1004-00002 · Cobalt Ventures LP · Structuring & Analysis

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 555 California Street, Suite 3500 San Francisco, California 94104

MEMORANDUM

TO: Pamela Cross, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP Theresa Kim, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP Dr. Marcus Yeung, Co-Founder & Managing Partner, Cobalt Ventures LP Priya Dasgupta, Co-Founder & Managing Partner, Cobalt Ventures LP

FROM: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP

DATE: April 30, 2026

RE: Tax Structuring Analysis — Cobalt Life Sciences Opportunities Fund I, LP

Matter No.: 1004-00002 Billing Code: 88103-CVC

Note: This memorandum has been prepared in coordination with Greystone Tax Advisors LLC (Kenneth Liu, Managing Director), the sponsor's outside tax advisor. References to Greystone's work and recommendations herein reflect our collaborative analysis. Greystone has reviewed and concurs with the conclusions set forth in this memorandum except where expressly noted.

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I. Executive Summary

The purpose of this memorandum is to provide a comprehensive federal, state, and local tax structuring analysis for the formation and operation of Cobalt Life Sciences Opportunities Fund I, LP ("CLSO Fund I" or the "Fund"), a Delaware limited partnership that will target Seven Hundred Fifty Million Dollars ($750,000,000) in aggregate commitments, with a hard cap of One Billion Dollars ($1,000,000,000), for opportunistic investing in the life-sciences sector, including clinical-stage therapeutics, platform biotechnology, and medical device companies.

The Fund will be managed by Cobalt Life Sciences GP I, LLC (the "General Partner" or "GP"), a Delaware limited liability company whose managing members are Dr. Marcus Yeung and Priya Dasgupta. Alan Whitford will also hold a carried interest allocation through the General Partner. The management fee associated with the Fund will be received by Cobalt Life Sciences Management I, LLC (the "Management Company"), also a Delaware limited liability company. The General Partner and the Management Company are each affiliates of Cobalt Ventures LP, the principals' existing investment advisory platform headquartered at 3400 Sand Hill Road, Suite 220, Menlo Park, California 94025.

This memorandum addresses the following key tax structuring objectives:

1. Minimization of UBTI Exposure for Tax-Exempt Investors. Several anticipated anchor investors are tax-exempt organizations, including state pension funds and university endowments. The Fund's structure must be designed to minimize the generation of unrelated business taxable income ("UBTI") under Internal Revenue Code ("IRC") Sections 511 through 514, which would otherwise subject these investors to federal income tax on their allocable share of Fund income.

2. Minimization of ECI for Non-U.S. Investors. To the extent the Fund accepts commitments from non-U.S. investors (up to 25% of commitments may originate from Western Europe and Israel), the structure must minimize the allocation of effectively connected income ("ECI") to such investors, thereby reducing their U.S. federal income tax exposure and filing obligations.

3. Compliance with IRC §1061 Carried Interest Holding Period Rules. The carried interest allocations to the Fund's principals constitute "applicable partnership interests" under Section 1061 of the Code and are therefore subject to a three-year holding period requirement for long-term capital gains treatment. The Fund's structure and partnership agreement must incorporate appropriate tracking, segregation, and reporting mechanisms to ensure compliance.

4. Optimization of State Income Tax Nexus Posture. The Fund's management activities will be conducted primarily from California, which will assert income tax nexus over the Fund. The structure must be designed to manage and monitor state income tax exposure across multiple jurisdictions, including California, Oregon, Connecticut, Massachusetts, and other states where portfolio investments may be located.

5. Appropriate Structuring of blocker Entities. A Delaware C-corporation blocker entity should be formed on a shelf basis and activated as needed to shield certain categories of investors from adverse tax consequences, including UBTI for tax-exempt investors and ECI for non-U.S. investors.

6. Proper Tax Treatment of Management Fees, Carried Interest Allocations, and the GP Commitment. Each of these economic components of the Fund carries distinct tax implications. The structure must ensure that management fees are appropriately characterized as ordinary income, that carried interest allocations comply with Section 1061, and that the GP commitment qualifies for the capital interest exception thereunder.

The anticipated anchor investor base for the Fund includes several tax-sensitive profiles that have materially influenced the structuring recommendations set forth in this memorandum:

• Ironwood Public Employees Retirement System ("Ironwood PERS"): An Oregon state pension fund with an anticipated commitment of One Hundred Million Dollars ($100,000,000). As an integral part of the State of Oregon, Ironwood PERS is tax-exempt under IRC §115, and its pension trust is subject to UBTI rules under IRC §511(a)(2)(B).

• Northgate Endowment Management LLC ("Northgate Endowment"): A university endowment based in Cambridge, Massachusetts, with an anticipated commitment of Fifty Million Dollars ($50,000,000). Northgate is tax-exempt under IRC §501(c)(3) and subject to UBTI under IRC §512. Additionally, Northgate may be subject to the excise tax on net investment income of certain private colleges and universities under IRC §4968.

• Pinnacle Insurance Group, Inc. ("Pinnacle Insurance"): A Connecticut-domiciled life and annuity insurer with a $28 billion general account and an anticipated commitment of Seventy-Five Million Dollars ($75,000,000). Pinnacle is subject to specialized insurance company taxation under IRC Subchapter L, including proration rules and deferred acquisition cost adjustments.

Total anticipated anchor commitments aggregate to approximately $225,000,000. The remaining $510,000,000 is expected to be raised from third-party investors through the Fund's placement agent, sagebrush Capital Partners LLC, net of the $15,000,000 GP commitment at target (representing 2% of aggregate commitments).

This memorandum should be read together with the Fund Structuring Memorandum prepared by Pamela Cross and Theresa Kim, which has been delivered concurrently and addresses the non-tax legal structuring considerations, including the limited partnership agreement provisions, side letter framework, and regulatory compliance matters.

II. Fund Structure Overview — Tax Perspective

A. Recommended Entity Architecture

The recommended entity architecture for CLSO Fund I consists of four principal entities, each serving a distinct function within the overall fund structure. The tax classification and treatment of each entity is summarized below.

CLSO Fund I, LP (the "Fund"). The Fund is a Delaware limited partnership that will serve as the primary investment vehicle. For federal income tax purposes, a domestic limited partnership with two or more partners is classified as a partnership by default under Treasury Regulation §301.7701-3(b)(1). No entity-level federal income tax is imposed on the Fund. Instead, all items of income, gain, loss, deduction, and credit are determined at the partnership level and then allocated among the partners in accordance with the partnership agreement and the applicable provisions of Subchapter K of the Internal Revenue Code (IRC §§701–761). Each partner reports its allocable share of these items on its own federal income tax return. The Fund's tax year will be the calendar year, as required under IRC §706(b)(1)(B) for partnerships with individual partners, unless an exception applies. The flow-through nature of the Fund is fundamental to the entire tax structuring analysis, as it means that the tax characteristics of Fund income (e.g., long-term capital gain, ordinary income, qualified dividend income) are preserved and passed through to investors at the partner level.

CLSO GP I, LLC (the "General Partner"). The General Partner is a Delaware limited liability company that will serve as the general partner of the Fund and will hold the carried interest allocation. The General Partner will have three members: Dr. Marcus Yeung (55% carried interest allocation), Priya Dasgupta (35% carried interest allocation), and Alan Whitford (10% carried interest allocation). Because the General Partner will have more than one member, it will be classified as a partnership for federal income tax purposes by default under Treasury Regulation §301.7701-3(b)(1), without the need for any affirmative "check-the-box" election. Partnership classification is appropriate and desired for the General Partner, as it allows the carried interest and GP commitment economics to flow through to the individual principals with a single level of taxation. The General Partner will also make the 2% GP commitment to the Fund on behalf of its members, as discussed in further detail in Section VIII below.

CLSO Management I, LLC (the "Management Company"). The Management Company is a Delaware limited liability company that will receive the management fee from the Fund. The Management Company will be a multi-member LLC with Dr. Marcus Yeung and Priya Dasgupta as its managing members. As a multi-member domestic LLC, it will be classified as a partnership for federal income tax purposes by default, which is the appropriate and desired classification. The management fee income received by the Management Company (currently structured at 2.00% per annum of aggregate commitments during the Investment Period) will be characterized as ordinary income and will flow through to the members of the Management Company. The tax treatment of management fees is addressed in detail in Section VII below.

Cobalt Life Sciences Opportunities Fund I (Blocker), Inc. (the "Blocker Corp"). The blocker Corp is a Delaware C-corporation to be formed on a shelf basis and activated only if needed based on the final investor composition of the Fund. As a domestic corporation, the blocker Corp will be classified as a corporation for federal income tax purposes by default under Treasury Regulation §301.7701-2(b), without the need for any election. The blocker Corp will be subject to entity-level federal income tax at the current corporate rate of 21% on its allocable share of Fund income. Distributions from the blocker Corp to its shareholders will be treated as dividends to the extent of the blocker Corp's earnings and profits. The purpose, structure, and tax implications of the blocker Corp are discussed in detail in Section V below.

The following diagram illustrates the recommended entity architecture from a tax perspective:

B. Tax Classification Elections

As noted above, no affirmative "check-the-box" elections under Treasury Regulation §301.7701-3 are required for any of the four entities in the recommended structure. Each entity's default classification under the Treasury Regulations is the classification that best serves the Fund's tax objectives.

For the Fund LP, partnership classification is the default for a domestic entity organized as a limited partnership with two or more partners. This classification provides the flow-through treatment that is essential to preserving the tax character of Fund income for investors with varying tax profiles. We note that the Fund should not make an election to be classified as an association taxable as a corporation, as this would impose an entity-level tax and eliminate the flow-through benefits that are central to the Fund's value proposition for investors.

For the General Partner LLC, partnership classification is the default for a domestic LLC with more than one member. If, for any reason, the membership structure of the GP LLC were to change such that it became a single-member entity (e.g., if two of the three principals departed), the entity would be treated as a disregarded entity for federal tax purposes, which would also be an acceptable classification. However, as currently structured with three members, partnership classification applies automatically.

For the Management Company LLC, the analysis is identical to that of the General Partner: as a multi-member domestic LLC, partnership classification is the default and is appropriate.

For the blocker Corp, corporate classification is the default for a domestic entity organized as a corporation under Delaware law. No election is needed, and none should be made. The blocker Corp's purpose is specifically to interpose a corporate-level tax entity between certain investors and the Fund, and corporate classification is essential to achieving that purpose.

We recommend that the formation documents for each entity include a provision stating that no entity classification election will be filed with the IRS without the prior written consent of the General Partner, to prevent inadvertent changes to the tax classification of any entity in the structure.

C. Partnership Tax Allocation Principles

The allocation of items of income, gain, loss, deduction, and credit among the partners of the Fund is governed by the partnership agreement (the Limited Partnership Agreement, or "LPA") and must comply with the requirements of IRC §704(b) and the Treasury Regulations thereunder. Under these provisions, allocations specified in the partnership agreement will be respected for tax purposes only if they have "substantial economic effect" or are "in accordance with the partners' interests in the partnership."

Substantial Economic Effect. To have "substantial economic effect," allocations must satisfy two requirements. First, the allocations must have "economic effect," meaning that (a) the partnership maintains capital accounts in accordance with Treasury Regulation §1.704-1(b)(2)(iv), (b) liquidating distributions are made in accordance with positive capital account balances, and (c) any partner with a deficit capital account balance after all adjustments is required to restore that deficit (or, alternatively, the partnership agreement includes a "qualified income offset" provision). Second, the economic effect must be "substantial," meaning that there must be a reasonable possibility that the allocation will affect the dollar amounts to be received by the partners, independent of tax consequences.

The LPA for CLSO Fund I must include the following provisions to ensure compliance with the substantial economic effect requirements:

• Capital account maintenance. The LPA must require the Fund to maintain capital accounts for each partner in accordance with the rules set forth in Treasury Regulation §1.704-1(b)(2)(iv). Capital accounts must be increased by (i) the amount of money contributed by the partner, (ii) the fair market value of property contributed by the partner (net of liabilities assumed), and (iii) allocations of income and gain to the partner. Capital accounts must be decreased by (i) the amount of money distributed to the partner, (ii) the fair market value of property distributed to the partner (net of liabilities assumed), and (iii) allocations of loss and deduction to the partner.

• Qualified income offset. The LPA should include a "qualified income offset" provision under Treasury Regulation §1.704-1(b)(2)(ii)(d), which provides that any partner who unexpectedly receives certain adjustments, allocations, or distributions that cause or increase a deficit capital account balance will be allocated items of income and gain in an amount sufficient to eliminate such deficit as quickly as possible. This provision serves as a safety valve to protect the validity of the Fund's allocations if a partner's capital account goes into deficit.

• Minimum gain chargeback. The LPA must include a "minimum gain chargeback" provision under Treasury Regulation §1.704-2(f), which requires that if there is a net decrease in partnership minimum gain during a taxable year, each partner must be allocated items of income and gain for that year equal to that partner's share of the net decrease. This provision is relevant to the extent the Fund incurs nonrecourse liabilities (e.g., subscription credit facilities or other indebtedness).

Targeted Capital Account Allocation Approach. We recommend that the LPA employ a "targeted" or "layered" allocation approach, which is the standard methodology used in private equity fund partnership agreements. Under this approach, items of income, gain, loss, and deduction are allocated among the partners in a manner that will cause each partner's capital account balance, following such allocations, to equal the amount that would be distributed to such partner if all of the Fund's assets were sold at their book values and the net proceeds (after satisfaction of all liabilities) were distributed in accordance with the contractual distribution waterfall set forth in the LPA. This approach ties the tax allocations directly to the economic deal among the partners, as reflected in the distribution waterfall. The mechanics of this approach are discussed in greater detail in Section XI below in connection with the distribution waterfall analysis.

IRC §704(c) Allocations. Section 704(c) of the Code requires that when property is contributed to a partnership, the partnership must allocate items of income, gain, loss, and deduction with respect to that property so as to take into account the difference between the fair market value of the property and its adjusted tax basis at the time of contribution (the "built-in gain" or "built-in loss"). Similar rules apply when a partnership revalues its assets in connection with certain events (e.g., the admission of a new partner or a distribution of property), pursuant to the "reverse §704(c)" rules under Treasury Regulation §1.704-1(b)(2)(iv)(f).

We recommend that the Fund adopt the "traditional method" of making §704(c) allocations under Treasury Regulation §1.704-3(b), with curative allocations under Treasury Regulation §1.704-3(c) permitted where appropriate. The traditional method is the simplest approach and is generally adequate for a fund that primarily invests cash in portfolio company equity. Curative allocations may be useful in limited circumstances where the traditional method produces a "ceiling rule" limitation that prevents the full elimination of the book-tax disparity. The remedial method under Treasury Regulation §1.704-3(d) is an alternative that creates notional tax items to correct ceiling rule distortions; however, it is more complex and is not necessary for the anticipated investment strategy. The specific §704(c) method should be set forth in the LPA and applied consistently.

III. UBTI Planning for Tax-Exempt Investors

A. Overview of UBTI Risk

Tax-exempt investors, including state pension funds such as Ironwood PERS and university endowments such as Northgate Endowment, are generally exempt from federal income tax on their investment income. However, under IRC §§511–514, these investors are subject to tax on "unrelated business taxable income" — income derived from a trade or business that is "regularly carried on" and that is not "substantially related" to the organization's exempt purpose. The UBTI tax is imposed at the rates applicable to trusts or corporations, depending on the nature of the tax-exempt entity, and can reach a marginal rate of 37% for trusts.

In the context of a life-sciences fund such as CLSO Fund I, the principal sources of UBTI risk are as follows:

1. Debt-Financed Income Under IRC §514. Income derived from "debt-financed property" — property acquired or held with the proceeds of indebtedness — is treated as UBTI to the extent of the ratio of acquisition indebtedness to the adjusted basis of the property. This rule is particularly relevant to fund-level borrowing, including subscription credit facilities.

2. Income from a Trade or Business Regularly Carried On (IRC §512(a)(1)). If the Fund invests in portfolio companies that are organized as pass-through entities (LLCs or partnerships) and those entities conduct active trades or businesses, the tax-exempt investor's allocable share of such income would constitute UBTI. This is a direct flow-through risk that arises from the Fund's partnership structure.

3. Partnership Income that Constitutes UBTI at the Partner Level. Under IRC §512(c)(1), a tax-exempt partner's share of partnership income that would constitute UBTI if received directly by the tax-exempt organization is treated as UBTI. This "look-through" rule means that the nature of the Fund's income is determined at the Fund level and then passed through to the tax-exempt partners with its UBTI character intact.

Importantly, investment income — including dividends, interest, royalties, certain rents, and capital gains from the sale or exchange of property — is generally excluded from UBTI under IRC §512(b)(1)–(5), provided that such income is not derived from debt-financed property. This exclusion is the cornerstone of UBTI planning for the Fund: to the extent the Fund's income consists of capital gains and dividends from investments in C-corporation portfolio companies, and the Fund does not employ significant leverage, the UBTI exposure of tax-exempt investors should be minimal.

B. Debt-Financed Property (IRC §514)

The Fund's LPA authorizes the use of a subscription credit facility (also referred to as a "capital call facility") secured by the unfunded capital commitments of the limited partners. Such facilities are commonly used in private equity funds to bridge capital calls, smooth cash flow, and provide operational flexibility to the General Partner. However, the use of borrowed funds to acquire or carry investments can generate "acquisition indebtedness" under IRC §514(c), which in turn can cause a portion of the income from the acquired investment to be treated as "debt-financed income" and therefore UBTI for tax-exempt investors.

The key analytical question under IRC §514 is whether the borrowings under the subscription credit facility constitute "acquisition indebtedness" with respect to Fund investments. Under IRC §514(c)(1), "acquisition indebtedness" is indebtedness incurred in connection with the acquisition or improvement of property, or indebtedness that would not have been incurred but for the acquisition of the property. The IRS has taken the position in certain rulings and guidance that subscription facility borrowings used to fund investments, even temporarily, can constitute acquisition indebtedness if the proceeds are traceable to the acquisition of investment property.

Recommendation: We recommend that the Fund structure its subscription facility drawdowns as short-term bridge financing, with a target repayment period of fewer than sixty (60) days. This approach is designed to minimize the duration of any indebtedness that could be characterized as acquisition indebtedness and to limit the ratio of debt-financed basis to total basis for purposes of the IRC §514 calculation. The LPA should include provisions that align the subscription facility terms with this approach and that empower the General Partner to manage drawdowns in a manner that minimizes UBTI exposure for tax-exempt investors. If the Fund requires longer-term borrowing to complete an acquisition or bridge a capital call during a period of market disruption, the General Partner should consult with tax counsel before drawing down the facility for a period exceeding sixty (60) days.

We further note that longer-term leverage at the portfolio company level generally does not create UBTI for the Fund's limited partners. Because each portfolio company is a separate legal entity, indebtedness incurred by a portfolio company organized as a C-corporation does not flow through to the Fund or its investors. The debt is at the corporate level, and the Fund's return from the portfolio company (in the form of capital gains upon exit or dividends during the hold period) is not treated as debt-financed income at the Fund level.

However, a potential UBTI issue arises if the Fund makes leveraged investments in portfolio companies organized as pass-through entities. If the Fund invests in an LLC or partnership that itself incurs indebtedness, the Fund's allocable share of income from such indebtedness could be UBTI. This scenario is unlikely given the Fund's primary strategy of investing in C-corporation biotech companies, but it is possible with certain platform technology companies organized as LLCs. We address this risk in Subsection C below.

C. Trade or Business Income

The Fund's investment strategy targets clinical-stage therapeutics, platform biotechnology, and medical device companies. The vast majority of these investments are expected to be structured as equity investments in companies organized as C-corporations. Under this structure, the tax-exempt investor's allocable share of Fund income from such investments will consist of dividends and capital gains, both of which are excluded from UBTI under IRC §512(b)(1) and (5), respectively.

The principal UBTI risk from a trade or business perspective arises if the Fund invests in portfolio companies organized as pass-through entities — specifically, LLCs treated as partnerships or disregarded entities — that conduct active trades or businesses. If the Fund holds a direct or indirect interest in such a pass-through entity, the tax-exempt investor's allocable share of the entity's trade or business income would constitute UBTI under the look-through rule of IRC §512(c)(1).

Recommendation: Where the Fund proposes to invest in a portfolio company organized as a pass-through entity that conducts an active trade or business, we recommend that the General Partner consider the following mitigation strategies:

(a) Interpose a blocker corporation. A C-corporation blocker entity (either the blocker Corp or a deal-specific AIV) can be interposed between the Fund and the pass-through portfolio company. The blocker would hold the Fund's interest in the pass-through entity and would be subject to corporate-level tax on the trade or business income, but the Fund's interest in the blocker would generate only dividends and capital gains — not UBTI.

(b) Structure the investment as preferred equity or debt. If the Fund's investment can be structured as preferred equity with fixed returns or as a debt instrument (e.g., convertible notes), the income received by the Fund may qualify for exclusion from UBTI as interest or dividends, depending on the specific terms of the instrument and the classification of the payments.

(c) Require the portfolio company to convert to C-corporation status. In some cases, the Fund may have sufficient negotiating leverage to require a pass-through portfolio company to elect to be treated as a C-corporation (by filing Form 8832) prior to or concurrent with the Fund's investment. This approach eliminates the UBTI risk at the source but may have adverse tax consequences for the portfolio company's existing owners and should be evaluated on a case-by-case basis.

Additionally, we note that monitoring fees and transaction fees received by the Fund or the Management Company in connection with portfolio company investments should be analyzed for potential UBTI flow-through to tax-exempt partners. If the Fund receives fees from portfolio companies that are characterized as income from a trade or business, such income could constitute UBTI. In practice, most monitoring and transaction fees received by a private equity fund are offset against the management fee (as is the case here, with an 80% offset), which mitigates but does not eliminate the UBTI risk. The characterization of the offset for UBTI purposes should be reviewed with Greystone Tax Advisors on a transaction-by-transaction basis.

D. Specific Investor Analysis

Ironwood PERS ($100,000,000 Anticipated Commitment). Ironwood PERS is the public employees retirement system of the State of Oregon. As an integral part of the state government, Ironwood PERS derives its tax-exempt status from IRC §115, which excludes from gross income income derived from the exercise of an essential governmental function and accruing to a state or its political subdivision. However, the UBTI rules of IRC §511 apply to state pension trusts by operation of IRC §511(a)(2)(B), which subjects "college or university" and "qualified trust" income to UBTI to the extent such income would be taxable under §511(a)(1) if derived by an organization described in §501(c)(3). The practical effect is that Ironwood PERS, while exempt from tax on its passive investment income, remains subject to tax on any UBTI, including debt-financed income and income from active trades or businesses.

For Ironwood PERS, the key UBTI planning imperatives are: (i) avoid allocating debt-financed income from Fund-level borrowings, (ii) ensure that the Fund's investments are structured to produce dividends and capital gains (not trade or business income) at the Fund level, and (iii) monitor any pass-through portfolio company investments for UBTI risk. Given Ironwood PERS's $100 million commitment (representing approximately 13.3% of target commitments), any UBTI generated by the Fund would have a material impact on Ironwood's overall tax position.

Northgate Endowment ($50,000,000 Anticipated Commitment). Northgate Endowment Management LLC manages the endowment of a private university in Cambridge, Massachusetts. The endowment is tax-exempt under IRC §501(c)(3) as an organization organized and operated exclusively for educational purposes. The endowment is subject to UBTI under IRC §512 in the same manner as other §501(c)(3) organizations.

In addition to the standard UBTI analysis, we must consider whether Northgate is subject to the excise tax on net investment income of certain private colleges and universities under IRC §4968. This provision, enacted as part of the Tax Cuts and Jobs Act of 2017, imposes a 1.4% excise tax on the net investment income (including capital gains, dividends, interest, rents, and royalties, less allowable deductions) of "applicable educational institutions." An institution is an "applicable educational institution" if it (i) had at least 500 tuition-paying students during the preceding taxable year, more than 50% of whom are located in the United States, (ii) is not described in the first sentence of IRC §511(a)(2)(B) (i.e., is not a state college or university), and (iii) has aggregate fair market value of assets (other than those used directly in carrying out the institution's exempt purpose) of at least $500,000 per student. If Northgate's parent university meets these criteria, the Fund's income allocable to Northgate's investment would be subject to the §4968 excise tax in addition to any applicable UBTI. We recommend confirming Northgate's status under §4968 as an early priority item, as set forth in the Open Items table in Section XV.

E. Silo Rule (IRC §512(a)(6))

Section 512(a)(6) of the Code, enacted as part of the Tax Cuts and Jobs Act of 2017, requires that UBTI be computed separately for each "unrelated trade or business" conducted by a tax-exempt organization. Under the prior law, a tax-exempt organization could aggregate UBTI from all of its unrelated trades or businesses, allowing losses from one activity to offset income from another. The silo rule eliminates this aggregation, requiring that each unrelated trade or business be treated as a separate silo for purposes of computing UBTI. Losses from one silo cannot offset income from another silo, although losses within a single silo can offset income within that same silo and can be carried forward under the applicable net operating loss rules.

The impact of the silo rule on CLSO Fund I is twofold. First, if the Fund generates UBTI from multiple sources (e.g., debt-financed income from the subscription credit facility and trade or business income from a pass-through portfolio company), each source must be separately tracked and reported, and losses from one source cannot offset income from the other. Second, the silo rule increases the administrative burden on both the Fund and its tax-exempt investors, as the Fund must provide sufficient detail in its K-1 reporting to enable each tax-exempt investor to properly silo its UBTI.

Recommendation: We recommend that the Fund maintain separate tracking of all UBTI-generating activities at the Fund level for reporting purposes. The LPA should include appropriate language requiring the General Partner to provide UBTI-related information in the annual tax packages delivered to investors. The K-1 reporting system implemented by Halcyon Fund Services should be designed to identify and separately report each UBTI component, including the source activity, to enable tax-exempt investors to comply with the silo rule. We also recommend including a provision in the LPA's tax reporting section that obligates the Fund to provide UBTI information in a format consistent with the silo rule requirements.

IV. ECI Planning for Non-U.S. Investors

A. Effectively Connected Income Overview

Non-U.S. investors in a U.S. partnership such as CLSO Fund I are subject to U.S. federal income tax on income that is "effectively connected" with the conduct of a trade or business within the United States. For non-U.S. individuals, the statutory authority is IRC §871(b); for non-U.S. corporations, it is IRC §882. ECI is taxed on a net basis at the same graduated rates applicable to U.S. persons (currently up to 37% for individuals and 21% for corporations). Non-U.S. corporate investors are additionally subject to a 30% "branch profits tax" under IRC §884 on the dividend equivalent amount, subject to reduction under an applicable income tax treaty.

In the context of a U.S. partnership, the determination of whether income is ECI is generally made at the partnership level. Under Revenue Ruling 91-32 and long-standing IRS administrative practice, a non-U.S. partner is treated as engaged in a U.S. trade or business if the partnership is so engaged, and the partner's allocable share of partnership income effectively connected with that trade or business is ECI to the partner.

Passive investment income — including dividends from U.S. corporations, portfolio interest, and capital gains from the sale of securities that are not attributable to a U.S. permanent establishment — is generally not ECI. This is a critical distinction for the Fund's non-U.S. investors, as the Fund's primary income stream is expected to consist of capital gains from the disposition of portfolio company equity and, to a lesser extent, dividends from portfolio companies. To the extent the Fund's income retains its character as passive investment income, it should not constitute ECI for non-U.S. investors.

However, IRC §864(c)(8), enacted as part of the Tax Cuts and Jobs Act of 2017, introduces a significant additional ECI exposure for non-U.S. partners. Under this provision, gain or loss on the sale or exchange of a partnership interest (including a secondary transfer or a redemption) is treated as ECI to the extent that the gain would be ECI if the partnership had sold all of its assets at fair market value immediately before the transfer. This provision codifies the holding of the IRS in Revenue Ruling 91-32 and extends it to partnership interest transfers, overruling the Tax Court's decision in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, 149 T.C. 63 (2017). The §864(c)(8) provision is relevant to any non-U.S. investor that may seek to transfer its interest in the Fund on the secondary market or have its interest redeemed.

B. Withholding Obligations

The Fund's withholding obligations with respect to non-U.S. investors arise under multiple provisions of the Code:

IRC §1446(a) Withholding on ECI Allocations. Under IRC §1446(a), a partnership that has effectively connected taxable income allocable to a non-U.S. partner must withhold tax on such income. The withholding rate is the highest applicable tax rate: currently 37% for non-U.S. individual partners and 21% for non-U.S. corporate partners. This withholding obligation applies on a quarterly estimated basis, with annual reconciliation on Form 8805 (filed with the partnership's Form 1065). The Fund must implement systems to identify non-U.S. partners, determine the amount of ECI allocable to each non-U.S. partner, and remit the required withholding to the IRS.

IRC §1446(f) Withholding on Partnership Interest Transfers. Under IRC §1446(f), enacted as part of the 2017 TCJA, a transferee of a partnership interest is required to withhold 10% of the amount realized on the transfer of a partnership interest by a non-U.S. person. If the transferee fails to withhold, the partnership itself is required to withhold from subsequent distributions to the transferee under IRC §1446(f)(4). The Fund must comply with these withholding mechanics upon any secondary transfer or redemption of a non-U.S. partner's interest. The Fund's transfer provisions in the LPA should include a requirement that any transferee of a non-U.S. partner's interest certify its compliance with §1446(f) withholding obligations.

FIRPTA Considerations. The Foreign Investment in Real Property Tax Act ("FIRPTA"), codified at IRC §§897 and 1445, imposes U.S. federal income tax on gain realized by a non-U.S. person from the disposition of a "U.S. real property interest" ("USRPI"). A USRPI includes an interest in a "U.S. real property holding corporation" — a domestic corporation in which the fair market value of USRPIs held by the corporation equals or exceeds 50% of the total fair market value of all assets. While FIRPTA exposure is unlikely in a life-sciences fund (whose portfolio companies are typically characterized by intellectual property, not real property), it is possible if the Fund invests in companies with significant real estate holdings, such as medical device manufacturing facilities or laboratory buildings. We recommend monitoring each portfolio company's asset composition to confirm that FIRPTA does not apply. If a portfolio company is or becomes a USRPI, the Fund's non-U.S. investors may be subject to FIRPTA tax on their allocable share of gain from the disposition of that company's equity.

C. Structuring Recommendations for Non-U.S. Investors

The Fund's offering documents contemplate that up to 25% of aggregate commitments may originate from investors based in Western Europe and Israel. If non-U.S. commitments reach a significant level, the following structuring options should be considered:

Parallel Fund or Offshore Feeder Structure. A common approach for accommodating non-U.S. investors is to establish either a parallel fund organized in an offshore jurisdiction (e.g., the Cayman Islands) that invests alongside the main Fund in each transaction, or an offshore feeder fund (e.g., a Cayman Islands LP) that invests all of its capital into the main Fund. The parallel fund approach provides greater structural flexibility and can be tailored to the specific tax needs of non-U.S. investors, but it also involves greater complexity and cost. The feeder fund approach is simpler but does not eliminate ECI exposure if the main Fund generates ECI. We recommend deferring the decision on a parallel or feeder structure until the magnitude of non-U.S. commitments is known, but we note that the LPA should preserve the General Partner's authority to establish such structures if needed.

blocker Corporation. The most straightforward approach to eliminating ECI and U.S. filing obligations for non-U.S. investors is to interpose a Delaware C-corporation (the blocker Corp) between the non-U.S. investors and the Fund. The blocker Corp would invest directly in the Fund and would be subject to corporate-level tax at the 21% federal rate on its allocable share of Fund income. The blocker Corp would then distribute after-tax proceeds to its non-U.S. shareholders as dividends. Dividends paid by the blocker Corp to non-U.S. shareholders are subject to 30% withholding tax under IRC §871(a) or §881, but this rate may be reduced under an applicable income tax treaty. For example, the U.S.-U.K. income tax treaty generally reduces dividend withholding to 15% (or 5% for certain corporate shareholders holding 10% or more of the voting stock), and the U.S.-Israel income tax treaty similarly provides for reduced withholding rates.

Treaty Planning. As part of the fundraising process, we should identify the anticipated jurisdictions of non-U.S. investors and analyze the applicable income tax treaty benefits. The key treaty provisions to analyze include: (i) reduced withholding rates on dividends from the blocker Corp, (ii) potential elimination or reduction of the branch profits tax under IRC §884 if a non-U.S. investor invests directly (without a blocker), and (iii) potential capital gains exemptions for certain categories of investment income. We recommend preparing a treaty benefits matrix for the most likely non-U.S. investor jurisdictions (United Kingdom, Germany, Switzerland, France, Netherlands, and Israel) once the investor pipeline is more defined.

Non-U.S. Portfolio Company Investments. The Fund's investment strategy permits deployment of up to 25% of commitments in Western Europe and Israel. Investments in non-U.S. portfolio companies generally do not generate ECI for U.S. tax purposes, provided the portfolio companies do not conduct a trade or business within the United States. However, if a non-U.S. portfolio company has U.S. operations or a U.S. permanent establishment, income from such operations could be ECI. Each non-U.S. portfolio investment should be analyzed for U.S. nexus at the time of investment to ensure that the Fund's non-U.S. investors are not inadvertently exposed to ECI.

D. FATCA Compliance

The Fund must comply with the Foreign Account Tax Compliance Act ("FATCA"), codified at IRC §§1471–1474. FATCA imposes a 30% withholding tax on certain "withholdable payments" (including U.S.-source dividends and interest, and, beginning in future years, gross proceeds from the sale of U.S. securities) made to "foreign financial institutions" ("FFIs") and "non-financial foreign entities" ("NFFEs") that do not comply with FATCA's reporting requirements.

As a U.S. partnership, the Fund is a "withholding agent" under FATCA and must implement appropriate due diligence, withholding, and reporting procedures. Specifically, the Fund must:

(a) Obtain a completed IRS Form W-9 from each U.S. investor and a completed IRS Form W-8BEN-E (or the appropriate variant of Form W-8) from each non-U.S. investor as part of the subscription process.

(b) Determine the FATCA status of each non-U.S. investor (e.g., participating FFI, deemed-compliant FFI, exempt beneficial owner, or NFFE) and verify the investor's Global Intermediary Identification Number ("GIIN"), if applicable.

(d) File Form 8966 (FATCA Report) with the IRS to report payments made to certain non-U.S. investors.

We recommend coordinating all FATCA compliance activities with Halcyon Fund Services, Inc. (Thomas Varga, Director), which will serve as the Fund's administrator and will be responsible for implementing the withholding and reporting infrastructure. Greystone Tax Advisors (Kenneth Liu) will provide ongoing advisory support on FATCA classification questions for specific investors.

V. Blocker Corporation Analysis

A. Purpose and Structure

Cobalt Life Sciences Opportunities Fund I (Blocker), Inc. (the "Blocker Corp") is a Delaware C-corporation to be formed on a shelf basis at or around the time of the Fund's first close. The blocker Corp will not be capitalized or activated unless the final investor composition of the Fund warrants its use. The decision to activate the blocker Corp will be made by the General Partner in consultation with tax counsel and the relevant investors.

The blocker Corp serves two primary purposes:

1. Shielding tax-exempt investors from UBTI. If the Fund generates UBTI — for example, through leveraged investments, investments in pass-through operating companies, or other UBTI-producing activities — a tax-exempt investor that invests through the blocker Corp would receive dividends from the blocker Corp rather than a direct allocation of UBTI. Dividends received from the blocker Corp are not UBTI (as they are excluded under IRC §512(b)(1)), and thus the interposition of the blocker Corp eliminates the UBTI exposure for the tax-exempt investor. The trade-off, however, is the imposition of a corporate-level tax on the blocker Corp's allocable share of Fund income.

2. Shielding non-U.S. investors from ECI and U.S. filing obligations. A non-U.S. investor that invests through the blocker Corp would not be treated as a partner in the Fund and would not receive a K-1 or have ECI allocable to it. Instead, the non-U.S. investor would receive dividends from the blocker Corp, which are subject to withholding tax at the applicable rate (30% statutory rate, reduced by treaty). The blocker Corp eliminates the non-U.S. investor's obligation to file a U.S. federal income tax return and to pay estimated taxes on ECI.

The blocker Corp would invest directly in the Fund as a limited partner (or, in certain circumstances, co-invest alongside the Fund in specific transactions). It would maintain its own capital account in the Fund and would receive allocations of income, gain, loss, and deduction in the same manner as any other limited partner. The blocker Corp would pay corporate-level federal income tax at 21% on its allocable share of Fund income and would distribute after-tax proceeds to its shareholders as dividends.

B. Investor-Specific blocker Analysis

Pinnacle Insurance Group, Inc. ($75,000,000 Anticipated Commitment). Pinnacle is a Connecticut-domiciled life and annuity insurer with a $28 billion general account. As an insurance company, Pinnacle is subject to specialized tax rules under IRC Subchapter L (§§801–848), which govern the taxation of life insurance companies. Pinnacle's investment income is subject to the "proration" rule under IRC §812, which apportions investment income between the company's share (taxable) and the policyholders' share (not separately taxable to the company), and to the deferred acquisition cost ("DAC") tax adjustment under IRC §848, which requires capitalization and amortization of a portion of net premiums to offset against investment income.

A blocker entity may be advisable for Pinnacle to simplify Pinnacle's tax reporting and to isolate the Fund investment from Pinnacle's complex insurance tax calculations. If Pinnacle invests directly in the Fund, its K-1 income will flow into Pinnacle's Form 1120-L (U.S. Life Insurance Company Income Tax Return) and will be subject to the proration, DAC, and other Subchapter L adjustments. A blocker would convert the K-1 income into dividend income from a domestic corporation, which is eligible for the dividends-received deduction ("DRD") under IRC §243 (currently 50% for dividends from a domestic corporation in which the corporate shareholder owns less than 20% of the stock, or 65% if the shareholder owns 20% or more). The DRD would partially offset the double taxation cost of the blocker structure.

Alternatively, Pinnacle may prefer to invest directly in the Fund and manage its own tax reporting. This approach avoids the corporate-level tax on the blocker but requires Pinnacle to integrate the Fund's K-1 into its already complex insurance company tax return. We recommend discussing this choice with Rachel Stein, SVP – Alternative Investments at Pinnacle, and providing a comparative after-tax analysis under both approaches, as set forth in the Open Items table in Section XV.

Northgate Endowment ($50,000,000 Anticipated Commitment). If the Fund's investment strategy generates meaningful UBTI — for example, through leveraged investments in pass-through portfolio companies — a blocker may be appropriate for Northgate to eliminate UBTI exposure. However, our initial assessment is that the UBTI risk is low for the Fund, given the expected C-corporation structure of most portfolio companies and the short-term nature of planned subscription facility borrowings. Accordingly, we recommend making a blocker structure available as an option for Northgate but not requiring its use at this time. The decision should be coordinated with David Park, Senior Portfolio Manager at Northgate, and should be informed by the Fund's initial portfolio construction and the actual level of UBTI-generating activity.

Non-U.S. Investors (To Be Determined). The blocker Corp will be essential if the Fund receives material commitments from non-U.S. investors. As noted in Section IV.C, the blocker converts ECI into dividend income and eliminates the non-U.S. investor's U.S. filing obligations. The blocker Corp should be structured as a "check-the-box" domestic corporation (which is the default classification for a Delaware corporation) and taxed at the 21% federal corporate rate. The benefit of treaty-reduced dividend withholding from the blocker Corp to non-U.S. shareholders should be analyzed on an investor-by-investor basis once the non-U.S. investor pipeline is defined.

C. Tax Costs and Trade-Offs

The use of a blocker corporation creates a "double tax" layer on the income that flows through the blocker: the blocker Corp pays corporate-level federal income tax at 21% (plus applicable state income tax) on its allocable share of Fund income, and distributions from the blocker Corp to its shareholders are subject to additional tax at the shareholder level (either as qualified dividends for U.S. individual shareholders, as dividends subject to the DRD for U.S. corporate shareholders, or as dividends subject to withholding for non-U.S. shareholders).

The following comparison illustrates the trade-off between the blocker structure and direct investment for different categories of investors:

As illustrated, the blocker structure does not always produce a lower overall tax burden, but it provides significant administrative benefits (no U.S. filing obligation for non-U.S. investors, no UBTI for tax-exempt investors) that are often worth the tax cost.

Additionally, the blocker Corp can be liquidated tax-efficiently at fund wind-down under IRC §331 (treating the liquidating distribution as a sale or exchange) and §336 (recognizing gain or loss at the corporate level on the distribution of property in liquidation). If structured properly, the liquidation can be timed to minimize the overall tax cost and to ensure that any remaining tax attributes (e.g., NOLs or capital loss carryovers) are utilized before dissolution.

We note that long-term capital gains at the blocker level are taxed at the 21% corporate rate, as there is no preferential capital gains rate for corporations. This compares unfavorably to the UBTI rate on capital gains for tax-exempt investors (which would be taxed at trust/estate capital gains rates, currently 20% plus the 3.8% net investment income tax, for a combined maximum rate of 23.8%). The capital gains differential is a factor that weighs in favor of direct investment (rather than through a blocker) for tax-exempt investors, provided UBTI risk is otherwise manageable.

D. Alternative: AIV Structure

As an alternative to a permanent blocker entity, the Fund could establish an Alternative Investment Vehicle ("AIV") on a deal-by-deal basis. An AIV is a separate vehicle — typically an LLC or LP — that invests in parallel with the Fund in specific transactions. The AIV approach allows the General Partner to interpose a blocker only for specific investments that present UBTI or ECI risk, rather than routing all of a particular investor's capital through a permanent blocker. This approach can be more tax-efficient, as it limits the double taxation to specific investments where the blocker is needed, while allowing the investor to participate directly in the Fund for investments that do not present UBTI or ECI concerns.

However, the AIV approach is more complex to administer, as it requires the formation and maintenance of a separate entity for each relevant investment, with separate accounting, tax reporting, and governance. The choice between a standing blocker and a deal-by-deal AIV approach should be discussed with the structuring team (Pamela Cross and Theresa Kim) and the relevant investors, with input from the Fund administrator (Halcyon Fund Services). We recommend deferring this decision until the investment pipeline and investor composition are more defined.

VI. Carried Interest — IRC §1061 Compliance

A. Overview of IRC §1061

Section 1061 of the Internal Revenue Code, enacted as part of the Tax Cuts and Jobs Act of 2017 and effective for taxable years beginning after December 31, 2017, modifies the tax treatment of capital gains attributable to certain partnership interests held by investment fund managers and other investment professionals. Specifically, §1061 requires a three-year holding period (rather than the standard one-year holding period under IRC §1222) for net long-term capital gain attributable to an "applicable partnership interest" ("API") to qualify for long-term capital gains treatment. If the three-year holding period is not met, the net long-term capital gain is recharacterized as short-term capital gain and taxed at ordinary income rates (currently up to 37% for individuals).

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

The Fund's carried interest allocations to its principals — Dr. Marcus Yeung (55%), Priya Dasgupta (35%), and Alan Whitford (10%) — are held through CLSO GP I, LLC in connection with the performance of substantial services in an applicable trade or business (i.e., the business of raising capital and investing in life-sciences companies). Accordingly, each principal's carried interest allocation constitutes an API subject to §1061.

B. Application to CLSO Fund I Principals

The three-year holding period requirement of §1061 applies at the asset level — that is, the Fund must hold each underlying portfolio investment for more than three years from the date of acquisition in order for the carried interest allocation of gain on that investment to qualify for long-term capital gains treatment. If the Fund disposes of a portfolio investment within three years of acquisition, the carried interest portion of the gain attributable to that investment will be recharacterized as short-term capital gain for the carry recipients, regardless of how long the carry recipients have held their APIs.

This asset-level holding period test is the critical §1061 planning consideration for the Fund. The Fund's investment strategy targets clinical-stage therapeutics and platform biotechnology companies, with typical hold periods in this sector of five to eight years. As a general matter, this investment horizon comfortably exceeds the three-year §1061 threshold, and the majority of the Fund's investments are expected to be held for more than three years before disposition. However, certain exit scenarios could trigger §1061 recharacterization:

(a) Early-stage acquisitions. If a portfolio company is acquired by a strategic or financial buyer within one to two years of the Fund's initial investment (e.g., following positive clinical trial results or FDA breakthrough therapy designation), the gain attributable to the carried interest portion of the Fund's profit from that investment would be recharacterized as short-term capital gain under §1061. While such early exits are favorable from an investment return perspective, they carry a tax cost for the carry recipients.

(b) Partial exits. If the Fund exits a portion of its position in a portfolio company (e.g., through a secondary sale or a partial IPO sell-down) within three years of investment, the gain on the sold portion would be subject to §1061 recharacterization. The retained portion would continue to be held for §1061 purposes, and any subsequent gain on the retained portion would qualify for long-term treatment if the total holding period exceeds three years.

(c) Milestone-based exits. The life-sciences sector frequently involves milestone-based exit strategies, with multiple liquidity events over a multi-year period. The §1061 analysis must be applied separately to each tranche of gain realized in each liquidity event, based on the Fund's holding period for the underlying assets as of the date of each event.

C. Structuring Recommendations

To ensure compliance with §1061 and to preserve the ability to report the applicable holding period information on K-1s, we make the following structuring recommendations:

Asset-Level Holding Period Tracking. The LPA should include a specific provision requiring the General Partner to maintain records of the acquisition date and disposition date of each portfolio investment for purposes of §1061. This tracking must be at the individual asset level (not the fund level or portfolio level), as the three-year holding period test applies separately to each asset. The Fund administrator (Halcyon Fund Services) should implement a tracking system that automatically identifies each portfolio investment's holding period as of any given date and flags investments approaching or exceeding the three-year threshold.

Character Segregation in Capital Account and Allocation Provisions. The LPA's allocation provisions should distinguish between (i) gains on assets held for more than three years, which will qualify for long-term capital gains treatment for carry recipients, and (ii) gains on assets held for three years or less, which will be recharacterized as short-term capital gain (ordinary income) for carry recipients under §1061. This distinction is not necessary for the limited partners, whose gain characterization depends on the standard one-year holding period under §1222 and who are not subject to §1061 (unless they are themselves service-providing partners, which is not expected).

GP Commitment — Capital Interest Exception. Under IRC §1061(c)(4), a partnership interest is not treated as an API to the extent the interest provides the holder with a right to share in partnership capital commensurate with the amount of capital contributed by the partner and the terms of the interest are the same as (or similar to) those of non-service-providing partners. This is the "capital interest exception," and it ensures that the principals' 2% GP commitment ($15,000,000 at target) is not subject to the three-year holding period requirement.

To qualify for the capital interest exception, the GP commitment must be properly documented. Specifically:

(a) The GP LLC Agreemen

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 555 California Street, Suite 3500 San Francisco, California 94104
MEMORANDUM
TO: Pamela Cross, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP Theresa Kim, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP Dr. Marcus Yeung, Co-Founder & Managing Partner, Cobalt Ventures LP Priya Dasgupta, Co-Founder & Managing Partner, Cobalt Ventures LP
FROM: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
DATE: April 30, 2026
RE: Tax Structuring Analysis — Cobalt Life Sciences Opportunities Fund I, LP
Matter No.: 1004-00002 Billing Code: 88103-CVC
Note: This memorandum has been prepared in coordination with Greystone Tax Advisors LLC (Kenneth Liu, Managing Director), the sponsor's outside tax advisor. References to Greystone's work and recommendations herein reflect our collaborative analysis. Greystone has reviewed and concurs with the conclusions set forth in this memorandum except where expressly noted.
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I. Executive Summary
The purpose of this memorandum is to provide a comprehensive federal, state, and local tax structuring analysis for the formation and operation of Cobalt Life Sciences Opportunities Fund I, LP ("CLSO Fund I" or the "Fund"), a Delaware limited partnership that will target Seven Hundred Fifty Million Dollars ($750,000,000) in aggregate commitments, with a hard cap of One Billion Dollars ($1,000,000,000), for opportunistic investing in the life-sciences sector, including clinical-stage therapeutics, platform biotechnology, and medical device companies.
The Fund will be managed by Cobalt Life Sciences GP I, LLC (the "General Partner" or "GP"), a Delaware limited liability company whose managing members are Dr. Marcus Yeung and Priya Dasgupta. Alan Whitford will also hold a carried interest allocation through the General Partner. The management fee associated with the Fund will be received by Cobalt Life Sciences Management I, LLC (the "Management Company"), also a Delaware limited liability company. The General Partner and the Management Company are each affiliates of Cobalt Ventures LP, the principals' existing investment advisory platform headquartered at 3400 Sand Hill Road, Suite 220, Menlo Park, California 94025.
This memorandum addresses the following key tax structuring objectives:
1. Minimization of UBTI Exposure for Tax-Exempt Investors. Several anticipated anchor investors are tax-exempt organizations, including state pension funds and university endowments. The Fund's structure must be designed to minimize the generation of unrelated business taxable income ("UBTI") under Internal Revenue Code ("IRC") Sections 511 through 514, which would otherwise subject these investors to federal income tax on their allocable share of Fund income.
2. Minimization of ECI for Non-U.S. Investors. To the extent the Fund accepts commitments from non-U.S. investors (up to 25% of commitments may originate from Western Europe and Israel), the structure must minimize the allocation of effectively connected income ("ECI") to such investors, thereby reducing their U.S. federal income tax exposure and filing obligations.
3. Compliance with IRC §1061 Carried Interest Holding Period Rules. The carried interest allocations to the Fund's principals constitute "applicable partnership interests" under Section 1061 of the Code and are therefore subject to a three-year holding period requirement for long-term capital gains treatment. The Fund's structure and partnership agreement must incorporate appropriate tracking, segregation, and reporting mechanisms to ensure compliance.
4. Optimization of State Income Tax Nexus Posture. The Fund's management activities will be conducted primarily from California, which will assert income tax nexus over the Fund. The structure must be designed to manage and monitor state income tax exposure across multiple jurisdictions, including California, Oregon, Connecticut, Massachusetts, and other states where portfolio investments may be located.
5. Appropriate Structuring of blocker Entities. A Delaware C-corporation blocker entity should be formed on a shelf basis and activated as needed to shield certain categories of investors from adverse tax consequences, including UBTI for tax-exempt investors and ECI for non-U.S. investors.
6. Proper Tax Treatment of Management Fees, Carried Interest Allocations, and the GP Commitment. Each of these economic components of the Fund carries distinct tax implications. The structure must ensure that management fees are appropriately characterized as ordinary income, that carried interest allocations comply with Section 1061, and that the GP commitment qualifies for the capital interest exception thereunder.
The anticipated anchor investor base for the Fund includes several tax-sensitive profiles that have materially influenced the structuring recommendations set forth in this memorandum:
• Ironwood Public Employees Retirement System ("Ironwood PERS"): An Oregon state pension fund with an anticipated commitment of One Hundred Million Dollars ($100,000,000). As an integral part of the State of Oregon, Ironwood PERS is tax-exempt under IRC §115, and its pension trust is subject to UBTI rules under IRC §511(a)(2)(B).
• Northgate Endowment Management LLC ("Northgate Endowment"): A university endowment based in Cambridge, Massachusetts, with an anticipated commitment of Fifty Million Dollars ($50,000,000). Northgate is tax-exempt under IRC §501(c)(3) and subject to UBTI under IRC §512. Additionally, Northgate may be subject to the excise tax on net investment income of certain private colleges and universities under IRC §4968.
• Pinnacle Insurance Group, Inc. ("Pinnacle Insurance"): A Connecticut-domiciled life and annuity insurer with a $28 billion general account and an anticipated commitment of Seventy-Five Million Dollars ($75,000,000). Pinnacle is subject to specialized insurance company taxation under IRC Subchapter L, including proration rules and deferred acquisition cost adjustments.
Total anticipated anchor commitments aggregate to approximately $225,000,000. The remaining $510,000,000 is expected to be raised from third-party investors through the Fund's placement agent, sagebrush Capital Partners LLC, net of the $15,000,000 GP commitment at target (representing 2% of aggregate commitments).
This memorandum should be read together with the Fund Structuring Memorandum prepared by Pamela Cross and Theresa Kim, which has been delivered concurrently and addresses the non-tax legal structuring considerations, including the limited partnership agreement provisions, side letter framework, and regulatory compliance matters.
II. Fund Structure Overview — Tax Perspective
A. Recommended Entity Architecture
The recommended entity architecture for CLSO Fund I consists of four principal entities, each serving a distinct function within the overall fund structure. The tax classification and treatment of each entity is summarized below.
CLSO Fund I, LP (the "Fund"). The Fund is a Delaware limited partnership that will serve as the primary investment vehicle. For federal income tax purposes, a domestic limited partnership with two or more partners is classified as a partnership by default under Treasury Regulation §301.7701-3(b)(1). No entity-level federal income tax is imposed on the Fund. Instead, all items of income, gain, loss, deduction, and credit are determined at the partnership level and then allocated among the partners in accordance with the partnership agreement and the applicable provisions of Subchapter K of the Internal Revenue Code (IRC §§701–761). Each partner reports its allocable share of these items on its own federal income tax return. The Fund's tax year will be the calendar year, as required under IRC §706(b)(1)(B) for partnerships with individual partners, unless an exception applies. The flow-through nature of the Fund is fundamental to the entire tax structuring analysis, as it means that the tax characteristics of Fund income (e.g., long-term capital gain, ordinary income, qualified dividend income) are preserved and passed through to investors at the partner level.
CLSO GP I, LLC (the "General Partner"). The General Partner is a Delaware limited liability company that will serve as the general partner of the Fund and will hold the carried interest allocation. The General Partner will have three members: Dr. Marcus Yeung (55% carried interest allocation), Priya Dasgupta (35% carried interest allocation), and Alan Whitford (10% carried interest allocation). Because the General Partner will have more than one member, it will be classified as a partnership for federal income tax purposes by default under Treasury Regulation §301.7701-3(b)(1), without the need for any affirmative "check-the-box" election. Partnership classification is appropriate and desired for the General Partner, as it allows the carried interest and GP commitment economics to flow through to the individual principals with a single level of taxation. The General Partner will also make the 2% GP commitment to the Fund on behalf of its members, as discussed in further detail in Section VIII below.
CLSO Management I, LLC (the "Management Company"). The Management Company is a Delaware limited liability company that will receive the management fee from the Fund. The Management Company will be a multi-member LLC with Dr. Marcus Yeung and Priya Dasgupta as its managing members. As a multi-member domestic LLC, it will be classified as a partnership for federal income tax purposes by default, which is the appropriate and desired classification. The management fee income received by the Management Company (currently structured at 2.00% per annum of aggregate commitments during the Investment Period) will be characterized as ordinary income and will flow through to the members of the Management Company. The tax treatment of management fees is addressed in detail in Section VII below.
Cobalt Life Sciences Opportunities Fund I (Blocker), Inc. (the "Blocker Corp"). The blocker Corp is a Delaware C-corporation to be formed on a shelf basis and activated only if needed based on the final investor composition of the Fund. As a domestic corporation, the blocker Corp will be classified as a corporation for federal income tax purposes by default under Treasury Regulation §301.7701-2(b), without the need for any election. The blocker Corp will be subject to entity-level federal income tax at the current corporate rate of 21% on its allocable share of Fund income. Distributions from the blocker Corp to its shareholders will be treated as dividends to the extent of the blocker Corp's earnings and profits. The purpose, structure, and tax implications of the blocker Corp are discussed in detail in Section V below.
The following diagram illustrates the recommended entity architecture from a tax perspective:
B. Tax Classification Elections
As noted above, no affirmative "check-the-box" elections under Treasury Regulation §301.7701-3 are required for any of the four entities in the recommended structure. Each entity's default classification under the Treasury Regulations is the classification that best serves the Fund's tax objectives.
For the Fund LP, partnership classification is the default for a domestic entity organized as a limited partnership with two or more partners. This classification provides the flow-through treatment that is essential to preserving the tax character of Fund income for investors with varying tax profiles. We note that the Fund should not make an election to be classified as an association taxable as a corporation, as this would impose an entity-level tax and eliminate the flow-through benefits that are central to the Fund's value proposition for investors.
For the General Partner LLC, partnership classification is the default for a domestic LLC with more than one member. If, for any reason, the membership structure of the GP LLC were to change such that it became a single-member entity (e.g., if two of the three principals departed), the entity would be treated as a disregarded entity for federal tax purposes, which would also be an acceptable classification. However, as currently structured with three members, partnership classification applies automatically.
For the Management Company LLC, the analysis is identical to that of the General Partner: as a multi-member domestic LLC, partnership classification is the default and is appropriate.
For the blocker Corp, corporate classification is the default for a domestic entity organized as a corporation under Delaware law. No election is needed, and none should be made. The blocker Corp's purpose is specifically to interpose a corporate-level tax entity between certain investors and the Fund, and corporate classification is essential to achieving that purpose.
We recommend that the formation documents for each entity include a provision stating that no entity classification election will be filed with the IRS without the prior written consent of the General Partner, to prevent inadvertent changes to the tax classification of any entity in the structure.
C. Partnership Tax Allocation Principles
The allocation of items of income, gain, loss, deduction, and credit among the partners of the Fund is governed by the partnership agreement (the Limited Partnership Agreement, or "LPA") and must comply with the requirements of IRC §704(b) and the Treasury Regulations thereunder. Under these provisions, allocations specified in the partnership agreement will be respected for tax purposes only if they have "substantial economic effect" or are "in accordance with the partners' interests in the partnership."
Substantial Economic Effect. To have "substantial economic effect," allocations must satisfy two requirements. First, the allocations must have "economic effect," meaning that (a) the partnership maintains capital accounts in accordance with Treasury Regulation §1.704-1(b)(2)(iv), (b) liquidating distributions are made in accordance with positive capital account balances, and (c) any partner with a deficit capital account balance after all adjustments is required to restore that deficit (or, alternatively, the partnership agreement includes a "qualified income offset" provision). Second, the economic effect must be "substantial," meaning that there must be a reasonable possibility that the allocation will affect the dollar amounts to be received by the partners, independent of tax consequences.
The LPA for CLSO Fund I must include the following provisions to ensure compliance with the substantial economic effect requirements:
• Capital account maintenance. The LPA must require the Fund to maintain capital accounts for each partner in accordance with the rules set forth in Treasury Regulation §1.704-1(b)(2)(iv). Capital accounts must be increased by (i) the amount of money contributed by the partner, (ii) the fair market value of property contributed by the partner (net of liabilities assumed), and (iii) allocations of income and gain to the partner. Capital accounts must be decreased by (i) the amount of money distributed to the partner, (ii) the fair market value of property distributed to the partner (net of liabilities assumed), and (iii) allocations of loss and deduction to the partner.
• Qualified income offset. The LPA should include a "qualified income offset" provision under Treasury Regulation §1.704-1(b)(2)(ii)(d), which provides that any partner who unexpectedly receives certain adjustments, allocations, or distributions that cause or increase a deficit capital account balance will be allocated items of income and gain in an amount sufficient to eliminate such deficit as quickly as possible. This provision serves as a safety valve to protect the validity of the Fund's allocations if a partner's capital account goes into deficit.
• Minimum gain chargeback. The LPA must include a "minimum gain chargeback" provision under Treasury Regulation §1.704-2(f), which requires that if there is a net decrease in partnership minimum gain during a taxable year, each partner must be allocated items of income and gain for that year equal to that partner's share of the net decrease. This provision is relevant to the extent the Fund incurs nonrecourse liabilities (e.g., subscription credit facilities or other indebtedness).
Targeted Capital Account Allocation Approach. We recommend that the LPA employ a "targeted" or "layered" allocation approach, which is the standard methodology used in private equity fund partnership agreements. Under this approach, items of income, gain, loss, and deduction are allocated among the partners in a manner that will cause each partner's capital account balance, following such allocations, to equal the amount that would be distributed to such partner if all of the Fund's assets were sold at their book values and the net proceeds (after satisfaction of all liabilities) were distributed in accordance with the contractual distribution waterfall set forth in the LPA. This approach ties the tax allocations directly to the economic deal among the partners, as reflected in the distribution waterfall. The mechanics of this approach are discussed in greater detail in Section XI below in connection with the distribution waterfall analysis.
IRC §704(c) Allocations. Section 704(c) of the Code requires that when property is contributed to a partnership, the partnership must allocate items of income, gain, loss, and deduction with respect to that property so as to take into account the difference between the fair market value of the property and its adjusted tax basis at the time of contribution (the "built-in gain" or "built-in loss"). Similar rules apply when a partnership revalues its assets in connection with certain events (e.g., the admission of a new partner or a distribution of property), pursuant to the "reverse §704(c)" rules under Treasury Regulation §1.704-1(b)(2)(iv)(f).
We recommend that the Fund adopt the "traditional method" of making §704(c) allocations under Treasury Regulation §1.704-3(b), with curative allocations under Treasury Regulation §1.704-3(c) permitted where appropriate. The traditional method is the simplest approach and is generally adequate for a fund that primarily invests cash in portfolio company equity. Curative allocations may be useful in limited circumstances where the traditional method produces a "ceiling rule" limitation that prevents the full elimination of the book-tax disparity. The remedial method under Treasury Regulation §1.704-3(d) is an alternative that creates notional tax items to correct ceiling rule distortions; however, it is more complex and is not necessary for the anticipated investment strategy. The specific §704(c) method should be set forth in the LPA and applied consistently.
III. UBTI Planning for Tax-Exempt Investors
A. Overview of UBTI Risk
Tax-exempt investors, including state pension funds such as Ironwood PERS and university endowments such as Northgate Endowment, are generally exempt from federal income tax on their investment income. However, under IRC §§511–514, these investors are subject to tax on "unrelated business taxable income" — income derived from a trade or business that is "regularly carried on" and that is not "substantially related" to the organization's exempt purpose. The UBTI tax is imposed at the rates applicable to trusts or corporations, depending on the nature of the tax-exempt entity, and can reach a marginal rate of 37% for trusts.
In the context of a life-sciences fund such as CLSO Fund I, the principal sources of UBTI risk are as follows:
1. Debt-Financed Income Under IRC §514. Income derived from "debt-financed property" — property acquired or held with the proceeds of indebtedness — is treated as UBTI to the extent of the ratio of acquisition indebtedness to the adjusted basis of the property. This rule is particularly relevant to fund-level borrowing, including subscription credit facilities.
2. Income from a Trade or Business Regularly Carried On (IRC §512(a)(1)). If the Fund invests in portfolio companies that are organized as pass-through entities (LLCs or partnerships) and those entities conduct active trades or businesses, the tax-exempt investor's allocable share of such income would constitute UBTI. This is a direct flow-through risk that arises from the Fund's partnership structure.
3. Partnership Income that Constitutes UBTI at the Partner Level. Under IRC §512(c)(1), a tax-exempt partner's share of partnership income that would constitute UBTI if received directly by the tax-exempt organization is treated as UBTI. This "look-through" rule means that the nature of the Fund's income is determined at the Fund level and then passed through to the tax-exempt partners with its UBTI character intact.
Importantly, investment income — including dividends, interest, royalties, certain rents, and capital gains from the sale or exchange of property — is generally excluded from UBTI under IRC §512(b)(1)–(5), provided that such income is not derived from debt-financed property. This exclusion is the cornerstone of UBTI planning for the Fund: to the extent the Fund's income consists of capital gains and dividends from investments in C-corporation portfolio companies, and the Fund does not employ significant leverage, the UBTI exposure of tax-exempt investors should be minimal.
B. Debt-Financed Property (IRC §514)
The Fund's LPA authorizes the use of a subscription credit facility (also referred to as a "capital call facility") secured by the unfunded capital commitments of the limited partners. Such facilities are commonly used in private equity funds to bridge capital calls, smooth cash flow, and provide operational flexibility to the General Partner. However, the use of borrowed funds to acquire or carry investments can generate "acquisition indebtedness" under IRC §514(c), which in turn can cause a portion of the income from the acquired investment to be treated as "debt-financed income" and therefore UBTI for tax-exempt investors.
The key analytical question under IRC §514 is whether the borrowings under the subscription credit facility constitute "acquisition indebtedness" with respect to Fund investments. Under IRC §514(c)(1), "acquisition indebtedness" is indebtedness incurred in connection with the acquisition or improvement of property, or indebtedness that would not have been incurred but for the acquisition of the property. The IRS has taken the position in certain rulings and guidance that subscription facility borrowings used to fund investments, even temporarily, can constitute acquisition indebtedness if the proceeds are traceable to the acquisition of investment property.
Recommendation: We recommend that the Fund structure its subscription facility drawdowns as short-term bridge financing, with a target repayment period of fewer than sixty (60) days. This approach is designed to minimize the duration of any indebtedness that could be characterized as acquisition indebtedness and to limit the ratio of debt-financed basis to total basis for purposes of the IRC §514 calculation. The LPA should include provisions that align the subscription facility terms with this approach and that empower the General Partner to manage drawdowns in a manner that minimizes UBTI exposure for tax-exempt investors. If the Fund requires longer-term borrowing to complete an acquisition or bridge a capital call during a period of market disruption, the General Partner should consult with tax counsel before drawing down the facility for a period exceeding sixty (60) days.
We further note that longer-term leverage at the portfolio company level generally does not create UBTI for the Fund's limited partners. Because each portfolio company is a separate legal entity, indebtedness incurred by a portfolio company organized as a C-corporation does not flow through to the Fund or its investors. The debt is at the corporate level, and the Fund's return from the portfolio company (in the form of capital gains upon exit or dividends during the hold period) is not treated as debt-financed income at the Fund level.
However, a potential UBTI issue arises if the Fund makes leveraged investments in portfolio companies organized as pass-through entities. If the Fund invests in an LLC or partnership that itself incurs indebtedness, the Fund's allocable share of income from such indebtedness could be UBTI. This scenario is unlikely given the Fund's primary strategy of investing in C-corporation biotech companies, but it is possible with certain platform technology companies organized as LLCs. We address this risk in Subsection C below.
C. Trade or Business Income
The Fund's investment strategy targets clinical-stage therapeutics, platform biotechnology, and medical device companies. The vast majority of these investments are expected to be structured as equity investments in companies organized as C-corporations. Under this structure, the tax-exempt investor's allocable share of Fund income from such investments will consist of dividends and capital gains, both of which are excluded from UBTI under IRC §512(b)(1) and (5), respectively.
The principal UBTI risk from a trade or business perspective arises if the Fund invests in portfolio companies organized as pass-through entities — specifically, LLCs treated as partnerships or disregarded entities — that conduct active trades or businesses. If the Fund holds a direct or indirect interest in such a pass-through entity, the tax-exempt investor's allocable share of the entity's trade or business income would constitute UBTI under the look-through rule of IRC §512(c)(1).
Recommendation: Where the Fund proposes to invest in a portfolio company organized as a pass-through entity that conducts an active trade or business, we recommend that the General Partner consider the following mitigation strategies:
(a) Interpose a blocker corporation. A C-corporation blocker entity (either the blocker Corp or a deal-specific AIV) can be interposed between the Fund and the pass-through portfolio company. The blocker would hold the Fund's interest in the pass-through entity and would be subject to corporate-level tax on the trade or business income, but the Fund's interest in the blocker would generate only dividends and capital gains — not UBTI.
(b) Structure the investment as preferred equity or debt. If the Fund's investment can be structured as preferred equity with fixed returns or as a debt instrument (e.g., convertible notes), the income received by the Fund may qualify for exclusion from UBTI as interest or dividends, depending on the specific terms of the instrument and the classification of the payments.
(c) Require the portfolio company to convert to C-corporation status. In some cases, the Fund may have sufficient negotiating leverage to require a pass-through portfolio company to elect to be treated as a C-corporation (by filing Form 8832) prior to or concurrent with the Fund's investment. This approach eliminates the UBTI risk at the source but may have adverse tax consequences for the portfolio company's existing owners and should be evaluated on a case-by-case basis.
Additionally, we note that monitoring fees and transaction fees received by the Fund or the Management Company in connection with portfolio company investments should be analyzed for potential UBTI flow-through to tax-exempt partners. If the Fund receives fees from portfolio companies that are characterized as income from a trade or business, such income could constitute UBTI. In practice, most monitoring and transaction fees received by a private equity fund are offset against the management fee (as is the case here, with an 80% offset), which mitigates but does not eliminate the UBTI risk. The characterization of the offset for UBTI purposes should be reviewed with Greystone Tax Advisors on a transaction-by-transaction basis.
D. Specific Investor Analysis
Ironwood PERS ($100,000,000 Anticipated Commitment). Ironwood PERS is the public employees retirement system of the State of Oregon. As an integral part of the state government, Ironwood PERS derives its tax-exempt status from IRC §115, which excludes from gross income income derived from the exercise of an essential governmental function and accruing to a state or its political subdivision. However, the UBTI rules of IRC §511 apply to state pension trusts by operation of IRC §511(a)(2)(B), which subjects "college or university" and "qualified trust" income to UBTI to the extent such income would be taxable under §511(a)(1) if derived by an organization described in §501(c)(3). The practical effect is that Ironwood PERS, while exempt from tax on its passive investment income, remains subject to tax on any UBTI, including debt-financed income and income from active trades or businesses.
For Ironwood PERS, the key UBTI planning imperatives are: (i) avoid allocating debt-financed income from Fund-level borrowings, (ii) ensure that the Fund's investments are structured to produce dividends and capital gains (not trade or business income) at the Fund level, and (iii) monitor any pass-through portfolio company investments for UBTI risk. Given Ironwood PERS's $100 million commitment (representing approximately 13.3% of target commitments), any UBTI generated by the Fund would have a material impact on Ironwood's overall tax position.
Northgate Endowment ($50,000,000 Anticipated Commitment). Northgate Endowment Management LLC manages the endowment of a private university in Cambridge, Massachusetts. The endowment is tax-exempt under IRC §501(c)(3) as an organization organized and operated exclusively for educational purposes. The endowment is subject to UBTI under IRC §512 in the same manner as other §501(c)(3) organizations.
In addition to the standard UBTI analysis, we must consider whether Northgate is subject to the excise tax on net investment income of certain private colleges and universities under IRC §4968. This provision, enacted as part of the Tax Cuts and Jobs Act of 2017, imposes a 1.4% excise tax on the net investment income (including capital gains, dividends, interest, rents, and royalties, less allowable deductions) of "applicable educational institutions." An institution is an "applicable educational institution" if it (i) had at least 500 tuition-paying students during the preceding taxable year, more than 50% of whom are located in the United States, (ii) is not described in the first sentence of IRC §511(a)(2)(B) (i.e., is not a state college or university), and (iii) has aggregate fair market value of assets (other than those used directly in carrying out the institution's exempt purpose) of at least $500,000 per student. If Northgate's parent university meets these criteria, the Fund's income allocable to Northgate's investment would be subject to the §4968 excise tax in addition to any applicable UBTI. We recommend confirming Northgate's status under §4968 as an early priority item, as set forth in the Open Items table in Section XV.
E. Silo Rule (IRC §512(a)(6))
Section 512(a)(6) of the Code, enacted as part of the Tax Cuts and Jobs Act of 2017, requires that UBTI be computed separately for each "unrelated trade or business" conducted by a tax-exempt organization. Under the prior law, a tax-exempt organization could aggregate UBTI from all of its unrelated trades or businesses, allowing losses from one activity to offset income from another. The silo rule eliminates this aggregation, requiring that each unrelated trade or business be treated as a separate silo for purposes of computing UBTI. Losses from one silo cannot offset income from another silo, although losses within a single silo can offset income within that same silo and can be carried forward under the applicable net operating loss rules.
The impact of the silo rule on CLSO Fund I is twofold. First, if the Fund generates UBTI from multiple sources (e.g., debt-financed income from the subscription credit facility and trade or business income from a pass-through portfolio company), each source must be separately tracked and reported, and losses from one source cannot offset income from the other. Second, the silo rule increases the administrative burden on both the Fund and its tax-exempt investors, as the Fund must provide sufficient detail in its K-1 reporting to enable each tax-exempt investor to properly silo its UBTI.
Recommendation: We recommend that the Fund maintain separate tracking of all UBTI-generating activities at the Fund level for reporting purposes. The LPA should include appropriate language requiring the General Partner to provide UBTI-related information in the annual tax packages delivered to investors. The K-1 reporting system implemented by Halcyon Fund Services should be designed to identify and separately report each UBTI component, including the source activity, to enable tax-exempt investors to comply with the silo rule. We also recommend including a provision in the LPA's tax reporting section that obligates the Fund to provide UBTI information in a format consistent with the silo rule requirements.
IV. ECI Planning for Non-U.S. Investors
A. Effectively Connected Income Overview
Non-U.S. investors in a U.S. partnership such as CLSO Fund I are subject to U.S. federal income tax on income that is "effectively connected" with the conduct of a trade or business within the United States. For non-U.S. individuals, the statutory authority is IRC §871(b); for non-U.S. corporations, it is IRC §882. ECI is taxed on a net basis at the same graduated rates applicable to U.S. persons (currently up to 37% for individuals and 21% for corporations). Non-U.S. corporate investors are additionally subject to a 30% "branch profits tax" under IRC §884 on the dividend equivalent amount, subject to reduction under an applicable income tax treaty.
In the context of a U.S. partnership, the determination of whether income is ECI is generally made at the partnership level. Under Revenue Ruling 91-32 and long-standing IRS administrative practice, a non-U.S. partner is treated as engaged in a U.S. trade or business if the partnership is so engaged, and the partner's allocable share of partnership income effectively connected with that trade or business is ECI to the partner.
Passive investment income — including dividends from U.S. corporations, portfolio interest, and capital gains from the sale of securities that are not attributable to a U.S. permanent establishment — is generally not ECI. This is a critical distinction for the Fund's non-U.S. investors, as the Fund's primary income stream is expected to consist of capital gains from the disposition of portfolio company equity and, to a lesser extent, dividends from portfolio companies. To the extent the Fund's income retains its character as passive investment income, it should not constitute ECI for non-U.S. investors.
However, IRC §864(c)(8), enacted as part of the Tax Cuts and Jobs Act of 2017, introduces a significant additional ECI exposure for non-U.S. partners. Under this provision, gain or loss on the sale or exchange of a partnership interest (including a secondary transfer or a redemption) is treated as ECI to the extent that the gain would be ECI if the partnership had sold all of its assets at fair market value immediately before the transfer. This provision codifies the holding of the IRS in Revenue Ruling 91-32 and extends it to partnership interest transfers, overruling the Tax Court's decision in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, 149 T.C. 63 (2017). The §864(c)(8) provision is relevant to any non-U.S. investor that may seek to transfer its interest in the Fund on the secondary market or have its interest redeemed.
B. Withholding Obligations
The Fund's withholding obligations with respect to non-U.S. investors arise under multiple provisions of the Code:
IRC §1446(a) Withholding on ECI Allocations. Under IRC §1446(a), a partnership that has effectively connected taxable income allocable to a non-U.S. partner must withhold tax on such income. The withholding rate is the highest applicable tax rate: currently 37% for non-U.S. individual partners and 21% for non-U.S. corporate partners. This withholding obligation applies on a quarterly estimated basis, with annual reconciliation on Form 8805 (filed with the partnership's Form 1065). The Fund must implement systems to identify non-U.S. partners, determine the amount of ECI allocable to each non-U.S. partner, and remit the required withholding to the IRS.
IRC §1446(f) Withholding on Partnership Interest Transfers. Under IRC §1446(f), enacted as part of the 2017 TCJA, a transferee of a partnership interest is required to withhold 10% of the amount realized on the transfer of a partnership interest by a non-U.S. person. If the transferee fails to withhold, the partnership itself is required to withhold from subsequent distributions to the transferee under IRC §1446(f)(4). The Fund must comply with these withholding mechanics upon any secondary transfer or redemption of a non-U.S. partner's interest. The Fund's transfer provisions in the LPA should include a requirement that any transferee of a non-U.S. partner's interest certify its compliance with §1446(f) withholding obligations.
FIRPTA Considerations. The Foreign Investment in Real Property Tax Act ("FIRPTA"), codified at IRC §§897 and 1445, imposes U.S. federal income tax on gain realized by a non-U.S. person from the disposition of a "U.S. real property interest" ("USRPI"). A USRPI includes an interest in a "U.S. real property holding corporation" — a domestic corporation in which the fair market value of USRPIs held by the corporation equals or exceeds 50% of the total fair market value of all assets. While FIRPTA exposure is unlikely in a life-sciences fund (whose portfolio companies are typically characterized by intellectual property, not real property), it is possible if the Fund invests in companies with significant real estate holdings, such as medical device manufacturing facilities or laboratory buildings. We recommend monitoring each portfolio company's asset composition to confirm that FIRPTA does not apply. If a portfolio company is or becomes a USRPI, the Fund's non-U.S. investors may be subject to FIRPTA tax on their allocable share of gain from the disposition of that company's equity.
C. Structuring Recommendations for Non-U.S. Investors
The Fund's offering documents contemplate that up to 25% of aggregate commitments may originate from investors based in Western Europe and Israel. If non-U.S. commitments reach a significant level, the following structuring options should be considered:
Parallel Fund or Offshore Feeder Structure. A common approach for accommodating non-U.S. investors is to establish either a parallel fund organized in an offshore jurisdiction (e.g., the Cayman Islands) that invests alongside the main Fund in each transaction, or an offshore feeder fund (e.g., a Cayman Islands LP) that invests all of its capital into the main Fund. The parallel fund approach provides greater structural flexibility and can be tailored to the specific tax needs of non-U.S. investors, but it also involves greater complexity and cost. The feeder fund approach is simpler but does not eliminate ECI exposure if the main Fund generates ECI. We recommend deferring the decision on a parallel or feeder structure until the magnitude of non-U.S. commitments is known, but we note that the LPA should preserve the General Partner's authority to establish such structures if needed.
blocker Corporation. The most straightforward approach to eliminating ECI and U.S. filing obligations for non-U.S. investors is to interpose a Delaware C-corporation (the blocker Corp) between the non-U.S. investors and the Fund. The blocker Corp would invest directly in the Fund and would be subject to corporate-level tax at the 21% federal rate on its allocable share of Fund income. The blocker Corp would then distribute after-tax proceeds to its non-U.S. shareholders as dividends. Dividends paid by the blocker Corp to non-U.S. shareholders are subject to 30% withholding tax under IRC §871(a) or §881, but this rate may be reduced under an applicable income tax treaty. For example, the U.S.-U.K. income tax treaty generally reduces dividend withholding to 15% (or 5% for certain corporate shareholders holding 10% or more of the voting stock), and the U.S.-Israel income tax treaty similarly provides for reduced withholding rates.
Treaty Planning. As part of the fundraising process, we should identify the anticipated jurisdictions of non-U.S. investors and analyze the applicable income tax treaty benefits. The key treaty provisions to analyze include: (i) reduced withholding rates on dividends from the blocker Corp, (ii) potential elimination or reduction of the branch profits tax under IRC §884 if a non-U.S. investor invests directly (without a blocker), and (iii) potential capital gains exemptions for certain categories of investment income. We recommend preparing a treaty benefits matrix for the most likely non-U.S. investor jurisdictions (United Kingdom, Germany, Switzerland, France, Netherlands, and Israel) once the investor pipeline is more defined.
Non-U.S. Portfolio Company Investments. The Fund's investment strategy permits deployment of up to 25% of commitments in Western Europe and Israel. Investments in non-U.S. portfolio companies generally do not generate ECI for U.S. tax purposes, provided the portfolio companies do not conduct a trade or business within the United States. However, if a non-U.S. portfolio company has U.S. operations or a U.S. permanent establishment, income from such operations could be ECI. Each non-U.S. portfolio investment should be analyzed for U.S. nexus at the time of investment to ensure that the Fund's non-U.S. investors are not inadvertently exposed to ECI.
D. FATCA Compliance
The Fund must comply with the Foreign Account Tax Compliance Act ("FATCA"), codified at IRC §§1471–1474. FATCA imposes a 30% withholding tax on certain "withholdable payments" (including U.S.-source dividends and interest, and, beginning in future years, gross proceeds from the sale of U.S. securities) made to "foreign financial institutions" ("FFIs") and "non-financial foreign entities" ("NFFEs") that do not comply with FATCA's reporting requirements.
As a U.S. partnership, the Fund is a "withholding agent" under FATCA and must implement appropriate due diligence, withholding, and reporting procedures. Specifically, the Fund must:
(a) Obtain a completed IRS Form W-9 from each U.S. investor and a completed IRS Form W-8BEN-E (or the appropriate variant of Form W-8) from each non-U.S. investor as part of the subscription process.
(b) Determine the FATCA status of each non-U.S. investor (e.g., participating FFI, deemed-compliant FFI, exempt beneficial owner, or NFFE) and verify the investor's Global Intermediary Identification Number ("GIIN"), if applicable.
(c) Withhold 30% on any withholdable payments allocable to non-compliant investors.
(d) File Form 8966 (FATCA Report) with the IRS to report payments made to certain non-U.S. investors.
We recommend coordinating all FATCA compliance activities with Halcyon Fund Services, Inc. (Thomas Varga, Director), which will serve as the Fund's administrator and will be responsible for implementing the withholding and reporting infrastructure. Greystone Tax Advisors (Kenneth Liu) will provide ongoing advisory support on FATCA classification questions for specific investors.
V. Blocker Corporation Analysis
A. Purpose and Structure
Cobalt Life Sciences Opportunities Fund I (Blocker), Inc. (the "Blocker Corp") is a Delaware C-corporation to be formed on a shelf basis at or around the time of the Fund's first close. The blocker Corp will not be capitalized or activated unless the final investor composition of the Fund warrants its use. The decision to activate the blocker Corp will be made by the General Partner in consultation with tax counsel and the relevant investors.
The blocker Corp serves two primary purposes:
1. Shielding tax-exempt investors from UBTI. If the Fund generates UBTI — for example, through leveraged investments, investments in pass-through operating companies, or other UBTI-producing activities — a tax-exempt investor that invests through the blocker Corp would receive dividends from the blocker Corp rather than a direct allocation of UBTI. Dividends received from the blocker Corp are not UBTI (as they are excluded under IRC §512(b)(1)), and thus the interposition of the blocker Corp eliminates the UBTI exposure for the tax-exempt investor. The trade-off, however, is the imposition of a corporate-level tax on the blocker Corp's allocable share of Fund income.
2. Shielding non-U.S. investors from ECI and U.S. filing obligations. A non-U.S. investor that invests through the blocker Corp would not be treated as a partner in the Fund and would not receive a K-1 or have ECI allocable to it. Instead, the non-U.S. investor would receive dividends from the blocker Corp, which are subject to withholding tax at the applicable rate (30% statutory rate, reduced by treaty). The blocker Corp eliminates the non-U.S. investor's obligation to file a U.S. federal income tax return and to pay estimated taxes on ECI.
The blocker Corp would invest directly in the Fund as a limited partner (or, in certain circumstances, co-invest alongside the Fund in specific transactions). It would maintain its own capital account in the Fund and would receive allocations of income, gain, loss, and deduction in the same manner as any other limited partner. The blocker Corp would pay corporate-level federal income tax at 21% on its allocable share of Fund income and would distribute after-tax proceeds to its shareholders as dividends.
B. Investor-Specific blocker Analysis
Pinnacle Insurance Group, Inc. ($75,000,000 Anticipated Commitment). Pinnacle is a Connecticut-domiciled life and annuity insurer with a $28 billion general account. As an insurance company, Pinnacle is subject to specialized tax rules under IRC Subchapter L (§§801–848), which govern the taxation of life insurance companies. Pinnacle's investment income is subject to the "proration" rule under IRC §812, which apportions investment income between the company's share (taxable) and the policyholders' share (not separately taxable to the company), and to the deferred acquisition cost ("DAC") tax adjustment under IRC §848, which requires capitalization and amortization of a portion of net premiums to offset against investment income.
A blocker entity may be advisable for Pinnacle to simplify Pinnacle's tax reporting and to isolate the Fund investment from Pinnacle's complex insurance tax calculations. If Pinnacle invests directly in the Fund, its K-1 income will flow into Pinnacle's Form 1120-L (U.S. Life Insurance Company Income Tax Return) and will be subject to the proration, DAC, and other Subchapter L adjustments. A blocker would convert the K-1 income into dividend income from a domestic corporation, which is eligible for the dividends-received deduction ("DRD") under IRC §243 (currently 50% for dividends from a domestic corporation in which the corporate shareholder owns less than 20% of the stock, or 65% if the shareholder owns 20% or more). The DRD would partially offset the double taxation cost of the blocker structure.
Alternatively, Pinnacle may prefer to invest directly in the Fund and manage its own tax reporting. This approach avoids the corporate-level tax on the blocker but requires Pinnacle to integrate the Fund's K-1 into its already complex insurance company tax return. We recommend discussing this choice with Rachel Stein, SVP – Alternative Investments at Pinnacle, and providing a comparative after-tax analysis under both approaches, as set forth in the Open Items table in Section XV.
Northgate Endowment ($50,000,000 Anticipated Commitment). If the Fund's investment strategy generates meaningful UBTI — for example, through leveraged investments in pass-through portfolio companies — a blocker may be appropriate for Northgate to eliminate UBTI exposure. However, our initial assessment is that the UBTI risk is low for the Fund, given the expected C-corporation structure of most portfolio companies and the short-term nature of planned subscription facility borrowings. Accordingly, we recommend making a blocker structure available as an option for Northgate but not requiring its use at this time. The decision should be coordinated with David Park, Senior Portfolio Manager at Northgate, and should be informed by the Fund's initial portfolio construction and the actual level of UBTI-generating activity.
Non-U.S. Investors (To Be Determined). The blocker Corp will be essential if the Fund receives material commitments from non-U.S. investors. As noted in Section IV.C, the blocker converts ECI into dividend income and eliminates the non-U.S. investor's U.S. filing obligations. The blocker Corp should be structured as a "check-the-box" domestic corporation (which is the default classification for a Delaware corporation) and taxed at the 21% federal corporate rate. The benefit of treaty-reduced dividend withholding from the blocker Corp to non-U.S. shareholders should be analyzed on an investor-by-investor basis once the non-U.S. investor pipeline is defined.
C. Tax Costs and Trade-Offs
The use of a blocker corporation creates a "double tax" layer on the income that flows through the blocker: the blocker Corp pays corporate-level federal income tax at 21% (plus applicable state income tax) on its allocable share of Fund income, and distributions from the blocker Corp to its shareholders are subject to additional tax at the shareholder level (either as qualified dividends for U.S. individual shareholders, as dividends subject to the DRD for U.S. corporate shareholders, or as dividends subject to withholding for non-U.S. shareholders).
The following comparison illustrates the trade-off between the blocker structure and direct investment for different categories of investors:
As illustrated, the blocker structure does not always produce a lower overall tax burden, but it provides significant administrative benefits (no U.S. filing obligation for non-U.S. investors, no UBTI for tax-exempt investors) that are often worth the tax cost.
Additionally, the blocker Corp can be liquidated tax-efficiently at fund wind-down under IRC §331 (treating the liquidating distribution as a sale or exchange) and §336 (recognizing gain or loss at the corporate level on the distribution of property in liquidation). If structured properly, the liquidation can be timed to minimize the overall tax cost and to ensure that any remaining tax attributes (e.g., NOLs or capital loss carryovers) are utilized before dissolution.
We note that long-term capital gains at the blocker level are taxed at the 21% corporate rate, as there is no preferential capital gains rate for corporations. This compares unfavorably to the UBTI rate on capital gains for tax-exempt investors (which would be taxed at trust/estate capital gains rates, currently 20% plus the 3.8% net investment income tax, for a combined maximum rate of 23.8%). The capital gains differential is a factor that weighs in favor of direct investment (rather than through a blocker) for tax-exempt investors, provided UBTI risk is otherwise manageable.
D. Alternative: AIV Structure
As an alternative to a permanent blocker entity, the Fund could establish an Alternative Investment Vehicle ("AIV") on a deal-by-deal basis. An AIV is a separate vehicle — typically an LLC or LP — that invests in parallel with the Fund in specific transactions. The AIV approach allows the General Partner to interpose a blocker only for specific investments that present UBTI or ECI risk, rather than routing all of a particular investor's capital through a permanent blocker. This approach can be more tax-efficient, as it limits the double taxation to specific investments where the blocker is needed, while allowing the investor to participate directly in the Fund for investments that do not present UBTI or ECI concerns.
However, the AIV approach is more complex to administer, as it requires the formation and maintenance of a separate entity for each relevant investment, with separate accounting, tax reporting, and governance. The choice between a standing blocker and a deal-by-deal AIV approach should be discussed with the structuring team (Pamela Cross and Theresa Kim) and the relevant investors, with input from the Fund administrator (Halcyon Fund Services). We recommend deferring this decision until the investment pipeline and investor composition are more defined.
VI. Carried Interest — IRC §1061 Compliance
A. Overview of IRC §1061
Section 1061 of the Internal Revenue Code, enacted as part of the Tax Cuts and Jobs Act of 2017 and effective for taxable years beginning after December 31, 2017, modifies the tax treatment of capital gains attributable to certain partnership interests held by investment fund managers and other investment professionals. Specifically, §1061 requires a three-year holding period (rather than the standard one-year holding period under IRC §1222) for net long-term capital gain attributable to an "applicable partnership interest" ("API") to qualify for long-term capital gains treatment. If the three-year holding period is not met, the net long-term capital gain is recharacterized as short-term capital gain and taxed at ordinary income rates (currently up to 37% for individuals).
An "applicable partnership interest" is defined under §1061(c)(1) as any interest in a partnership that is transferred to (or held by) a taxpayer in connection with the performance of substantial services by the taxpayer (or any other related person) in any "applicable trade or business." An "applicable trade or business" is defined under §1061(c)(2) as any activity conducted on a regular, continuous, and substantial basis that consists, in whole or in part, of (i) raising or returning capital, and (ii) either investing in (or disposing of) specified assets, or developing specified assets. "Specified assets" include securities, commodities, real estate, cash or cash equivalents, options or derivative contracts with respect to any of the foregoing, and interests in partnerships to the extent of such partnership's proportionate interest in any of the foregoing.
The Fund's carried interest allocations to its principals — Dr. Marcus Yeung (55%), Priya Dasgupta (35%), and Alan Whitford (10%) — are held through CLSO GP I, LLC in connection with the performance of substantial services in an applicable trade or business (i.e., the business of raising capital and investing in life-sciences companies). Accordingly, each principal's carried interest allocation constitutes an API subject to §1061.
B. Application to CLSO Fund I Principals
The three-year holding period requirement of §1061 applies at the asset level — that is, the Fund must hold each underlying portfolio investment for more than three years from the date of acquisition in order for the carried interest allocation of gain on that investment to qualify for long-term capital gains treatment. If the Fund disposes of a portfolio investment within three years of acquisition, the carried interest portion of the gain attributable to that investment will be recharacterized as short-term capital gain for the carry recipients, regardless of how long the carry recipients have held their APIs.
This asset-level holding period test is the critical §1061 planning consideration for the Fund. The Fund's investment strategy targets clinical-stage therapeutics and platform biotechnology companies, with typical hold periods in this sector of five to eight years. As a general matter, this investment horizon comfortably exceeds the three-year §1061 threshold, and the majority of the Fund's investments are expected to be held for more than three years before disposition. However, certain exit scenarios could trigger §1061 recharacterization:
(a) Early-stage acquisitions. If a portfolio company is acquired by a strategic or financial buyer within one to two years of the Fund's initial investment (e.g., following positive clinical trial results or FDA breakthrough therapy designation), the gain attributable to the carried interest portion of the Fund's profit from that investment would be recharacterized as short-term capital gain under §1061. While such early exits are favorable from an investment return perspective, they carry a tax cost for the carry recipients.
(b) Partial exits. If the Fund exits a portion of its position in a portfolio company (e.g., through a secondary sale or a partial IPO sell-down) within three years of investment, the gain on the sold portion would be subject to §1061 recharacterization. The retained portion would continue to be held for §1061 purposes, and any subsequent gain on the retained portion would qualify for long-term treatment if the total holding period exceeds three years.
(c) Milestone-based exits. The life-sciences sector frequently involves milestone-based exit strategies, with multiple liquidity events over a multi-year period. The §1061 analysis must be applied separately to each tranche of gain realized in each liquidity event, based on the Fund's holding period for the underlying assets as of the date of each event.
C. Structuring Recommendations
To ensure compliance with §1061 and to preserve the ability to report the applicable holding period information on K-1s, we make the following structuring recommendations:
Asset-Level Holding Period Tracking. The LPA should include a specific provision requiring the General Partner to maintain records of the acquisition date and disposition date of each portfolio investment for purposes of §1061. This tracking must be at the individual asset level (not the fund level or portfolio level), as the three-year holding period test applies separately to each asset. The Fund administrator (Halcyon Fund Services) should implement a tracking system that automatically identifies each portfolio investment's holding period as of any given date and flags investments approaching or exceeding the three-year threshold.
Character Segregation in Capital Account and Allocation Provisions. The LPA's allocation provisions should distinguish between (i) gains on assets held for more than three years, which will qualify for long-term capital gains treatment for carry recipients, and (ii) gains on assets held for three years or less, which will be recharacterized as short-term capital gain (ordinary income) for carry recipients under §1061. This distinction is not necessary for the limited partners, whose gain characterization depends on the standard one-year holding period under §1222 and who are not subject to §1061 (unless they are themselves service-providing partners, which is not expected).
GP Commitment — Capital Interest Exception. Under IRC §1061(c)(4), a partnership interest is not treated as an API to the extent the interest provides the holder with a right to share in partnership capital commensurate with the amount of capital contributed by the partner and the terms of the interest are the same as (or similar to) those of non-service-providing partners. This is the "capital interest exception," and it ensures that the principals' 2% GP commitment ($15,000,000 at target) is not subject to the three-year holding period requirement.
To qualify for the capital interest exception, the GP commitment must be properly documented. Specifically:
(a) The GP LLC Agreemen

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