1023-00003 · Ironside Capital Management LP · IDR Responses

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — TAX ADVICE

CALDERWOOD & HARKNESS LLP Attorneys at Law

1251 Avenue of the Americas, 40th Floor New York, New York 10020

Telephone: (212) 558-4000 Facsimile: (212) 558-3588

www.calderwoodharkness.com

June 23, 2023

Via Sundial Data Systems and Electronic Mail

Timothy J. Albrecht Revenue Agent (Badge No. 74-28193) Internal Revenue Service Large Business & International Division 290 Broadway New York, NY 10007

Re: Ironside Capital Management LP (EIN: 83-2741956) — Response to Information Document Request #2 Tax Year Ended: December 31, 2021 Form: 1065

Dear Mr. Albrecht:

Calderwood & Harkness LLP represents Ironside Capital Management LP ("ICM" or the "Fund") in connection with the examination by the Internal Revenue Service (the "Service") of the Fund's federal income tax return (Form 1065, U.S. Return of Partnership Income) for the tax year ended December 31, 2021. As you are aware, a Form 2848 (Power of Attorney and Declaration of Representative) was filed with the Service on April 14, 2023, designating the undersigned, Sylvia Hartwell, and my colleague, Leila Nazari, as authorized representatives of ICM for purposes of this examination. We respectfully request that all communications relating to this examination be directed to our attention at the address set forth above.

This letter constitutes the Fund's response to Information Document Request #2, dated June 2, 2023 (hereinafter, "IDR #2"), which consists of eighteen (18) enumerated items focused on the management fee waiver mechanics employed by Ironside Capital GP LLC ("Ironside GP" or the "General Partner") during the 2021 tax year. Enclosed with this response are the documents and materials responsive to each of the eighteen items, indexed and organized as described in Part VII below.

ICM expressly reserves all rights, privileges, objections, and defenses in connection with this examination and the production of documents and information described herein, including, but not limited to, the attorney-client privilege, the tax practitioner privilege under Internal Revenue Code ("IRC") Section 7525, the work product doctrine, and the right to supplement, amend, or clarify any response set forth in this letter or in any prior or subsequent correspondence. Nothing contained herein, and no document produced herewith, shall be construed as a waiver of any such right, privilege, objection, or defense.

I. EXECUTIVE SUMMARY OF THE MANAGEMENT FEE WAIVER

For the tax year ended December 31, 2021, Ironside Capital GP LLC elected to waive $23.8 million of management fees that would otherwise have been payable to it under Section 4.1 of the Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP, dated as of September 1, 2016, as further amended through the Fourth Amendment dated March 15, 2020 (collectively, the "LPA"). In exchange for the waiver, the General Partner received an increased capital interest in the Fund. This increased capital interest is subject to the same risks of loss, the same allocation provisions, and the same distribution mechanics as all other capital interests held by any partner in the Fund. There is no preferential treatment, no guaranteed floor, no priority distribution, and no separate or segregated account insulating the General Partner's waiver-based capital from the investment risks borne by the Fund's portfolio.

The waiver was made pursuant to a bona fide, arm's-length election mechanism expressly set forth in LPA Section 4.1(c), which was negotiated among the General Partner and the Fund's limited partners — including several large institutional investors — at the time of the Fund's formation and in connection with subsequent amendments to the LPA. The election mechanism requires the General Partner to make an irrevocable written election prior to the commencement of each calendar quarter in which the management fee would otherwise accrue, thereby ensuring that the waiver decision is made prospectively, before the services giving rise to the fee are rendered.

Total management fees for the 2021 tax year, absent the waiver, would have been $71.6 million, calculated as 2% per annum of the Fund's average committed capital of approximately $3.58 billion, as provided under LPA Section 4.1. After the waiver, $47.8 million was paid to the General Partner as management fees (constituting ordinary income to the General Partner), and $23.8 million was contributed to the Fund as additional General Partner capital, subject to the full range of entrepreneurial risks inherent in the Fund's investment activities.

The fee waiver arrangement employed by ICM has genuine economic substance, involves real and meaningful downside risk to the General Partner, and was implemented and documented with the rigor and formality that one would expect of an institutional-quality alternative investment fund. As set forth in detail below, the arrangement is fundamentally distinguishable from the abusive fee conversion structures that have drawn scrutiny from the Service and from Congress. We respectfully submit that the waiver is properly respected for federal income tax purposes, and that the waived amounts are appropriately treated as capital contributions by the General Partner rather than as disguised payments for services under IRC Section 707(a)(2)(A).

II. DETAILED FACTUAL NARRATIVE

A. Fund Structure and Management Fee Framework

Ironside Capital Management LP is a Delaware limited partnership formed on June 14, 2016, pursuant to a Certificate of Limited Partnership filed with the Delaware Secretary of State. ICM operates as a multi-strategy hedge fund employing a diversified array of investment strategies, including global macro, event-driven equity, and credit strategies. The Fund's investment objective is to generate superior risk-adjusted returns over a full market cycle through the flexible deployment of capital across these complementary strategies, with the allocation among strategies determined by the General Partner in its discretion based on prevailing market conditions and the opportunity set available to the Fund.

As of December 31, 2021, the Fund had total assets under management of approximately $3.82 billion. The Fund's investor base consisted of forty-seven (47) limited partners and the General Partner. The limited partner base is comprised predominantly of institutional investors, including public and private pension funds, endowments, foundations, family offices, and other sophisticated allocators of capital.

The General Partner of the Fund is Ironside Capital GP LLC, a Delaware limited liability company (EIN: 83-2741890), which was formed on June 10, 2016. The General Partner is managed by its two Managing Members:

• Desmond R. Calloway, Founder and Chief Investment Officer, who holds a 62% membership interest in the General Partner; and

• Priya Venkatesh, Chief Operating Officer and Chief Financial Officer, who holds a 28% membership interest in the General Partner.

The remaining 10% of the General Partner's membership interests are held by other members of the GP entity, consisting of certain senior investment professionals and other key personnel of the Fund's management team.

Under LPA Section 4.1, the Fund pays the General Partner a management fee equal to 2% per annum of committed capital, payable quarterly in advance on the first business day of each calendar quarter. The management fee is intended to compensate the General Partner for the provision of investment advisory, portfolio management, operational, and administrative services to the Fund. For the 2021 tax year, the Fund's average committed capital was approximately $3.58 billion, yielding a total annual management fee of $71.6 million (calculated as $3.58 billion multiplied by 2%).

Separately, and in addition to the management fee, LPA Section 5.2 provides for a performance allocation (commonly referred to as "carried interest") equal to 20% of the net profits of the Fund above an 8% preferred return hurdle, with a full catch-up provision. The performance allocation is designed to align the economic interests of the General Partner with those of the limited partners by ensuring that the General Partner shares in the investment gains of the Fund. For the 2021 tax year, total performance allocations to the General Partner were $94.3 million, reflecting a gross fund return of approximately 18.7% for the year. The performance allocation is not the subject of IDR #2 and is referenced here solely for contextual purposes; however, excerpts of LPA Section 5.2 are included among the enclosed documents at the request of the examination team.

B. The Waiver Election Mechanism Under the LPA

LPA Section 4.1(c), which was included in the original LPA at the time of the Fund's formation and has remained substantively unchanged through the Fourth Amendment, grants the General Partner a right, exercisable in its sole and absolute discretion, to irrevocably waive all or a portion of the management fee for any calendar quarter in exchange for a corresponding increase in the General Partner's capital account. The relevant provisions of Section 4.1(c) are set forth below, and a certified excerpt of Section 4.1(c) is enclosed as part of the document production accompanying this response:

"The General Partner may, in its sole and absolute discretion, elect to irrevocably waive all or any portion of the Management Fee for any calendar quarter (a 'Fee Waiver Election'). Any such Fee Waiver Election shall be made in writing, executed by a Managing Member of the General Partner, and delivered to the Fund Administrator no later than the last Business Day of the calendar quarter immediately preceding the calendar quarter in which the Management Fee subject to the Fee Waiver Election would otherwise accrue. Upon the effective date of a Fee Waiver Election, the amount of the Management Fee so waived shall be treated for all purposes of this Agreement as a capital contribution by the General Partner to the Partnership, and the General Partner's Capital Account shall be increased by the amount of such waived Management Fee as of the date on which the Management Fee would otherwise have been payable. Such capital contribution shall thereafter be subject to the same allocation and distribution provisions of this Agreement as all other Capital Contributions, including, without limitation, allocations of Net Income, Net Loss, and items thereof pursuant to Article VI."

Several features of this election mechanism are noteworthy and merit emphasis:

Irrevocability. Once a Fee Waiver Election is made, it is irrevocable for the calendar quarter to which it applies. The General Partner cannot reverse or rescind the election if the Fund subsequently experiences investment losses during or after the applicable quarter. This irrevocability is a critical feature of the arrangement, because it means that the General Partner assumes a genuine risk of loss at the time the election is made — a risk that cannot be mitigated or eliminated after the fact.

Prospective Timing. The election must be made and delivered to the Fund Administrator no later than the last business day of the calendar quarter preceding the quarter in which the fee would otherwise accrue. This means that the General Partner must commit to the waiver before the commencement of the quarter in which the management services will be rendered and the fee will be earned. The prospective nature of the election further reinforces the entrepreneurial risk assumed by the General Partner, because the General Partner cannot wait to observe the Fund's performance before deciding whether to waive the fee.

Capital Contribution Treatment. The waived fee amount is treated as a capital contribution by the General Partner for all purposes of the LPA. The contribution is credited to the General Partner's capital account and is thereafter subject to all of the allocation and distribution provisions of the LPA, without any preferential or priority treatment. The waiver-based capital contribution participates in the Fund's investment gains and losses on the same basis as any other capital contribution by any partner.

No Segregation or Separate Account. The LPA does not provide for the waived amounts to be segregated in a separate account, invested in a distinct or lower-risk pool of assets, or otherwise insulated from the investment risks of the Fund's main portfolio. Once contributed, the waived capital is commingled with the Fund's general investment pool and is deployed across the Fund's full range of global macro, event-driven equity, and credit strategies.

For the 2021 tax year, the General Partner made four quarterly Fee Waiver Elections, as follows:

Each of these elections was made and delivered to Greystone Fund Administration LLC (the "Fund Administrator") on the dates indicated above, which in each case was the last business day of the calendar quarter preceding the quarter to which the waiver applied. Copies of the four executed waiver election resolutions are enclosed with this response.

C. Economic Substance and Genuine Downside Risk

The management fee waiver arrangement employed by the General Partner involves genuine, meaningful, and significant downside risk. This point cannot be overstated, as it is the central factual predicate upon which the proper tax treatment of the waiver rests.

Upon the effective date of each Fee Waiver Election, the waived management fee amount was contributed to the Fund's capital and became fully at risk in the Fund's investment portfolio. The General Partner's increased capital interest participates pari passu with all other partners' capital in the gains and losses of the Fund. There is no side letter, no separate account, no preferential allocation, no priority distribution, no guaranteed return, no minimum return, no clawback protection, and no other mechanism that would insulate the General Partner's waiver-based capital from the full range of investment risks inherent in the Fund's portfolio.

The Fund's investment strategies — global macro, event-driven equity, and credit — involve material market risk. The global macro strategy involves directional and relative-value positions in equities, fixed income, currencies, and commodities across global markets. The event-driven equity strategy involves investments in securities of companies undergoing or expected to undergo corporate events such as mergers, acquisitions, restructurings, and spin-offs. The credit strategy involves investments in performing and distressed corporate credit instruments, including leveraged loans, high-yield bonds, and structured credit. Each of these strategies is subject to significant volatility and the potential for meaningful losses. In any given quarter or year, adverse market conditions, idiosyncratic events, or erroneous investment judgments could result in material losses to the Fund's portfolio, which would directly and proportionally reduce the value of the General Partner's waiver-based capital contributions.

By way of illustration, during the first quarter of 2020, the Fund experienced a drawdown of approximately 11.3% as a result of the onset of the COVID-19 pandemic and the resulting global market dislocation. Had the General Partner waived management fees for that quarter (which, for the record, it did not), the waived capital would have borne that loss in full, just as all other Fund capital did. The General Partner's decision to waive or not to waive in any given quarter is informed by its assessment of the risk-return profile of the Fund, but the decision, once made, is irrevocable and the outcome is uncertain.

As of December 31, 2021, the capital accounts of the Managing Members of the General Partner stood at the following levels:

• Desmond R. Calloway: $187.4 million

• Priya Venkatesh: $48.6 million

A meaningful portion of these capital account balances reflects accumulated waiver-based contributions from the 2021 tax year and from prior tax years. These accumulated contributions have been subject to investment gains and losses alongside all other Fund capital. The fact that the Managing Members of the General Partner have accumulated substantial capital in the Fund through the waiver mechanism — capital that is fully at risk — underscores the genuine economic substance of the arrangement and the alignment of interests between the General Partner and the limited partners.

The arm's-length nature of the waiver mechanism is further evidenced by the fact that the LPA provisions governing the waiver were negotiated with, and consented to by, sophisticated institutional limited partners. Key limited partners who participated in the negotiation of the LPA and its amendments, and who were fully aware of and consented to the fee waiver mechanism, include:

• Northgate Public Employees' Retirement System — capital commitment of $412 million;

• Bramblewood Family Office LLC — capital commitment of $95 million; and

• Marlowe Asset Management Horizon Endowment Fund — capital commitment of $175 million.

These and other limited partners are represented by sophisticated legal counsel and investment advisors and conducted extensive due diligence on the Fund's terms, including the fee waiver mechanism, before committing capital. The inclusion of the waiver mechanism in the LPA was the product of genuine arm's-length negotiation, and the limited partners understood and agreed that the waiver mechanism served a legitimate business purpose — namely, aligning the interests of the General Partner with those of the limited partners by increasing the General Partner's "skin in the game."

In sum, the ICM fee waiver arrangement is substantively and fundamentally different from a fee deferral or a guaranteed payment. The General Partner genuinely exchanges a fixed, determinable, and unconditional right to receive cash compensation (in the form of the management fee) for an uncertain, at-risk equity interest in the Fund. This exchange involves a real and meaningful assumption of entrepreneurial risk, and the arrangement has genuine economic substance independent of any tax considerations.

D. Contemporaneous Documentation

The management fee waiver elections for the 2021 tax year were thoroughly documented on a contemporaneous basis, as follows:

GP Resolutions. Each of the four quarterly waiver elections was memorialized in a formal written resolution of the Managing Members of Ironside Capital GP LLC. Each resolution was executed by both Desmond R. Calloway and Priya Venkatesh in their capacities as Managing Members. The resolutions set forth the amount of the management fee to be waived, the quarter to which the waiver applies, and the irrevocable nature of the election. Copies of all four resolutions are enclosed with this response (see Index of Enclosed Documents, Item 3).

Internal Memoranda. Priya Venkatesh, in her capacity as Chief Operating Officer and Chief Financial Officer of the General Partner, prepared contemporaneous internal memoranda documenting the business rationale for each quarterly waiver election. These memoranda include an analysis of the expected risk-return profile of the Fund at the time of each election, a discussion of the General Partner's existing capital commitment to the Fund, and an assessment of how the waiver would further align the interests of the General Partner and the limited partners. Each memorandum was prepared and finalized on or before the date of the corresponding waiver election resolution. Copies of all four memoranda are enclosed with this response (see Index of Enclosed Documents, Item 4).

Fund Administrator Records. Greystone Fund Administration LLC, the Fund's independent third-party administrator, processed each waiver election upon receipt and adjusted the General Partner's capital account accordingly in its books and records. Greystone's capital account records reflect the waived fee amounts as capital contributions by the General Partner on the dates corresponding to each quarterly fee accrual. Greystone's records for each quarterly adjustment are enclosed with this response (see Index of Enclosed Documents, Item 5).

Independent Audit and Tax Return Preparation. Borwick Craine & Associates LLP serves as the Fund's independent auditor (engagement partner: Sandra Whitmore, CPA) and as the preparer of the Fund's federal and state tax returns (engagement partner: Elliot Navarro, CPA). Fenwick Craine reviewed the management fee waiver mechanism as part of its audit of the Fund's financial statements for the year ended December 31, 2021, and in connection with the preparation of the Fund's 2021 Form 1065. Fenwick Craine's workpapers relating to the management fee waiver, including the firm's analysis of the waiver's accounting and tax treatment, are enclosed in excerpted form with this response (see Index of Enclosed Documents, Item 6). We note that certain additional workpapers have been withheld on the basis of the tax practitioner privilege under IRC Section 7525 and the work product doctrine, as more fully described in Part VI below.

E. Calculation Methodology

The following table summarizes the management fee calculation and waiver for the 2021 tax year:

The $47.8 million of net management fees paid in cash was reported as a guaranteed payment to the General Partner on the Fund's 2021 Form 1065, Schedule K, and on the General Partner's Schedule K-1, and was included in the General Partner's ordinary income for the 2021 tax year. The $23.8 million of waived management fees was reflected on the Fund's books and records as a capital contribution by the General Partner, credited to the General Partner's capital account on the dates corresponding to each quarterly fee accrual (i.e., the first business day of each calendar quarter of 2021). The capital contribution was thereafter subject to the same partnership allocation provisions as all other capital in the Fund, receiving its pro rata share of the Fund's net income, net loss, and unrealized gains and losses for the remainder of the applicable quarter and all subsequent periods.

The quarterly breakdown is as follows:

Detailed management fee calculation schedules, on both a quarterly and annual basis, are enclosed with this response (see Index of Enclosed Documents, Item 7). General Partner capital account statements as of December 31, 2021, are also enclosed (see Index of Enclosed Documents, Item 8).

III. LEGAL FRAMEWORK AND DISTINCTION FROM ABUSIVE STRUCTURES

A. IRC § 707(a)(2)(A) — Disguised Payments for Services

IRC Section 707(a)(2)(A) provides that, if a partner performs services for the partnership and there is a related direct or indirect allocation and distribution to such partner, the transaction will be treated as occurring between the partnership and a person who is not a partner (i.e., as a payment for services taxable as ordinary income under Section 61 and subject to self-employment tax under Section 1402) if the performance of services and the allocation and distribution, when viewed together, are properly characterized as a transaction between the partnership and a non-partner.

The legislative history of Section 707(a)(2)(A) reflects Congress's concern with arrangements in which a service-providing partner receives what is, in substance, compensation for services, but the payment is structured as a partnership allocation in order to convert what would otherwise be ordinary income into capital gain, or to achieve other tax benefits not contemplated by the partnership taxation provisions of Subchapter K.

Treasury Regulation Section 1.707-2 implements Section 707(a)(2)(A) by setting forth six factors to be considered in determining whether an arrangement between a partner and a partnership constitutes a disguised payment for services. These factors are:

1. Whether the arrangement lacks significant entrepreneurial risk, taking into account the overall arrangement and whether the allocation is subject to substantial risk of reduction or loss based on the entrepreneurial risks of partnership operations;

2. Whether the partner's status as a partner is transitory — i.e., whether the partner's interest in the partnership is of such brief duration or limited scope that it suggests the partner's status is merely nominal;

3. Whether the allocation and distribution to the partner are close in time to the performance of services, which may suggest that the allocation is, in substance, a fee;

4. Whether, under all the facts and circumstances, the partner became a partner primarily to obtain tax benefits that would not have been available if the services had been rendered in a third-party capacity;

5. Whether the value of the partner's interest in the partnership is small relative to the allocation; and

6. Any other facts and circumstances that are relevant under all the facts and circumstances, including the relationship between the allocation and distribution and the services performed.

The regulations make clear that the most important of these factors is whether the arrangement lacks significant entrepreneurial risk. If the arrangement subjects the service-providing partner to genuine entrepreneurial risk — that is, if there is a real and meaningful possibility that the partner will receive less than the value of the services rendered, or may receive nothing, or may even suffer a loss — then the arrangement is less likely to be characterized as a disguised payment for services, and is more likely to be respected as a legitimate partnership allocation.

B. Application to Ironside's Waiver Arrangement

When the six factors of Treasury Regulation Section 1.707-2 are applied to the ICM management fee waiver arrangement, each factor weighs strongly against recharacterization of the waiver as a disguised payment for services under Section 707(a)(2)(A).

Factor 1: Significant Entrepreneurial Risk. This is the most critical factor, and it weighs decisively in ICM's favor. The General Partner's capital contribution derived from the waived management fees is fully at risk in the Fund's investment portfolio. The waiver-based capital participates in all gains and losses of the Fund on a pari passu basis with all other partners' capital. There is no preferential return, no guaranteed floor, no priority distribution, no loss limitation, no stop-loss mechanism, and no separate or segregated account. The Fund invests across global macro, event-driven equity, and credit strategies, each of which involves material market risk and the genuine possibility of loss. As noted above, the Fund experienced an 11.3% drawdown in Q1 2020, demonstrating that losses of material magnitude are a realistic possibility. The General Partner assumes this risk irrevocably at the time each waiver election is made, before the services giving rise to the management fee are rendered.

Factor 2: Transitory Partner Status. The General Partner is the permanent general partner of the Fund and has been since the Fund's formation in 2016. The General Partner's interest in the Fund is not transitory or nominal in any respect. As of December 31, 2021, the Managing Members of the General Partner held capital accounts totaling in excess of $236 million, reflecting a substantial, long-term, and permanent interest in the Fund.

Factor 3: Timing of Allocation and Distribution Relative to Services. The waiver election is made irrevocably before the commencement of the quarter in which the management fee would otherwise accrue — that is, before the services are rendered. Furthermore, the waiver-based capital contribution is not distributed to the General Partner in close temporal proximity to the performance of services; rather, it remains in the Fund's capital pool, subject to the same withdrawal and distribution restrictions as all other capital. The General Partner's capital account is subject to a lock-up period and the Fund's general liquidity provisions, and the General Partner does not receive distributions of waiver-based capital on any preferential or accelerated basis.

Factor 4: Tax Motivation for Partner Status. The General Partner's status as a partner is not motivated by tax considerations. The General Partner has served as the Fund's general partner since the Fund's inception and performs all of the investment advisory, portfolio management, and operational functions essential to the Fund's business. The General Partner's partnership interest is the natural and customary structure for the management entity of a hedge fund and serves well-established non-tax business purposes, including alignment of interests, liability protection, and governance.

Factor 5: Value of Partner Interest Relative to Allocation. The General Partner's capital account in the Fund is substantial — over $236 million as of December 31, 2021 — and the waiver-based capital contributions represent a meaningful addition to an already significant interest. The General Partner's interest is not nominal or de minimis; it is one of the largest capital accounts in the Fund.

Factor 6: Other Facts and Circumstances. Additional facts and circumstances supporting the legitimacy of the waiver arrangement include: (i) the arm's-length negotiation of the LPA provisions with sophisticated institutional limited partners; (ii) the thorough contemporaneous documentation of each waiver election; (iii) the review and approval of the waiver mechanism by the Fund's independent auditor; and (iv) the consistent application of the waiver mechanism across multiple tax years, reflecting a settled business practice rather than a one-time tax planning maneuver.

In sum, when the totality of the facts and circumstances is considered, the ICM management fee waiver arrangement is a bona fide partnership arrangement that subjects the General Partner to genuine and significant entrepreneurial risk. The arrangement does not warrant recharacterization as a disguised payment for services under Section 707(a)(2)(A).

C. Distinction from Abusive Fee Waiver / Conversion Arrangements

We are aware that the Service has devoted attention to management fee waiver and conversion arrangements in the alternative investment fund context, and that certain such arrangements have been the subject of audit activity, proposed adjustments, and public commentary by Service officials. We believe it is important to distinguish the ICM arrangement from the types of abusive structures that have properly drawn the Service's scrutiny.

The abusive arrangements that have been criticized by the Service and by commentators generally share one or more of the following characteristics: (i) the waived management fees are invested in low-risk, short-duration instruments (such as Treasury bills or money market funds) or in a segregated account designed to minimize or eliminate investment risk; (ii) the general partner receives a priority return, a guaranteed minimum, or other preferential treatment that effectively insulates the waived capital from meaningful downside exposure; (iii) the waiver election is made retroactively, after the services have been rendered and the fee has been earned, or the election is nominally prospective but is effectively a foregone conclusion based on the structure of the arrangement; or (iv) the arrangement is designed solely to convert ordinary income (management fees) into capital gains (partnership allocations) without any genuine shift in economic risk.

The ICM arrangement possesses none of these characteristics. Specifically:

(i) Full Investment Risk, No Segregation. The waived capital is invested in the same multi-strategy portfolio as all other Fund capital. It is not segregated, not invested in low-risk instruments, and not otherwise insulated from the market risks inherent in the Fund's global macro, event-driven equity, and credit strategies. The Fund does not maintain a separate account, sub-fund, or sleeve for waiver-based capital. The General Partner's waiver-based capital bears the same risk of loss as every other dollar of capital in the Fund.

(ii) No Priority, No Guarantee, No Floor. There is no priority return, no guaranteed minimum return, no loss limitation, and no preferential distribution applicable to the General Partner's waiver-based capital. The waiver-based capital participates pari passu with all other capital in gains and losses. If the Fund's portfolio declines in value, the General Partner's waiver-based capital declines proportionally, with no protection or cushion of any kind.

(iii) Genuinely Prospective and Irrevocable. Each waiver election is made and delivered to the Fund Administrator before the commencement of the quarter in which the management fee would otherwise accrue, and each election is irrevocable once made. The General Partner cannot observe the Fund's performance for the quarter and then decide whether to waive — the decision must be made in advance, under conditions of genuine uncertainty about the Fund's future investment results.

(iv) Arm's-Length Negotiation. The waiver mechanism was negotiated as part of the LPA with sophisticated institutional limited partners represented by experienced legal counsel and investment advisors. The mechanism serves a legitimate business purpose — aligning the interests of the General Partner with those of the limited partners — and was not adopted solely or primarily for tax purposes.

We also wish to address two items of IRS guidance that may be relevant to the examination team's analysis:

Revenue Procedure 93-27. Rev. Proc. 93-27 provides that the receipt of a partnership profits interest for the provision of services to or for the benefit of a partnership in a partner capacity is generally not a taxable event. While Rev. Proc. 93-27 is not directly on point — because the ICM waiver involves the exchange of a contractual right to a management fee for a capital interest, rather than the receipt of a profits interest — the principles underlying Rev. Proc. 93-27 support the conclusion that the conversion of a service fee into a partnership interest with genuine entrepreneurial risk is consistent with the treatment of such interests under Subchapter K. In any event, the ICM waiver-based capital interest is a capital interest (not merely a profits interest), and the General Partner's assumption of full downside risk further distinguishes the arrangement from a mere receipt of a profits interest.

Notice 2005-43. Notice 2005-43 addresses certain partnership transactions involving the use of partnerships to inappropriately defer or avoid the recognition of income. The notice targets arrangements that lack economic substance and are designed to achieve tax results inconsistent with the economic substance of the transaction. As discussed at length above, the ICM fee waiver arrangement has genuine economic substance, involves real and meaningful entrepreneurial risk, and produces tax results that are consistent with the economic reality of the transaction. The General Partner genuinely exchanges a fixed, determinable right to receive cash compensation for an uncertain, at-risk equity interest, and the tax treatment of the arrangement reflects that economic reality. Accordingly, Notice 2005-43 does not support the recharacterization of the ICM waiver arrangement.

IV. INDEX OF ENCLOSED DOCUMENTS

The following documents are enclosed with this response, organized by IDR #2 item number. The enclosed documents constitute a subset of the approximately 4,600 pages produced across all IDR responses in this examination.

Item 1. Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP — certified excerpts of Section 4.1 (Management Fee Provisions), including Section 4.1(c) (Fee Waiver Election Mechanism). (32 pages)

Item 2. Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP — certified excerpts of Section 5.2 (Performance Allocation / Carried Interest Provisions), provided for context as requested by the examination team. (18 pages)

Item 3. Resolutions of the Managing Members of Ironside Capital GP LLC authorizing the quarterly Fee Waiver Elections for the 2021 tax year — four (4) resolutions, each signed by Desmond R. Calloway and Priya Venkatesh, dated December 30, 2020; March 30, 2021; June 29, 2021; and September 29, 2021, respectively. (8 pages)

Item 4. Contemporaneous internal memoranda prepared by Priya Venkatesh, CFO, documenting the business rationale for each quarterly Fee Waiver Election for the 2021 tax year — four (4) memoranda, each corresponding to one of the quarterly elections described above. (24 pages)

Item 5. Greystone Fund Administration LLC capital account adjustment records for each quarterly Fee Waiver Election, reflecting the processing of each election and the corresponding adjustment to the General Partner's capital account. (16 pages)

Item 6. Borwick Craine & Associates LLP workpapers related to the management fee waiver — excerpts from the 2021 audit file (engagement partner: Sandra Whitmore, CPA) and the 2021 tax return preparation file (engagement partner: Elliot Navarro, CPA), subject to the privilege limitations described in Part VI of this response. (42 pages)

Item 7. Management fee calculation schedules for the 2021 tax year, on both a quarterly and annual basis, reflecting the gross management fee, the waived amount, and the net fee paid in cash. (6 pages)

Item 8. General Partner capital account statements as of December 31, 2021, reflecting total capital contributions (including waiver-based contributions), allocations of net income and net loss, distributions, and ending capital account balances. (10 pages)

Item 9. Schedules K-1 (Form 1065) for the General Partner (Ironside Capital GP LLC) for the 2021 tax year, reflecting the waiver-based capital contributions and the related partnership allocations. (4 pages)

Item 10. Correspondence between Ironside Capital GP LLC and Greystone Fund Administration LLC regarding the processing of each quarterly Fee Waiver Election for the 2021 tax year. (12 pages)

Item 11. Ironside Capital GP LLC Operating Agreement — certified excerpts reflecting the ownership interests and governance structure of the General Partner. (14 pages)

Item 12. Schedule of committed capital by limited partner as of December 31, 2021 (with investor names redacted to protect confidentiality, except for the three institutional investors identified in this response with their consent). (4 pages)

Item 13. Fund monthly performance reports for January through December 2021, reflecting gross and net returns by strategy and in the aggregate. (48 pages)

Item 14. Summary of management fee waiver elections for all tax years since inception of the Fund (2016–2021), reflecting the historical pattern of waiver elections by the General Partner. (3 pages)

Item 15. Relevant provisions of side letters with Northgate Public Employees' Retirement System, Bramblewood Family Office LLC, and Marlowe Asset Management Horizon Endowment Fund, to the extent such provisions relate to the management fee or the fee waiver mechanism (with non-relevant provisions redacted). (22 pages)

Item 16. Annual financial statements of Ironside Capital Management LP for the year ended December 31, 2021, as audited by Borwick Craine & Associates LLP, including the independent auditor's report. (38 pages)

Item 17. Ironside Capital Management LP Form 1065 for the tax year ended December 31, 2021, including all schedules and attachments (as previously produced in response to IDR #1; provided again for completeness). (86 pages)

Item 18. General Partner's annual certification of compliance with LPA provisions, including certification of the fee waiver elections, signed by Desmond R. Calloway and Priya Venkatesh and dated March 1, 2022. (2 pages)

Total pages enclosed with this response: approximately 389 pages.

V. RESERVATION OF RIGHTS

Ironside Capital Management LP, by and through its undersigned counsel, expressly reserves all rights, privileges, objections, and defenses available to it in connection with this examination and the production of documents and information described herein, including, but not limited to:

(a) The attorney-client privilege, as applicable to communications between ICM, its General Partner, and their legal counsel (including Calderwood & Harkness LLP and any other counsel) made for the purpose of obtaining or providing legal advice;

(b) The tax practitioner privilege under IRC Section 7525, as applicable to tax advice communications between ICM, its General Partner, and their federally authorized tax practitioners;

(c) The work product doctrine, as applicable to documents and materials prepared by or at the direction of counsel in anticipation of litigation or in connection with the rendering of legal advice;

(d) The right to supplement, amend, or clarify any response set forth in this letter or in any prior or subsequent correspondence, including the right to produce additional documents or information if and when identified;

(e) The right to raise additional arguments, authorities, or defenses in support of any position taken on the Fund's 2021 Form 1065 or in connection with this examination; and

(f) All other rights, privileges, objections, and defenses available under applicable law, regulation, or administrative guidance.

The production of documents and information in connection with this response does not constitute, and shall not be deemed to constitute, a waiver of any applicable privilege, protection, or objection, whether or not expressly asserted herein. ICM does not concede the relevance, materiality, or admissibility of any document or piece of information produced in response to IDR #2 or any other information document request issued in connection with this examination.

To the extent that any document produced herewith contains or reflects privileged or protected communications, such production is inadvertent and does not constitute a waiver of any applicable privilege or protection. ICM reserves the right to assert the privilege or protection as to any such document and to seek the return or sequestration of any inadvertently produced privileged or protected material, in accordance with Federal Rule of Evidence 502(b) and any other applicable law or regulation.

VI. CLOSING

We trust that the foregoing narrative and the enclosed documents are responsive to the items set forth in IDR #2. We have endeavored to provide a thorough and transparent account of the management fee waiver mechanics employed by the General Partner, the economic substance of the arrangement, and the legal basis for the tax treatment reflected on the Fund's 2021 Form 1065.

Should you, or any member of the examination team, have any questions regarding this response or the enclosed documents, or should you wish to schedule a conference to discuss these materials, please do not hesitate to contact the undersigned or Leila Nazari at the address and contact information set forth below. We are available to meet at your convenience and are committed to facilitating a productive and efficient examination process.

Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, New York 10020 Telephone: (212) 558-4127

Email: shartwell@calderwoodharkness.com

Leila Nazari Counsel, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, New York 10020 Telephone: (212) 558-4243

Email: lnazari@calderwoodharkness.com

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Sylvia Hartwell Partner, Tax Department

cc: Dawn M. Petrovic, Revenue Agent, IRS Large Business & International Division Marcus Trent, General Counsel, Ironside Capital Management LP Leila Nazari, Calderwood & Harkness LLP

Enclosures: As indexed above (IDR #2, Items 1–18)

Quarter	Waiver Amount	Election Date	Delivery to Fund Administrator
Q1 2021	$5,950,000	December 30, 2020	December 30, 2020
Q2 2021	$5,950,000	March 30, 2021	March 30, 2021
Q3 2021	$5,950,000	June 29, 2021	June 29, 2021
Q4 2021	$5,950,000	September 29, 2021	September 29, 2021
Total	$23,800,000
Line Item	Amount
Average committed capital (2021)	$3,580,000,000
Management fee rate (per annum)	2.00%
Total management fee before waiver	$71,600,000
Less: Waived amount (four quarterly waivers of $5.95M each)	($23,800,000)
Net management fee paid in cash	$47,800,000
Waived amount treated as GP capital contribution	$23,800,000
Quarter	Gross Fee	Waived	Net Fee Paid in Cash	Capital Contribution
Q1 2021	$17,900,000	$5,950,000	$11,950,000	$5,950,000
Q2 2021	$17,900,000	$5,950,000	$11,950,000	$5,950,000
Q3 2021	$17,900,000	$5,950,000	$11,950,000	$5,950,000
Q4 2021	$17,900,000	$5,950,000	$11,950,000	$5,950,000
Total	$71,600,000	$23,800,000	$47,800,000	$23,800,000

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — TAX ADVICE
CALDERWOOD & HARKNESS LLP Attorneys at Law
1251 Avenue of the Americas, 40th Floor New York, New York 10020
Telephone: (212) 558-4000 Facsimile: (212) 558-3588
www.calderwoodharkness.com
June 23, 2023
Via Sundial Data Systems and Electronic Mail
Timothy J. Albrecht Revenue Agent (Badge No. 74-28193) Internal Revenue Service Large Business & International Division 290 Broadway New York, NY 10007
Re: Ironside Capital Management LP (EIN: 83-2741956) — Response to Information Document Request #2 Tax Year Ended: December 31, 2021 Form: 1065
Dear Mr. Albrecht:
Calderwood & Harkness LLP represents Ironside Capital Management LP ("ICM" or the "Fund") in connection with the examination by the Internal Revenue Service (the "Service") of the Fund's federal income tax return (Form 1065, U.S. Return of Partnership Income) for the tax year ended December 31, 2021. As you are aware, a Form 2848 (Power of Attorney and Declaration of Representative) was filed with the Service on April 14, 2023, designating the undersigned, Sylvia Hartwell, and my colleague, Leila Nazari, as authorized representatives of ICM for purposes of this examination. We respectfully request that all communications relating to this examination be directed to our attention at the address set forth above.
This letter constitutes the Fund's response to Information Document Request #2, dated June 2, 2023 (hereinafter, "IDR #2"), which consists of eighteen (18) enumerated items focused on the management fee waiver mechanics employed by Ironside Capital GP LLC ("Ironside GP" or the "General Partner") during the 2021 tax year. Enclosed with this response are the documents and materials responsive to each of the eighteen items, indexed and organized as described in Part VII below.
ICM expressly reserves all rights, privileges, objections, and defenses in connection with this examination and the production of documents and information described herein, including, but not limited to, the attorney-client privilege, the tax practitioner privilege under Internal Revenue Code ("IRC") Section 7525, the work product doctrine, and the right to supplement, amend, or clarify any response set forth in this letter or in any prior or subsequent correspondence. Nothing contained herein, and no document produced herewith, shall be construed as a waiver of any such right, privilege, objection, or defense.
I. EXECUTIVE SUMMARY OF THE MANAGEMENT FEE WAIVER
For the tax year ended December 31, 2021, Ironside Capital GP LLC elected to waive $23.8 million of management fees that would otherwise have been payable to it under Section 4.1 of the Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP, dated as of September 1, 2016, as further amended through the Fourth Amendment dated March 15, 2020 (collectively, the "LPA"). In exchange for the waiver, the General Partner received an increased capital interest in the Fund. This increased capital interest is subject to the same risks of loss, the same allocation provisions, and the same distribution mechanics as all other capital interests held by any partner in the Fund. There is no preferential treatment, no guaranteed floor, no priority distribution, and no separate or segregated account insulating the General Partner's waiver-based capital from the investment risks borne by the Fund's portfolio.
The waiver was made pursuant to a bona fide, arm's-length election mechanism expressly set forth in LPA Section 4.1(c), which was negotiated among the General Partner and the Fund's limited partners — including several large institutional investors — at the time of the Fund's formation and in connection with subsequent amendments to the LPA. The election mechanism requires the General Partner to make an irrevocable written election prior to the commencement of each calendar quarter in which the management fee would otherwise accrue, thereby ensuring that the waiver decision is made prospectively, before the services giving rise to the fee are rendered.
Total management fees for the 2021 tax year, absent the waiver, would have been $71.6 million, calculated as 2% per annum of the Fund's average committed capital of approximately $3.58 billion, as provided under LPA Section 4.1. After the waiver, $47.8 million was paid to the General Partner as management fees (constituting ordinary income to the General Partner), and $23.8 million was contributed to the Fund as additional General Partner capital, subject to the full range of entrepreneurial risks inherent in the Fund's investment activities.
The fee waiver arrangement employed by ICM has genuine economic substance, involves real and meaningful downside risk to the General Partner, and was implemented and documented with the rigor and formality that one would expect of an institutional-quality alternative investment fund. As set forth in detail below, the arrangement is fundamentally distinguishable from the abusive fee conversion structures that have drawn scrutiny from the Service and from Congress. We respectfully submit that the waiver is properly respected for federal income tax purposes, and that the waived amounts are appropriately treated as capital contributions by the General Partner rather than as disguised payments for services under IRC Section 707(a)(2)(A).
II. DETAILED FACTUAL NARRATIVE
A. Fund Structure and Management Fee Framework
Ironside Capital Management LP is a Delaware limited partnership formed on June 14, 2016, pursuant to a Certificate of Limited Partnership filed with the Delaware Secretary of State. ICM operates as a multi-strategy hedge fund employing a diversified array of investment strategies, including global macro, event-driven equity, and credit strategies. The Fund's investment objective is to generate superior risk-adjusted returns over a full market cycle through the flexible deployment of capital across these complementary strategies, with the allocation among strategies determined by the General Partner in its discretion based on prevailing market conditions and the opportunity set available to the Fund.
As of December 31, 2021, the Fund had total assets under management of approximately $3.82 billion. The Fund's investor base consisted of forty-seven (47) limited partners and the General Partner. The limited partner base is comprised predominantly of institutional investors, including public and private pension funds, endowments, foundations, family offices, and other sophisticated allocators of capital.
The General Partner of the Fund is Ironside Capital GP LLC, a Delaware limited liability company (EIN: 83-2741890), which was formed on June 10, 2016. The General Partner is managed by its two Managing Members:
• Desmond R. Calloway, Founder and Chief Investment Officer, who holds a 62% membership interest in the General Partner; and
• Priya Venkatesh, Chief Operating Officer and Chief Financial Officer, who holds a 28% membership interest in the General Partner.
The remaining 10% of the General Partner's membership interests are held by other members of the GP entity, consisting of certain senior investment professionals and other key personnel of the Fund's management team.
Under LPA Section 4.1, the Fund pays the General Partner a management fee equal to 2% per annum of committed capital, payable quarterly in advance on the first business day of each calendar quarter. The management fee is intended to compensate the General Partner for the provision of investment advisory, portfolio management, operational, and administrative services to the Fund. For the 2021 tax year, the Fund's average committed capital was approximately $3.58 billion, yielding a total annual management fee of $71.6 million (calculated as $3.58 billion multiplied by 2%).
Separately, and in addition to the management fee, LPA Section 5.2 provides for a performance allocation (commonly referred to as "carried interest") equal to 20% of the net profits of the Fund above an 8% preferred return hurdle, with a full catch-up provision. The performance allocation is designed to align the economic interests of the General Partner with those of the limited partners by ensuring that the General Partner shares in the investment gains of the Fund. For the 2021 tax year, total performance allocations to the General Partner were $94.3 million, reflecting a gross fund return of approximately 18.7% for the year. The performance allocation is not the subject of IDR #2 and is referenced here solely for contextual purposes; however, excerpts of LPA Section 5.2 are included among the enclosed documents at the request of the examination team.
B. The Waiver Election Mechanism Under the LPA
LPA Section 4.1(c), which was included in the original LPA at the time of the Fund's formation and has remained substantively unchanged through the Fourth Amendment, grants the General Partner a right, exercisable in its sole and absolute discretion, to irrevocably waive all or a portion of the management fee for any calendar quarter in exchange for a corresponding increase in the General Partner's capital account. The relevant provisions of Section 4.1(c) are set forth below, and a certified excerpt of Section 4.1(c) is enclosed as part of the document production accompanying this response:
"The General Partner may, in its sole and absolute discretion, elect to irrevocably waive all or any portion of the Management Fee for any calendar quarter (a 'Fee Waiver Election'). Any such Fee Waiver Election shall be made in writing, executed by a Managing Member of the General Partner, and delivered to the Fund Administrator no later than the last Business Day of the calendar quarter immediately preceding the calendar quarter in which the Management Fee subject to the Fee Waiver Election would otherwise accrue. Upon the effective date of a Fee Waiver Election, the amount of the Management Fee so waived shall be treated for all purposes of this Agreement as a capital contribution by the General Partner to the Partnership, and the General Partner's Capital Account shall be increased by the amount of such waived Management Fee as of the date on which the Management Fee would otherwise have been payable. Such capital contribution shall thereafter be subject to the same allocation and distribution provisions of this Agreement as all other Capital Contributions, including, without limitation, allocations of Net Income, Net Loss, and items thereof pursuant to Article VI."
Several features of this election mechanism are noteworthy and merit emphasis:
Irrevocability. Once a Fee Waiver Election is made, it is irrevocable for the calendar quarter to which it applies. The General Partner cannot reverse or rescind the election if the Fund subsequently experiences investment losses during or after the applicable quarter. This irrevocability is a critical feature of the arrangement, because it means that the General Partner assumes a genuine risk of loss at the time the election is made — a risk that cannot be mitigated or eliminated after the fact.
Prospective Timing. The election must be made and delivered to the Fund Administrator no later than the last business day of the calendar quarter preceding the quarter in which the fee would otherwise accrue. This means that the General Partner must commit to the waiver before the commencement of the quarter in which the management services will be rendered and the fee will be earned. The prospective nature of the election further reinforces the entrepreneurial risk assumed by the General Partner, because the General Partner cannot wait to observe the Fund's performance before deciding whether to waive the fee.
Capital Contribution Treatment. The waived fee amount is treated as a capital contribution by the General Partner for all purposes of the LPA. The contribution is credited to the General Partner's capital account and is thereafter subject to all of the allocation and distribution provisions of the LPA, without any preferential or priority treatment. The waiver-based capital contribution participates in the Fund's investment gains and losses on the same basis as any other capital contribution by any partner.
No Segregation or Separate Account. The LPA does not provide for the waived amounts to be segregated in a separate account, invested in a distinct or lower-risk pool of assets, or otherwise insulated from the investment risks of the Fund's main portfolio. Once contributed, the waived capital is commingled with the Fund's general investment pool and is deployed across the Fund's full range of global macro, event-driven equity, and credit strategies.
For the 2021 tax year, the General Partner made four quarterly Fee Waiver Elections, as follows:
Each of these elections was made and delivered to Greystone Fund Administration LLC (the "Fund Administrator") on the dates indicated above, which in each case was the last business day of the calendar quarter preceding the quarter to which the waiver applied. Copies of the four executed waiver election resolutions are enclosed with this response.
C. Economic Substance and Genuine Downside Risk
The management fee waiver arrangement employed by the General Partner involves genuine, meaningful, and significant downside risk. This point cannot be overstated, as it is the central factual predicate upon which the proper tax treatment of the waiver rests.
Upon the effective date of each Fee Waiver Election, the waived management fee amount was contributed to the Fund's capital and became fully at risk in the Fund's investment portfolio. The General Partner's increased capital interest participates pari passu with all other partners' capital in the gains and losses of the Fund. There is no side letter, no separate account, no preferential allocation, no priority distribution, no guaranteed return, no minimum return, no clawback protection, and no other mechanism that would insulate the General Partner's waiver-based capital from the full range of investment risks inherent in the Fund's portfolio.
The Fund's investment strategies — global macro, event-driven equity, and credit — involve material market risk. The global macro strategy involves directional and relative-value positions in equities, fixed income, currencies, and commodities across global markets. The event-driven equity strategy involves investments in securities of companies undergoing or expected to undergo corporate events such as mergers, acquisitions, restructurings, and spin-offs. The credit strategy involves investments in performing and distressed corporate credit instruments, including leveraged loans, high-yield bonds, and structured credit. Each of these strategies is subject to significant volatility and the potential for meaningful losses. In any given quarter or year, adverse market conditions, idiosyncratic events, or erroneous investment judgments could result in material losses to the Fund's portfolio, which would directly and proportionally reduce the value of the General Partner's waiver-based capital contributions.
By way of illustration, during the first quarter of 2020, the Fund experienced a drawdown of approximately 11.3% as a result of the onset of the COVID-19 pandemic and the resulting global market dislocation. Had the General Partner waived management fees for that quarter (which, for the record, it did not), the waived capital would have borne that loss in full, just as all other Fund capital did. The General Partner's decision to waive or not to waive in any given quarter is informed by its assessment of the risk-return profile of the Fund, but the decision, once made, is irrevocable and the outcome is uncertain.
As of December 31, 2021, the capital accounts of the Managing Members of the General Partner stood at the following levels:
• Desmond R. Calloway: $187.4 million
• Priya Venkatesh: $48.6 million
A meaningful portion of these capital account balances reflects accumulated waiver-based contributions from the 2021 tax year and from prior tax years. These accumulated contributions have been subject to investment gains and losses alongside all other Fund capital. The fact that the Managing Members of the General Partner have accumulated substantial capital in the Fund through the waiver mechanism — capital that is fully at risk — underscores the genuine economic substance of the arrangement and the alignment of interests between the General Partner and the limited partners.
The arm's-length nature of the waiver mechanism is further evidenced by the fact that the LPA provisions governing the waiver were negotiated with, and consented to by, sophisticated institutional limited partners. Key limited partners who participated in the negotiation of the LPA and its amendments, and who were fully aware of and consented to the fee waiver mechanism, include:
• Northgate Public Employees' Retirement System — capital commitment of $412 million;
• Bramblewood Family Office LLC — capital commitment of $95 million; and
• Marlowe Asset Management Horizon Endowment Fund — capital commitment of $175 million.
These and other limited partners are represented by sophisticated legal counsel and investment advisors and conducted extensive due diligence on the Fund's terms, including the fee waiver mechanism, before committing capital. The inclusion of the waiver mechanism in the LPA was the product of genuine arm's-length negotiation, and the limited partners understood and agreed that the waiver mechanism served a legitimate business purpose — namely, aligning the interests of the General Partner with those of the limited partners by increasing the General Partner's "skin in the game."
In sum, the ICM fee waiver arrangement is substantively and fundamentally different from a fee deferral or a guaranteed payment. The General Partner genuinely exchanges a fixed, determinable, and unconditional right to receive cash compensation (in the form of the management fee) for an uncertain, at-risk equity interest in the Fund. This exchange involves a real and meaningful assumption of entrepreneurial risk, and the arrangement has genuine economic substance independent of any tax considerations.
D. Contemporaneous Documentation
The management fee waiver elections for the 2021 tax year were thoroughly documented on a contemporaneous basis, as follows:
GP Resolutions. Each of the four quarterly waiver elections was memorialized in a formal written resolution of the Managing Members of Ironside Capital GP LLC. Each resolution was executed by both Desmond R. Calloway and Priya Venkatesh in their capacities as Managing Members. The resolutions set forth the amount of the management fee to be waived, the quarter to which the waiver applies, and the irrevocable nature of the election. Copies of all four resolutions are enclosed with this response (see Index of Enclosed Documents, Item 3).
Internal Memoranda. Priya Venkatesh, in her capacity as Chief Operating Officer and Chief Financial Officer of the General Partner, prepared contemporaneous internal memoranda documenting the business rationale for each quarterly waiver election. These memoranda include an analysis of the expected risk-return profile of the Fund at the time of each election, a discussion of the General Partner's existing capital commitment to the Fund, and an assessment of how the waiver would further align the interests of the General Partner and the limited partners. Each memorandum was prepared and finalized on or before the date of the corresponding waiver election resolution. Copies of all four memoranda are enclosed with this response (see Index of Enclosed Documents, Item 4).
Fund Administrator Records. Greystone Fund Administration LLC, the Fund's independent third-party administrator, processed each waiver election upon receipt and adjusted the General Partner's capital account accordingly in its books and records. Greystone's capital account records reflect the waived fee amounts as capital contributions by the General Partner on the dates corresponding to each quarterly fee accrual. Greystone's records for each quarterly adjustment are enclosed with this response (see Index of Enclosed Documents, Item 5).
Independent Audit and Tax Return Preparation. Borwick Craine & Associates LLP serves as the Fund's independent auditor (engagement partner: Sandra Whitmore, CPA) and as the preparer of the Fund's federal and state tax returns (engagement partner: Elliot Navarro, CPA). Fenwick Craine reviewed the management fee waiver mechanism as part of its audit of the Fund's financial statements for the year ended December 31, 2021, and in connection with the preparation of the Fund's 2021 Form 1065. Fenwick Craine's workpapers relating to the management fee waiver, including the firm's analysis of the waiver's accounting and tax treatment, are enclosed in excerpted form with this response (see Index of Enclosed Documents, Item 6). We note that certain additional workpapers have been withheld on the basis of the tax practitioner privilege under IRC Section 7525 and the work product doctrine, as more fully described in Part VI below.
E. Calculation Methodology
The following table summarizes the management fee calculation and waiver for the 2021 tax year:
The $47.8 million of net management fees paid in cash was reported as a guaranteed payment to the General Partner on the Fund's 2021 Form 1065, Schedule K, and on the General Partner's Schedule K-1, and was included in the General Partner's ordinary income for the 2021 tax year. The $23.8 million of waived management fees was reflected on the Fund's books and records as a capital contribution by the General Partner, credited to the General Partner's capital account on the dates corresponding to each quarterly fee accrual (i.e., the first business day of each calendar quarter of 2021). The capital contribution was thereafter subject to the same partnership allocation provisions as all other capital in the Fund, receiving its pro rata share of the Fund's net income, net loss, and unrealized gains and losses for the remainder of the applicable quarter and all subsequent periods.
The quarterly breakdown is as follows:
Detailed management fee calculation schedules, on both a quarterly and annual basis, are enclosed with this response (see Index of Enclosed Documents, Item 7). General Partner capital account statements as of December 31, 2021, are also enclosed (see Index of Enclosed Documents, Item 8).
III. LEGAL FRAMEWORK AND DISTINCTION FROM ABUSIVE STRUCTURES
A. IRC § 707(a)(2)(A) — Disguised Payments for Services
IRC Section 707(a)(2)(A) provides that, if a partner performs services for the partnership and there is a related direct or indirect allocation and distribution to such partner, the transaction will be treated as occurring between the partnership and a person who is not a partner (i.e., as a payment for services taxable as ordinary income under Section 61 and subject to self-employment tax under Section 1402) if the performance of services and the allocation and distribution, when viewed together, are properly characterized as a transaction between the partnership and a non-partner.
The legislative history of Section 707(a)(2)(A) reflects Congress's concern with arrangements in which a service-providing partner receives what is, in substance, compensation for services, but the payment is structured as a partnership allocation in order to convert what would otherwise be ordinary income into capital gain, or to achieve other tax benefits not contemplated by the partnership taxation provisions of Subchapter K.
Treasury Regulation Section 1.707-2 implements Section 707(a)(2)(A) by setting forth six factors to be considered in determining whether an arrangement between a partner and a partnership constitutes a disguised payment for services. These factors are:
1. Whether the arrangement lacks significant entrepreneurial risk, taking into account the overall arrangement and whether the allocation is subject to substantial risk of reduction or loss based on the entrepreneurial risks of partnership operations;
2. Whether the partner's status as a partner is transitory — i.e., whether the partner's interest in the partnership is of such brief duration or limited scope that it suggests the partner's status is merely nominal;
3. Whether the allocation and distribution to the partner are close in time to the performance of services, which may suggest that the allocation is, in substance, a fee;
4. Whether, under all the facts and circumstances, the partner became a partner primarily to obtain tax benefits that would not have been available if the services had been rendered in a third-party capacity;
5. Whether the value of the partner's interest in the partnership is small relative to the allocation; and
6. Any other facts and circumstances that are relevant under all the facts and circumstances, including the relationship between the allocation and distribution and the services performed.
The regulations make clear that the most important of these factors is whether the arrangement lacks significant entrepreneurial risk. If the arrangement subjects the service-providing partner to genuine entrepreneurial risk — that is, if there is a real and meaningful possibility that the partner will receive less than the value of the services rendered, or may receive nothing, or may even suffer a loss — then the arrangement is less likely to be characterized as a disguised payment for services, and is more likely to be respected as a legitimate partnership allocation.
B. Application to Ironside's Waiver Arrangement
When the six factors of Treasury Regulation Section 1.707-2 are applied to the ICM management fee waiver arrangement, each factor weighs strongly against recharacterization of the waiver as a disguised payment for services under Section 707(a)(2)(A).
Factor 1: Significant Entrepreneurial Risk. This is the most critical factor, and it weighs decisively in ICM's favor. The General Partner's capital contribution derived from the waived management fees is fully at risk in the Fund's investment portfolio. The waiver-based capital participates in all gains and losses of the Fund on a pari passu basis with all other partners' capital. There is no preferential return, no guaranteed floor, no priority distribution, no loss limitation, no stop-loss mechanism, and no separate or segregated account. The Fund invests across global macro, event-driven equity, and credit strategies, each of which involves material market risk and the genuine possibility of loss. As noted above, the Fund experienced an 11.3% drawdown in Q1 2020, demonstrating that losses of material magnitude are a realistic possibility. The General Partner assumes this risk irrevocably at the time each waiver election is made, before the services giving rise to the management fee are rendered.
Factor 2: Transitory Partner Status. The General Partner is the permanent general partner of the Fund and has been since the Fund's formation in 2016. The General Partner's interest in the Fund is not transitory or nominal in any respect. As of December 31, 2021, the Managing Members of the General Partner held capital accounts totaling in excess of $236 million, reflecting a substantial, long-term, and permanent interest in the Fund.
Factor 3: Timing of Allocation and Distribution Relative to Services. The waiver election is made irrevocably before the commencement of the quarter in which the management fee would otherwise accrue — that is, before the services are rendered. Furthermore, the waiver-based capital contribution is not distributed to the General Partner in close temporal proximity to the performance of services; rather, it remains in the Fund's capital pool, subject to the same withdrawal and distribution restrictions as all other capital. The General Partner's capital account is subject to a lock-up period and the Fund's general liquidity provisions, and the General Partner does not receive distributions of waiver-based capital on any preferential or accelerated basis.
Factor 4: Tax Motivation for Partner Status. The General Partner's status as a partner is not motivated by tax considerations. The General Partner has served as the Fund's general partner since the Fund's inception and performs all of the investment advisory, portfolio management, and operational functions essential to the Fund's business. The General Partner's partnership interest is the natural and customary structure for the management entity of a hedge fund and serves well-established non-tax business purposes, including alignment of interests, liability protection, and governance.
Factor 5: Value of Partner Interest Relative to Allocation. The General Partner's capital account in the Fund is substantial — over $236 million as of December 31, 2021 — and the waiver-based capital contributions represent a meaningful addition to an already significant interest. The General Partner's interest is not nominal or de minimis; it is one of the largest capital accounts in the Fund.
Factor 6: Other Facts and Circumstances. Additional facts and circumstances supporting the legitimacy of the waiver arrangement include: (i) the arm's-length negotiation of the LPA provisions with sophisticated institutional limited partners; (ii) the thorough contemporaneous documentation of each waiver election; (iii) the review and approval of the waiver mechanism by the Fund's independent auditor; and (iv) the consistent application of the waiver mechanism across multiple tax years, reflecting a settled business practice rather than a one-time tax planning maneuver.
In sum, when the totality of the facts and circumstances is considered, the ICM management fee waiver arrangement is a bona fide partnership arrangement that subjects the General Partner to genuine and significant entrepreneurial risk. The arrangement does not warrant recharacterization as a disguised payment for services under Section 707(a)(2)(A).
C. Distinction from Abusive Fee Waiver / Conversion Arrangements
We are aware that the Service has devoted attention to management fee waiver and conversion arrangements in the alternative investment fund context, and that certain such arrangements have been the subject of audit activity, proposed adjustments, and public commentary by Service officials. We believe it is important to distinguish the ICM arrangement from the types of abusive structures that have properly drawn the Service's scrutiny.
The abusive arrangements that have been criticized by the Service and by commentators generally share one or more of the following characteristics: (i) the waived management fees are invested in low-risk, short-duration instruments (such as Treasury bills or money market funds) or in a segregated account designed to minimize or eliminate investment risk; (ii) the general partner receives a priority return, a guaranteed minimum, or other preferential treatment that effectively insulates the waived capital from meaningful downside exposure; (iii) the waiver election is made retroactively, after the services have been rendered and the fee has been earned, or the election is nominally prospective but is effectively a foregone conclusion based on the structure of the arrangement; or (iv) the arrangement is designed solely to convert ordinary income (management fees) into capital gains (partnership allocations) without any genuine shift in economic risk.
The ICM arrangement possesses none of these characteristics. Specifically:
(i) Full Investment Risk, No Segregation. The waived capital is invested in the same multi-strategy portfolio as all other Fund capital. It is not segregated, not invested in low-risk instruments, and not otherwise insulated from the market risks inherent in the Fund's global macro, event-driven equity, and credit strategies. The Fund does not maintain a separate account, sub-fund, or sleeve for waiver-based capital. The General Partner's waiver-based capital bears the same risk of loss as every other dollar of capital in the Fund.
(ii) No Priority, No Guarantee, No Floor. There is no priority return, no guaranteed minimum return, no loss limitation, and no preferential distribution applicable to the General Partner's waiver-based capital. The waiver-based capital participates pari passu with all other capital in gains and losses. If the Fund's portfolio declines in value, the General Partner's waiver-based capital declines proportionally, with no protection or cushion of any kind.
(iii) Genuinely Prospective and Irrevocable. Each waiver election is made and delivered to the Fund Administrator before the commencement of the quarter in which the management fee would otherwise accrue, and each election is irrevocable once made. The General Partner cannot observe the Fund's performance for the quarter and then decide whether to waive — the decision must be made in advance, under conditions of genuine uncertainty about the Fund's future investment results.
(iv) Arm's-Length Negotiation. The waiver mechanism was negotiated as part of the LPA with sophisticated institutional limited partners represented by experienced legal counsel and investment advisors. The mechanism serves a legitimate business purpose — aligning the interests of the General Partner with those of the limited partners — and was not adopted solely or primarily for tax purposes.
We also wish to address two items of IRS guidance that may be relevant to the examination team's analysis:
Revenue Procedure 93-27. Rev. Proc. 93-27 provides that the receipt of a partnership profits interest for the provision of services to or for the benefit of a partnership in a partner capacity is generally not a taxable event. While Rev. Proc. 93-27 is not directly on point — because the ICM waiver involves the exchange of a contractual right to a management fee for a capital interest, rather than the receipt of a profits interest — the principles underlying Rev. Proc. 93-27 support the conclusion that the conversion of a service fee into a partnership interest with genuine entrepreneurial risk is consistent with the treatment of such interests under Subchapter K. In any event, the ICM waiver-based capital interest is a capital interest (not merely a profits interest), and the General Partner's assumption of full downside risk further distinguishes the arrangement from a mere receipt of a profits interest.
Notice 2005-43. Notice 2005-43 addresses certain partnership transactions involving the use of partnerships to inappropriately defer or avoid the recognition of income. The notice targets arrangements that lack economic substance and are designed to achieve tax results inconsistent with the economic substance of the transaction. As discussed at length above, the ICM fee waiver arrangement has genuine economic substance, involves real and meaningful entrepreneurial risk, and produces tax results that are consistent with the economic reality of the transaction. The General Partner genuinely exchanges a fixed, determinable right to receive cash compensation for an uncertain, at-risk equity interest, and the tax treatment of the arrangement reflects that economic reality. Accordingly, Notice 2005-43 does not support the recharacterization of the ICM waiver arrangement.
IV. INDEX OF ENCLOSED DOCUMENTS
The following documents are enclosed with this response, organized by IDR #2 item number. The enclosed documents constitute a subset of the approximately 4,600 pages produced across all IDR responses in this examination.
Item 1. Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP — certified excerpts of Section 4.1 (Management Fee Provisions), including Section 4.1(c) (Fee Waiver Election Mechanism). (32 pages)
Item 2. Amended and Restated Limited Partnership Agreement of Ironside Capital Management LP — certified excerpts of Section 5.2 (Performance Allocation / Carried Interest Provisions), provided for context as requested by the examination team. (18 pages)
Item 3. Resolutions of the Managing Members of Ironside Capital GP LLC authorizing the quarterly Fee Waiver Elections for the 2021 tax year — four (4) resolutions, each signed by Desmond R. Calloway and Priya Venkatesh, dated December 30, 2020; March 30, 2021; June 29, 2021; and September 29, 2021, respectively. (8 pages)
Item 4. Contemporaneous internal memoranda prepared by Priya Venkatesh, CFO, documenting the business rationale for each quarterly Fee Waiver Election for the 2021 tax year — four (4) memoranda, each corresponding to one of the quarterly elections described above. (24 pages)
Item 5. Greystone Fund Administration LLC capital account adjustment records for each quarterly Fee Waiver Election, reflecting the processing of each election and the corresponding adjustment to the General Partner's capital account. (16 pages)
Item 6. Borwick Craine & Associates LLP workpapers related to the management fee waiver — excerpts from the 2021 audit file (engagement partner: Sandra Whitmore, CPA) and the 2021 tax return preparation file (engagement partner: Elliot Navarro, CPA), subject to the privilege limitations described in Part VI of this response. (42 pages)
Item 7. Management fee calculation schedules for the 2021 tax year, on both a quarterly and annual basis, reflecting the gross management fee, the waived amount, and the net fee paid in cash. (6 pages)
Item 8. General Partner capital account statements as of December 31, 2021, reflecting total capital contributions (including waiver-based contributions), allocations of net income and net loss, distributions, and ending capital account balances. (10 pages)
Item 9. Schedules K-1 (Form 1065) for the General Partner (Ironside Capital GP LLC) for the 2021 tax year, reflecting the waiver-based capital contributions and the related partnership allocations. (4 pages)
Item 10. Correspondence between Ironside Capital GP LLC and Greystone Fund Administration LLC regarding the processing of each quarterly Fee Waiver Election for the 2021 tax year. (12 pages)
Item 11. Ironside Capital GP LLC Operating Agreement — certified excerpts reflecting the ownership interests and governance structure of the General Partner. (14 pages)
Item 12. Schedule of committed capital by limited partner as of December 31, 2021 (with investor names redacted to protect confidentiality, except for the three institutional investors identified in this response with their consent). (4 pages)
Item 13. Fund monthly performance reports for January through December 2021, reflecting gross and net returns by strategy and in the aggregate. (48 pages)
Item 14. Summary of management fee waiver elections for all tax years since inception of the Fund (2016–2021), reflecting the historical pattern of waiver elections by the General Partner. (3 pages)
Item 15. Relevant provisions of side letters with Northgate Public Employees' Retirement System, Bramblewood Family Office LLC, and Marlowe Asset Management Horizon Endowment Fund, to the extent such provisions relate to the management fee or the fee waiver mechanism (with non-relevant provisions redacted). (22 pages)
Item 16. Annual financial statements of Ironside Capital Management LP for the year ended December 31, 2021, as audited by Borwick Craine & Associates LLP, including the independent auditor's report. (38 pages)
Item 17. Ironside Capital Management LP Form 1065 for the tax year ended December 31, 2021, including all schedules and attachments (as previously produced in response to IDR #1; provided again for completeness). (86 pages)
Item 18. General Partner's annual certification of compliance with LPA provisions, including certification of the fee waiver elections, signed by Desmond R. Calloway and Priya Venkatesh and dated March 1, 2022. (2 pages)
Total pages enclosed with this response: approximately 389 pages.
V. RESERVATION OF RIGHTS
Ironside Capital Management LP, by and through its undersigned counsel, expressly reserves all rights, privileges, objections, and defenses available to it in connection with this examination and the production of documents and information described herein, including, but not limited to:
(a) The attorney-client privilege, as applicable to communications between ICM, its General Partner, and their legal counsel (including Calderwood & Harkness LLP and any other counsel) made for the purpose of obtaining or providing legal advice;
(b) The tax practitioner privilege under IRC Section 7525, as applicable to tax advice communications between ICM, its General Partner, and their federally authorized tax practitioners;
(c) The work product doctrine, as applicable to documents and materials prepared by or at the direction of counsel in anticipation of litigation or in connection with the rendering of legal advice;
(d) The right to supplement, amend, or clarify any response set forth in this letter or in any prior or subsequent correspondence, including the right to produce additional documents or information if and when identified;
(e) The right to raise additional arguments, authorities, or defenses in support of any position taken on the Fund's 2021 Form 1065 or in connection with this examination; and
(f) All other rights, privileges, objections, and defenses available under applicable law, regulation, or administrative guidance.
The production of documents and information in connection with this response does not constitute, and shall not be deemed to constitute, a waiver of any applicable privilege, protection, or objection, whether or not expressly asserted herein. ICM does not concede the relevance, materiality, or admissibility of any document or piece of information produced in response to IDR #2 or any other information document request issued in connection with this examination.
To the extent that any document produced herewith contains or reflects privileged or protected communications, such production is inadvertent and does not constitute a waiver of any applicable privilege or protection. ICM reserves the right to assert the privilege or protection as to any such document and to seek the return or sequestration of any inadvertently produced privileged or protected material, in accordance with Federal Rule of Evidence 502(b) and any other applicable law or regulation.
VI. CLOSING
We trust that the foregoing narrative and the enclosed documents are responsive to the items set forth in IDR #2. We have endeavored to provide a thorough and transparent account of the management fee waiver mechanics employed by the General Partner, the economic substance of the arrangement, and the legal basis for the tax treatment reflected on the Fund's 2021 Form 1065.
Should you, or any member of the examination team, have any questions regarding this response or the enclosed documents, or should you wish to schedule a conference to discuss these materials, please do not hesitate to contact the undersigned or Leila Nazari at the address and contact information set forth below. We are available to meet at your convenience and are committed to facilitating a productive and efficient examination process.
Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, New York 10020 Telephone: (212) 558-4127
Email: shartwell@calderwoodharkness.com
Leila Nazari Counsel, Tax Department Calderwood & Harkness LLP 1251 Avenue of the Americas, 40th Floor New York, New York 10020 Telephone: (212) 558-4243
Email: lnazari@calderwoodharkness.com
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Sylvia Hartwell Partner, Tax Department
cc: Dawn M. Petrovic, Revenue Agent, IRS Large Business & International Division Marcus Trent, General Counsel, Ironside Capital Management LP Leila Nazari, Calderwood & Harkness LLP
Enclosures: As indexed above (IDR #2, Items 1–18)
Quarter | Waiver Amount | Election Date | Delivery to Fund Administrator
Q1 2021 | $5,950,000 | December 30, 2020 | December 30, 2020
Q2 2021 | $5,950,000 | March 30, 2021 | March 30, 2021
Q3 2021 | $5,950,000 | June 29, 2021 | June 29, 2021
Q4 2021 | $5,950,000 | September 29, 2021 | September 29, 2021
Total | $23,800,000
Line Item | Amount
Average committed capital (2021) | $3,580,000,000
Management fee rate (per annum) | 2.00%
Total management fee before waiver | $71,600,000
Less: Waived amount (four quarterly waivers of $5.95M each) | ($23,800,000)
Net management fee paid in cash | $47,800,000
Waived amount treated as GP capital contribution | $23,800,000
Quarter | Gross Fee | Waived | Net Fee Paid in Cash | Capital Contribution
Q1 2021 | $17,900,000 | $5,950,000 | $11,950,000 | $5,950,000
Q2 2021 | $17,900,000 | $5,950,000 | $11,950,000 | $5,950,000
Q3 2021 | $17,900,000 | $5,950,000 | $11,950,000 | $5,950,000
Q4 2021 | $17,900,000 | $5,950,000 | $11,950,000 | $5,950,000
Total | $71,600,000 | $23,800,000 | $47,800,000 | $23,800,000

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — TAX ADVICE

I. EXECUTIVE SUMMARY OF THE MANAGEMENT FEE WAIVER

II. DETAILED FACTUAL NARRATIVE

III. LEGAL FRAMEWORK AND DISTINCTION FROM ABUSIVE STRUCTURES

IV. INDEX OF ENCLOSED DOCUMENTS

V. RESERVATION OF RIGHTS

VI. CLOSING

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

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