1023-00003 · Ironside Capital Management LP · Correspondence

client-update-no-change-result.docx DOCUMENT M&A / Corporate

5 / 12 ← → ✕

CALDERWOOD & HARKNESS LLP Attorneys at Law 1251 Avenue of the Americas, 40th Floor New York, NY 10020

October 14, 2023

Via Email and First Class Mail

Desmond R. Calloway Founder & Chief Investment Officer Ironside Capital Management LP 590 Madison Avenue, 28th Floor New York, NY 10022

Marcus Trent General Counsel Ironside Capital Management LP 590 Madison Avenue, 28th Floor New York, NY 10022

Re: Closure of IRS Examination — Ironside Capital Management LP (EIN 83-2741956); Tax Year Ended December 31, 2021; IRS Letter 4396-A (No-Change)

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

Dear Desmond and Marcus:

We are pleased to report that the Internal Revenue Service examination of Ironside Capital Management LP's ("ICM") 2021 Form 1065 — the U.S. Return of Partnership Income for the calendar year ended December 31, 2021 — has been formally closed without adjustment. Revenue Agent Timothy J. Albrecht issued IRS Letter 4396-A (commonly referred to as a "no-change letter"), dated October 14, 2023, under the authority of Territory Manager Karen P. Driscoll, Pass-Through Entities Practice Area, IRS Large Business & International Division ("LB&I"). No modifications to any items reported on ICM's 2021 partnership return were proposed or made. This represents a complete and favorable resolution of the examination that was initiated by Letter 2205-D on March 22, 2023. A copy of the Letter 4396-A is enclosed with this correspondence for ICM's permanent files.

The purpose of this letter is to provide you with a comprehensive summary of the examination, including its procedural history, the issues examined, the outcome on each issue, the aggregate tax impact avoided, and our recommendations regarding next steps, notifications, record retention, and engagement closure.

I. Summary of Examination Background

The IRS LB&I Division opened its examination of ICM's 2021 Form 1065 via Letter 2205-D, dated March 22, 2023. That letter was received by ICM at its offices on March 29, 2023. The examination was conducted under the Centralized Partnership Audit Regime enacted by the Bipartisan Budget Act of 2015, as implemented under Sections 6221 through 6241 of the Internal Revenue Code (the "Code").

Calderwood & Harkness LLP was retained to represent ICM in connection with the examination on April 5, 2023. An engagement letter was executed on April 10, 2023, defining the scope of representation as the defense of ICM in the IRS examination of its 2021 Form 1065. On April 14, 2023, we filed Form 2848 (Power of Attorney and Declaration of Representative) with the IRS, designating Sylvia Hartwell and Leila Nazari of this firm as ICM's authorized representatives before the Internal Revenue Service with respect to all matters arising from the examination.

The IRS examination team assigned to the matter consisted of the following individuals:

• Revenue Agent Timothy J. Albrecht — Lead Examiner (GS-13, Badge No. 74-28193), IRS Large Business & International Division, Pass-Through Entities Practice Area;

• Revenue Agent Dawn M. Petrovic — Assisting Examiner (GS-12), IRS Large Business & International Division; and

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

Over the course of the approximately six-month examination, our engagement with the IRS was extensive and substantive. We responded to four separate Information Document Requests ("IDRs"), which collectively encompassed eighty individual items spanning partnership agreements, financial statements, trade records, tax workpapers, board resolutions, internal memoranda, and legal analyses. In total, we produced approximately 4,600 pages of documents and workpapers to the examination team.

In addition to document production, we participated in the following conferences with the IRS:

1. June 9, 2023 — A telephone conference with Revenue Agent Albrecht and Revenue Agent Petrovic to discuss the scope and focus of the examination and to clarify certain items responsive to IDR Nos. 1 and 2.

2. July 14, 2023 — An in-person meeting at the IRS Manhattan Campus located at 290 Broadway, New York, New York. This meeting included Revenue Agent Albrecht, Revenue Agent Petrovic, and IRS Counsel Eric S. Lundgren. Sylvia Hartwell and Leila Nazari attended on behalf of ICM. The meeting addressed all three substantive issues under examination in detail, including a walk-through of the supporting documentation and applicable legal authorities.

3. September 22, 2023 — A follow-up teleconference with the full examination team to address supplemental questions raised by IRS Counsel following his review of our legal memorandum.

On September 6, 2023, we submitted a comprehensive legal memorandum to the examination team and IRS Counsel addressing all three issues under examination. That memorandum set forth ICM's factual and legal positions in detail, supported by documentary evidence, relevant statutory authority, Treasury Regulations, legislative history, and applicable case law and administrative guidance.

On October 3, 2023, Revenue Agent Albrecht notified us by telephone that the IRS had determined to close the examination without proposing any adjustments. The formal no-change letter, IRS Letter 4396-A, followed on October 14, 2023, confirming the closure.

II. Issue-by-Issue Outcome Summary

The IRS examination focused on three discrete issues. We summarize each issue below, including the IRS's area of inquiry, the potential tax impact had the IRS sustained its position, and the basis for the favorable outcome.

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

Issue Examined. The IRS examined whether $23.8 million in management fees waived by Ironside Capital GP LLC (the "GP") during the 2021 tax year, in exchange for an increased capital interest in the fund, constituted disguised payments for services under Section 707(a)(2)(A) of the Internal Revenue Code. Under Section 707(a)(2)(A), if a partner performs services for a partnership and the related allocation and distribution, when considered together, are properly characterized as a transaction between the partnership and a non-partner, the arrangement is treated as a payment of compensation — taxable as ordinary income — rather than as a distributive share of partnership income or gain.

The IRS was specifically focused on whether the fee waiver arrangement lacked genuine entrepreneurial risk and was, in substance, an arrangement to convert what would otherwise be ordinary fee income into capital gain income allocable to the GP's increased capital interest. This line of inquiry was consistent with the IRS's broader enforcement initiative targeting management fee waiver and conversion structures in the private fund industry, as reflected in LB&I's Campaigns announced in recent years.

Potential Tax Impact. Had the IRS sustained its position and recharacterized the $23.8 million as ordinary income to the GP, the estimated tax impact would have been approximately $4.95 million. This estimate reflects the differential between the 37% ordinary income tax rate applicable to the GP's individual partners and the 20% long-term capital gains rate, together with the 3.8% net investment income tax under Section 1411, that would otherwise apply to the amounts allocated to the GP's increased capital interest.

Outcome. The IRS accepted ICM's position that the fee waiver was structured as a legitimate entrepreneurial risk arrangement with genuine downside exposure, and was therefore distinguishable from the abusive fee waiver and conversion structures that have been the subject of IRS scrutiny. Several factors were critical in supporting this conclusion:

• The terms of Section 4.1 of the Amended and Restated Agreement of Limited Partnership of ICM (the "LPA"), which established the fee waiver election mechanism and imposed conditions that exposed the GP's waived fees to the same investment risks borne by the limited partners, including the risk of total loss of the amounts attributable to the waived fees.

• Contemporaneous board resolutions of Ironside Capital GP LLC, adopted at the time of the waiver election, which documented the GP's deliberative process and the specific reasons for electing to waive fees in favor of the increased capital interest.

• Detailed memoranda prepared by Priya Venkatesh, ICM's Chief Operating Officer and Chief Financial Officer, documenting the economic rationale for the waiver election, the genuine risk of loss, the absence of any floor or guaranteed return on the capital interest acquired in lieu of fees, and the alignment of the arrangement with the fund's investment strategy.

No adjustment was proposed on this issue.

B. Issue 2: Carried Interest Holding Period (IRC § 1061)

Issue Examined. The IRS examined whether $38.7 million of the $94.3 million total performance allocation (commonly referred to as "carried interest") to the GP for the 2021 tax year qualified for long-term capital gain treatment under Section 1061 of the Internal Revenue Code. Section 1061, enacted as part of the Tax Cuts and Jobs Act of 2017 and effective for taxable years beginning after December 31, 2017, imposes a three-year holding period requirement (in lieu of the standard one-year holding period) for gain recognized with respect to an "applicable partnership interest" — generally, a partnership interest transferred to or held by a taxpayer in connection with the performance of services — to qualify as long-term capital gain.

The IRS specifically questioned whether fourteen investment positions liquidated by the fund during the 2021 tax year met the three-year holding period threshold required under Section 1061. The examination team scrutinized the acquisition and disposition dates of each of the fourteen challenged positions, as well as the nature and structure of the underlying investments.

Potential Tax Impact. Had the IRS reclassified the $38.7 million from long-term capital gain to short-term capital gain, the estimated additional tax impact to the GP's partners would have been approximately $6.58 million, reflecting the differential between the 20% long-term capital gains rate (plus the 3.8% net investment income tax) and the 37% ordinary income tax rate applicable to short-term capital gains.

Outcome. Our trade-level holding period analysis, prepared in conjunction with ICM's internal operations team and cross-referenced to trade confirmations obtained from Ridgeline Securities LLC (ICM's prime broker), demonstrated conclusively that all fourteen challenged positions exceeded the statutory three-year holding period mandated by Section 1061. We presented the IRS with a position-by-position holding period schedule that identified the acquisition date, the disposition date, and the resulting holding period for each of the fourteen positions. In every instance, the holding period exceeded three years, in some cases substantially. The IRS examination team confirmed the accuracy of the holding period analysis and raised no further questions after reviewing the Ridgeline Securities trade confirmations.

No adjustment was proposed on this issue.

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

Issue Examined. The IRS challenged whether $680,000 of the $1.42 million deducted by ICM under Section 709(b) of the Internal Revenue Code was properly classified as deductible organizational expenses rather than non-deductible syndication costs. Under Section 709(a), amounts paid or incurred to organize a partnership or to promote the sale of an interest in a partnership (syndication costs) are generally not deductible. However, under Section 709(b), a partnership may elect to deduct up to $5,000 of organizational expenses in the taxable year in which the partnership begins business (reduced by the amount by which such expenses exceed $50,000), with the remainder amortized ratably over a 180-month period beginning with the month the partnership begins business. Syndication costs, by contrast, are neither deductible nor amortizable.

The distinction between organizational expenses and syndication costs is fact-intensive and has been the subject of significant administrative and judicial scrutiny. The IRS specifically questioned whether certain legal, accounting, and consulting costs incurred in connection with ICM's formation were properly categorized as organizational expenses rather than syndication costs.

Potential Tax Impact. Had the IRS reclassified the $680,000 from deductible organizational expenses to non-deductible syndication costs, the estimated tax impact would have been approximately $251,600 across all partners, computed at the 37% marginal rate.

Outcome. The proper allocation between organizational expenses and syndication costs was supported by contemporaneous legal invoices from ICM's formation in June 2016, which were reviewed and categorized at the time of filing based on the nature of the services rendered. Ironside Capital GP LLC board resolutions adopted contemporaneously with the formation documented the nature and purpose of each category of expense. Additionally, supporting workpapers prepared by Borwick Craine & Associates LLP ("FC&A"), ICM's tax return preparer and independent auditor, provided a detailed expense-by-expense analysis and classification consistent with Section 709, Treasury Regulation § 1.709-2, and applicable IRS guidance. The IRS examination team accepted the classifications as presented.

No adjustment was proposed on this issue.

III. Aggregate Amounts at Stake and Tax Impact Avoided

The following table summarizes the total potential partnership-level adjustments and estimated tax impact across all three issues examined:

All positions taken on ICM's 2021 Form 1065 were fully sustained. The entire $63.18 million in potential partnership-level adjustments and the approximately $11.78 million in estimated aggregate tax liability were avoided. No modifications of any kind were made to any items reported on the return.

IV. Recommended Next Steps and Notifications

In light of the favorable resolution of the examination, we recommend that ICM take the following steps:

1. Internal Notification — Priya Venkatesh (COO & CFO). We recommend that ICM promptly notify Priya Venkatesh of the favorable outcome. Ms. Venkatesh played an instrumental role throughout the examination, particularly with respect to the management fee waiver issue, where her contemporaneous memoranda documenting the economic rationale and genuine risk of loss were critical to the defense. In addition, her oversight of fund operations and coordination of document production were essential to the efficient conduct of the engagement.

2. Notification to Borwick Craine & Associates LLP. We recommend that ICM notify Elliot Navarro, Engagement Partner (Tax) at Borwick Craine & Associates LLP, who served as ICM's tax return preparer for the 2021 Form 1065, so that FC&A may update its engagement files and quality control records accordingly. In addition, Sandra Whitmore, Engagement Partner (Audit) at Fenwick Craine, should be informed of the result for purposes of audit documentation and any related workpaper retention requirements under applicable professional standards.

3. Notification to Greystone Fund Administration LLC. We recommend that ICM notify Greystone Fund Administration LLC of the no-change result so that Greystone may update its records for net asset value ("NAV") calculations and fund administration purposes. Because no adjustments were made, no restatement of NAV or reallocation among partner capital accounts will be necessary.

4. Consideration of Limited Partner Notification. ICM is under no legal obligation to notify limited partners individually of the closure of the examination. However, given the significance of the issues examined and the potential magnitude of the tax impact that was at stake, the fund may wish to consider providing a brief notification to its significant institutional limited partners as a matter of good investor relations and transparency. Among others, this may include Northgate Public Employees' Retirement System, Bramblewood Family Office LLC, and Marlowe Asset Management Horizon Endowment Fund. Any such communication should be carefully drafted to avoid inadvertent waiver of privilege, and we are available to assist in preparing an appropriate notice if ICM elects to proceed.

5. Enclosure. A copy of IRS Letter 4396-A, dated October 14, 2023, is enclosed with this letter. We recommend that the Letter 4396-A be maintained in ICM's permanent tax files.

V. Statute of Limitations and Record Retention

It is important to note that the no-change result with respect to the 2021 tax year does not preclude the IRS from examining subsequent tax years. Each tax year is subject to separate examination, and the positions taken on ICM's returns for tax years 2022 and forward will be evaluated independently by the IRS in the event of any future examination.

We recommend that ICM retain all records and workpapers related to the 2021 tax year — and, in particular, all documentation relating to the management fee waiver, the carried interest positions and holding period analysis, and the organizational and syndication cost classifications — for at least six years from the date on which the 2021 Form 1065 was filed. ICM's 2021 Form 1065 was timely filed on September 15, 2022 (on extension). Accordingly, under the general three-year statute of limitations applicable to partnership returns under Section 6501 of the Code, with consideration for the extended six-year limitations period applicable in certain circumstances (including substantial omissions of income under Section 6501(e)), we recommend retaining all records through at least September 15, 2028.

Additionally, we note that records related to the fourteen investment positions whose holding periods were examined under Section 1061, as well as the underlying trade confirmations and holding period analyses, should be retained for as long as those positions or their successors remain relevant to future tax returns. To the extent that any of the underlying investments or related positions continue to be held, or have been rolled into successor investments, the holding period records will remain material and should be preserved.

VI. Final Invoice and Engagement Closure

A final invoice for professional services rendered in connection with this engagement will be transmitted under separate cover. For your reference, the total fees and expenses for the engagement are summarized as follows:

The engagement for this matter is now concluded. Calderwood & Harkness LLP's representation of Ironside Capital Management LP with respect to the IRS examination of its 2021 Form 1065 (U.S. Return of Partnership Income for the calendar year ended December 31, 2021) is terminated as of the date of this letter. Our termination of this engagement does not affect any other ongoing or future engagements between Calderwood & Harkness and ICM, if any. Calderwood & Harkness remains available and would be pleased to assist ICM with any future tax controversy, tax advisory, or related matters that may arise.

We wish to express our sincere gratitude for ICM's confidence in Calderwood & Harkness throughout this engagement. The successful resolution of the examination — resulting in a full no-change closing across all three issues and the avoidance of approximately $11.78 million in potential tax liability — is a testament to the strength of the positions taken on ICM's return and the quality of ICM's contemporaneous documentation practices. We would be remiss if we did not specifically acknowledge the cooperation and responsiveness of Marcus Trent, Priya Venkatesh, and the Borwick Craine & Associates team throughout the engagement. Their prompt and thorough responses to our requests for information and documentation were invaluable in facilitating the efficient and favorable resolution of this matter.

Should you have any questions regarding the contents of this letter, the enclosed no-change letter, or any related matter, please do not hesitate to contact Sylvia Hartwell at (212) 558-4100 or shartwell@calderwoodharkness.com, or Leila Nazari at (212) 558-4247 or lnazari@calderwoodharkness.com.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, NY 10020

Enclosure: IRS Letter 4396-A dated October 14, 2023 (No-Change Letter)

cc: Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP

Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP

Issue	Potential Adjustment	Estimated Tax Impact
Management Fee Waiver / Conversion (§ 707(a)(2)(A))	$23,800,000	$4,950,000
Carried Interest Holding Period (§ 1061)	$38,700,000	$6,580,000
Organizational / Syndication Cost Deductions (§§ 709, 195)	$680,000	$251,600
Total	$63,180,000	$11,781,600
Category	Amount
Professional Fees	$487,350.00
Expenses (reproduction, courier, travel, database research)	$14,280.00
Total Engagement Cost	$501,630.00

CALDERWOOD & HARKNESS LLP Attorneys at Law 1251 Avenue of the Americas, 40th Floor New York, NY 10020
October 14, 2023
Via Email and First Class Mail
Desmond R. Calloway Founder & Chief Investment Officer Ironside Capital Management LP 590 Madison Avenue, 28th Floor New York, NY 10022
Marcus Trent General Counsel Ironside Capital Management LP 590 Madison Avenue, 28th Floor New York, NY 10022
Re: Closure of IRS Examination — Ironside Capital Management LP (EIN 83-2741956); Tax Year Ended December 31, 2021; IRS Letter 4396-A (No-Change)
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
Dear Desmond and Marcus:
We are pleased to report that the Internal Revenue Service examination of Ironside Capital Management LP's ("ICM") 2021 Form 1065 — the U.S. Return of Partnership Income for the calendar year ended December 31, 2021 — has been formally closed without adjustment. Revenue Agent Timothy J. Albrecht issued IRS Letter 4396-A (commonly referred to as a "no-change letter"), dated October 14, 2023, under the authority of Territory Manager Karen P. Driscoll, Pass-Through Entities Practice Area, IRS Large Business & International Division ("LB&I"). No modifications to any items reported on ICM's 2021 partnership return were proposed or made. This represents a complete and favorable resolution of the examination that was initiated by Letter 2205-D on March 22, 2023. A copy of the Letter 4396-A is enclosed with this correspondence for ICM's permanent files.
The purpose of this letter is to provide you with a comprehensive summary of the examination, including its procedural history, the issues examined, the outcome on each issue, the aggregate tax impact avoided, and our recommendations regarding next steps, notifications, record retention, and engagement closure.
I. Summary of Examination Background
The IRS LB&I Division opened its examination of ICM's 2021 Form 1065 via Letter 2205-D, dated March 22, 2023. That letter was received by ICM at its offices on March 29, 2023. The examination was conducted under the Centralized Partnership Audit Regime enacted by the Bipartisan Budget Act of 2015, as implemented under Sections 6221 through 6241 of the Internal Revenue Code (the "Code").
Calderwood & Harkness LLP was retained to represent ICM in connection with the examination on April 5, 2023. An engagement letter was executed on April 10, 2023, defining the scope of representation as the defense of ICM in the IRS examination of its 2021 Form 1065. On April 14, 2023, we filed Form 2848 (Power of Attorney and Declaration of Representative) with the IRS, designating Sylvia Hartwell and Leila Nazari of this firm as ICM's authorized representatives before the Internal Revenue Service with respect to all matters arising from the examination.
The IRS examination team assigned to the matter consisted of the following individuals:
• Revenue Agent Timothy J. Albrecht — Lead Examiner (GS-13, Badge No. 74-28193), IRS Large Business & International Division, Pass-Through Entities Practice Area;
• Revenue Agent Dawn M. Petrovic — Assisting Examiner (GS-12), IRS Large Business & International Division; and
• Eric S. Lundgren — Attorney, IRS Office of Chief Counsel, Large Business & International, Branch 5.
Over the course of the approximately six-month examination, our engagement with the IRS was extensive and substantive. We responded to four separate Information Document Requests ("IDRs"), which collectively encompassed eighty individual items spanning partnership agreements, financial statements, trade records, tax workpapers, board resolutions, internal memoranda, and legal analyses. In total, we produced approximately 4,600 pages of documents and workpapers to the examination team.
In addition to document production, we participated in the following conferences with the IRS:
1. June 9, 2023 — A telephone conference with Revenue Agent Albrecht and Revenue Agent Petrovic to discuss the scope and focus of the examination and to clarify certain items responsive to IDR Nos. 1 and 2.
2. July 14, 2023 — An in-person meeting at the IRS Manhattan Campus located at 290 Broadway, New York, New York. This meeting included Revenue Agent Albrecht, Revenue Agent Petrovic, and IRS Counsel Eric S. Lundgren. Sylvia Hartwell and Leila Nazari attended on behalf of ICM. The meeting addressed all three substantive issues under examination in detail, including a walk-through of the supporting documentation and applicable legal authorities.
3. September 22, 2023 — A follow-up teleconference with the full examination team to address supplemental questions raised by IRS Counsel following his review of our legal memorandum.
On September 6, 2023, we submitted a comprehensive legal memorandum to the examination team and IRS Counsel addressing all three issues under examination. That memorandum set forth ICM's factual and legal positions in detail, supported by documentary evidence, relevant statutory authority, Treasury Regulations, legislative history, and applicable case law and administrative guidance.
On October 3, 2023, Revenue Agent Albrecht notified us by telephone that the IRS had determined to close the examination without proposing any adjustments. The formal no-change letter, IRS Letter 4396-A, followed on October 14, 2023, confirming the closure.
II. Issue-by-Issue Outcome Summary
The IRS examination focused on three discrete issues. We summarize each issue below, including the IRS's area of inquiry, the potential tax impact had the IRS sustained its position, and the basis for the favorable outcome.
A. Issue 1: Management Fee Waiver / Conversion (IRC § 707(a)(2)(A))
Issue Examined. The IRS examined whether $23.8 million in management fees waived by Ironside Capital GP LLC (the "GP") during the 2021 tax year, in exchange for an increased capital interest in the fund, constituted disguised payments for services under Section 707(a)(2)(A) of the Internal Revenue Code. Under Section 707(a)(2)(A), if a partner performs services for a partnership and the related allocation and distribution, when considered together, are properly characterized as a transaction between the partnership and a non-partner, the arrangement is treated as a payment of compensation — taxable as ordinary income — rather than as a distributive share of partnership income or gain.
The IRS was specifically focused on whether the fee waiver arrangement lacked genuine entrepreneurial risk and was, in substance, an arrangement to convert what would otherwise be ordinary fee income into capital gain income allocable to the GP's increased capital interest. This line of inquiry was consistent with the IRS's broader enforcement initiative targeting management fee waiver and conversion structures in the private fund industry, as reflected in LB&I's Campaigns announced in recent years.
Potential Tax Impact. Had the IRS sustained its position and recharacterized the $23.8 million as ordinary income to the GP, the estimated tax impact would have been approximately $4.95 million. This estimate reflects the differential between the 37% ordinary income tax rate applicable to the GP's individual partners and the 20% long-term capital gains rate, together with the 3.8% net investment income tax under Section 1411, that would otherwise apply to the amounts allocated to the GP's increased capital interest.
Outcome. The IRS accepted ICM's position that the fee waiver was structured as a legitimate entrepreneurial risk arrangement with genuine downside exposure, and was therefore distinguishable from the abusive fee waiver and conversion structures that have been the subject of IRS scrutiny. Several factors were critical in supporting this conclusion:
• The terms of Section 4.1 of the Amended and Restated Agreement of Limited Partnership of ICM (the "LPA"), which established the fee waiver election mechanism and imposed conditions that exposed the GP's waived fees to the same investment risks borne by the limited partners, including the risk of total loss of the amounts attributable to the waived fees.
• Contemporaneous board resolutions of Ironside Capital GP LLC, adopted at the time of the waiver election, which documented the GP's deliberative process and the specific reasons for electing to waive fees in favor of the increased capital interest.
• Detailed memoranda prepared by Priya Venkatesh, ICM's Chief Operating Officer and Chief Financial Officer, documenting the economic rationale for the waiver election, the genuine risk of loss, the absence of any floor or guaranteed return on the capital interest acquired in lieu of fees, and the alignment of the arrangement with the fund's investment strategy.
No adjustment was proposed on this issue.
B. Issue 2: Carried Interest Holding Period (IRC § 1061)
Issue Examined. The IRS examined whether $38.7 million of the $94.3 million total performance allocation (commonly referred to as "carried interest") to the GP for the 2021 tax year qualified for long-term capital gain treatment under Section 1061 of the Internal Revenue Code. Section 1061, enacted as part of the Tax Cuts and Jobs Act of 2017 and effective for taxable years beginning after December 31, 2017, imposes a three-year holding period requirement (in lieu of the standard one-year holding period) for gain recognized with respect to an "applicable partnership interest" — generally, a partnership interest transferred to or held by a taxpayer in connection with the performance of services — to qualify as long-term capital gain.
The IRS specifically questioned whether fourteen investment positions liquidated by the fund during the 2021 tax year met the three-year holding period threshold required under Section 1061. The examination team scrutinized the acquisition and disposition dates of each of the fourteen challenged positions, as well as the nature and structure of the underlying investments.
Potential Tax Impact. Had the IRS reclassified the $38.7 million from long-term capital gain to short-term capital gain, the estimated additional tax impact to the GP's partners would have been approximately $6.58 million, reflecting the differential between the 20% long-term capital gains rate (plus the 3.8% net investment income tax) and the 37% ordinary income tax rate applicable to short-term capital gains.
Outcome. Our trade-level holding period analysis, prepared in conjunction with ICM's internal operations team and cross-referenced to trade confirmations obtained from Ridgeline Securities LLC (ICM's prime broker), demonstrated conclusively that all fourteen challenged positions exceeded the statutory three-year holding period mandated by Section 1061. We presented the IRS with a position-by-position holding period schedule that identified the acquisition date, the disposition date, and the resulting holding period for each of the fourteen positions. In every instance, the holding period exceeded three years, in some cases substantially. The IRS examination team confirmed the accuracy of the holding period analysis and raised no further questions after reviewing the Ridgeline Securities trade confirmations.
No adjustment was proposed on this issue.
C. Issue 3: Organizational and Syndication Cost Deductions (IRC §§ 709, 195)
Issue Examined. The IRS challenged whether $680,000 of the $1.42 million deducted by ICM under Section 709(b) of the Internal Revenue Code was properly classified as deductible organizational expenses rather than non-deductible syndication costs. Under Section 709(a), amounts paid or incurred to organize a partnership or to promote the sale of an interest in a partnership (syndication costs) are generally not deductible. However, under Section 709(b), a partnership may elect to deduct up to $5,000 of organizational expenses in the taxable year in which the partnership begins business (reduced by the amount by which such expenses exceed $50,000), with the remainder amortized ratably over a 180-month period beginning with the month the partnership begins business. Syndication costs, by contrast, are neither deductible nor amortizable.
The distinction between organizational expenses and syndication costs is fact-intensive and has been the subject of significant administrative and judicial scrutiny. The IRS specifically questioned whether certain legal, accounting, and consulting costs incurred in connection with ICM's formation were properly categorized as organizational expenses rather than syndication costs.
Potential Tax Impact. Had the IRS reclassified the $680,000 from deductible organizational expenses to non-deductible syndication costs, the estimated tax impact would have been approximately $251,600 across all partners, computed at the 37% marginal rate.
Outcome. The proper allocation between organizational expenses and syndication costs was supported by contemporaneous legal invoices from ICM's formation in June 2016, which were reviewed and categorized at the time of filing based on the nature of the services rendered. Ironside Capital GP LLC board resolutions adopted contemporaneously with the formation documented the nature and purpose of each category of expense. Additionally, supporting workpapers prepared by Borwick Craine & Associates LLP ("FC&A"), ICM's tax return preparer and independent auditor, provided a detailed expense-by-expense analysis and classification consistent with Section 709, Treasury Regulation § 1.709-2, and applicable IRS guidance. The IRS examination team accepted the classifications as presented.
No adjustment was proposed on this issue.
III. Aggregate Amounts at Stake and Tax Impact Avoided
The following table summarizes the total potential partnership-level adjustments and estimated tax impact across all three issues examined:
All positions taken on ICM's 2021 Form 1065 were fully sustained. The entire $63.18 million in potential partnership-level adjustments and the approximately $11.78 million in estimated aggregate tax liability were avoided. No modifications of any kind were made to any items reported on the return.
IV. Recommended Next Steps and Notifications
In light of the favorable resolution of the examination, we recommend that ICM take the following steps:
1. Internal Notification — Priya Venkatesh (COO & CFO). We recommend that ICM promptly notify Priya Venkatesh of the favorable outcome. Ms. Venkatesh played an instrumental role throughout the examination, particularly with respect to the management fee waiver issue, where her contemporaneous memoranda documenting the economic rationale and genuine risk of loss were critical to the defense. In addition, her oversight of fund operations and coordination of document production were essential to the efficient conduct of the engagement.
2. Notification to Borwick Craine & Associates LLP. We recommend that ICM notify Elliot Navarro, Engagement Partner (Tax) at Borwick Craine & Associates LLP, who served as ICM's tax return preparer for the 2021 Form 1065, so that FC&A may update its engagement files and quality control records accordingly. In addition, Sandra Whitmore, Engagement Partner (Audit) at Fenwick Craine, should be informed of the result for purposes of audit documentation and any related workpaper retention requirements under applicable professional standards.
3. Notification to Greystone Fund Administration LLC. We recommend that ICM notify Greystone Fund Administration LLC of the no-change result so that Greystone may update its records for net asset value ("NAV") calculations and fund administration purposes. Because no adjustments were made, no restatement of NAV or reallocation among partner capital accounts will be necessary.
4. Consideration of Limited Partner Notification. ICM is under no legal obligation to notify limited partners individually of the closure of the examination. However, given the significance of the issues examined and the potential magnitude of the tax impact that was at stake, the fund may wish to consider providing a brief notification to its significant institutional limited partners as a matter of good investor relations and transparency. Among others, this may include Northgate Public Employees' Retirement System, Bramblewood Family Office LLC, and Marlowe Asset Management Horizon Endowment Fund. Any such communication should be carefully drafted to avoid inadvertent waiver of privilege, and we are available to assist in preparing an appropriate notice if ICM elects to proceed.
5. Enclosure. A copy of IRS Letter 4396-A, dated October 14, 2023, is enclosed with this letter. We recommend that the Letter 4396-A be maintained in ICM's permanent tax files.
V. Statute of Limitations and Record Retention
It is important to note that the no-change result with respect to the 2021 tax year does not preclude the IRS from examining subsequent tax years. Each tax year is subject to separate examination, and the positions taken on ICM's returns for tax years 2022 and forward will be evaluated independently by the IRS in the event of any future examination.
We recommend that ICM retain all records and workpapers related to the 2021 tax year — and, in particular, all documentation relating to the management fee waiver, the carried interest positions and holding period analysis, and the organizational and syndication cost classifications — for at least six years from the date on which the 2021 Form 1065 was filed. ICM's 2021 Form 1065 was timely filed on September 15, 2022 (on extension). Accordingly, under the general three-year statute of limitations applicable to partnership returns under Section 6501 of the Code, with consideration for the extended six-year limitations period applicable in certain circumstances (including substantial omissions of income under Section 6501(e)), we recommend retaining all records through at least September 15, 2028.
Additionally, we note that records related to the fourteen investment positions whose holding periods were examined under Section 1061, as well as the underlying trade confirmations and holding period analyses, should be retained for as long as those positions or their successors remain relevant to future tax returns. To the extent that any of the underlying investments or related positions continue to be held, or have been rolled into successor investments, the holding period records will remain material and should be preserved.
VI. Final Invoice and Engagement Closure
A final invoice for professional services rendered in connection with this engagement will be transmitted under separate cover. For your reference, the total fees and expenses for the engagement are summarized as follows:
The engagement for this matter is now concluded. Calderwood & Harkness LLP's representation of Ironside Capital Management LP with respect to the IRS examination of its 2021 Form 1065 (U.S. Return of Partnership Income for the calendar year ended December 31, 2021) is terminated as of the date of this letter. Our termination of this engagement does not affect any other ongoing or future engagements between Calderwood & Harkness and ICM, if any. Calderwood & Harkness remains available and would be pleased to assist ICM with any future tax controversy, tax advisory, or related matters that may arise.
We wish to express our sincere gratitude for ICM's confidence in Calderwood & Harkness throughout this engagement. The successful resolution of the examination — resulting in a full no-change closing across all three issues and the avoidance of approximately $11.78 million in potential tax liability — is a testament to the strength of the positions taken on ICM's return and the quality of ICM's contemporaneous documentation practices. We would be remiss if we did not specifically acknowledge the cooperation and responsiveness of Marcus Trent, Priya Venkatesh, and the Borwick Craine & Associates team throughout the engagement. Their prompt and thorough responses to our requests for information and documentation were invaluable in facilitating the efficient and favorable resolution of this matter.
Should you have any questions regarding the contents of this letter, the enclosed no-change letter, or any related matter, please do not hesitate to contact Sylvia Hartwell at (212) 558-4100 or shartwell@calderwoodharkness.com, or Leila Nazari at (212) 558-4247 or lnazari@calderwoodharkness.com.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, NY 10020
Enclosure: IRS Letter 4396-A dated October 14, 2023 (No-Change Letter)
cc: Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP
Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP
Issue | Potential Adjustment | Estimated Tax Impact
Management Fee Waiver / Conversion (§ 707(a)(2)(A)) | $23,800,000 | $4,950,000
Carried Interest Holding Period (§ 1061) | $38,700,000 | $6,580,000
Organizational / Syndication Cost Deductions (§§ 709, 195) | $680,000 | $251,600
Total | $63,180,000 | $11,781,600
Category | Amount
Professional Fees | $487,350.00
Expenses (reproduction, courier, travel, database research) | $14,280.00
Total Engagement Cost | $501,630.00

CALDERWOOD & HARKNESS LLP Attorneys at Law 1251 Avenue of the Americas, 40th Floor New York, NY 10020

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts