1023-00003 · Ironside Capital Management LP · Analysis

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM

July 16, 2023

FROM: Leila Nazari, Associate, Tax Department

TO: Sylvia Hartwell, Partner, Tax Department Leonard Cross, Partner, Tax Department

RE: Ironside Capital Management LP (EIN: 83-2741956) — Summary of In-Person Meeting with IRS Examination Team, July 14, 2023

CLIENT/MATTER: Ironside Capital Management LP — IRS Partnership Examination, Tax Year 2021

This memorandum summarizes the substance of the in-person meeting held on July 14, 2023, between counsel for Ironside Capital Management LP ("ICM" or the "Partnership") and the IRS examination team at the IRS Manhattan Campus. This memorandum has been prepared in anticipation of litigation and reflects legal analysis and strategic assessments protected by the attorney-client privilege and the attorney work product doctrine. Distribution is restricted as set forth in Section X below.

I. Meeting Logistics

The in-person meeting took place on Friday, July 14, 2023, commencing at approximately 10:00 a.m. and concluding at approximately 1:15 p.m., for a total duration of approximately three hours and fifteen minutes. The meeting was held at the IRS Large Business & International ("LB&I") Division, Manhattan Campus, located at 290 Broadway, New York, NY 10007, in Conference Room 12-B on the twelfth floor of the federal building.

The meeting concerned the ongoing examination of ICM's 2021 Form 1065, U.S. Return of Partnership Income. The 2021 Form 1065 was filed on September 15, 2022, on extension. The examination was initiated by IRS Letter 2205-D, dated March 22, 2023, which notified ICM of the IRS's selection of the 2021 tax year for examination and identified the LB&I Division as the examining division. Calderwood & Harkness LLP ("C&H") entered its appearance as counsel for ICM via Form 2848, Power of Attorney and Declaration of Representative, filed with the IRS on April 3, 2023.

II. Attendees

The following individuals were present at the meeting:

A. Calderwood & Harkness LLP

• Sylvia Hartwell — Partner, Tax Department, Responsible Partner for the engagement

• Leila Nazari — Associate, Tax Department, Lead Associate for the engagement

B. IRS Examination Team

• Timothy J. Albrecht — Revenue Agent, GS-13, Lead Examiner (Badge No. 74-28193), LB&I Division, Pass-Through Entities Practice Area

• Dawn M. Petrovic — Revenue Agent, GS-12, LB&I Division, Pass-Through Entities Practice Area

• Eric S. Lundgren — Attorney, IRS Office of Chief Counsel, Large Business & International Branch 5

C. Not in Attendance

• Marcus Trent, General Counsel of ICM, did not attend the meeting. At C&H's recommendation, Mr. Trent was advised not to attend in order to maintain the Partnership's attorney-client privilege posture during the examination. The presence of in-house counsel at an examination meeting could create ambiguity regarding the scope of privileged communications, particularly given the IRS's potential interest in internal legal analyses regarding the management fee waiver arrangement. Mr. Trent was informed that C&H would provide a separate client update following the meeting.

• Robert Jansen, Working Associate at C&H, did not attend the meeting in person. Mr. Jansen remained at the C&H office to provide real-time research support as needed during the meeting. Mr. Jansen was available by telephone and secure email throughout the duration of the meeting and was consulted once on a question regarding the IRC § 1061 regulatory framework (discussed below in Section V).

III. Purpose of Meeting

The meeting was requested by Revenue Agent Timothy J. Albrecht in a telephone call with Leila Nazari on July 6, 2023. RA Albrecht proposed the meeting in conjunction with the issuance of Information Document Request No. 3 ("IDR #3"), which was received by C&H on July 11, 2023. IDR #3 contained twelve items focused on carried interest holding period documentation under IRC § 1061, including requests for trade-level records, acquisition and disposition confirmations, and internal holding period analyses for specific positions liquidated during the 2021 tax year.

C&H agreed to the in-person meeting for the following reasons. First, the meeting provided an opportunity to discuss all three open examination issues in a single session, allowing C&H to present the factual and legal context for each issue and to better understand the IRS examination team's concerns and preliminary positions. Second, the meeting allowed C&H to provide context for the pending IDR #3 response, which is due on July 28, 2023, and to ensure that the response addressed the IRS team's specific evidentiary needs. Third, the in-person format facilitated a more productive dialogue than the prior telephone conferences and written correspondence, particularly given the complexity of the management fee waiver issue under IRC § 707(a)(2)(A).

This meeting represented the first in-person interaction between C&H and the IRS examination team. Prior interactions during the examination included the following:

• IDR #1 Response — May 19, 2023: C&H submitted a comprehensive response to IDR #1, which contained forty-two items covering the Partnership's organizational documents, financial statements, partnership agreement, tax return workpapers, and general operational information. The IDR #1 response comprised approximately 2,847 pages of documents and was delivered both electronically (via IRS Secure Messaging) and in hard copy.

• IDR #2 Response — June 23, 2023: C&H submitted a response to IDR #2, which contained eighteen items focused primarily on the management fee waiver arrangement, including the relevant provisions of the Limited Partnership Agreement ("LPA"), the GP's waiver election documentation, and contemporaneous memoranda prepared by Priya Venkatesh, ICM's Chief Operating Officer and Chief Financial Officer.

• Telephone Conference — June 9, 2023: A telephone conference was held between Sylvia Hartwell and Leila Nazari (for C&H) and RA Albrecht and RA Petrovic (for the IRS), during which the parties discussed the scope of the examination and the IRS team's initial areas of focus. During that call, RA Albrecht identified three primary examination issues, which were subsequently confirmed in writing and which form the basis of the substantive discussion summarized in Sections IV through VI below.

IV. Discussion of Issue 1: Management Fee Waiver / Conversion (IRC § 707(a)(2)(A))

A. IRS Concerns Expressed

Revenue Agent Albrecht opened the substantive portion of the meeting by addressing Issue 1, which concerns the management fee waiver arrangement implemented by Ironside Capital GP LLC (the "GP") for the 2021 tax year. Specifically, the GP waived $23.8 million of the $71.6 million in total management fees to which it was contractually entitled under the LPA for the 2021 fiscal year. In exchange for the waived fees, the GP received an increased capital interest in ICM, entitling the GP to a proportionate share of future fund appreciation and investment returns.

RA Albrecht stated that the examination team's principal concern was that the waiver of the $23.8 million in management fees in exchange for an increased capital interest constituted a disguised payment for services under IRC § 707(a)(2)(A). Under that provision, if a partner performs services for the partnership, and there is a related direct or indirect allocation and distribution to the partner, and the performance of such services and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, the transaction is treated as a payment to a non-partner for services — i.e., as ordinary income subject to ordinary income tax rates.

RA Albrecht stated that the economic effect of the waiver arrangement was to convert what would otherwise be ordinary income — management fees taxable at a top federal rate of up to 37%, plus the 3.8% net investment income tax ("NIIT") under IRC § 1411 — into potential long-term capital gain income taxable at the preferential 20% rate, through the mechanism of subsequent fund appreciation attributable to the GP's increased capital interest.

RA Albrecht provided an estimate of the potential tax impact of a full reclassification. Specifically, the estimated differential was calculated as follows:

• Ordinary/LTCG rate differential: $23.8 million × approximately 17 percentage points (37% ordinary rate minus 20% LTCG rate) = approximately $4.046 million

• NIIT impact: $23.8 million × 3.8% = approximately $904,000

• Total estimated tax impact for Issue 1: approximately $4.95 million (across all affected partners, primarily the GP's principals, Desmond R. Calloway and Priya Venkatesh)

Revenue Agent Petrovic then raised a factual question regarding the degree to which the GP bore genuine entrepreneurial risk with respect to the waived amount. Specifically, RA Petrovic noted that ICM's consistent strong investment performance — including an approximate 18.7% gross return in the 2021 calendar year — arguably reduced the real economic risk associated with the fee waiver. RA Petrovic questioned whether, in the context of a fund with a track record of consistently positive returns, the purported risk of loss on the waived fees was more theoretical than real. RA Petrovic suggested that the IRS would want to examine the fund's historical performance record to assess whether there was a genuine possibility that the GP would receive less value through the capital interest than it would have received in management fees.

IRS Counsel Eric S. Lundgren then provided additional legal context for the IRS team's concerns. Mr. Lundgren referenced Revenue Procedure 93-27, which provides guidance on the tax treatment of the receipt of a partnership profits interest for services, and subsequent guidance including Revenue Procedure 2001-43 regarding substantially nonvested profits interests. Mr. Lundgren expressed the view that the IRS has observed a significant increase in management fee waiver arrangements among private equity, hedge fund, and alternative investment fund managers, and that in many instances these arrangements lack genuine economic substance because the waiver is a formalistic mechanism designed to achieve rate arbitrage without exposing the fund manager to meaningful risk of economic loss. Mr. Lundgren noted that the IRS Office of Chief Counsel has been devoting attention to this category of transactions and that the examination team intended to scrutinize the arrangement closely.

B. C&H Response and Defense Position

Sylvia Hartwell provided a detailed explanation of the fee waiver mechanics as set forth in the ICM Limited Partnership Agreement. Specifically, Ms. Hartwell walked the IRS team through LPA § 4.1, which governs the management fee structure, the GP's right to elect to waive all or a portion of its management fee entitlement in exchange for an increased capital interest, and the terms and conditions applicable to any such waiver election. Ms. Hartwell emphasized the following points in support of the Partnership's position:

Irrevocable Pre-Performance Election. The fee waiver was an irrevocable election made by the GP at the beginning of the 2021 calendar year, in January 2021, before the fund's 2021 investment performance was known. The waiver election was documented in a written instrument executed by Desmond R. Calloway, in his capacity as Managing Member of Ironside Capital GP LLC, dated January 8, 2021. The irrevocable nature of the election and its timing are critical to the analysis under IRC § 707(a)(2)(A), because the GP was committing to forgo guaranteed fee income at a time when the GP had no way of knowing whether the fund would generate positive returns, negative returns, or returns below the management fee amount that was being waived. This is fundamentally different from a retroactive reclassification of fees after investment performance is known.

Genuine Downside Risk. The GP's increased capital interest obtained in exchange for the waived management fees was subject to genuine downside risk. If the fund's investment performance had been negative during the 2021 calendar year, or if the fund had experienced losses that reduced the value of the GP's increased capital interest below the amount of the waived management fees, the GP would have suffered a real economic loss. The GP could, in a worst-case scenario, lose the entire $23.8 million waived amount if the fund experienced significant investment losses. This downside exposure constitutes the type of genuine entrepreneurial risk that distinguishes legitimate fee waiver arrangements from abusive fee conversion structures.

Distinguishable from Abusive Structures. Ms. Hartwell distinguished the ICM arrangement from abusive management fee waiver or fee conversion structures that the IRS has challenged in other contexts. Specifically, the ICM arrangement was distinguishable because: (i) the GP bore a real risk of loss, not a de minimis or theoretical risk; (ii) the waiver was not a retroactive reclassification after investment performance was known; (iii) the waiver terms were established at the outset and were an integral part of the LPA as negotiated between the GP and the limited partners; and (iv) the waiver was fully disclosed to limited partners in the fund's annual reporting and in supplemental communications.

Contemporaneous Documentation. Ms. Hartwell referenced the contemporaneous memoranda prepared by Priya Venkatesh, ICM's COO and CFO, which documented the business rationale for the fee waiver election. These memoranda, which were previously provided to the IRS examination team as part of the IDR #2 response submitted on June 23, 2023, set forth the GP's strategic reasoning for the waiver, including the alignment of GP and LP interests through increased GP capital commitment, the signaling effect to current and prospective limited partners of the GP's confidence in the fund's investment strategy, and the GP's desire to reduce the fund's fixed cost burden during a period of anticipated market volatility.

Substantial Capital at Risk. Ms. Hartwell further noted that the principals of the GP had substantial personal capital invested in the fund, which further evidenced genuine entrepreneurial commitment and alignment with the limited partners. Specifically, as of December 31, 2021, Desmond R. Calloway maintained a capital account balance of $187.4 million, and Priya Venkatesh maintained a capital account balance of $48.6 million. These capital account balances reflected cumulative invested capital, reinvested returns, and the additional capital interests obtained through prior fee waiver elections. The magnitude of the GP principals' personal capital at risk demonstrates that the fee waiver was part of a broader pattern of economic alignment, not an isolated tax-motivated transaction.

At the conclusion of her presentation on Issue 1, Ms. Hartwell offered to prepare and submit a comprehensive legal memorandum addressing the management fee waiver issue in detail, including a full analysis of the statutory framework under IRC § 707(a)(2)(A), the relevant Treasury Regulations (including Treas. Reg. § 1.707-2), applicable legislative history, relevant case law, and published IRS guidance. Ms. Hartwell stated that the comprehensive memorandum would present C&H's legal position on the issue and would address each of the specific concerns raised by the IRS examination team during the meeting.

C. IRS Reaction

Revenue Agent Albrecht acknowledged receipt and review of the IDR #2 response materials, including the Venkatesh contemporaneous memoranda, but indicated that the examination team had not yet reached a final position on Issue 1. RA Albrecht stated that the examination team would need additional time to complete its analysis and that the comprehensive legal memorandum proposed by Ms. Hartwell would be an important input into the IRS team's evaluation.

IRS Counsel Lundgren stated that he would review the legal authorities more carefully once C&H's comprehensive legal memorandum was submitted. Mr. Lundgren indicated that his primary areas of interest in the memorandum would include: (i) the proper application of the six-factor test under Treas. Reg. § 1.707-2(c) for determining whether a purported allocation and distribution to a partner should be treated as a disguised payment for services; (ii) the relevance of the irrevocable election timing and the significance of pre-performance versus post-performance waivers; and (iii) the appropriate standard for evaluating whether the GP bore "significant" entrepreneurial risk, particularly in light of the fund's historical performance record.

Mr. Lundgren also raised a specific factual question during this portion of the discussion. He asked whether any of ICM's limited partners — and he specifically referenced the Northgate Public Employees' Retirement System, which maintains a $412 million capital commitment to the fund, as well as other tax-exempt investors — had raised concerns about the fee waiver arrangement. Mr. Lundgren's question appeared to be directed at whether the limited partners viewed the waiver as genuinely beneficial to their interests (i.e., reducing the fund's fixed management fee expense) or whether the arrangement was primarily for the benefit of the GP (i.e., obtaining preferential tax treatment on the waived amount). Ms. Hartwell responded that communications between ICM and its limited partners regarding the fee waiver were privileged, but she confirmed that the fee waiver arrangement was properly disclosed to all limited partners as required by the LPA, and that the waiver mechanism was a negotiated provision of the LPA that reflected the arm's-length bargaining between the GP and the limited partners at the time of the fund's formation and during subsequent closings.

V. Discussion of Issue 2: Carried Interest Holding Period (IRC § 1061)

A. IRS Concerns Expressed

IRS Counsel Eric S. Lundgren led the discussion on Issue 2, which concerns the holding period requirements applicable to performance allocations (commonly referred to as "carried interest" or "carry") under IRC § 1061. The issue involves $38.7 million of performance allocations, out of $94.3 million in total performance allocations to the GP for the 2021 tax year, that ICM reported as long-term capital gain on its 2021 Form 1065 and corresponding Schedule K-1s.

Mr. Lundgren provided the statutory framework for the IRS team's analysis. IRC § 1061, enacted as part of the Tax Cuts and Jobs Act of 2017, provides that, notwithstanding the general one-year holding period requirement for long-term capital gain treatment under IRC § 1222, gains allocable to an "applicable partnership interest" ("API") are treated as short-term capital gain unless the underlying assets giving rise to the gain satisfy a three-year holding period. An "applicable partnership interest" is defined as any interest in a partnership that, directly or indirectly, is transferred to (or held by) a taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business. The three-year holding period requirement applies at the level of the assets held by the partnership — i.e., the partnership's investment positions must have been held for more than three years for the allocable share of gain to qualify as long-term capital gain in the hands of the GP.

Mr. Lundgren stated that the examination team had identified fourteen specific investment positions liquidated by ICM during the 2021 tax year for which the examination team questioned whether the three-year holding period threshold under IRC § 1061 was met. Mr. Lundgren indicated that these fourteen positions collectively accounted for the $38.7 million in performance allocations reported as long-term capital gain. The remaining $55.6 million of the $94.3 million total performance allocations for 2021 were reported as short-term capital gain and were not at issue.

Mr. Lundgren noted that IDR #3, which C&H received on July 11, 2023, was specifically designed to obtain trade-level documentation to verify the acquisition and disposition dates for each of the fourteen positions in question. IDR #3 requested, among other items, internal trading records, portfolio management system reports, trade blotters, and prime broker confirmations for each of the fourteen positions.

Revenue Agent Petrovic then asked a procedural question regarding ICM's record-keeping practices. Specifically, RA Petrovic asked whether ICM maintained contemporaneous records of acquisition dates at the trade level, or whether the holding period analysis reflected in the tax return and supporting workpapers had been reconstructed for purposes of the examination. RA Petrovic noted that in prior examinations of other fund managers, the IRS had encountered situations in which holding period data was assembled after the fact from incomplete or inconsistent records, which had raised credibility concerns.

Revenue Agent Albrecht supplemented RA Petrovic's question by requesting that the IDR #3 response include trade confirmations from Ridgeline Securities LLC, ICM's prime broker, to independently corroborate the acquisition and disposition dates reflected in ICM's internal records. RA Albrecht stated that independent third-party documentation from the prime broker would be the most persuasive evidence of the actual trade dates and would allow the examination team to verify ICM's holding period calculations without relying solely on ICM's own internal records.

B. C&H Response and Defense Position

Ms. Hartwell confirmed that ICM's records contained contemporaneous trade-level data and that the holding period analysis reflected in the 2021 tax return workpapers was based on original, contemporaneous records maintained by two independent third-party service providers: Greystone Fund Administration LLC, ICM's independent fund administrator, and Ridgeline Securities LLC, ICM's prime broker. Ms. Hartwell emphasized that the holding period data was not reconstructed or assembled after the fact for purposes of the examination; rather, the acquisition and disposition dates for all investment positions were recorded in real time by Greystone and Ridgeline as part of their ordinary course of business operations in connection with the fund's investment activities.

Leila Nazari then provided additional detail regarding the documentation that C&H was preparing for the IDR #3 response. Ms. Nazari stated that Robert Jansen, the working associate at C&H who remained at the office during the meeting, was in the process of preparing a detailed holding period schedule at the trade level for all fourteen positions identified by the IRS examination team. The schedule would include the following data fields for each position:

• Position identifier (internal ICM reference number)

• Security or instrument name (including CUSIP or ISIN where applicable)

• Acquisition date (from Greystone Fund Administration LLC records)

• Disposition date (from Greystone Fund Administration LLC records)

• Holding period expressed in calendar days

• Holding period expressed in years and months

• Acquisition cost (cost basis)

• Sale proceeds (gross disposition proceeds)

• Realized gain or loss

• Long-term vs. short-term classification under IRC § 1061 (three-year holding period threshold)

Ms. Nazari confirmed that C&H would cross-reference each entry in the holding period schedule to the corresponding Ridgeline Securities LLC trade confirmation, and that copies of the relevant trade confirmations would be appended to the IDR #3 response as supporting exhibits. The cross-referencing process would enable the IRS examination team to independently verify each acquisition and disposition date against third-party documentation.

Ms. Hartwell stated that C&H's preliminary review of the records for all fourteen positions indicated that each of the fourteen positions exceeded the three-year holding period required by IRC § 1061. Ms. Hartwell noted that C&H's review was ongoing and that the IDR #3 response would contain a definitive position for each of the fourteen positions, but that preliminary indications were favorable.

Ms. Hartwell also raised an additional legal point for the examination team's consideration. Specifically, Ms. Hartwell noted that the Treasury Regulations under IRC § 1061 (Treas. Reg. § 1.1061-1 through 1.1061-6) distinguish between "applicable partnership interests" and certain capital interests that are excluded from the definition of an API and therefore from the three-year holding period requirement. In particular, Treas. Reg. § 1.1061-3(c)(2) provides that a partnership interest is not an API to the extent it represents a right to share in partnership capital that was contributed by the taxpayer (other than in exchange for services). Ms. Hartwell stated that C&H would address the scope of IRC § 1061 and the applicable regulatory exclusions in the comprehensive legal memorandum, to the extent that any of the fourteen positions at issue may be allocable to capital interests that fall outside the API definition.

C. IRS Reaction

IRS Counsel Lundgren stated that the trade-level holding period schedules with Ridgeline Securities LLC trade confirmation cross-references would be "critical" to resolving Issue 2. Mr. Lundgren emphasized that objective, contemporaneous, third-party documentation of trade dates would be the most effective means of demonstrating compliance with the three-year holding period requirement and that such documentation, if consistent with ICM's reported positions, would substantially reduce the examination team's concerns.

Revenue Agent Albrecht confirmed that the IDR #3 response deadline of July 28, 2023, remained in effect and that no extension of time was being offered at this time. RA Albrecht noted that if C&H anticipated any difficulty in meeting the deadline, C&H should contact him as soon as possible to discuss a potential extension request.

Mr. Lundgren raised one additional question near the conclusion of the Issue 2 discussion. He asked whether any of the fourteen positions in question involved complex financial instruments — such as options, swaps, convertible securities, structured products, or other derivative instruments — for which the holding period determination might be non-standard or subject to special rules. Mr. Lundgren noted that the holding period rules for certain derivative instruments and constructive ownership positions can be complex and may differ from the straightforward acquisition-to-disposition analysis applicable to outright equity and debt positions. Ms. Hartwell responded that the majority of the fourteen positions at issue were equity and credit positions (including common stock, preferred stock, and corporate bonds) with straightforward acquisition and disposition dates. Ms. Hartwell stated that C&H would review the full list of fourteen positions and would identify in the IDR #3 response any instruments that might require special holding period analysis, including a discussion of the applicable rules and C&H's position on the proper holding period treatment for each such instrument.

VI. Discussion of Issue 3: Organizational and Syndication Cost Deductions (IRC §§ 709, 195)

A. IRS Concerns Expressed

Revenue Agent Petrovic led the discussion on Issue 3, which concerns the classification of expenses deducted by ICM under IRC § 709(b) as organizational expenses. Specifically, ICM claimed a total of $1.42 million in deductions under IRC § 709(b) on its 2021 Form 1065. Of this total, $680,000 was classified as organizational expenses — i.e., expenses incurred in connection with the creation of the partnership — that were amortizable and deductible over a 180-month period beginning with the month in which the partnership commenced business. The remaining $740,000 of the $1.42 million total was classified as start-up expenses under IRC § 195, which is subject to a similar amortization regime.

RA Petrovic stated that the IRS examination team's preliminary view was that a portion of the $680,000 classified as organizational expenses may in fact constitute non-deductible syndication costs under IRC § 709(a). Under IRC § 709(a), no deduction is allowed for amounts paid or incurred to organize a partnership or to promote the sale of, or to sell, interests in such partnership (i.e., syndication costs). While IRC § 709(b) provides an exception permitting the amortization and deduction of "organizational expenses" (as defined in IRC § 709(b)(3)), syndication costs are permanently non-deductible — they may not be amortized or capitalized and recovered through any means.

RA Petrovic explained that the critical distinction between organizational and syndication costs turns on the nature and purpose of the expenditure. Costs incurred to create the partnership — such as legal fees for drafting the partnership agreement, accounting fees incident to the organization of the partnership, and filing fees for state registrations — qualify as deductible organizational expenses. In contrast, costs incurred to promote and market partnership interests to investors — such as legal fees for preparing private placement memoranda, printing and distribution costs for offering materials, and brokerage or placement agent fees — are non-deductible syndication costs.

RA Petrovic indicated that the examination team's concern was based on an initial review of the IDR #1 response materials, which included summary descriptions of the $1.42 million in total deductions but did not include the underlying invoices or other source documentation that would allow the examination team to determine, on an item-by-item basis, whether each expenditure was properly classified as organizational or syndication in nature.

Revenue Agent Albrecht stated that the examination team planned to issue IDR #4 in early August 2023, and that IDR #4 would contain eight items requesting contemporaneous documentation relevant to Issue 3, including the following: (i) legal invoices from the law firm or firms that represented ICM in connection with its formation in 2016; (ii) engagement letters with formation counsel; (iii) Ironside Capital GP LLC board resolutions authorizing the formation of the Partnership and the incurrence of formation-related expenses; (iv) internal accounting records classifying each expenditure as organizational or syndication; and (v) any memoranda or analyses prepared by the Partnership's tax return preparer in connection with the classification of these expenses. RA Albrecht noted that IDR #4 was subsequently issued on August 4, 2023, containing eight items consistent with these descriptions.

RA Albrecht also noted the potential tax impact of a reclassification. If the entire $680,000 in claimed organizational expenses were reclassified as non-deductible syndication costs, the resulting tax impact would be approximately $251,600 ($680,000 × 37% top marginal rate), allocated across all partners proportionally based on their distributive shares of partnership income and deductions.

B. C&H Response and Defense Position

Leila Nazari provided an overview of the costs at issue, explaining that the $1.42 million total reflected costs incurred in connection with the formation of ICM in June 2016. The Partnership's formation date was June 14, 2016, the date on which the Certificate of Limited Partnership was filed with the Delaware Secretary of State. The formation-related legal and accounting work was performed over a period of approximately five months, from February 2016 through June 2016, by ICM's formation counsel and its accountants.

Ms. Nazari stated that ICM maintained contemporaneous legal invoices that itemized the work performed by formation counsel, distinguishing between work related to drafting the LPA and other formation documents (organizational activities) and work related to preparing the private placement memorandum, investor presentation materials, subscription agreements, and other marketing and offering materials (syndication activities). The invoices contained detailed time entry narratives that described the nature of the work performed by each attorney and paralegal on each date, which would allow the IRS examination team to evaluate the classification of each expenditure on a line-item basis.

Ms. Hartwell supplemented Ms. Nazari's presentation by noting that ICM's formation counsel at the time had appropriately segregated its billings between organizational and syndication activities, consistent with the IRS guidance distinguishing these two categories of expenses. The $680,000 at issue consisted of costs associated with the following organizational activities:

• Drafting and negotiating the Limited Partnership Agreement, including all exhibits and schedules

• Drafting and filing the Certificate of Limited Partnership with the Delaware Secretary of State

• Negotiating governance terms between the GP and the founding limited partners, including voting rights, advisory committee provisions, key person provisions, and removal provisions

• Preparing and filing the application for the Partnership's Employer Identification Number (EIN: 83-2741956) with the IRS

• Obtaining state registrations and blue sky filings required in connection with the formation of the Partnership (as distinguished from the offering of partnership interests)

• Drafting the GP's operating agreement and ancillary organizational documents

Ms. Hartwell stated that C&H would provide the contemporaneous invoices and Ironside Capital GP LLC board resolutions as part of the IDR #4 response, once IDR #4 was formally received. In addition, Ms. Hartwell referenced the tax return preparation workpapers maintained by Borwick Craine & Associates LLP, ICM's independent accounting firm, and prepared by Elliot Navarro, CPA, the engagement partner at Fenwick Craine who was responsible for the preparation of ICM's 2021 Form 1065 and the original classification of the organizational and syndication expenses. Ms. Hartwell stated that the Fenwick Craine workpapers included a detailed schedule of all formation-related expenditures, with each expenditure classified as either organizational or syndication based on the nature of the work reflected in the underlying invoices. C&H would coordinate with Fenwick Craine to obtain these workpapers and include them in the IDR #4 response as supporting documentation for the classification methodology.

C. IRS Reaction

Revenue Agent Petrovic stated that the contemporaneous invoices would be "dispositive" of the classification question if they clearly delineated organizational activities from syndication activities on a line-item basis. RA Petrovic indicated that the IRS examination team's primary concern was the possibility that the invoices were vague, generic, or otherwise insufficient to support the claimed classification. If the invoices contained specific time entry narratives identifying the nature of the work performed, RA Petrovic indicated that the examination team would likely be able to evaluate the classification without significant difficulty.

Revenue Agent Albrecht noted that Issue 3 was the smallest of the three issues in dollar terms — with a potential tax impact of approximately $251,600, compared to approximately $4.95 million for Issue 1 and a significantly larger amount for Issue 2 — and indicated that the examination team would wait for the IDR #4 response before forming a definitive view on the issue. RA Albrecht acknowledged that the contemporaneous invoices and Fenwick Craine workpapers would be the key documents and stated that if the documentation was clear, this issue should be relatively straightforward to resolve.

VII. General Examination Procedural Matters

The following procedural matters were discussed during the meeting, primarily near the conclusion of the substantive discussion:

Examination Oversight. Revenue Agent Albrecht confirmed that the examination remains under the jurisdiction of the IRS LB&I Division, Pass-Through Entities Practice Area, and is being conducted under the supervision of Territory Manager Karen P. Driscoll. RA Albrecht stated that Ms. Driscoll had been briefed on the three examination issues and was aware of the July 14 meeting. C&H has not had direct interaction with Ms. Driscoll to date, but RA Albrecht indicated that Ms. Driscoll might participate in future meetings or teleconferences as the examination progresses, particularly if the parties are unable to reach agreement on any of the three issues.

Anticipated IDR Activity. RA Albrecht stated that no additional IDRs beyond IDR #4 were anticipated at this time. However, RA Albrecht expressly reserved the IRS examination team's right to issue additional IDRs or follow-up requests as the examination progresses, depending on the substance of C&H's responses to IDR #3 and IDR #4 and the content of the comprehensive legal memorandum.

Total IDR Volume. Ms. Hartwell confirmed for the record that the total number of IDR items across all four requests was eighty (42 items in IDR #1, plus 18 items in IDR #2, plus 12 items in IDR #3, plus 8 items in IDR #4). Ms. Hartwell also noted that C&H had produced, or anticipated producing, approximately 4,600 pages of documents across all four IDR responses. Ms. Hartwell stated that C&H was committed to being responsive and cooperative throughout the examination process.

Comprehensive Legal Memorandum. Ms. Hartwell proposed submitting a single comprehensive legal memorandum addressing all three examination issues following the completion of the IDR #3 and IDR #4 responses. Ms. Hartwell stated that the memorandum would provide a unified presentation of C&H's legal position on each issue, supported by statutory authority, Treasury Regulations, legislative history, relevant case law, and published IRS guidance. RA Albrecht and IRS Counsel Lundgren both agreed that a comprehensive legal memorandum would be helpful and would facilitate the examination team's evaluation of the three issues. The parties discussed a target submission date and agreed that early September 2023 would be an appropriate timeline, allowing C&H sufficient time to complete the IDR #3 and IDR #4 responses and to prepare a thorough memorandum.

Statute of Limitations. RA Albrecht affirmatively noted that the statute of limitations under IRC § 6235 was not at risk for the 2021 tax year. Under the Bipartisan Budget Act of 2015 partnership audit rules applicable to ICM, the IRS generally has three years from the date the partnership return was filed to initiate an administrative adjustment. Because the 2021 Form 1065 was filed on September 15, 2022, the limitations period does not expire until September 15, 2025, providing ample time for the examination to proceed without time pressure. RA Albrecht confirmed that no consent to extend the limitations period (IRS Form 872 or Form 872-P) was being requested at this time.

VIII. Action Items

The following action items were identified during or as a result of the meeting:

A. Calderwood & Harkness LLP Action Items

1. IDR #3 Response (Due: July 28, 2023)

Complete the trade-level holding period analysis for all fourteen investment positions identified by the IRS examination team as challenged positions under IRC § 1061. Robert Jansen is responsible for finalizing the holding period schedule, which will be prepared in Excel workbook format with a summary tab and individual position detail tabs. The schedule will include, for each position: position identifier, security or instrument name, acquisition date, disposition date, holding period in calendar days and in years/months, acquisition cost, sale proceeds, realized gain or loss, and long-term vs. short-term classification.

Obtain and attach Ridgeline Securities LLC trade confirmations for each of the fourteen positions, cross-referenced to the corresponding entries in the holding period schedule. Coordinate with Ridgeline Securities LLC's client services team to obtain the trade confirmations in a timely manner sufficient to meet the July 28 deadline.

If any of the fourteen positions involve complex financial instruments (e.g., options, swaps, structured products) for which the standard holding period analysis may not apply, identify such instruments and include a discussion of the applicable holding period rules and C&H's position on the proper holding period treatment.

2. IDR #4 Response (Anticipated receipt: early August 2023; subsequently received August 4, 2023)

Gather contemporaneous legal invoices from ICM's formation in 2016, including invoices from formation counsel that itemize work performed on organizational activities versus syndication activities. Obtain Ironside Capital GP LLC board resolutions authorizing the formation of ICM and the incurrence of formation-related expenses. Coordinate with Borwick Craine & Associates LLP (Elliot Navarro, CPA, engagement partner) to obtain the original tax return preparation workpapers supporting the organizational/syndication cost classification methodology reflected in the 2021 Form 1065. Prepare the IDR #4 response within thirty days of receipt unless a different deadline is specified in IDR #4.

3. Comprehensive Legal Memorandum (Target submission: early September 2023)

Prepare and submit a formal comprehensive legal memorandum to Revenue Agent Albrecht and IRS Counsel Lundgren addressing all three examination issues. The memorandum will include:

• Issue 1 (IRC § 707(a)(2)(A)): Analysis of the management fee waiver under the disguised payment for services rules, including application of the six-factor test under Treas. Reg. § 1.707-2(c), discussion of the significance of the irrevocable pre-performance election, analysis of genuine entrepreneurial risk, and distinction from abusive fee conversion arrangements.

• Issue 2 (IRC § 1061): Analysis of the three-year holding period requirement for applicable partnership interests, including the scope of the API definition, applicable regulatory exclusions, and the holding period rules for any complex instruments among the fourteen challenged positions.

• Issue 3 (IRC §§ 709, 195): Analysis of the distinction between organizational and syndication costs, including the applicable legal standards and the factual basis for ICM's classification of the $680,000 at issue.

The memorandum will reference applicable statutory authority, Treasury Regulations, legislative history (including relevant committee reports), case law, and published IRS guidance (including Revenue Procedures, Revenue Rulings, Private Letter Rulings, and IRS Chief Counsel Advice memoranda, to the extent relevant and available).

4. Client Communication

Sylvia Hartwell will prepare a separate client update memorandum for distribution to Marcus Trent (General Counsel of ICM) and Desmond R. Calloway (Founder & Chief Investment Officer) summarizing the substance of the July 14 meeting and the IRS examination team's posture on each of the three issues. Ms. Hartwell will also coordinate with Priya Venkatesh (COO & CFO) to identify and obtain any additional documentation that may be needed for the IDR #3 and IDR #4 responses or for the comprehensive legal memorandum. All client communications will be maintained as privileged and confidential.

B. IRS Action Items (As Stated by IRS Team)

1. Revenue Agent Albrecht stated he would issue IDR #4 in early August 2023, containing eight items requesting contemporaneous documentation relating to the organizational and syndication cost classification issue. IDR #4 was subsequently received on August 4, 2023.

2. IRS Counsel Lundgren stated he would review C&H's comprehensive legal memorandum upon receipt and coordinate an internal review within the IRS Office of Chief Counsel, Large Business & International Branch 5. Mr. Lundgren indicated that the Chief Counsel review would focus on the IRC § 707(a)(2)(A) and IRC § 1061 issues given the dollar amounts involved.

3. Revenue Agent Albrecht stated he would schedule a follow-up teleconference following receipt of the comprehensive legal memorandum to discuss the IRS examination team's preliminary views on each of the three issues. RA Albrecht indicated that the follow-up teleconference would likely occur approximately three to four weeks after the IRS team's receipt of the comprehensive memorandum, to allow sufficient time for internal review.

IX. Observations and Strategic Assessment

The following observations and strategic assessments reflect the mental impressions, conclusions, and legal theories of counsel and are protected by the attorney work product doctrine. This section is intended solely for the use of C&H attorneys working on this matter and should not be disclosed to any person outside C&H without express authorization.

A. Tone and Demeanor of IRS Team

The meeting was conducted in a professional, courteous, and cooperative tone throughout. Both Revenue Agent Albrecht and Revenue Agent Petrovic were well-prepared and demonstrated that they had reviewed the IDR #1 and IDR #2 responses in considerable detail. RA Albrecht's questions were focused and substantive, and RA Petrovic's questions regarding entrepreneurial risk and record-keeping practices were thoughtful and reflected a genuine effort to understand the factual record.

The participation of IRS Counsel Eric S. Lundgren from the Office of Chief Counsel, Large Business & International Branch 5, is noteworthy. The assignment of a Chief Counsel attorney to this examination suggests that the IRS is devoting serious institutional attention to the management fee waiver and carried interest holding period issues, which is consistent with the significant dollar amounts at stake. The total potential partnership-level adjustment across all three issues is approximately $63.18 million ($23.8 million for Issue 1, plus $38.7 million for Issue 2, plus $680,000 for Issue 3), and the estimated aggregate tax impact across all partners is approximately $11.78 million. These amounts are well within the thresholds that would warrant Chief Counsel involvement.

Mr. Lundgren appeared to be most focused on Issue 2 (the IRC § 1061 holding period issue) and indicated on multiple occasions that objective, contemporaneous, third-party trade-level documentation would be the most persuasive form of evidence. This observation is relevant to our strategic approach: if the holding period schedules and Ridgeline Securities LLC trade confirmations conclusively demonstrate compliance with the three-year holding period, we may be able to resolve Issue 2 at the examination level without the need for extended legal debate.

Mr. Lundgren also appeared genuinely interested in the legal analysis on Issue 1 (the management fee waiver) and seemed to be approaching the issue with an open mind, notwithstanding his general statement about the increase in management fee waiver arrangements. His request for a comprehensive legal memorandum, rather than an immediate assertion of a deficiency position, suggests that the IRS team is willing to be persuaded if C&H presents a well-supported legal analysis.

B. Assessment of Each Issue

Issue 1 — Management Fee Waiver (IRC § 707(a)(2)(A)) — Amount at Issue: $23.8 Million

The IRS has not yet formed a definitive position on Issue 1. The examination team's concerns are understandable given the current enforcement environment and the IRS's institutional focus on management fee waiver arrangements. However, the facts are favorable to ICM for several reasons. The fee waiver election was irrevocable, made at the beginning of the 2021 calendar year before fund performance was known, and the GP bore genuine downside risk — including the risk of losing the entire $23.8 million waived amount. The contemporaneous documentation, including the Venkatesh memoranda and the GP board resolutions, demonstrates a legitimate business rationale for the waiver. The substantial capital at risk by the GP principals ($187.4 million for Calloway and $48.6 million for Venkatesh) further supports the conclusion that the arrangement reflects genuine entrepreneurial commitment rather than tax-motivated rate arbitrage.

The comprehensive legal memorandum will be critical to the resolution of Issue 1. The memorandum should present a thorough analysis of the six-factor test under Treas. Reg. § 1.707-2(c), with particular emphasis on the factors that weigh in ICM's favor: (i) the reasonable relationship between the allocation/distribution and the GP's services; (ii) the transitory nature of the allocation (or lack thereof); (iii) the time at which the allocation was agreed to (pre-performance); and (iv) the extent of the GP's capital interest subject to entrepreneurial risk.

Issue 2 — Carried Interest Holding Period (IRC § 1061) — Amount at Issue: $38.7 Million

Issue 2 appears to be the issue most susceptible to resolution through documentary evidence. The IRS team's concerns are fundamentally factual — do the fourteen challenged positions satisfy the three-year holding period under IRC § 1061? — and the resolution depends primarily on the trade-level records and prime broker confirmations. If the holding period schedules and Ridgeline Securities LLC trade confirmations demonstrate that all fourteen positions were held for more than three years, there is limited factual or legal basis for the IRS to sustain an adjustment. C&H's preliminary review indicates that all fourteen positions exceed the three-year threshold, which is encouraging. The IDR #3 response should be thorough, well-organized, and easy for the IRS team to verify against the third-party documentation.

The only potential complication on Issue 2 involves positions that may require non-standard holding period analysis (e.g., instruments involving constructive ownership rules, wash sale adjustments, or tacking of holding periods). Ms. Hartwell's response at the meeting — that the majority of the positions were equity and credit positions with straightforward acquisition and disposition dates — reduces this concern, but C&H should conduct a careful review to ensure that no position involves complex holding period issues that could undermine the otherwise strong documentary record.

Issue 3 — Organizational and Syndication Cost Deductions (IRC §§ 709, 195) — Amount at Issue: $680,000

Issue 3 is the smallest of the three issues by a significant margin, with a potential tax impact of approximately $251,600. The IRS team appeared least focused on this issue, and RA Albrecht's comment that the examination team would wait for the IDR #4 response before forming a view suggests that this issue may be resolved relatively quickly if the contemporaneous invoices clearly support the organizational classification. The fact that ICM's formation counsel appropriately segregated billings between organizational and syndication activities, and that Fenwick Craine's workpapers document the classification methodology, should provide a solid evidentiary foundation for ICM's position.

C. Privileged Recommendation

Based on the foregoing observations and assessment, I recommend the following strategic approach:

1. Prioritize the completion of the IDR #3 response and the trade-level holding period schedule to meet the July 28, 2023 deadline. This is the most time-sensitive deliverable and, if successful, has the potential to resolve the largest examination issue (Issue 2 — $38.7 million) through documentary evidence alone.

2. Begin drafting the comprehensive legal memorandum promptly, with particular emphasis on Issue 1 (the management fee waiver), which presents the greatest legal complexity and the highest degree of uncertainty regarding the IRS's ultimate position. The memorandum should be structured to address each of the specific concerns raised by RA Albrecht, RA Petrovic, and IRS Counsel Lundgren during the July 14 meeting.

3. If the comprehensive legal memorandum does not fully resolve the IRS's concerns on Issue 1, consider requesting a separate meeting with IRS Counsel Lundgren focused exclusively on the IRC § 707(a)(2)(A) analysis. A targeted, in-depth discussion with counsel may be more productive than attempting to address all three issues simultaneously.

4. Coordinate with the client team (Trent, Calloway, Venkatesh) to ensure that all documentation needed for the IDR #3 and IDR #4 responses is gathered promptly and that the client is informed of the IRS team's posture and our strategic approach.

X. Document Distribution and Confidentiality

This memorandum is subject to the attorney-client privilege and the attorney work product doctrine. The contents reflect confidential attorney-client communications and the mental impressions, conclusions, opinions, and legal theories of counsel prepared in anticipation of litigation or in connection with the provision of legal advice.

Distribution of this memorandum is limited to the following individuals, all of whom are attorneys or staff of Calderwood & Harkness LLP:

• Sylvia Hartwell, Partner, Tax Department

• Leonard Cross, Partner, Tax Department

• Leila Nazari, Associate, Tax Department

• Robert Jansen, Associate, Tax Department

This memorandum is not to be shared with client personnel, third parties, or any person outside of Calderwood & Harkness LLP without the prior express written approval of Sylvia Hartwell. Communication to the client regarding the substance of the July 14, 2023 meeting will be provided via a separate client update prepared by Ms. Hartwell, which will be tailored for client distribution and will not contain the strategic assessments and privileged recommendations set forth in Section IX above.

Prepared by:

________________________________________

Leila Nazari Associate, Tax Department Calderwood & Harkness LLP

Date: July 16, 2023

Reviewed by:

________________________________________

Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP

Date: ________

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This document is protected from disclosure by the attorney-client privilege and the attorney work product doctrine. Unauthorized review, use, disclosure, or distribution is prohibited.

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM
July 16, 2023
FROM: Leila Nazari, Associate, Tax Department
TO: Sylvia Hartwell, Partner, Tax Department Leonard Cross, Partner, Tax Department
RE: Ironside Capital Management LP (EIN: 83-2741956) — Summary of In-Person Meeting with IRS Examination Team, July 14, 2023
CLIENT/MATTER: Ironside Capital Management LP — IRS Partnership Examination, Tax Year 2021
This memorandum summarizes the substance of the in-person meeting held on July 14, 2023, between counsel for Ironside Capital Management LP ("ICM" or the "Partnership") and the IRS examination team at the IRS Manhattan Campus. This memorandum has been prepared in anticipation of litigation and reflects legal analysis and strategic assessments protected by the attorney-client privilege and the attorney work product doctrine. Distribution is restricted as set forth in Section X below.
I. Meeting Logistics
The in-person meeting took place on Friday, July 14, 2023, commencing at approximately 10:00 a.m. and concluding at approximately 1:15 p.m., for a total duration of approximately three hours and fifteen minutes. The meeting was held at the IRS Large Business & International ("LB&I") Division, Manhattan Campus, located at 290 Broadway, New York, NY 10007, in Conference Room 12-B on the twelfth floor of the federal building.
The meeting concerned the ongoing examination of ICM's 2021 Form 1065, U.S. Return of Partnership Income. The 2021 Form 1065 was filed on September 15, 2022, on extension. The examination was initiated by IRS Letter 2205-D, dated March 22, 2023, which notified ICM of the IRS's selection of the 2021 tax year for examination and identified the LB&I Division as the examining division. Calderwood & Harkness LLP ("C&H") entered its appearance as counsel for ICM via Form 2848, Power of Attorney and Declaration of Representative, filed with the IRS on April 3, 2023.
II. Attendees
The following individuals were present at the meeting:
A. Calderwood & Harkness LLP
•  Sylvia Hartwell — Partner, Tax Department, Responsible Partner for the engagement
•  Leila Nazari — Associate, Tax Department, Lead Associate for the engagement
B. IRS Examination Team
•  Timothy J. Albrecht — Revenue Agent, GS-13, Lead Examiner (Badge No. 74-28193), LB&I Division, Pass-Through Entities Practice Area
•  Dawn M. Petrovic — Revenue Agent, GS-12, LB&I Division, Pass-Through Entities Practice Area
•  Eric S. Lundgren — Attorney, IRS Office of Chief Counsel, Large Business & International Branch 5
C. Not in Attendance
•  Marcus Trent, General Counsel of ICM, did not attend the meeting. At C&H's recommendation, Mr. Trent was advised not to attend in order to maintain the Partnership's attorney-client privilege posture during the examination. The presence of in-house counsel at an examination meeting could create ambiguity regarding the scope of privileged communications, particularly given the IRS's potential interest in internal legal analyses regarding the management fee waiver arrangement. Mr. Trent was informed that C&H would provide a separate client update following the meeting.
•  Robert Jansen, Working Associate at C&H, did not attend the meeting in person. Mr. Jansen remained at the C&H office to provide real-time research support as needed during the meeting. Mr. Jansen was available by telephone and secure email throughout the duration of the meeting and was consulted once on a question regarding the IRC § 1061 regulatory framework (discussed below in Section V).
III. Purpose of Meeting
The meeting was requested by Revenue Agent Timothy J. Albrecht in a telephone call with Leila Nazari on July 6, 2023. RA Albrecht proposed the meeting in conjunction with the issuance of Information Document Request No. 3 ("IDR #3"), which was received by C&H on July 11, 2023. IDR #3 contained twelve items focused on carried interest holding period documentation under IRC § 1061, including requests for trade-level records, acquisition and disposition confirmations, and internal holding period analyses for specific positions liquidated during the 2021 tax year.
C&H agreed to the in-person meeting for the following reasons. First, the meeting provided an opportunity to discuss all three open examination issues in a single session, allowing C&H to present the factual and legal context for each issue and to better understand the IRS examination team's concerns and preliminary positions. Second, the meeting allowed C&H to provide context for the pending IDR #3 response, which is due on July 28, 2023, and to ensure that the response addressed the IRS team's specific evidentiary needs. Third, the in-person format facilitated a more productive dialogue than the prior telephone conferences and written correspondence, particularly given the complexity of the management fee waiver issue under IRC § 707(a)(2)(A).
This meeting represented the first in-person interaction between C&H and the IRS examination team. Prior interactions during the examination included the following:
•  IDR #1 Response — May 19, 2023: C&H submitted a comprehensive response to IDR #1, which contained forty-two items covering the Partnership's organizational documents, financial statements, partnership agreement, tax return workpapers, and general operational information. The IDR #1 response comprised approximately 2,847 pages of documents and was delivered both electronically (via IRS Secure Messaging) and in hard copy.
•  IDR #2 Response — June 23, 2023: C&H submitted a response to IDR #2, which contained eighteen items focused primarily on the management fee waiver arrangement, including the relevant provisions of the Limited Partnership Agreement ("LPA"), the GP's waiver election documentation, and contemporaneous memoranda prepared by Priya Venkatesh, ICM's Chief Operating Officer and Chief Financial Officer.
•  Telephone Conference — June 9, 2023: A telephone conference was held between Sylvia Hartwell and Leila Nazari (for C&H) and RA Albrecht and RA Petrovic (for the IRS), during which the parties discussed the scope of the examination and the IRS team's initial areas of focus. During that call, RA Albrecht identified three primary examination issues, which were subsequently confirmed in writing and which form the basis of the substantive discussion summarized in Sections IV through VI below.
IV. Discussion of Issue 1: Management Fee Waiver / Conversion (IRC § 707(a)(2)(A))
A. IRS Concerns Expressed
Revenue Agent Albrecht opened the substantive portion of the meeting by addressing Issue 1, which concerns the management fee waiver arrangement implemented by Ironside Capital GP LLC (the "GP") for the 2021 tax year. Specifically, the GP waived $23.8 million of the $71.6 million in total management fees to which it was contractually entitled under the LPA for the 2021 fiscal year. In exchange for the waived fees, the GP received an increased capital interest in ICM, entitling the GP to a proportionate share of future fund appreciation and investment returns.
RA Albrecht stated that the examination team's principal concern was that the waiver of the $23.8 million in management fees in exchange for an increased capital interest constituted a disguised payment for services under IRC § 707(a)(2)(A). Under that provision, if a partner performs services for the partnership, and there is a related direct or indirect allocation and distribution to the partner, and the performance of such services and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, the transaction is treated as a payment to a non-partner for services — i.e., as ordinary income subject to ordinary income tax rates.
RA Albrecht stated that the economic effect of the waiver arrangement was to convert what would otherwise be ordinary income — management fees taxable at a top federal rate of up to 37%, plus the 3.8% net investment income tax ("NIIT") under IRC § 1411 — into potential long-term capital gain income taxable at the preferential 20% rate, through the mechanism of subsequent fund appreciation attributable to the GP's increased capital interest.
RA Albrecht provided an estimate of the potential tax impact of a full reclassification. Specifically, the estimated differential was calculated as follows:
•  Ordinary/LTCG rate differential: $23.8 million × approximately 17 percentage points (37% ordinary rate minus 20% LTCG rate) = approximately $4.046 million
•  NIIT impact: $23.8 million × 3.8% = approximately $904,000
•  Total estimated tax impact for Issue 1: approximately $4.95 million (across all affected partners, primarily the GP's principals, Desmond R. Calloway and Priya Venkatesh)
Revenue Agent Petrovic then raised a factual question regarding the degree to which the GP bore genuine entrepreneurial risk with respect to the waived amount. Specifically, RA Petrovic noted that ICM's consistent strong investment performance — including an approximate 18.7% gross return in the 2021 calendar year — arguably reduced the real economic risk associated with the fee waiver. RA Petrovic questioned whether, in the context of a fund with a track record of consistently positive returns, the purported risk of loss on the waived fees was more theoretical than real. RA Petrovic suggested that the IRS would want to examine the fund's historical performance record to assess whether there was a genuine possibility that the GP would receive less value through the capital interest than it would have received in management fees.
IRS Counsel Eric S. Lundgren then provided additional legal context for the IRS team's concerns. Mr. Lundgren referenced Revenue Procedure 93-27, which provides guidance on the tax treatment of the receipt of a partnership profits interest for services, and subsequent guidance including Revenue Procedure 2001-43 regarding substantially nonvested profits interests. Mr. Lundgren expressed the view that the IRS has observed a significant increase in management fee waiver arrangements among private equity, hedge fund, and alternative investment fund managers, and that in many instances these arrangements lack genuine economic substance because the waiver is a formalistic mechanism designed to achieve rate arbitrage without exposing the fund manager to meaningful risk of economic loss. Mr. Lundgren noted that the IRS Office of Chief Counsel has been devoting attention to this category of transactions and that the examination team intended to scrutinize the arrangement closely.
B. C&H Response and Defense Position
Sylvia Hartwell provided a detailed explanation of the fee waiver mechanics as set forth in the ICM Limited Partnership Agreement. Specifically, Ms. Hartwell walked the IRS team through LPA § 4.1, which governs the management fee structure, the GP's right to elect to waive all or a portion of its management fee entitlement in exchange for an increased capital interest, and the terms and conditions applicable to any such waiver election. Ms. Hartwell emphasized the following points in support of the Partnership's position:
Irrevocable Pre-Performance Election. The fee waiver was an irrevocable election made by the GP at the beginning of the 2021 calendar year, in January 2021, before the fund's 2021 investment performance was known. The waiver election was documented in a written instrument executed by Desmond R. Calloway, in his capacity as Managing Member of Ironside Capital GP LLC, dated January 8, 2021. The irrevocable nature of the election and its timing are critical to the analysis under IRC § 707(a)(2)(A), because the GP was committing to forgo guaranteed fee income at a time when the GP had no way of knowing whether the fund would generate positive returns, negative returns, or returns below the management fee amount that was being waived. This is fundamentally different from a retroactive reclassification of fees after investment performance is known.
Genuine Downside Risk. The GP's increased capital interest obtained in exchange for the waived management fees was subject to genuine downside risk. If the fund's investment performance had been negative during the 2021 calendar year, or if the fund had experienced losses that reduced the value of the GP's increased capital interest below the amount of the waived management fees, the GP would have suffered a real economic loss. The GP could, in a worst-case scenario, lose the entire $23.8 million waived amount if the fund experienced significant investment losses. This downside exposure constitutes the type of genuine entrepreneurial risk that distinguishes legitimate fee waiver arrangements from abusive fee conversion structures.
Distinguishable from Abusive Structures. Ms. Hartwell distinguished the ICM arrangement from abusive management fee waiver or fee conversion structures that the IRS has challenged in other contexts. Specifically, the ICM arrangement was distinguishable because: (i) the GP bore a real risk of loss, not a de minimis or theoretical risk; (ii) the waiver was not a retroactive reclassification after investment performance was known; (iii) the waiver terms were established at the outset and were an integral part of the LPA as negotiated between the GP and the limited partners; and (iv) the waiver was fully disclosed to limited partners in the fund's annual reporting and in supplemental communications.
Contemporaneous Documentation. Ms. Hartwell referenced the contemporaneous memoranda prepared by Priya Venkatesh, ICM's COO and CFO, which documented the business rationale for the fee waiver election. These memoranda, which were previously provided to the IRS examination team as part of the IDR #2 response submitted on June 23, 2023, set forth the GP's strategic reasoning for the waiver, including the alignment of GP and LP interests through increased GP capital commitment, the signaling effect to current and prospective limited partners of the GP's confidence in the fund's investment strategy, and the GP's desire to reduce the fund's fixed cost burden during a period of anticipated market volatility.
Substantial Capital at Risk. Ms. Hartwell further noted that the principals of the GP had substantial personal capital invested in the fund, which further evidenced genuine entrepreneurial commitment and alignment with the limited partners. Specifically, as of December 31, 2021, Desmond R. Calloway maintained a capital account balance of $187.4 million, and Priya Venkatesh maintained a capital account balance of $48.6 million. These capital account balances reflected cumulative invested capital, reinvested returns, and the additional capital interests obtained through prior fee waiver elections. The magnitude of the GP principals' personal capital at risk demonstrates that the fee waiver was part of a broader pattern of economic alignment, not an isolated tax-motivated transaction.
At the conclusion of her presentation on Issue 1, Ms. Hartwell offered to prepare and submit a comprehensive legal memorandum addressing the management fee waiver issue in detail, including a full analysis of the statutory framework under IRC § 707(a)(2)(A), the relevant Treasury Regulations (including Treas. Reg. § 1.707-2), applicable legislative history, relevant case law, and published IRS guidance. Ms. Hartwell stated that the comprehensive memorandum would present C&H's legal position on the issue and would address each of the specific concerns raised by the IRS examination team during the meeting.
C. IRS Reaction
Revenue Agent Albrecht acknowledged receipt and review of the IDR #2 response materials, including the Venkatesh contemporaneous memoranda, but indicated that the examination team had not yet reached a final position on Issue 1. RA Albrecht stated that the examination team would need additional time to complete its analysis and that the comprehensive legal memorandum proposed by Ms. Hartwell would be an important input into the IRS team's evaluation.
IRS Counsel Lundgren stated that he would review the legal authorities more carefully once C&H's comprehensive legal memorandum was submitted. Mr. Lundgren indicated that his primary areas of interest in the memorandum would include: (i) the proper application of the six-factor test under Treas. Reg. § 1.707-2(c) for determining whether a purported allocation and distribution to a partner should be treated as a disguised payment for services; (ii) the relevance of the irrevocable election timing and the significance of pre-performance versus post-performance waivers; and (iii) the appropriate standard for evaluating whether the GP bore "significant" entrepreneurial risk, particularly in light of the fund's historical performance record.
Mr. Lundgren also raised a specific factual question during this portion of the discussion. He asked whether any of ICM's limited partners — and he specifically referenced the Northgate Public Employees' Retirement System, which maintains a $412 million capital commitment to the fund, as well as other tax-exempt investors — had raised concerns about the fee waiver arrangement. Mr. Lundgren's question appeared to be directed at whether the limited partners viewed the waiver as genuinely beneficial to their interests (i.e., reducing the fund's fixed management fee expense) or whether the arrangement was primarily for the benefit of the GP (i.e., obtaining preferential tax treatment on the waived amount). Ms. Hartwell responded that communications between ICM and its limited partners regarding the fee waiver were privileged, but she confirmed that the fee waiver arrangement was properly disclosed to all limited partners as required by the LPA, and that the waiver mechanism was a negotiated provision of the LPA that reflected the arm's-length bargaining between the GP and the limited partners at the time of the fund's formation and during subsequent closings.
V. Discussion of Issue 2: Carried Interest Holding Period (IRC § 1061)
A. IRS Concerns Expressed
IRS Counsel Eric S. Lundgren led the discussion on Issue 2, which concerns the holding period requirements applicable to performance allocations (commonly referred to as "carried interest" or "carry") under IRC § 1061. The issue involves $38.7 million of performance allocations, out of $94.3 million in total performance allocations to the GP for the 2021 tax year, that ICM reported as long-term capital gain on its 2021 Form 1065 and corresponding Schedule K-1s.
Mr. Lundgren provided the statutory framework for the IRS team's analysis. IRC § 1061, enacted as part of the Tax Cuts and Jobs Act of 2017, provides that, notwithstanding the general one-year holding period requirement for long-term capital gain treatment under IRC § 1222, gains allocable to an "applicable partnership interest" ("API") are treated as short-term capital gain unless the underlying assets giving rise to the gain satisfy a three-year holding period. An "applicable partnership interest" is defined as any interest in a partnership that, directly or indirectly, is transferred to (or held by) a taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business. The three-year holding period requirement applies at the level of the assets held by the partnership — i.e., the partnership's investment positions must have been held for more than three years for the allocable share of gain to qualify as long-term capital gain in the hands of the GP.
Mr. Lundgren stated that the examination team had identified fourteen specific investment positions liquidated by ICM during the 2021 tax year for which the examination team questioned whether the three-year holding period threshold under IRC § 1061 was met. Mr. Lundgren indicated that these fourteen positions collectively accounted for the $38.7 million in performance allocations reported as long-term capital gain. The remaining $55.6 million of the $94.3 million total performance allocations for 2021 were reported as short-term capital gain and were not at issue.
Mr. Lundgren noted that IDR #3, which C&H received on July 11, 2023, was specifically designed to obtain trade-level documentation to verify the acquisition and disposition dates for each of the fourteen positions in question. IDR #3 requested, among other items, internal trading records, portfolio management system reports, trade blotters, and prime broker confirmations for each of the fourteen positions.
Revenue Agent Petrovic then asked a procedural question regarding ICM's record-keeping practices. Specifically, RA Petrovic asked whether ICM maintained contemporaneous records of acquisition dates at the trade level, or whether the holding period analysis reflected in the tax return and supporting workpapers had been reconstructed for purposes of the examination. RA Petrovic noted that in prior examinations of other fund managers, the IRS had encountered situations in which holding period data was assembled after the fact from incomplete or inconsistent records, which had raised credibility concerns.
Revenue Agent Albrecht supplemented RA Petrovic's question by requesting that the IDR #3 response include trade confirmations from Ridgeline Securities LLC, ICM's prime broker, to independently corroborate the acquisition and disposition dates reflected in ICM's internal records. RA Albrecht stated that independent third-party documentation from the prime broker would be the most persuasive evidence of the actual trade dates and would allow the examination team to verify ICM's holding period calculations without relying solely on ICM's own internal records.
B. C&H Response and Defense Position
Ms. Hartwell confirmed that ICM's records contained contemporaneous trade-level data and that the holding period analysis reflected in the 2021 tax return workpapers was based on original, contemporaneous records maintained by two independent third-party service providers: Greystone Fund Administration LLC, ICM's independent fund administrator, and Ridgeline Securities LLC, ICM's prime broker. Ms. Hartwell emphasized that the holding period data was not reconstructed or assembled after the fact for purposes of the examination; rather, the acquisition and disposition dates for all investment positions were recorded in real time by Greystone and Ridgeline as part of their ordinary course of business operations in connection with the fund's investment activities.
Leila Nazari then provided additional detail regarding the documentation that C&H was preparing for the IDR #3 response. Ms. Nazari stated that Robert Jansen, the working associate at C&H who remained at the office during the meeting, was in the process of preparing a detailed holding period schedule at the trade level for all fourteen positions identified by the IRS examination team. The schedule would include the following data fields for each position:
•  Position identifier (internal ICM reference number)
•  Security or instrument name (including CUSIP or ISIN where applicable)
•  Acquisition date (from Greystone Fund Administration LLC records)
•  Disposition date (from Greystone Fund Administration LLC records)
•  Holding period expressed in calendar days
•  Holding period expressed in years and months
•  Acquisition cost (cost basis)
•  Sale proceeds (gross disposition proceeds)
•  Realized gain or loss
•  Long-term vs. short-term classification under IRC § 1061 (three-year holding period threshold)
Ms. Nazari confirmed that C&H would cross-reference each entry in the holding period schedule to the corresponding Ridgeline Securities LLC trade confirmation, and that copies of the relevant trade confirmations would be appended to the IDR #3 response as supporting exhibits. The cross-referencing process would enable the IRS examination team to independently verify each acquisition and disposition date against third-party documentation.
Ms. Hartwell stated that C&H's preliminary review of the records for all fourteen positions indicated that each of the fourteen positions exceeded the three-year holding period required by IRC § 1061. Ms. Hartwell noted that C&H's review was ongoing and that the IDR #3 response would contain a definitive position for each of the fourteen positions, but that preliminary indications were favorable.
Ms. Hartwell also raised an additional legal point for the examination team's consideration. Specifically, Ms. Hartwell noted that the Treasury Regulations under IRC § 1061 (Treas. Reg. § 1.1061-1 through 1.1061-6) distinguish between "applicable partnership interests" and certain capital interests that are excluded from the definition of an API and therefore from the three-year holding period requirement. In particular, Treas. Reg. § 1.1061-3(c)(2) provides that a partnership interest is not an API to the extent it represents a right to share in partnership capital that was contributed by the taxpayer (other than in exchange for services). Ms. Hartwell stated that C&H would address the scope of IRC § 1061 and the applicable regulatory exclusions in the comprehensive legal memorandum, to the extent that any of the fourteen positions at issue may be allocable to capital interests that fall outside the API definition.
C. IRS Reaction
IRS Counsel Lundgren stated that the trade-level holding period schedules with Ridgeline Securities LLC trade confirmation cross-references would be "critical" to resolving Issue 2. Mr. Lundgren emphasized that objective, contemporaneous, third-party documentation of trade dates would be the most effective means of demonstrating compliance with the three-year holding period requirement and that such documentation, if consistent with ICM's reported positions, would substantially reduce the examination team's concerns.
Revenue Agent Albrecht confirmed that the IDR #3 response deadline of July 28, 2023, remained in effect and that no extension of time was being offered at this time. RA Albrecht noted that if C&H anticipated any difficulty in meeting the deadline, C&H should contact him as soon as possible to discuss a potential extension request.
Mr. Lundgren raised one additional question near the conclusion of the Issue 2 discussion. He asked whether any of the fourteen positions in question involved complex financial instruments — such as options, swaps, convertible securities, structured products, or other derivative instruments — for which the holding period determination might be non-standard or subject to special rules. Mr. Lundgren noted that the holding period rules for certain derivative instruments and constructive ownership positions can be complex and may differ from the straightforward acquisition-to-disposition analysis applicable to outright equity and debt positions. Ms. Hartwell responded that the majority of the fourteen positions at issue were equity and credit positions (including common stock, preferred stock, and corporate bonds) with straightforward acquisition and disposition dates. Ms. Hartwell stated that C&H would review the full list of fourteen positions and would identify in the IDR #3 response any instruments that might require special holding period analysis, including a discussion of the applicable rules and C&H's position on the proper holding period treatment for each such instrument.
VI. Discussion of Issue 3: Organizational and Syndication Cost Deductions (IRC §§ 709, 195)
A. IRS Concerns Expressed
Revenue Agent Petrovic led the discussion on Issue 3, which concerns the classification of expenses deducted by ICM under IRC § 709(b) as organizational expenses. Specifically, ICM claimed a total of $1.42 million in deductions under IRC § 709(b) on its 2021 Form 1065. Of this total, $680,000 was classified as organizational expenses — i.e., expenses incurred in connection with the creation of the partnership — that were amortizable and deductible over a 180-month period beginning with the month in which the partnership commenced business. The remaining $740,000 of the $1.42 million total was classified as start-up expenses under IRC § 195, which is subject to a similar amortization regime.
RA Petrovic stated that the IRS examination team's preliminary view was that a portion of the $680,000 classified as organizational expenses may in fact constitute non-deductible syndication costs under IRC § 709(a). Under IRC § 709(a), no deduction is allowed for amounts paid or incurred to organize a partnership or to promote the sale of, or to sell, interests in such partnership (i.e., syndication costs). While IRC § 709(b) provides an exception permitting the amortization and deduction of "organizational expenses" (as defined in IRC § 709(b)(3)), syndication costs are permanently non-deductible — they may not be amortized or capitalized and recovered through any means.
RA Petrovic explained that the critical distinction between organizational and syndication costs turns on the nature and purpose of the expenditure. Costs incurred to create the partnership — such as legal fees for drafting the partnership agreement, accounting fees incident to the organization of the partnership, and filing fees for state registrations — qualify as deductible organizational expenses. In contrast, costs incurred to promote and market partnership interests to investors — such as legal fees for preparing private placement memoranda, printing and distribution costs for offering materials, and brokerage or placement agent fees — are non-deductible syndication costs.
RA Petrovic indicated that the examination team's concern was based on an initial review of the IDR #1 response materials, which included summary descriptions of the $1.42 million in total deductions but did not include the underlying invoices or other source documentation that would allow the examination team to determine, on an item-by-item basis, whether each expenditure was properly classified as organizational or syndication in nature.
Revenue Agent Albrecht stated that the examination team planned to issue IDR #4 in early August 2023, and that IDR #4 would contain eight items requesting contemporaneous documentation relevant to Issue 3, including the following: (i) legal invoices from the law firm or firms that represented ICM in connection with its formation in 2016; (ii) engagement letters with formation counsel; (iii) Ironside Capital GP LLC board resolutions authorizing the formation of the Partnership and the incurrence of formation-related expenses; (iv) internal accounting records classifying each expenditure as organizational or syndication; and (v) any memoranda or analyses prepared by the Partnership's tax return preparer in connection with the classification of these expenses. RA Albrecht noted that IDR #4 was subsequently issued on August 4, 2023, containing eight items consistent with these descriptions.
RA Albrecht also noted the potential tax impact of a reclassification. If the entire $680,000 in claimed organizational expenses were reclassified as non-deductible syndication costs, the resulting tax impact would be approximately $251,600 ($680,000 × 37% top marginal rate), allocated across all partners proportionally based on their distributive shares of partnership income and deductions.
B. C&H Response and Defense Position
Leila Nazari provided an overview of the costs at issue, explaining that the $1.42 million total reflected costs incurred in connection with the formation of ICM in June 2016. The Partnership's formation date was June 14, 2016, the date on which the Certificate of Limited Partnership was filed with the Delaware Secretary of State. The formation-related legal and accounting work was performed over a period of approximately five months, from February 2016 through June 2016, by ICM's formation counsel and its accountants.
Ms. Nazari stated that ICM maintained contemporaneous legal invoices that itemized the work performed by formation counsel, distinguishing between work related to drafting the LPA and other formation documents (organizational activities) and work related to preparing the private placement memorandum, investor presentation materials, subscription agreements, and other marketing and offering materials (syndication activities). The invoices contained detailed time entry narratives that described the nature of the work performed by each attorney and paralegal on each date, which would allow the IRS examination team to evaluate the classification of each expenditure on a line-item basis.
Ms. Hartwell supplemented Ms. Nazari's presentation by noting that ICM's formation counsel at the time had appropriately segregated its billings between organizational and syndication activities, consistent with the IRS guidance distinguishing these two categories of expenses. The $680,000 at issue consisted of costs associated with the following organizational activities:
•  Drafting and negotiating the Limited Partnership Agreement, including all exhibits and schedules
•  Drafting and filing the Certificate of Limited Partnership with the Delaware Secretary of State
•  Negotiating governance terms between the GP and the founding limited partners, including voting rights, advisory committee provisions, key person provisions, and removal provisions
•  Preparing and filing the application for the Partnership's Employer Identification Number (EIN: 83-2741956) with the IRS
•  Obtaining state registrations and blue sky filings required in connection with the formation of the Partnership (as distinguished from the offering of partnership interests)
•  Drafting the GP's operating agreement and ancillary organizational documents
Ms. Hartwell stated that C&H would provide the contemporaneous invoices and Ironside Capital GP LLC board resolutions as part of the IDR #4 response, once IDR #4 was formally received. In addition, Ms. Hartwell referenced the tax return preparation workpapers maintained by Borwick Craine & Associates LLP, ICM's independent accounting firm, and prepared by Elliot Navarro, CPA, the engagement partner at Fenwick Craine who was responsible for the preparation of ICM's 2021 Form 1065 and the original classification of the organizational and syndication expenses. Ms. Hartwell stated that the Fenwick Craine workpapers included a detailed schedule of all formation-related expenditures, with each expenditure classified as either organizational or syndication based on the nature of the work reflected in the underlying invoices. C&H would coordinate with Fenwick Craine to obtain these workpapers and include them in the IDR #4 response as supporting documentation for the classification methodology.
C. IRS Reaction
Revenue Agent Petrovic stated that the contemporaneous invoices would be "dispositive" of the classification question if they clearly delineated organizational activities from syndication activities on a line-item basis. RA Petrovic indicated that the IRS examination team's primary concern was the possibility that the invoices were vague, generic, or otherwise insufficient to support the claimed classification. If the invoices contained specific time entry narratives identifying the nature of the work performed, RA Petrovic indicated that the examination team would likely be able to evaluate the classification without significant difficulty.
Revenue Agent Albrecht noted that Issue 3 was the smallest of the three issues in dollar terms — with a potential tax impact of approximately $251,600, compared to approximately $4.95 million for Issue 1 and a significantly larger amount for Issue 2 — and indicated that the examination team would wait for the IDR #4 response before forming a definitive view on the issue. RA Albrecht acknowledged that the contemporaneous invoices and Fenwick Craine workpapers would be the key documents and stated that if the documentation was clear, this issue should be relatively straightforward to resolve.
VII. General Examination Procedural Matters
The following procedural matters were discussed during the meeting, primarily near the conclusion of the substantive discussion:
Examination Oversight. Revenue Agent Albrecht confirmed that the examination remains under the jurisdiction of the IRS LB&I Division, Pass-Through Entities Practice Area, and is being conducted under the supervision of Territory Manager Karen P. Driscoll. RA Albrecht stated that Ms. Driscoll had been briefed on the three examination issues and was aware of the July 14 meeting. C&H has not had direct interaction with Ms. Driscoll to date, but RA Albrecht indicated that Ms. Driscoll might participate in future meetings or teleconferences as the examination progresses, particularly if the parties are unable to reach agreement on any of the three issues.
Anticipated IDR Activity. RA Albrecht stated that no additional IDRs beyond IDR #4 were anticipated at this time. However, RA Albrecht expressly reserved the IRS examination team's right to issue additional IDRs or follow-up requests as the examination progresses, depending on the substance of C&H's responses to IDR #3 and IDR #4 and the content of the comprehensive legal memorandum.
Total IDR Volume. Ms. Hartwell confirmed for the record that the total number of IDR items across all four requests was eighty (42 items in IDR #1, plus 18 items in IDR #2, plus 12 items in IDR #3, plus 8 items in IDR #4). Ms. Hartwell also noted that C&H had produced, or anticipated producing, approximately 4,600 pages of documents across all four IDR responses. Ms. Hartwell stated that C&H was committed to being responsive and cooperative throughout the examination process.
Comprehensive Legal Memorandum. Ms. Hartwell proposed submitting a single comprehensive legal memorandum addressing all three examination issues following the completion of the IDR #3 and IDR #4 responses. Ms. Hartwell stated that the memorandum would provide a unified presentation of C&H's legal position on each issue, supported by statutory authority, Treasury Regulations, legislative history, relevant case law, and published IRS guidance. RA Albrecht and IRS Counsel Lundgren both agreed that a comprehensive legal memorandum would be helpful and would facilitate the examination team's evaluation of the three issues. The parties discussed a target submission date and agreed that early September 2023 would be an appropriate timeline, allowing C&H sufficient time to complete the IDR #3 and IDR #4 responses and to prepare a thorough memorandum.
Statute of Limitations. RA Albrecht affirmatively noted that the statute of limitations under IRC § 6235 was not at risk for the 2021 tax year. Under the Bipartisan Budget Act of 2015 partnership audit rules applicable to ICM, the IRS generally has three years from the date the partnership return was filed to initiate an administrative adjustment. Because the 2021 Form 1065 was filed on September 15, 2022, the limitations period does not expire until September 15, 2025, providing ample time for the examination to proceed without time pressure. RA Albrecht confirmed that no consent to extend the limitations period (IRS Form 872 or Form 872-P) was being requested at this time.
VIII. Action Items
The following action items were identified during or as a result of the meeting:
A. Calderwood & Harkness LLP Action Items
1. IDR #3 Response (Due: July 28, 2023)
Complete the trade-level holding period analysis for all fourteen investment positions identified by the IRS examination team as challenged positions under IRC § 1061. Robert Jansen is responsible for finalizing the holding period schedule, which will be prepared in Excel workbook format with a summary tab and individual position detail tabs. The schedule will include, for each position: position identifier, security or instrument name, acquisition date, disposition date, holding period in calendar days and in years/months, acquisition cost, sale proceeds, realized gain or loss, and long-term vs. short-term classification.
Obtain and attach Ridgeline Securities LLC trade confirmations for each of the fourteen positions, cross-referenced to the corresponding entries in the holding period schedule. Coordinate with Ridgeline Securities LLC's client services team to obtain the trade confirmations in a timely manner sufficient to meet the July 28 deadline.
If any of the fourteen positions involve complex financial instruments (e.g., options, swaps, structured products) for which the standard holding period analysis may not apply, identify such instruments and include a discussion of the applicable holding period rules and C&H's position on the proper holding period treatment.
2. IDR #4 Response (Anticipated receipt: early August 2023; subsequently received August 4, 2023)
Gather contemporaneous legal invoices from ICM's formation in 2016, including invoices from formation counsel that itemize work performed on organizational activities versus syndication activities. Obtain Ironside Capital GP LLC board resolutions authorizing the formation of ICM and the incurrence of formation-related expenses. Coordinate with Borwick Craine & Associates LLP (Elliot Navarro, CPA, engagement partner) to obtain the original tax return preparation workpapers supporting the organizational/syndication cost classification methodology reflected in the 2021 Form 1065. Prepare the IDR #4 response within thirty days of receipt unless a different deadline is specified in IDR #4.
3. Comprehensive Legal Memorandum (Target submission: early September 2023)
Prepare and submit a formal comprehensive legal memorandum to Revenue Agent Albrecht and IRS Counsel Lundgren addressing all three examination issues. The memorandum will include:
•  Issue 1 (IRC § 707(a)(2)(A)): Analysis of the management fee waiver under the disguised payment for services rules, including application of the six-factor test under Treas. Reg. § 1.707-2(c), discussion of the significance of the irrevocable pre-performance election, analysis of genuine entrepreneurial risk, and distinction from abusive fee conversion arrangements.
•  Issue 2 (IRC § 1061): Analysis of the three-year holding period requirement for applicable partnership interests, including the scope of the API definition, applicable regulatory exclusions, and the holding period rules for any complex instruments among the fourteen challenged positions.
•  Issue 3 (IRC §§ 709, 195): Analysis of the distinction between organizational and syndication costs, including the applicable legal standards and the factual basis for ICM's classification of the $680,000 at issue.
The memorandum will reference applicable statutory authority, Treasury Regulations, legislative history (including relevant committee reports), case law, and published IRS guidance (including Revenue Procedures, Revenue Rulings, Private Letter Rulings, and IRS Chief Counsel Advice memoranda, to the extent relevant and available).
4. Client Communication
Sylvia Hartwell will prepare a separate client update memorandum for distribution to Marcus Trent (General Counsel of ICM) and Desmond R. Calloway (Founder & Chief Investment Officer) summarizing the substance of the July 14 meeting and the IRS examination team's posture on each of the three issues. Ms. Hartwell will also coordinate with Priya Venkatesh (COO & CFO) to identify and obtain any additional documentation that may be needed for the IDR #3 and IDR #4 responses or for the comprehensive legal memorandum. All client communications will be maintained as privileged and confidential.
B. IRS Action Items (As Stated by IRS Team)
1. Revenue Agent Albrecht stated he would issue IDR #4 in early August 2023, containing eight items requesting contemporaneous documentation relating to the organizational and syndication cost classification issue. IDR #4 was subsequently received on August 4, 2023.
2. IRS Counsel Lundgren stated he would review C&H's comprehensive legal memorandum upon receipt and coordinate an internal review within the IRS Office of Chief Counsel, Large Business & International Branch 5. Mr. Lundgren indicated that the Chief Counsel review would focus on the IRC § 707(a)(2)(A) and IRC § 1061 issues given the dollar amounts involved.
3. Revenue Agent Albrecht stated he would schedule a follow-up teleconference following receipt of the comprehensive legal memorandum to discuss the IRS examination team's preliminary views on each of the three issues. RA Albrecht indicated that the follow-up teleconference would likely occur approximately three to four weeks after the IRS team's receipt of the comprehensive memorandum, to allow sufficient time for internal review.
IX. Observations and Strategic Assessment
The following observations and strategic assessments reflect the mental impressions, conclusions, and legal theories of counsel and are protected by the attorney work product doctrine. This section is intended solely for the use of C&H attorneys working on this matter and should not be disclosed to any person outside C&H without express authorization.
A. Tone and Demeanor of IRS Team
The meeting was conducted in a professional, courteous, and cooperative tone throughout. Both Revenue Agent Albrecht and Revenue Agent Petrovic were well-prepared and demonstrated that they had reviewed the IDR #1 and IDR #2 responses in considerable detail. RA Albrecht's questions were focused and substantive, and RA Petrovic's questions regarding entrepreneurial risk and record-keeping practices were thoughtful and reflected a genuine effort to understand the factual record.
The participation of IRS Counsel Eric S. Lundgren from the Office of Chief Counsel, Large Business & International Branch 5, is noteworthy. The assignment of a Chief Counsel attorney to this examination suggests that the IRS is devoting serious institutional attention to the management fee waiver and carried interest holding period issues, which is consistent with the significant dollar amounts at stake. The total potential partnership-level adjustment across all three issues is approximately $63.18 million ($23.8 million for Issue 1, plus $38.7 million for Issue 2, plus $680,000 for Issue 3), and the estimated aggregate tax impact across all partners is approximately $11.78 million. These amounts are well within the thresholds that would warrant Chief Counsel involvement.
Mr. Lundgren appeared to be most focused on Issue 2 (the IRC § 1061 holding period issue) and indicated on multiple occasions that objective, contemporaneous, third-party trade-level documentation would be the most persuasive form of evidence. This observation is relevant to our strategic approach: if the holding period schedules and Ridgeline Securities LLC trade confirmations conclusively demonstrate compliance with the three-year holding period, we may be able to resolve Issue 2 at the examination level without the need for extended legal debate.
Mr. Lundgren also appeared genuinely interested in the legal analysis on Issue 1 (the management fee waiver) and seemed to be approaching the issue with an open mind, notwithstanding his general statement about the increase in management fee waiver arrangements. His request for a comprehensive legal memorandum, rather than an immediate assertion of a deficiency position, suggests that the IRS team is willing to be persuaded if C&H presents a well-supported legal analysis.
B. Assessment of Each Issue
Issue 1 — Management Fee Waiver (IRC § 707(a)(2)(A)) — Amount at Issue: $23.8 Million
The IRS has not yet formed a definitive position on Issue 1. The examination team's concerns are understandable given the current enforcement environment and the IRS's institutional focus on management fee waiver arrangements. However, the facts are favorable to ICM for several reasons. The fee waiver election was irrevocable, made at the beginning of the 2021 calendar year before fund performance was known, and the GP bore genuine downside risk — including the risk of losing the entire $23.8 million waived amount. The contemporaneous documentation, including the Venkatesh memoranda and the GP board resolutions, demonstrates a legitimate business rationale for the waiver. The substantial capital at risk by the GP principals ($187.4 million for Calloway and $48.6 million for Venkatesh) further supports the conclusion that the arrangement reflects genuine entrepreneurial commitment rather than tax-motivated rate arbitrage.
The comprehensive legal memorandum will be critical to the resolution of Issue 1. The memorandum should present a thorough analysis of the six-factor test under Treas. Reg. § 1.707-2(c), with particular emphasis on the factors that weigh in ICM's favor: (i) the reasonable relationship between the allocation/distribution and the GP's services; (ii) the transitory nature of the allocation (or lack thereof); (iii) the time at which the allocation was agreed to (pre-performance); and (iv) the extent of the GP's capital interest subject to entrepreneurial risk.
Issue 2 — Carried Interest Holding Period (IRC § 1061) — Amount at Issue: $38.7 Million
Issue 2 appears to be the issue most susceptible to resolution through documentary evidence. The IRS team's concerns are fundamentally factual — do the fourteen challenged positions satisfy the three-year holding period under IRC § 1061? — and the resolution depends primarily on the trade-level records and prime broker confirmations. If the holding period schedules and Ridgeline Securities LLC trade confirmations demonstrate that all fourteen positions were held for more than three years, there is limited factual or legal basis for the IRS to sustain an adjustment. C&H's preliminary review indicates that all fourteen positions exceed the three-year threshold, which is encouraging. The IDR #3 response should be thorough, well-organized, and easy for the IRS team to verify against the third-party documentation.
The only potential complication on Issue 2 involves positions that may require non-standard holding period analysis (e.g., instruments involving constructive ownership rules, wash sale adjustments, or tacking of holding periods). Ms. Hartwell's response at the meeting — that the majority of the positions were equity and credit positions with straightforward acquisition and disposition dates — reduces this concern, but C&H should conduct a careful review to ensure that no position involves complex holding period issues that could undermine the otherwise strong documentary record.
Issue 3 — Organizational and Syndication Cost Deductions (IRC §§ 709, 195) — Amount at Issue: $680,000
Issue 3 is the smallest of the three issues by a significant margin, with a potential tax impact of approximately $251,600. The IRS team appeared least focused on this issue, and RA Albrecht's comment that the examination team would wait for the IDR #4 response before forming a view suggests that this issue may be resolved relatively quickly if the contemporaneous invoices clearly support the organizational classification. The fact that ICM's formation counsel appropriately segregated billings between organizational and syndication activities, and that Fenwick Craine's workpapers document the classification methodology, should provide a solid evidentiary foundation for ICM's position.
C. Privileged Recommendation
Based on the foregoing observations and assessment, I recommend the following strategic approach:
1. Prioritize the completion of the IDR #3 response and the trade-level holding period schedule to meet the July 28, 2023 deadline. This is the most time-sensitive deliverable and, if successful, has the potential to resolve the largest examination issue (Issue 2 — $38.7 million) through documentary evidence alone.
2. Begin drafting the comprehensive legal memorandum promptly, with particular emphasis on Issue 1 (the management fee waiver), which presents the greatest legal complexity and the highest degree of uncertainty regarding the IRS's ultimate position. The memorandum should be structured to address each of the specific concerns raised by RA Albrecht, RA Petrovic, and IRS Counsel Lundgren during the July 14 meeting.
3. If the comprehensive legal memorandum does not fully resolve the IRS's concerns on Issue 1, consider requesting a separate meeting with IRS Counsel Lundgren focused exclusively on the IRC § 707(a)(2)(A) analysis. A targeted, in-depth discussion with counsel may be more productive than attempting to address all three issues simultaneously.
4. Coordinate with the client team (Trent, Calloway, Venkatesh) to ensure that all documentation needed for the IDR #3 and IDR #4 responses is gathered promptly and that the client is informed of the IRS team's posture and our strategic approach.
X. Document Distribution and Confidentiality
This memorandum is subject to the attorney-client privilege and the attorney work product doctrine. The contents reflect confidential attorney-client communications and the mental impressions, conclusions, opinions, and legal theories of counsel prepared in anticipation of litigation or in connection with the provision of legal advice.
Distribution of this memorandum is limited to the following individuals, all of whom are attorneys or staff of Calderwood & Harkness LLP:
•  Sylvia Hartwell, Partner, Tax Department
•  Leonard Cross, Partner, Tax Department
•  Leila Nazari, Associate, Tax Department
•  Robert Jansen, Associate, Tax Department
This memorandum is not to be shared with client personnel, third parties, or any person outside of Calderwood & Harkness LLP without the prior express written approval of Sylvia Hartwell. Communication to the client regarding the substance of the July 14, 2023 meeting will be provided via a separate client update prepared by Ms. Hartwell, which will be tailored for client distribution and will not contain the strategic assessments and privileged recommendations set forth in Section IX above.
Prepared by:
________________________________________
Leila Nazari Associate, Tax Department Calderwood & Harkness LLP
Date: July 16, 2023
Reviewed by:
________________________________________
Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP
Date: ________
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This document is protected from disclosure by the attorney-client privilege and the attorney work product doctrine. Unauthorized review, use, disclosure, or distribution is prohibited.

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM

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