) Abandonment losses for capitalized transaction costs ($12,790,000): Ordinary deduction under IRC §165, as discussed in Section IV.B above. This is the single largest source of tax benefit in the Wind-Down Scenario.

(b) Capital loss on liquidation of partnership interest: Capital loss under IRC §731(a)(2), computed as the excess of Ironside's outside basis over the amount of cash received in the liquidating distribution (after giving effect to the ordinary deductions described above). The capital loss would be a long-term capital loss, subject to the capital loss limitation rules. For a partnership such as Ironside, the capital loss would flow through to Ironside's own partners and would be subject to the capital loss limitations applicable to each such partner individually.

(c) Organizational expense deduction upon termination ($285,000, less any previously claimed amortization): Ordinary deduction under IRC §709(b) and §165, as discussed in Section IV.B above.

(d) Placement-agent fee ($1,050,000): If classified as a syndication expense, permanently non-deductible (no loss recognized). If classified as a capitalized transaction cost, ordinary deduction upon abandonment under IRC §165, as discussed in Section IV.B above.

(e) R&W insurance premium deposit ($4,875,000): If non-recoverable, deductible as an ordinary loss under IRC §165 (recommended characterization). If partially recoverable, the non-refunded portion is deductible as an ordinary loss.

Ironside should consider the overall mix of ordinary and capital losses and, to the extent permissible, structure the wind-down to maximize the amount of ordinary loss deductions. Specifically, the Vehicle should claim the abandonment loss deductions at the partnership level (on the Vehicle's final partnership return) before the liquidating distribution is made to Ironside. This sequencing would reduce the Vehicle's inside basis in its assets (by reflecting the deductions), which in turn would reduce the amount of the liquidating distribution and increase the ordinary deduction component of the overall loss, while reducing the capital loss component. Because ordinary losses are generally more valuable than capital losses (due to the absence of capital loss limitations on ordinary deductions), this sequencing is advantageous to Ironside.

E. Impact on Ironside's Other Funds and Positions

Ironside manages approximately $14.8 billion in total assets under management, of which approximately $3.2 billion is invested in infrastructure-related assets across three vehicles (Fund IV, the Vehicle, and a separate infrastructure credit fund). Losses recognized by Ironside upon the wind-down of the Vehicle would flow through to Ironside's partners and could potentially offset gains recognized by those partners in connection with other infrastructure investments or other portfolio positions.

We recommend that Ironside's internal tax team coordinate with our firm and with KTA regarding the timing of the wind-down election and the filing of the Vehicle's final partnership return. If Ironside's other funds are expected to recognize significant gains in a particular taxable year, timing the wind-down to occur in that same year could maximize the tax benefit of the losses. Conversely, if Ironside's partners are not expected to have sufficient gains to absorb the capital loss component of the wind-down losses, deferring the wind-down (if commercially feasible and consistent with the terms of the LP Agreement) could be considered, although we note that the continuing dormancy expenses would reduce the net benefit of any such deferral.

V. State and Local Tax Considerations

A. Delaware. ICM Cascadia Co-Invest, LP is a Delaware limited partnership and is therefore subject to Delaware's annual franchise tax, which is $300 per year for a limited partnership. Delaware does not impose an income tax on partnership income or loss, and accordingly, the Vehicle's income, deductions, and losses are not subject to Delaware income tax at the entity level. Similarly, Ironside, as a nonresident limited partner, is not subject to Delaware income tax on its allocable share of the Vehicle's income or loss.

Upon wind-down, the following Delaware compliance steps would be required:

(a) Filing of the Vehicle's final annual report with the Delaware Secretary of State, together with payment of any outstanding franchise tax;

(b) Filing of a Certificate of Cancellation with the Delaware Secretary of State to cancel the Vehicle's Certificate of Limited Partnership (File No. 7439218); and

(c) Termination of the Vehicle's engagement with its Delaware registered agent, Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, DE 19904.

In the Reactivation Scenario, the Vehicle would continue to file its annual report and pay the annual franchise tax. No additional Delaware filings or registrations would be required in connection with the reactivation itself, although additional registrations may be required if the acquisition closes and the Vehicle acquires assets or conducts business activities in other states (as discussed below).

B. Oregon. Cascadia Renewables Holdings, Inc. is an Oregon corporation, and the proposed Cascadia acquisition involves the acquisition of assets and operations located primarily in Oregon, including the Bull Run Filtration Project concession. The Vehicle's activities to date have been limited to due diligence and preparatory work related to the Oregon-based target, and no operational income has been earned by the Vehicle from Oregon sources.

Reactivation Scenario. If the acquisition closes, the Vehicle would hold an indirect interest in Cascadia's Oregon-based operations, and Ironside would have Oregon-source income flowing through the Vehicle. Oregon imposes income tax on a nonresident partner's share of Oregon-source income derived from a partnership doing business in Oregon. See ORS §316.127; ORS §314.772. The Vehicle would be required to file Oregon partnership returns, and Ironside (or its partners, depending on the filing obligations applicable to tiered partnership structures) would be required to report its allocable share of Oregon-source income on its Oregon nonresident return. The Oregon personal income tax rate ranges up to 9.9% (for tax year 2024), and the Oregon corporate excise tax rate is 6.6% (7.6% on taxable income in excess of $1 million). The applicable rate and filing obligations would depend on the character of Ironside's partners and the structure of the flow-through.

This would create a significant and ongoing compliance obligation for Ironside and should be factored into the cost-benefit analysis of the Reactivation Scenario. We recommend that Ironside evaluate whether a blocker entity or other structuring technique is appropriate to manage the Oregon tax compliance burden for its investors, particularly any tax-exempt or foreign investors who may have specific concerns regarding state income tax exposure.

Wind-Down Scenario. If the Vehicle is wound down without consummating the acquisition, the Vehicle would have no Oregon-source income (only pre-acquisition expenses, which are not allocable to Oregon sources). In that case, the Vehicle's Oregon filing obligations are likely limited. However, we recommend confirming whether the Vehicle's due-diligence activities in Oregon — including the payment of deposits to Oregon-based entities and the engagement of Oregon-based consultants and advisors — created sufficient nexus for Oregon to assert filing obligations. Oregon's nexus standards for pass-through entities are broad, and the Oregon Department of Revenue has taken aggressive positions in certain cases regarding the filing obligations of out-of-state partnerships with even limited Oregon connections.

We note that Oregon SB 1567 (2022), the regulatory change that triggered the Bull Run concession renegotiation, does not have direct tax implications for the Vehicle or Ironside. However, to the extent SB 1567 affects the economics of the Cascadia investment (by reducing the concession revenue or altering the regulatory framework), it may indirectly affect the tax analysis in a Reactivation Scenario by changing the projected income, deductions, and returns from the investment.

C. Other States (Washington and Idaho)

Cascadia operates facilities in Washington and Idaho, and the proposed acquisition would give the Vehicle an indirect interest in those operations.

Washington. Washington does not impose a state income tax. However, Cascadia's Washington operations are subject to the Washington Business and Occupation ("B&O") tax, which is a gross receipts tax imposed on the privilege of doing business in Washington. The B&O tax is imposed at the entity level (on Cascadia) and would not directly flow through to the Vehicle or Ironside. However, the B&O tax burden on Cascadia's Washington operations would reduce Cascadia's overall profitability and therefore indirectly affect the returns available to the Vehicle's investors.

In the Wind-Down Scenario, the Vehicle has no Washington-source income and no Washington filing obligations. In the Reactivation Scenario, the Vehicle would not be directly subject to the B&O tax (which is imposed on Cascadia at the entity level), but Ironside should be aware of the B&O tax burden on Cascadia's operations when evaluating the after-tax economics of the investment.

Idaho. Idaho imposes income tax on pass-through income allocable to Idaho sources. If the acquisition closes, the Vehicle (and, by extension, Ironside) would have Idaho-source income flowing through Cascadia's Idaho operations, and the Vehicle would be required to file Idaho partnership returns. The Idaho individual income tax rate ranges up to 5.8% (for tax year 2024), and the Idaho corporate income tax rate is 5.8%. As with Oregon, this would create an ongoing state tax compliance obligation in the Reactivation Scenario.

In the Wind-Down Scenario, the Vehicle has no Idaho-source income and no Idaho filing obligations.

D. New York

Ironside Capital Management LP is headquartered at 590 Madison Avenue, 38th Floor, New York, NY 10022. Any income or loss allocated to Ironside from the Vehicle flows through to Ironside's New York tax position.

New York treats partnership income and loss on a flow-through basis. Losses recognized by Ironside on the wind-down of the Vehicle — whether ordinary abandonment losses or capital losses from the liquidation of the partnership interest — would be includable in Ironside's New York income tax computation. To the extent Ironside's partners are New York residents or the income/loss is allocable to New York sources, the losses would reduce Ironside's (or its partners') New York tax liability.

New York imposes a personal income tax at rates up to 10.9% (for tax year 2024) and a corporate franchise tax at an effective rate of 7.25% for most corporations (with a capital base tax alternative). The applicable rate depends on the character of Ironside's partners and the structure of the flow-through. We recommend that Ironside's internal tax team model the New York tax impact of the wind-down losses in the context of Ironside's overall New York tax position.

VI. UBTI Analysis (Update)

Our original ERISA and benefit plan investor analysis memorandum dated July 27, 2022, confirmed that the Vehicle is not subject to the plan-asset rules under ERISA and the Department of Labor's regulations thereunder (29 C.F.R. §2510.3-101, as modified by Section 3(42) of ERISA), based on the Vehicle's investment structure and the composition of its investors. That conclusion remains unchanged.

However, certain of Ironside's upstream investors — that is, the limited partners in Ironside's fund vehicles — may be tax-exempt entities (including pension funds, endowments, foundations, and other organizations described in IRC §501(c)(3) or §501(a)). For such investors, the unrelated business taxable income ("UBTI") rules under IRC §511 through §514 are relevant to the extent the Vehicle's investment activities involve debt-financed property.

Wind-Down Scenario. In the Wind-Down Scenario, no acquisition has been consummated, no debt-financed property has been acquired by the Vehicle, and the Vehicle's assets consist solely of cash and contractual rights (the R&W insurance policy rights and any recoverable deposits). Accordingly, there is no UBTI concern in the Wind-Down Scenario.

Reactivation Scenario. In the Reactivation Scenario, if new debt financing is obtained to fund the Cascadia acquisition (the original Atlas National Bank/Pinnacle Credit Partners commitment letter having expired on October 31, 2023), the acquisition of Cascadia's equity with leveraged financing could generate UBTI for any tax-exempt investors in Ironside's upstream fund structure. Under IRC §514, income from "debt-financed property" — defined as property that is held to produce income and with respect to which there is "acquisition indebtedness" — is treated as UBTI to the extent of the debt-to-basis ratio of the property. If the Cascadia acquisition is financed in part with debt, the Vehicle's share of the acquisition-level debt could constitute acquisition indebtedness with respect to the Cascadia equity, thereby generating UBTI for tax-exempt investors.

Ironside's tax team should evaluate whether the use of a "Blocker" entity (typically a domestic C corporation interposed between the tax-exempt investor and the debt-financed investment) is appropriate to insulate tax-exempt investors from UBTI exposure. The costs and benefits of a blocker entity — including the additional layer of corporate income tax and the administrative complexity — should be weighed against the UBTI exposure that would result from a direct investment through the partnership structure.

We note that the UBTI analysis is relevant to Ironside's upstream investors rather than to Ironside itself (which is not a tax-exempt entity). However, if Ironside determines that a significant portion of its investor base consists of tax-exempt entities, the UBTI implications of the Reactivation Scenario should be addressed as part of the investment decision-making process.

VII. Carried Interest and IRC §1061 Implications

The Vehicle's LP Agreement provides for a carried interest allocation of 10% to Meridian GP above an 8% preferred return to Ironside (compounded quarterly). As noted in Section III.C above, this carried interest constitutes an "applicable partnership interest" within the meaning of IRC §1061.

Under IRC §1061(a), if a taxpayer holds an applicable partnership interest, the taxpayer's net long-term capital gain with respect to such interest for the taxable year is treated as short-term capital gain to the extent the gain is attributable to assets held for less than three years. This effectively extends the holding period required for long-term capital gain treatment from one year to three years for gain allocable to carried interests.

The implications of IRC §1061 differ under the two scenarios:

Wind-Down Scenario. In the Wind-Down Scenario, the Vehicle has not consummated any investment and has generated no gains. The carried interest has no economic value (because no gains above the preferred return have been earned), and no carried interest distributions have been or will be made to Meridian GP. Accordingly, IRC §1061 has no application in the Wind-Down Scenario. The carried interest provision in the LP Agreement simply expires, with no tax consequences.

Reactivation Scenario. In the Reactivation Scenario, the holding period for IRC §1061 purposes would begin upon the Vehicle's acquisition of equity in Cascadia (i.e., the closing date of the acquisition). If the Cascadia investment is subsequently disposed of within three years of the acquisition date, any gain allocable to Meridian GP's carried interest would be recharacterized as short-term capital gain under IRC §1061(a). If the investment is held for three years or more, the gain would qualify for long-term capital gain treatment.

While this is primarily a concern for Meridian GP (as the holder of the carried interest), it could affect the overall economics of the Vehicle and the timing of distributions to Ironside. If Meridian GP faces the prospect of short-term capital gain treatment on its carried interest, it may have an economic incentive to defer the disposition of the Cascadia investment until the three-year holding period has been satisfied. This could influence the exit strategy and timing of distributions to all partners, including Ironside.

We recommend that Ironside consider the IRC §1061 implications in connection with any discussions with Meridian regarding the Reactivation Scenario and the expected investment holding period.

VIII. R&W Insurance Policy — Tax Treatment Under Each Scenario

The Vehicle's representations-and-warranties insurance policy (Policy No. NSW-RI-2022-09814) was issued by Northgate Specialty Insurance Co., a Connecticut-domiciled insurer, with a coverage limit of $195 million (representing 10% of the $1,950,000,000 enterprise value of Cascadia). The premium deposit of $4,875,000 (reflecting a 2.5% premium rate on the $195 million coverage limit) was paid by the Vehicle on September 2, 2022. The policy was bound on September 1, 2022, and is currently in tolling status pursuant to the Side Letter between the Vehicle and Northgate Specialty dated January 20, 2023. The policy is governed by Connecticut law.

A. Reactivation Scenario

If the Reactivation Scenario proceeds, the R&W insurance policy would be reactivated and un-tolled, and the $4,875,000 premium deposit would be applied toward the policy premium. Depending on the terms of the reactivated policy, additional premium may be due at or before closing of the Cascadia acquisition — for example, if the coverage limit is adjusted to reflect a revised enterprise value, or if Northgate Specialty imposes an additional premium to account for the extended tolling period or changed risk profile.

For tax purposes, the R&W insurance premium would be treated as a capitalized cost of the acquisition. Under Treas. Reg. §1.263(a)-5, amounts paid to facilitate an acquisition of a trade or business must be capitalized, and insurance premiums incurred in connection with the acquisition are generally treated as facilitative costs. The capitalized premium would be added to the Vehicle's basis in the acquired Cascadia equity and would be recovered through depreciation, amortization, or upon disposition of the Cascadia investment.

Alternatively, if the R&W insurance premium is allocable to a specific post-closing indemnification obligation rather than to the acquisition itself, there may be an argument for treating the premium as a deductible business expense under IRC §162 in the year paid or incurred. This characterization is less certain and would depend on the specific terms of the policy and the allocation of the premium between acquisition-facilitative

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 125 Broad Street, 44th Floor New York, NY 10004 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
MEMORANDUM
I. Executive Summary and Purpose
This memorandum updates our prior tax structuring analysis dated July 15, 2022, as well as the supplemental K-1 review memoranda prepared in connection with the federal and state partnership tax returns of ICM Cascadia Co-Invest, LP (the "Vehicle") for tax years 2022 and 2023 (dated March 17, 2023, and March 22, 2024, respectively). We have prepared this updated analysis at the request of Marcus J. Calloway and Renata Obasi in light of the two distinct paths now confronting Ironside Capital Management LP ("Ironside") with respect to the Vehicle: (a) reactivation of the underlying transaction and the co-investment vehicle (the "Reactivation Scenario"), or (b) wind-down and liquidation of the Vehicle (the "Wind-Down Scenario").
By way of background, the Vehicle — ICM Cascadia Co-Invest, LP (EIN 88-3921457; Delaware Secretary of State File No. 7439218) — has been dormant since January 9, 2023, when Meridian Infrastructure Partners LP ("Meridian") suspended all transaction-related activities following the enactment of Oregon SB 1567 and the resulting renegotiation of the Bull Run Filtration Project concession between Cascadia Renewables Holdings, Inc. ("Cascadia") and the Portland Metropolitan Water District. The 18-month wind-down election right provided under Section 7.04(c) of the Amended and Restated Agreement of Limited Partnership of ICM Cascadia Co-Invest, LP, dated July 22, 2022 (the "LP Agreement"), ripened on July 9, 2024. As of the date of this memorandum, Ironside has not exercised that election.
On September 1, 2024, Meridian circulated a reactivation feasibility memorandum (the "Meridian Reactivation Memo") to the limited partners of Meridian Infrastructure Partners Fund IV, LP ("Fund IV") and to Ironside in its capacity as the sole limited partner of the Vehicle. That memorandum outlined the potential for reviving the Cascadia acquisition on revised terms, reflecting a tentative revised concession framework that was reached on June 30, 2024, between Cascadia and the Portland Metropolitan Water District. The revised concession framework has not yet been finalized and remains subject to further negotiation and regulatory approval.
This memorandum addresses the federal and state income tax consequences of each of the two scenarios for Ironside in its capacity as the 99.99% limited partner in the Vehicle. Specifically, we analyze: (i) the treatment of the Vehicle as a continuing partnership versus a liquidating partnership; (ii) the classification and deductibility of previously incurred expenses — including organizational expenses, the placement-agent fee, the representations-and-warranties insurance premium deposit, due-diligence costs, and dormancy-period operating expenses; (iii) gain and loss recognition upon liquidation or, alternatively, the basis adjustments that would accompany reactivation and further capital deployment; (iv) state and local tax considerations in Delaware, Oregon, Washington, Idaho, and New York; (v) the implications for unrelated business taxable income ("UBTI") with respect to tax-exempt investors upstream in Ironside's fund structure; (vi) carried interest and IRC §1061 considerations; and (vii) potential restructuring considerations if the economics of the underlying Cascadia transaction change materially from the terms originally agreed.
We emphasize at the outset that the tax analysis in this memorandum is necessarily preliminary in certain respects, particularly with regard to the Reactivation Scenario, where the revised transaction economics are not yet finalized. We recommend that this analysis be revisited and updated once Ironside has made a determination regarding its preferred path, and once additional information regarding the revised concession framework and financing terms becomes available. We remain available to model specific scenarios and to coordinate with Ironside's internal tax team and with Kendrick Thorne & Associates LLP ("KTA"), the Vehicle's fund administrator and tax preparer, as the decision-making process proceeds.
II. Background: Vehicle Structure and Tax Classification
A. Entity Overview
ICM Cascadia Co-Invest, LP is a Delaware limited partnership formed on July 22, 2022, pursuant to a Certificate of Limited Partnership filed with the Delaware Secretary of State (File No. 7439218) and the LP Agreement entered into as of the same date. The Vehicle was organized for the specific purpose of co-investing alongside Fund IV in the proposed acquisition of Cascadia Renewables Holdings, Inc., an Oregon corporation engaged in the development, ownership, and operation of renewable energy and water infrastructure assets in the Pacific Northwest.
The Vehicle's partners and their respective interests are as follows:
Meridian Infrastructure GP IV LLC (the "General Partner" or "Meridian GP") serves as the general partner of the Vehicle and is responsible for the management and conduct of the Vehicle's business, subject to the terms and conditions of the LP Agreement. Meridian GP is an affiliate of Meridian Infrastructure Partners LP, the sponsor of Fund IV.
Ironside Capital Management LP is a Delaware limited partnership that serves as the sole limited partner of the Vehicle. Ironside is a registered investment adviser with the U.S. Securities and Exchange Commission and, as of its most recent Form ADV filing, reported total regulatory assets under management of approximately $14.8 billion. Ironside's principal office is located at 590 Madison Avenue, 38th Floor, New York, NY 10022.
For federal income tax purposes, the Vehicle is classified as a partnership. No election has been made, or is currently contemplated, under Treasury Regulation §301.7701-3 to treat the Vehicle as an association taxable as a corporation. The Vehicle's Employer Identification Number is 88-3921457.
The Vehicle's fund administrator and tax return preparer is Kendrick Thorne & Associates LLP, located at One Liberty Plaza, Suite 4100, New York, NY 10006. KTA has prepared the Vehicle's federal and state partnership tax returns (Form 1065 and applicable state returns) for tax years 2022 and 2023 and has issued the corresponding Schedules K-1 to Ironside and Meridian GP in each of those years.
B. Capital Contributions and Current Financial Position
Since its formation, the Vehicle has made a single capital call. On August 15, 2022, the General Partner issued a capital call notice pursuant to Section 3.02(a) of the LP Agreement, calling $22,500,000 in aggregate capital contributions from the partners (representing 7.5% of the total $300,000,000 committed capital). Ironside's share of this capital call was $22,497,750 (99.99%), and Meridian GP's share was $2,250 (0.01%).
The proceeds of this capital call were applied as follows:
The Vehicle's unfunded capital commitment as of the date of this memorandum is $277,500,000 ($277,497,225 attributable to Ironside; $2,775 attributable to Meridian GP).
During the dormancy period (from approximately January 9, 2023, to the present), the Vehicle has continued to incur operating expenses at an estimated annual rate of approximately $185,000. These dormancy-period expenses consist principally of fund administration fees paid to KTA, fees paid to the Vehicle's Delaware registered agent (Cascade Systems, 160 Greentree Drive, Suite 101, Dover, DE 19904), Delaware annual franchise tax ($300 per year for a Delaware limited partnership), annual audit fees, and K-1 preparation costs. These expenses have been funded from the working-capital reserve.
We note that the Vehicle is not subject to a management fee. Pursuant to a side letter between Ironside and Meridian GP dated July 29, 2022 (the "Side Letter"), the standard management fee that would otherwise be payable under the LP Agreement was waived in its entirety in consideration of Ironside's commitment to co-invest on the terms set forth in the Co-Investment Allocation Agreement.
The carried interest structure applicable to the Vehicle provides for a 10% carried interest allocation to Meridian GP above an 8% preferred return to Ironside, with the preferred return compounded on a quarterly basis. This carried interest rate is reduced from the 20% carried interest applicable to Fund IV's main partnership, reflecting the co-investment economics negotiated between Ironside and Meridian.
C. Underlying Transaction Economics (for Reference)
For context and reference in connection with the tax analysis that follows, we summarize below the key economics of the proposed Cascadia acquisition as originally agreed prior to the dormancy period. We understand that these economics may change materially in a Reactivation Scenario, and we address the tax implications of potential changes in Section X below.
The target of the proposed acquisition is Cascadia Renewables Holdings, Inc., an Oregon corporation. Cascadia's principal assets include renewable energy generation facilities and water infrastructure concessions in Oregon, Washington, and Idaho, including the Bull Run Filtration Project concession with the Portland Metropolitan Water District, which generates annual revenue of approximately $64 million (subject to the ongoing renegotiation described above).
The key financial parameters of the originally proposed acquisition were as follows:
The proposed acquisition was to be financed in part with a $975 million senior secured term loan (with Atlas National Bank, N.A., committing $650 million and Pinnacle Credit Partners LLC committing $325 million) and a $150 million revolving credit facility. The debt financing commitment letter expired on October 31, 2023, and no replacement commitment has been obtained as of the date of this memorandum. In any Reactivation Scenario, new debt financing would need to be arranged, and the terms and structure of such financing could have material tax implications (as discussed in Sections VI and X.C below).
The proposed acquisition was to be effected through Cascadia Acquisition Corp., a newly formed Delaware corporation, which would serve as the direct acquisition vehicle. The Vehicle and Fund IV would contribute their respective equity commitments to Cascadia Acquisition Corp. (or a holding entity above it), which would in turn acquire 100% of the outstanding equity of Cascadia.
III. Federal Income Tax Analysis — Scenario A: Reactivation
A. Treatment of Vehicle as Continuing Partnership
If Ironside determines to pursue the Reactivation Scenario, the Vehicle would continue in existence as a partnership for federal income tax purposes. The resumption of active operations and the deployment of capital toward the Cascadia acquisition would not constitute a termination or deemed termination of the partnership under IRC §708. We note that the technical termination rule formerly contained in IRC §708(b)(1)(B), which treated a partnership as terminated upon the sale or exchange of 50% or more of the total interest in partnership capital and profits within a 12-month period, was repealed by the Tax Cuts and Jobs Act of 2017, effective for partnership taxable years beginning after December 31, 2017. Accordingly, there is no risk that a change in the composition of the Vehicle's partnership or a restructuring of interests would inadvertently trigger a deemed termination.
As a continuing partnership, all previously incurred expenses that remain on the Vehicle's books — including organizational expenditures, capitalized transaction costs, deposits, and the R&W insurance premium deposit — would continue to be treated in accordance with their original classification. Specifically:
(a) Organizational expenses that have been or are being amortized under IRC §709(b) would continue to be amortized over the original 180-month amortization period, beginning with the month in which the partnership commenced business (to the extent the partnership has been deemed to have "begun business" for purposes of §709(b));
(b) Capitalized transaction costs (including due-diligence costs and deposits) would continue to be carried on the Vehicle's books as capitalized expenditures and would be allocated to the basis of the acquired assets upon closing of the Cascadia acquisition; and
(c) The R&W insurance premium deposit would be treated as a capitalized cost of the proposed acquisition, to be allocated and amortized or deducted as appropriate upon closing.
Ironside's outside basis in its partnership interest in the Vehicle is currently approximately $22,497,750 (its contributed capital), reduced by its allocable share of deductions for dormancy-period operating expenses claimed by the Vehicle on its partnership returns for tax years 2022, 2023, and 2024 (estimated at approximately 99.99% × $462,500 cumulative dormancy expenses through mid-2024, or approximately $462,454 in cumulative allocated deductions), and further adjusted for any organizational expense amortization deductions allocated to Ironside in those years. We refer to our K-1 review memoranda dated March 17, 2023, and March 22, 2024, for the specific allocation amounts reflected on Ironside's Schedules K-1 for tax years 2022 and 2023, respectively. The precise outside basis as of the date of reactivation will need to be confirmed with KTA in connection with the preparation of the Vehicle's tax year 2024 return.
Critically, no taxable event is triggered by the mere reactivation of the Vehicle or the resumption of capital deployment activities. Reactivation is simply a continuation of the Vehicle's operations, and the resumption of capital calls would increase Ironside's outside basis on a dollar-for-dollar basis as additional contributions are made.
B. Capital Calls and Basis Adjustments Upon Reactivation
If the Reactivation Scenario proceeds, the General Partner would issue additional capital call notices to fund the Vehicle's equity contribution to the Cascadia acquisition and related transaction costs. The maximum additional amount that could be called is the remaining $277,500,000 unfunded commitment ($277,497,225 attributable to Ironside).
Each additional capital contribution made by Ironside to the Vehicle would increase Ironside's outside basis in its partnership interest under IRC §722, which provides that the basis of a contributing partner's interest in a partnership is increased by the amount of money contributed. This is a straightforward mechanical adjustment and would be computed and documented by KTA in the ordinary course.
However, if the economics of the Cascadia transaction change as a result of the revised concession framework — for example, if the enterprise value of Cascadia is reduced from the original $1,950,000,000, resulting in a lower equity requirement — the amount of capital actually called by the General Partner may be less than the full unfunded commitment. In such case, Ironside's outside basis would increase only by the amount of additional capital actually contributed.
Any change in the amount of equity required could also affect the allocation provisions contained in the LP Agreement and the Co-Investment Allocation Agreement dated July 22, 2022, between Fund IV and the Vehicle. Under the Co-Investment Allocation Agreement, the Vehicle is entitled to co-invest 28.57% of the total equity commitment alongside Fund IV (71.43%). If the total equity requirement is reduced, the parties would need to determine whether the co-invest allocation percentage remains constant (resulting in a proportionate reduction in both Fund IV's and the Vehicle's commitments) or whether one party's commitment is reduced disproportionately. We discuss the tax implications of changes to the co-invest allocation in Section X.A below.
C. Carried Interest Considerations
The Vehicle's LP Agreement provides for a carried interest allocation of 10% to Meridian GP above an 8% preferred return to Ironside, with the preferred return compounded quarterly. This carried interest is an "applicable partnership interest" within the meaning of IRC §1061, as added by the Tax Cuts and Jobs Act of 2017.
Under IRC §1061(a), net long-term capital gain with respect to an applicable partnership interest is treated as short-term capital gain (and thus taxed at ordinary income rates) to the extent such gain is attributable to assets held for less than three years. This three-year holding period requirement applies in lieu of the standard one-year holding period for long-term capital gain treatment under IRC §1222.
In the Reactivation Scenario, the holding period for purposes of IRC §1061 would begin upon the Vehicle's acquisition of equity in Cascadia (i.e., the closing date of the acquisition). The dormancy period does not create an applicable-partnership-interest issue in itself, because no investment has yet been made and no gain has been recognized. The mere existence of the carried interest arrangement during the dormancy period does not trigger §1061 consequences.
We note that the preferred return (8% compounded quarterly) accrues from the date of actual capital deployment — that is, from the date the Vehicle's capital is invested in Cascadia equity — and not from the dormancy period or from the date of the Vehicle's formation. Accordingly, the dormancy period does not affect the calculation of the preferred return hurdle or the point at which the carried interest begins to accrue economically.
From a planning perspective, if Ironside anticipates a holding period of less than three years for the Cascadia investment, the IRC §1061 three-year holding period would recharacterize any long-term capital gain allocable to the GP's carried interest as short-term capital gain. While this is primarily a concern for Meridian GP (as the carried interest holder), it could indirectly affect the overall Vehicle economics and the timing and amount of distributions to Ironside, to the extent the GP's tax position influences the GP's preferences regarding the timing of an exit or disposition of the Cascadia investment.
D. Impact of Potential Restructuring on Tax Treatment
The Meridian Reactivation Memo suggests that, depending on the outcome of the revised concession framework negotiations, Meridian may propose structural changes to the acquisition. These could include a revised equity split between Fund IV and the Vehicle, a modified co-invest allocation, or the formation of a new acquisition entity to replace or supplement Cascadia Acquisition Corp.
We address below the principal tax considerations that would arise in connection with each of these potential structural changes.
Contribution of Existing Assets to a Restructured Vehicle. If a restructured transaction requires the formation of a new co-investment vehicle, the Vehicle's existing assets — consisting primarily of cash (the working-capital reserve, net of expenses), the R&W insurance policy rights, and any recoverable due-diligence deposits — could be contributed to the new vehicle. Under IRC §721(a), no gain or loss is recognized by a partnership or any of its partners upon the contribution of property to a partnership in exchange for an interest in the partnership. Accordingly, if the Vehicle's assets are contributed to a new partnership (or if Ironside's interest in the Vehicle is contributed to a new partnership), such contribution would generally be a non-recognition event, provided it is properly structured.
Similarly, if a new co-investment vehicle is formed as a corporation (for example, a new acquisition subsidiary), a contribution of assets by the Vehicle to the new corporation could qualify for non-recognition treatment under IRC §351, provided the Vehicle (together with any other transferors) controls the new corporation immediately after the exchange. Control for purposes of §351 is defined as ownership of stock possessing at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock.
Transfer of Ironside's Partnership Interest. If Ironside transfers its interest in the Vehicle to a new co-investment vehicle (rather than the Vehicle itself contributing its assets), the transfer could take the form of a contribution of the partnership interest to the new vehicle. Under IRC §721, the contribution of a partnership interest to another partnership is generally a non-recognition event. However, care must be taken to ensure that the transfer does not result in a deemed exchange of the partnership interest for consideration other than a partnership interest in the new vehicle, which could trigger gain or loss recognition under IRC §741.
Disguised Sale Concerns. Particular caution is warranted if, in connection with a restructuring, Ironside receives distributions from the existing Vehicle contemporaneously with, or in anticipation of, contributions to a new vehicle. Under IRC §707(a)(2)(B) and the Treasury Regulations thereunder (Treas. Reg. §1.707-3 through §1.707-6), transfers of property by a partner to a partnership and related distributions from the partnership to the partner may be recharacterized as a disguised sale of property if, when viewed together, the transfers are more properly characterized as a sale or exchange. The regulations establish a two-year presumption: if a partner contributes property to a partnership and receives a distribution within two years of the contribution (or vice versa), the transactions are presumed to be a disguised sale unless the facts and circumstances clearly establish otherwise.
To avoid disguised sale characterization, any transition from the existing Vehicle to a new vehicle should be carefully sequenced and documented. We recommend that any distributions from the existing Vehicle and contributions to a new vehicle be separated by a reasonable period of time and that the transactions be documented as independent business decisions, supported by contemporaneous business justifications unrelated to one another. We are available to advise on the structuring and documentation of any such transition.
E. FERC Re-Filing and Regulatory Cost Allocation
The proposed Cascadia acquisition was subject to approval by the Federal Energy Regulatory Commission ("FERC") under Section 203 of the Federal Power Act (16 U.S.C. §824b). FERC approval was sought in Docket No. EC22-143-000, and a conditional order was issued on February 10, 2023. However, the FERC approval lapsed on June 15, 2024, due to the failure to consummate the transaction within the time period specified in the FERC order. In any Reactivation Scenario, a new Section 203 application would need to be filed with FERC, which would entail additional legal, regulatory, and consulting costs.
In addition, the Oregon Public Utility Commission ("OPUC") proceedings in Docket No. UM-2287, which related to the transfer of Cascadia's regulated utility assets, were stayed at the request of the parties on February 15, 2023. Un-staying those proceedings — and potentially supplementing or amending the application to reflect the revised concession framework and transaction economics — would entail additional regulatory costs.
The costs of the FERC re-filing and the OPUC proceedings would need to be analyzed for proper tax characterization. Depending on the nature of the specific costs, they may be treated as (i) organizational expenses of the Vehicle (to the extent they relate to the formation and structuring of the acquisition), (ii) capitalized transaction costs (to the extent they are incident to and directly facilitate the acquisition of Cascadia), or (iii) investment-related expenses (to the extent they relate to ongoing due diligence and analysis). The characterization of these costs will affect whether they are amortizable, capitalizable, or currently deductible, and should be determined on an item-by-item basis in coordination with KTA.
Under the Co-Investment Allocation Agreement, transaction costs are generally allocated between Fund IV and the Vehicle on a pro rata basis in proportion to their respective equity commitments — 71.43% to Fund IV and 28.57% to the Vehicle. Any regulatory re-filing costs would be subject to this allocation, and the Vehicle's 28.57% share would be reflected on the Vehicle's tax return and allocated to Ironside on its Schedule K-1.
IV. Federal Income Tax Analysis — Scenario B: Wind-Down and Liquidation
A. Triggering the Wind-Down
Under Section 7.04(c) of the LP Agreement, Ironside, as the sole limited partner holding more than 50% of the limited partnership interests, has the right to elect a wind-down of the Vehicle if the Vehicle has been dormant for a continuous period of 18 months or more. The dormancy period began on January 9, 2023, and the 18-month threshold was reached on July 9, 2024. Ironside's wind-down election right is therefore currently exercisable.
If Ironside elects to wind down the Vehicle, the General Partner would be required to undertake an orderly wind-down of the Vehicle's affairs, including (i) the payment or provision for all liabilities and obligations of the Vehicle, (ii) the recovery or disposition of all assets of the Vehicle (including any recoverable deposits and the R&W insurance policy), (iii) the distribution of remaining assets to the partners in accordance with the distribution waterfall set forth in Section 5.01 of the LP Agreement, and (iv) the filing of a Certificate of Cancellation with the Delaware Secretary of State.
The wind-down process would result in the return of uncommitted capital to Ironside. We emphasize that the return of uncommitted capital is not a taxable event, because unfunded capital commitments are not treated as capital contributions for tax purposes. Ironside's unfunded commitment of $277,497,225 has not been contributed to the Vehicle and therefore has no tax basis or tax consequence. The only amounts with tax significance are the $22,497,750 actually contributed by Ironside and the cumulative tax deductions and amortization allocated to Ironside during the Vehicle's existence.
B. Classification of Previously Incurred Expenses
The tax treatment of the Vehicle's previously incurred expenses is the central analytical question in the Wind-Down Scenario. Each category of expense is addressed below.
Organizational Expenses ($285,000). Organizational expenses of a partnership are defined in IRC §709(b)(3) as expenditures that are (i) incident to the creation of the partnership, (ii) chargeable to a capital account, and (iii) of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amortizable over such life. Under IRC §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 (reduced dollar-for-dollar for organizational expenses exceeding $50,000) and to amortize the remainder ratably over a 180-month period beginning with the month in which the partnership begins business.
A threshold question is whether the Vehicle ever "began business" for purposes of IRC §709(b). The commencement of business for a partnership is generally the date on which the partnership first engages in the activities for which it was organized. In the case of an investment partnership organized to acquire a specific target, there is authority for the position that the partnership begins business when it commences its investment activities — which could include performing due diligence and incurring expenses preparatory to the acquisition. However, other authority suggests that a partnership formed to acquire a specific asset does not begin business until the acquisition is consummated.
If the Vehicle is treated as having begun business (by virtue of its due-diligence and preparatory activities in 2022), then the organizational expenses have been subject to the §709(b) amortization election, and the Vehicle would have claimed approximately $285,000 × (number of months from business commencement through wind-down / 180) in cumulative amortization deductions. The unamortized balance at the time of wind-down would be deductible as a loss upon liquidation of the Vehicle under IRC §165.
If the Vehicle is treated as never having begun business, then the organizational expenses would not have been subject to the §709(b) election and would not have been amortized. In that case, the full $285,000 would be deductible as a loss upon liquidation under IRC §165, on the theory that the expenditures, having been capitalized, become worthless upon the termination of the partnership.
In either case, the organizational expenses would give rise to an ordinary deduction upon wind-down, either as the unamortized balance of §709(b) amortization or as an abandonment/worthlessness loss under §165.
Placement-Agent Fee ($1,050,000). The proper characterization of the $1,050,000 fee paid to Rivermark Capital Markets Inc. is a significant issue in the Wind-Down Scenario. Under IRC §709(a), syndication expenses — defined as expenditures connected with the issuing and marketing of interests in the partnership — are neither deductible nor amortizable. Unlike organizational expenses, for which a statutory amortization election is available, syndication expenses must be capitalized and receive no tax benefit during the life of the partnership. Importantly, the IRS has consistently taken the position that syndication expenses are not deductible even upon the termination or liquidation of a partnership. See, e.g., Treas. Reg. §1.709-2(b) (listing examples of syndication costs, including brokerage fees, registration fees, legal fees of the underwriter, and printing costs of the prospectus or placement memorandum).
The question is whether the Rivermark fee is properly classified as a syndication expense or as a transaction-advisory fee that should be treated as a capitalized cost of the proposed acquisition. If Rivermark's services were directed toward "selling" or "marketing" interests in the Vehicle to Ironside or other potential co-investors, the fee would be a syndication expense and would be permanently non-deductible — even upon wind-down. This would result in a loss of $1,050,000 in potential tax benefit.
However, if Rivermark's services were more properly characterized as advisory services related to the structuring and negotiation of the co-investment arrangement — rather than the marketing or sale of partnership interests — the fee could potentially be classified as a capitalized transaction cost under IRC §263, which would become deductible as an abandonment loss upon the termination of the transaction (as discussed below in connection with due-diligence costs). We recommend a detailed review of the Rivermark engagement letter and the scope of services actually performed to determine the appropriate classification. This is a fact-specific inquiry, and the distinction between syndication services and advisory services is often contested by the IRS.
This is a significant tax risk in the Wind-Down Scenario. If the placement-agent fee is classified as a syndication expense, Ironside would permanently lose the $1,050,000 deduction. We recommend that Ironside obtain and preserve documentation of the specific services performed by Rivermark, with a view toward supporting the position that the fee is a capitalized transaction cost rather than a syndication expense, if that position is supportable on the facts.
R&W Insurance Premium Deposit ($4,875,000). The Vehicle paid a premium deposit of $4,875,000 to Northgate Specialty Insurance Co. on September 2, 2022, for a representations-and-warranties insurance policy (Policy No. NSW-RI-2022-09814) with a coverage limit of $195 million (representing 10% of the $1,950,000,000 enterprise value). The policy was bound on September 1, 2022, and is currently in tolling status pursuant to a side letter between the Vehicle and Northgate Specialty dated January 20, 2023. The policy is governed by Connecticut law.
The tax treatment of the R&W insurance premium deposit upon wind-down depends on whether the deposit is recoverable (in whole or in part) from Northgate Specialty. We understand that the Side Letter provides for a tolling of the policy during the dormancy period but does not expressly address the refundability of the premium deposit upon termination of the policy. This is a contractual question that should be resolved with Northgate Specialty before the wind-down election is formally exercised.
(a) If the premium deposit is fully non-refundable, the entire $4,875,000 would be treated as a loss upon abandonment of the transaction. The character of this loss — ordinary versus capital — depends on the proper classification of the premium deposit. We recommend treating the premium as an ordinary business expense (insurance cost) that was capitalized in anticipation of the acquisition, in which case the loss upon abandonment would be an ordinary loss under IRC §165.
(b) If the premium deposit is partially refundable, the non-refunded portion would be treated as a loss upon abandonment (as described above), and the refunded portion would be returned to the Vehicle as cash, reducing the aggregate loss recognized by the Vehicle upon liquidation.
(c) If the premium deposit is fully refundable, the full $4,875,000 would be returned to the Vehicle as cash and distributed to the partners as part of the liquidating distribution. No loss would be recognized with respect to the premium deposit itself.
We strongly recommend that Ironside and the General Partner engage with Northgate Specialty to determine the recoverability of the premium deposit before any wind-down election is made, as the outcome will materially affect the tax consequences and the net cash proceeds available for distribution to Ironside.
Due-Diligence Costs and Deposits ($12,790,000). The Vehicle incurred $12,790,000 in due-diligence costs and deposits in connection with the proposed Cascadia acquisition. These costs include legal fees, financial advisory fees, technical and engineering studies, environmental assessments, regulatory analysis, and earnest money or exclusivity deposits paid to Cascadia or its shareholders.
Under IRC §263 and the regulations thereunder, costs that are incurred in connection with the acquisition of a trade or business — including investigatory costs, legal and accounting fees, and other costs that "facilitate" the acquisition — must be capitalized as part of the cost of the acquisition. See Treas. Reg. §1.263(a)-5 (requiring capitalization of amounts paid to facilitate an acquisition of a trade or business). These capitalized costs are added to the basis of the acquired assets and recovered through depreciation, amortization, or upon disposition of the acquired assets.
However, if the proposed acquisition is abandoned — that is, if the taxpayer makes a definitive decision not to consummate the transaction — the capitalized costs become deductible as a loss in the year of abandonment. See Rev. Rul. 73-580, 1973-2 C.B. 86 (holding that expenditures incurred in investigating the acquisition of a specific business that is subsequently abandoned are deductible as a loss in the year the project is abandoned); see also Rev. Rul. 77-254, 1977-2 C.B. 63 (applying the same principle to abandoned capital projects).
The abandonment must be evidenced by an "identifiable event" — a concrete act or occurrence that demonstrates the taxpayer's decision to abandon the transaction. In the Wind-Down Scenario, the formal exercise of the wind-down election by Ironside under Section 7.04(c) of the LP Agreement would constitute such an identifiable event. We recommend that the wind-down election be documented in writing, with a clear statement that the Vehicle is abandoning the proposed Cascadia acquisition, to establish the identifiable event for purposes of the abandonment loss deduction.
The character of the abandonment loss for capitalized transaction costs is ordinary. Under Rev. Rul. 73-580, the loss deduction arises under IRC §165(a), which permits a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." Because the capitalized transaction costs do not constitute a "capital asset" or "property used in the trade or business" (within the meaning of IRC §1221 or §1231), the loss is not subject to the capital loss limitations and is deductible as an ordinary loss.
This is a significant tax benefit in the Wind-Down Scenario: the $12,790,000 in capitalized due-diligence costs and deposits would be deductible as an ordinary loss in the year of the wind-down election, subject to the Vehicle's ability to demonstrate the identifiable-event requirement and the proper capitalization of the underlying costs.
Working-Capital Reserve ($3,500,000). The working-capital reserve represents cash held by the Vehicle that has not been deployed toward the acquisition or other capital expenditures. During the dormancy period, a portion of the working-capital reserve has been used to fund the Vehicle's ongoing operating expenses (estimated at approximately $185,000 per year, or approximately $462,500 cumulatively through mid-2024). The remaining balance of the working-capital reserve (approximately $3,037,500, subject to adjustment for additional dormancy expenses through the date of actual wind-down) would be distributed to Ironside as part of the liquidating distribution.
The distribution of cash to Ironside in the course of the Vehicle's liquidation does not give rise to gain or loss to the extent the amount of cash distributed does not exceed Ironside's outside basis in its partnership interest. See IRC §731(a)(1) (no gain recognized on distribution of money by a partnership to a partner except to the extent the amount of money distributed exceeds the adjusted basis of the partner's interest). Given that Ironside's outside basis (approximately $22,035,296, subject to adjustments described herein) is expected to substantially exceed the amount of cash available for distribution, no gain would be recognized on the distribution of the working-capital reserve.
C. Loss Recognition Upon Liquidation
Upon the complete liquidation of the Vehicle, Ironside would recognize a loss to the extent its outside basis in its partnership interest exceeds the amount of cash and the fair market value of property received in the liquidating distribution. Under IRC §731(a)(2), a loss is recognized by a partner upon the liquidation of a partnership interest only if the distribution consists solely of money, unrealized receivables (as defined in IRC §751(c)), and inventory (as defined in IRC §751(d)). Because the Vehicle's assets at wind-down are expected to consist primarily (or entirely) of cash and receivables (e.g., any right to recover the R&W insurance deposit), this requirement is expected to be satisfied.
The loss recognized by Ironside upon liquidation would be a capital loss. Under IRC §731(a)(2), the loss is treated as a loss from the sale or exchange of the partnership interest, which is a capital asset in the hands of Ironside. Because Ironside has held its partnership interest for more than one year (since July 22, 2022), the loss would be a long-term capital loss, subject to the capital loss limitation rules under IRC §1211 and §1212.
Estimated Loss Computation. The approximate loss that Ironside would recognize upon liquidation of the Vehicle can be estimated as follows, subject to the significant caveats noted below:
The net loss figure is subject to adjustment depending on (i) the recoverability of the R&W insurance premium deposit, (ii) the recoverability of any portion of the due-diligence deposits, (iii) the characterization of the placement-agent fee (syndication expense vs. capitalized transaction cost), (iv) the precise amount of dormancy expenses through the date of liquidation, and (v) any organizational expense amortization deductions already claimed.
We note that a portion of this loss may be recognized as an ordinary loss (through the Vehicle-level deductions for abandoned transaction costs and organizational expenses under IRC §165, as discussed in Section IV.B above), and a portion may be recognized as a capital loss (upon the liquidation of Ironside's partnership interest under IRC §731(a)(2)). The interplay between these two categories of loss is discussed in Section IV.D below.
D. Character of Losses
The character of the losses recognized in the Wind-Down Scenario is an important consideration for Ironside, given the different tax treatment of ordinary losses and capital losses. We summarize below the expected character of each category of loss:
(a) Abandonment losses for capitalized transaction costs ($12,790,000): Ordinary deduction under IRC §165, as discussed in Section IV.B above. This is the single largest source of tax benefit in the Wind-Down Scenario.
(b) Capital loss on liquidation of partnership interest: Capital loss under IRC §731(a)(2), computed as the excess of Ironside's outside basis over the amount of cash received in the liquidating distribution (after giving effect to the ordinary deductions described above). The capital loss would be a long-term capital loss, subject to the capital loss limitation rules. For a partnership such as Ironside, the capital loss would flow through to Ironside's own partners and would be subject to the capital loss limitations applicable to each such partner individually.
(c) Organizational expense deduction upon termination ($285,000, less any previously claimed amortization): Ordinary deduction under IRC §709(b) and §165, as discussed in Section IV.B above.
(d) Placement-agent fee ($1,050,000): If classified as a syndication expense, permanently non-deductible (no loss recognized). If classified as a capitalized transaction cost, ordinary deduction upon abandonment under IRC §165, as discussed in Section IV.B above.
(e) R&W insurance premium deposit ($4,875,000): If non-recoverable, deductible as an ordinary loss under IRC §165 (recommended characterization). If partially recoverable, the non-refunded portion is deductible as an ordinary loss.
Ironside should consider the overall mix of ordinary and capital losses and, to the extent permissible, structure the wind-down to maximize the amount of ordinary loss deductions. Specifically, the Vehicle should claim the abandonment loss deductions at the partnership level (on the Vehicle's final partnership return) before the liquidating distribution is made to Ironside. This sequencing would reduce the Vehicle's inside basis in its assets (by reflecting the deductions), which in turn would reduce the amount of the liquidating distribution and increase the ordinary deduction component of the overall loss, while reducing the capital loss component. Because ordinary losses are generally more valuable than capital losses (due to the absence of capital loss limitations on ordinary deductions), this sequencing is advantageous to Ironside.
E. Impact on Ironside's Other Funds and Positions
Ironside manages approximately $14.8 billion in total assets under management, of which approximately $3.2 billion is invested in infrastructure-related assets across three vehicles (Fund IV, the Vehicle, and a separate infrastructure credit fund). Losses recognized by Ironside upon the wind-down of the Vehicle would flow through to Ironside's partners and could potentially offset gains recognized by those partners in connection with other infrastructure investments or other portfolio positions.
We recommend that Ironside's internal tax team coordinate with our firm and with KTA regarding the timing of the wind-down election and the filing of the Vehicle's final partnership return. If Ironside's other funds are expected to recognize significant gains in a particular taxable year, timing the wind-down to occur in that same year could maximize the tax benefit of the losses. Conversely, if Ironside's partners are not expected to have sufficient gains to absorb the capital loss component of the wind-down losses, deferring the wind-down (if commercially feasible and consistent with the terms of the LP Agreement) could be considered, although we note that the continuing dormancy expenses would reduce the net benefit of any such deferral.
V. State and Local Tax Considerations
A. Delaware. ICM Cascadia Co-Invest, LP is a Delaware limited partnership and is therefore subject to Delaware's annual franchise tax, which is $300 per year for a limited partnership. Delaware does not impose an income tax on partnership income or loss, and accordingly, the Vehicle's income, deductions, and losses are not subject to Delaware income tax at the entity level. Similarly, Ironside, as a nonresident limited partner, is not subject to Delaware income tax on its allocable share of the Vehicle's income or loss.
Upon wind-down, the following Delaware compliance steps would be required:
(a) Filing of the Vehicle's final annual report with the Delaware Secretary of State, together with payment of any outstanding franchise tax;
(b) Filing of a Certificate of Cancellation with the Delaware Secretary of State to cancel the Vehicle's Certificate of Limited Partnership (File No. 7439218); and
(c) Termination of the Vehicle's engagement with its Delaware registered agent, Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, DE 19904.
In the Reactivation Scenario, the Vehicle would continue to file its annual report and pay the annual franchise tax. No additional Delaware filings or registrations would be required in connection with the reactivation itself, although additional registrations may be required if the acquisition closes and the Vehicle acquires assets or conducts business activities in other states (as discussed below).
B. Oregon. Cascadia Renewables Holdings, Inc. is an Oregon corporation, and the proposed Cascadia acquisition involves the acquisition of assets and operations located primarily in Oregon, including the Bull Run Filtration Project concession. The Vehicle's activities to date have been limited to due diligence and preparatory work related to the Oregon-based target, and no operational income has been earned by the Vehicle from Oregon sources.
Reactivation Scenario. If the acquisition closes, the Vehicle would hold an indirect interest in Cascadia's Oregon-based operations, and Ironside would have Oregon-source income flowing through the Vehicle. Oregon imposes income tax on a nonresident partner's share of Oregon-source income derived from a partnership doing business in Oregon. See ORS §316.127; ORS §314.772. The Vehicle would be required to file Oregon partnership returns, and Ironside (or its partners, depending on the filing obligations applicable to tiered partnership structures) would be required to report its allocable share of Oregon-source income on its Oregon nonresident return. The Oregon personal income tax rate ranges up to 9.9% (for tax year 2024), and the Oregon corporate excise tax rate is 6.6% (7.6% on taxable income in excess of $1 million). The applicable rate and filing obligations would depend on the character of Ironside's partners and the structure of the flow-through.
This would create a significant and ongoing compliance obligation for Ironside and should be factored into the cost-benefit analysis of the Reactivation Scenario. We recommend that Ironside evaluate whether a blocker entity or other structuring technique is appropriate to manage the Oregon tax compliance burden for its investors, particularly any tax-exempt or foreign investors who may have specific concerns regarding state income tax exposure.
Wind-Down Scenario. If the Vehicle is wound down without consummating the acquisition, the Vehicle would have no Oregon-source income (only pre-acquisition expenses, which are not allocable to Oregon sources). In that case, the Vehicle's Oregon filing obligations are likely limited. However, we recommend confirming whether the Vehicle's due-diligence activities in Oregon — including the payment of deposits to Oregon-based entities and the engagement of Oregon-based consultants and advisors — created sufficient nexus for Oregon to assert filing obligations. Oregon's nexus standards for pass-through entities are broad, and the Oregon Department of Revenue has taken aggressive positions in certain cases regarding the filing obligations of out-of-state partnerships with even limited Oregon connections.
We note that Oregon SB 1567 (2022), the regulatory change that triggered the Bull Run concession renegotiation, does not have direct tax implications for the Vehicle or Ironside. However, to the extent SB 1567 affects the economics of the Cascadia investment (by reducing the concession revenue or altering the regulatory framework), it may indirectly affect the tax analysis in a Reactivation Scenario by changing the projected income, deductions, and returns from the investment.
C. Other States (Washington and Idaho)
Cascadia operates facilities in Washington and Idaho, and the proposed acquisition would give the Vehicle an indirect interest in those operations.
Washington. Washington does not impose a state income tax. However, Cascadia's Washington operations are subject to the Washington Business and Occupation ("B&O") tax, which is a gross receipts tax imposed on the privilege of doing business in Washington. The B&O tax is imposed at the entity level (on Cascadia) and would not directly flow through to the Vehicle or Ironside. However, the B&O tax burden on Cascadia's Washington operations would reduce Cascadia's overall profitability and therefore indirectly affect the returns available to the Vehicle's investors.
In the Wind-Down Scenario, the Vehicle has no Washington-source income and no Washington filing obligations. In the Reactivation Scenario, the Vehicle would not be directly subject to the B&O tax (which is imposed on Cascadia at the entity level), but Ironside should be aware of the B&O tax burden on Cascadia's operations when evaluating the after-tax economics of the investment.
Idaho. Idaho imposes income tax on pass-through income allocable to Idaho sources. If the acquisition closes, the Vehicle (and, by extension, Ironside) would have Idaho-source income flowing through Cascadia's Idaho operations, and the Vehicle would be required to file Idaho partnership returns. The Idaho individual income tax rate ranges up to 5.8% (for tax year 2024), and the Idaho corporate income tax rate is 5.8%. As with Oregon, this would create an ongoing state tax compliance obligation in the Reactivation Scenario.
In the Wind-Down Scenario, the Vehicle has no Idaho-source income and no Idaho filing obligations.
D. New York
Ironside Capital Management LP is headquartered at 590 Madison Avenue, 38th Floor, New York, NY 10022. Any income or loss allocated to Ironside from the Vehicle flows through to Ironside's New York tax position.
New York treats partnership income and loss on a flow-through basis. Losses recognized by Ironside on the wind-down of the Vehicle — whether ordinary abandonment losses or capital losses from the liquidation of the partnership interest — would be includable in Ironside's New York income tax computation. To the extent Ironside's partners are New York residents or the income/loss is allocable to New York sources, the losses would reduce Ironside's (or its partners') New York tax liability.
New York imposes a personal income tax at rates up to 10.9% (for tax year 2024) and a corporate franchise tax at an effective rate of 7.25% for most corporations (with a capital base tax alternative). The applicable rate depends on the character of Ironside's partners and the structure of the flow-through. We recommend that Ironside's internal tax team model the New York tax impact of the wind-down losses in the context of Ironside's overall New York tax position.
VI. UBTI Analysis (Update)
Our original ERISA and benefit plan investor analysis memorandum dated July 27, 2022, confirmed that the Vehicle is not subject to the plan-asset rules under ERISA and the Department of Labor's regulations thereunder (29 C.F.R. §2510.3-101, as modified by Section 3(42) of ERISA), based on the Vehicle's investment structure and the composition of its investors. That conclusion remains unchanged.
However, certain of Ironside's upstream investors — that is, the limited partners in Ironside's fund vehicles — may be tax-exempt entities (including pension funds, endowments, foundations, and other organizations described in IRC §501(c)(3) or §501(a)). For such investors, the unrelated business taxable income ("UBTI") rules under IRC §511 through §514 are relevant to the extent the Vehicle's investment activities involve debt-financed property.
Wind-Down Scenario. In the Wind-Down Scenario, no acquisition has been consummated, no debt-financed property has been acquired by the Vehicle, and the Vehicle's assets consist solely of cash and contractual rights (the R&W insurance policy rights and any recoverable deposits). Accordingly, there is no UBTI concern in the Wind-Down Scenario.
Reactivation Scenario. In the Reactivation Scenario, if new debt financing is obtained to fund the Cascadia acquisition (the original Atlas National Bank/Pinnacle Credit Partners commitment letter having expired on October 31, 2023), the acquisition of Cascadia's equity with leveraged financing could generate UBTI for any tax-exempt investors in Ironside's upstream fund structure. Under IRC §514, income from "debt-financed property" — defined as property that is held to produce income and with respect to which there is "acquisition indebtedness" — is treated as UBTI to the extent of the debt-to-basis ratio of the property. If the Cascadia acquisition is financed in part with debt, the Vehicle's share of the acquisition-level debt could constitute acquisition indebtedness with respect to the Cascadia equity, thereby generating UBTI for tax-exempt investors.
Ironside's tax team should evaluate whether the use of a "Blocker" entity (typically a domestic C corporation interposed between the tax-exempt investor and the debt-financed investment) is appropriate to insulate tax-exempt investors from UBTI exposure. The costs and benefits of a blocker entity — including the additional layer of corporate income tax and the administrative complexity — should be weighed against the UBTI exposure that would result from a direct investment through the partnership structure.
We note that the UBTI analysis is relevant to Ironside's upstream investors rather than to Ironside itself (which is not a tax-exempt entity). However, if Ironside determines that a significant portion of its investor base consists of tax-exempt entities, the UBTI implications of the Reactivation Scenario should be addressed as part of the investment decision-making process.
VII. Carried Interest and IRC §1061 Implications
The Vehicle's LP Agreement provides for a carried interest allocation of 10% to Meridian GP above an 8% preferred return to Ironside (compounded quarterly). As noted in Section III.C above, this carried interest constitutes an "applicable partnership interest" within the meaning of IRC §1061.
Under IRC §1061(a), if a taxpayer holds an applicable partnership interest, the taxpayer's net long-term capital gain with respect to such interest for the taxable year is treated as short-term capital gain to the extent the gain is attributable to assets held for less than three years. This effectively extends the holding period required for long-term capital gain treatment from one year to three years for gain allocable to carried interests.
The implications of IRC §1061 differ under the two scenarios:
Wind-Down Scenario. In the Wind-Down Scenario, the Vehicle has not consummated any investment and has generated no gains. The carried interest has no economic value (because no gains above the preferred return have been earned), and no carried interest distributions have been or will be made to Meridian GP. Accordingly, IRC §1061 has no application in the Wind-Down Scenario. The carried interest provision in the LP Agreement simply expires, with no tax consequences.
Reactivation Scenario. In the Reactivation Scenario, the holding period for IRC §1061 purposes would begin upon the Vehicle's acquisition of equity in Cascadia (i.e., the closing date of the acquisition). If the Cascadia investment is subsequently disposed of within three years of the acquisition date, any gain allocable to Meridian GP's carried interest would be recharacterized as short-term capital gain under IRC §1061(a). If the investment is held for three years or more, the gain would qualify for long-term capital gain treatment.
While this is primarily a concern for Meridian GP (as the holder of the carried interest), it could affect the overall economics of the Vehicle and the timing of distributions to Ironside. If Meridian GP faces the prospect of short-term capital gain treatment on its carried interest, it may have an economic incentive to defer the disposition of the Cascadia investment until the three-year holding period has been satisfied. This could influence the exit strategy and timing of distributions to all partners, including Ironside.
We recommend that Ironside consider the IRC §1061 implications in connection with any discussions with Meridian regarding the Reactivation Scenario and the expected investment holding period.
VIII. R&W Insurance Policy — Tax Treatment Under Each Scenario
The Vehicle's representations-and-warranties insurance policy (Policy No. NSW-RI-2022-09814) was issued by Northgate Specialty Insurance Co., a Connecticut-domiciled insurer, with a coverage limit of $195 million (representing 10% of the $1,950,000,000 enterprise value of Cascadia). The premium deposit of $4,875,000 (reflecting a 2.5% premium rate on the $195 million coverage limit) was paid by the Vehicle on September 2, 2022. The policy was bound on September 1, 2022, and is currently in tolling status pursuant to the Side Letter between the Vehicle and Northgate Specialty dated January 20, 2023. The policy is governed by Connecticut law.
A. Reactivation Scenario
If the Reactivation Scenario proceeds, the R&W insurance policy would be reactivated and un-tolled, and the $4,875,000 premium deposit would be applied toward the policy premium. Depending on the terms of the reactivated policy, additional premium may be due at or before closing of the Cascadia acquisition — for example, if the coverage limit is adjusted to reflect a revised enterprise value, or if Northgate Specialty imposes an additional premium to account for the extended tolling period or changed risk profile.
For tax purposes, the R&W insurance premium would be treated as a capitalized cost of the acquisition. Under Treas. Reg. §1.263(a)-5, amounts paid to facilitate an acquisition of a trade or business must be capitalized, and insurance premiums incurred in connection with the acquisition are generally treated as facilitative costs. The capitalized premium would be added to the Vehicle's basis in the acquired Cascadia equity and would be recovered through depreciation, amortization, or upon disposition of the Cascadia investment.
Alternatively, if the R&W insurance premium is allocable to a specific post-closing indemnification obligation rather than to the acquisition itself, there may be an argument for treating the premium as a deductible business expense under IRC §162 in the year paid or incurred. This characterization is less certain and would depend on the specific terms of the policy and the allocation of the premium between acquisition-facilitative

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