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CALDERWOOD & HARKNESS LLP Counselors at Law

One World Financial Center, 200 Liberty Street, 48th Floor New York, New York 10281

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

June 20, 2023

TO: Jonathan R. Caldwell

FROM: Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP

CC: Victoria Chambers, Responsible Partner; Monica Reyes, Lead Associate; Elliot Nguyen, Working Associate

RE: Valuation discount Analysis — GRAT Funding Transfers (Stonecrest Realty Holdings LLC Membership Interests; Caldwell Ridgeline Capital Fund IV, Fund V, and Fund VI Interests)

MATTER NO.: 1034-00004

BILLING CODE: 78412-JRC

This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of Jonathan R. Caldwell and his advisors. This memorandum reflects the legal analysis and conclusions of counsel and is protected from disclosure under the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.

I. EXECUTIVE SUMMARY

The purpose of this memorandum is to analyze and substantiate the valuation discounts applied to the illiquid assets contributed to the three Grantor Retained Annuity Trusts ("GRATs") established as part of Jonathan R. Caldwell's comprehensive generational estate plan. As discussed in our prior correspondence and planning memoranda, the GRAT strategy is designed to transfer future appreciation in excess of the applicable Section 7520 hurdle rate to the Caldwell Family Dynasty Trust while minimizing gift tax cost. The effectiveness of this strategy depends, in significant part, on the accurate determination of the fair market value of the contributed assets — including the application of appropriate valuation discounts for interests in closely held entities that lack marketability, liquidity, and, in certain instances, control attributes.

This memorandum addresses three categories of discounted assets contributed to the GRATs:

Stonecrest Realty Holdings LLC Membership Interests (GRAT B). On May 1, 2023, Mr. Caldwell contributed an approximate 59.7% membership interest in Stonecrest Realty Holdings LLC ("Stonecrest") to the Caldwell 2023 Realty GRAT ("GRAT B"). Ashford Valuation Group LLC ("Ashford") has determined that a combined lack-of-marketability and lack-of-control discount of 25% is appropriate for this interest. On a pre-discount basis, the 59.7% membership interest has a fair market value of approximately $80,000,000. After application of the 25% combined discount, the post-discount fair market value for gift tax reporting purposes is $60,000,000. The dollar amount of the discount is $20,000,000.

Caldwell Ridgeline Fund IV LP and Fund V LP Interests (GRAT C). On June 1, 2023, Mr. Caldwell contributed his limited partnership interests in Caldwell Ridgeline Fund IV LP ("Fund IV") and Caldwell Ridgeline Fund V LP ("Fund V") to the Caldwell 2023 Carried Interest GRAT ("GRAT C"). Ashford has determined that a combined lack-of-marketability and lack-of-control discount of 35% is appropriate for each of these passive limited partnership interests. On a pre-discount basis, the aggregate fair market value of the Fund IV and Fund V LP interests is $26,000,000 ($12,000,000 for Fund IV and $14,000,000 for Fund V). After application of the 35% combined discount, the aggregate post-discount fair market value is $16,900,000 ($7,800,000 for Fund IV and $9,100,000 for Fund V). The dollar amount of the aggregate discount is $9,100,000.

Caldwell Ridgeline Fund VI Carried Interest (GRAT C). Also on June 1, 2023, Mr. Caldwell contributed his carried-interest position (profits interest / incentive allocation) in Caldwell Ridgeline Fund VI LP ("Fund VI") to GRAT C. Ashford has determined that a combined discount of 30% is appropriate for this interest. On a pre-discount basis, the carried interest has a fair market value of $12,000,000. After application of the 30% discount, the post-discount fair market value is $8,400,000. The dollar amount of the discount is $3,600,000.

The blended post-discount fair market value of all interests contributed to GRAT C is $25,300,000 (i.e., $16,900,000 for the Fund IV and Fund V LP interests, plus $8,400,000 for the Fund VI carried interest).

In reaching these conclusions, we have reviewed the independent appraisal reports prepared by Ashford Valuation Group LLC. The appraisals were performed under the direction of Dr. Leonard K. Whitfield, ASA, Managing Partner of Ashford, whose office is located at 1120 Avenue of the Americas, Suite 3500, New York, New York 10036. Ashford's appraisal reports were received by this firm on June 15, 2023. Dr. Whitfield is an Accredited Senior Appraiser of the American Society of Appraisers with more than twenty-five years of experience in the valuation of interests in closely held entities, real estate holding companies, and alternative investment fund interests.

Our conclusion, after thorough review of the Ashford appraisal reports, applicable empirical data, and relevant judicial and administrative authority, is that all discount levels applied by Ashford are supportable, fall within the range of accepted valuation practice, and are consistent with Tax Court precedent and Internal Revenue Service guidance. The discounts are neither aggressive nor unreasonable; indeed, they fall at or below the midpoint of the ranges typically observed in the empirical studies and comparable judicial decisions. We believe these discount levels are defensible in the event of IRS audit.

The post-discount fair market values discussed in this memorandum will be used for gift tax reporting purposes on Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) for the calendar year 2023. The Form 709 is being prepared by Calderwood & Harkness LLP in coordination with Strathmore Corporation & Greaves LLP (Martin J. Prescott, CPA), which serves as Mr. Caldwell's accounting firm for federal and state income tax compliance purposes.

II. SCOPE AND METHODOLOGY

A. Purpose and Context

This valuation discount analysis is undertaken in connection with Mr. Caldwell's comprehensive generational estate plan, the structure and implementation of which have been described in detail in our prior planning memoranda dated February 15, 2023 and March 30, 2023. As context for the present analysis, Mr. Caldwell's gross estate is estimated at approximately $300,000,000 as of the date of the GRAT funding transactions. The composition of the estate is as follows:

• Liquid Securities: Approximately $112,000,000 in publicly traded equities, fixed income instruments, and cash equivalents held in brokerage and advisory accounts.

• Real Estate (via Stonecrest): Approximately $134,000,000 in real estate assets held through Stonecrest Realty Holdings LLC, a New York limited liability company that owns a portfolio of eleven commercial and residential properties in New York, New Jersey, and Connecticut.

• Carried Interest and Fund Stakes (Caldwell Ridgeline Capital): Approximately $38,000,000 in limited partnership interests and carried-interest positions in Caldwell Ridgeline Capital's fund vehicles (Fund IV LP, Fund V LP, and Fund VI LP).

• Art and Collectibles: Approximately $9,000,000 in fine art, decorative arts, and collectible items.

• Other Assets: Approximately $7,000,000 in miscellaneous assets, including personal property, vehicles, and other holdings.

As part of the estate plan, three zeroed-out GRATs were created under Internal Revenue Code ("IRC") Section 2702 to transfer appreciation in excess of the applicable Section 7520 hurdle rate to the Caldwell Family Dynasty Trust, a Delaware situs irrevocable trust with Northgate Trust Company of Delaware serving as institutional co-trustee. Each GRAT is structured as a two-year or three-year annuity trust designed to "zero out" the taxable gift at inception, such that the annuity payments to Mr. Caldwell over the GRAT term, discounted at the Section 7520 rate, equal the initial fair market value of the contributed assets. To the extent the contributed assets appreciate at a rate in excess of the 5.0% Section 7520 hurdle rate applicable to each of the three GRATs, the excess appreciation will pass to the Dynasty Trust free of gift and estate tax.

The three GRATs and their respective funding are summarized as follows:

GRAT A — Caldwell 2023 Securities GRAT. GRAT A was funded on April 15, 2023 with $60,000,000 in publicly traded securities. Because the contributed assets are liquid and publicly traded, no valuation discount is applicable. The fair market value of the contributed securities is determined by reference to publicly available market prices on the funding date. GRAT A is not the subject of this memorandum.

GRAT B — Caldwell 2023 Realty GRAT. GRAT B was funded on May 1, 2023 with an approximate 59.7% membership interest in Stonecrest Realty Holdings LLC, having a pre-discount fair market value of $80,000,000. A valuation discount analysis is required for this contribution, and it is addressed in detail in Section III of this memorandum.

GRAT C — Caldwell 2023 Carried Interest GRAT. GRAT C was funded on June 1, 2023 with limited partnership interests in Fund IV LP and Fund V LP (aggregate pre-discount fair market value of $26,000,000) and a carried-interest position in Fund VI LP (pre-discount fair market value of $12,000,000), for a total pre-discount fair market value of $38,000,000. A valuation discount analysis is required for all three interests contributed to GRAT C. The LP interest analysis is addressed in Section IV and the carried interest analysis is addressed in Section V.

Valuation discounts are critical for two distinct but related purposes. First, the discounts determine the fair market value of the contributed interests for gift tax purposes, which in turn determines the amount of the taxable gift, if any, associated with the GRAT funding. Second, and equally important, the annuity payments required to "zero out" the GRAT are computed based on the pre-discount fair market value of the contributed assets (i.e., the full undiscounted value of the contributed interests), not the post-discount value. The effect of the discounts is to reduce the gift tax value of the transfer while preserving the economic benefit of the full pre-discount value within the GRAT structure. This is a well-established and IRS-recognized consequence of funding a GRAT with discounted assets.

B. Valuation Standard

All valuations discussed in this memorandum are prepared in accordance with the fair market value standard applicable to federal gift tax purposes. Under IRC Section 2512 and Treasury Regulation Section 25.2512-1, the fair market value of property transferred by gift is defined as:

"[T]he price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

This standard requires that the property be valued from the perspective of a hypothetical willing buyer and a hypothetical willing seller, each acting in their own self-interest and with full knowledge of all relevant facts. The standard does not contemplate a specific buyer or seller, nor does it account for the unique circumstances, motivations, or financial positions of any particular market participant. The property is valued as of the date of the gift, which is the date of the contribution to the GRAT.

The appraisals prepared by Ashford Valuation Group comply with the qualified appraisal requirements applicable under IRC Section 170(f)(11)(E) and Treasury Regulation Section 1.170A-17, which, while technically applicable to charitable contribution deductions, are applied by analogy to gift tax appraisals and represent the benchmark for appraisal quality and completeness in the gift tax context. The Ashford appraisals also comply with the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by The Appraisal Foundation.

The relevant valuation dates are May 1, 2023, for the Stonecrest membership interests contributed to GRAT B, and June 1, 2023, for the Caldwell Ridgeline Fund IV, Fund V, and Fund VI interests contributed to GRAT C. All fair market value determinations discussed in this memorandum are as of the applicable valuation date.

C. Engagement of Ashford Valuation Group LLC

Ashford Valuation Group LLC was retained by Calderwood & Harkness LLP pursuant to an appraisal engagement letter dated April 20, 2023. Ashford was retained through counsel to preserve the attorney-client privilege and work-product protection with respect to the appraisal engagement and communications between Ashford and this firm. Ashford is a nationally recognized valuation firm with extensive experience in the valuation of closely held business interests, real estate holding company interests, and alternative investment fund interests for estate, gift, and income tax purposes.

The engagement was supervised by Dr. Leonard K. Whitfield, ASA, Managing Partner of Ashford. Dr. Whitfield is an Accredited Senior Appraiser of the American Society of Appraisers, with a designation in Business Valuation. He holds a Ph.D. in finance from Columbia University and has more than twenty-five years of experience in the valuation of closely held entities and illiquid investment interests. Dr. Whitfield has been qualified as an expert witness in valuation matters in the United States Tax Court, the United States District Court for the Southern District of New York, and numerous state courts. His curriculum vitae is attached to each of the Ashford appraisal reports.

Ashford was instructed to appraise the following interests:

(a) The approximate 59.7% membership interest in Stonecrest Realty Holdings LLC contributed to GRAT B as of May 1, 2023;

(b) The limited partnership interest in Caldwell Ridgeline Fund IV LP contributed to GRAT C as of June 1, 2023;

(d) The carried-interest position (profits interest / incentive allocation) in Caldwell Ridgeline Fund VI LP contributed to GRAT C as of June 1, 2023.

Ashford's three appraisal reports (one for the Stonecrest interest and two covering the Caldwell Ridgeline interests, including both the LP interests and the carried interest) were received by this firm on June 15, 2023. Summaries of the appraisal reports are set forth in Appendix A to this memorandum.

In preparing the appraisals, Ashford coordinated with Gregory S. Fenton, Chief Financial Officer of Caldwell Ridgeline Capital LLC, for financial data, fund performance reports, partnership agreements, and other documentation relating to the Fund IV, Fund V, and Fund VI interests. Ashford also coordinated with Robert M. Sinclair, Chief Operating Officer of Stonecrest Realty Holdings LLC, for financial statements, property appraisals, rent rolls, operating data, and governance documents relating to Stonecrest and its portfolio of real estate assets. All data furnished to Ashford was reviewed by this firm for completeness and accuracy.

D. Analytical Framework

The valuation of interests in closely held entities for gift tax purposes generally involves a two-tier analytical framework:

Tier 1: Entity-Level or Asset-Level Value. The first step is to determine the fair market value of the underlying entity or its assets. For a real estate holding company such as Stonecrest, this involves determining the fair market value of the real estate portfolio (net of liabilities) and any other assets held by the entity. For an investment fund such as the Caldwell Ridgeline funds, this involves determining the net asset value of the fund (or, in the case of carried interest, the present value of projected future cash flows from the performance allocation). The entity-level value is then allocated pro rata to the interest being valued based on the holder's ownership percentage.

Tier 2: Application of Holder-Level discounts. The second step is to apply appropriate discounts to the pro rata share of entity-level value to reflect the specific characteristics of the interest being transferred. These characteristics include, but are not limited to, the lack of a public market for the interest (lack of marketability), the absence of control over entity operations and decision-making (lack of control or minority interest discount), and any other factors that would cause a hypothetical willing buyer to pay less than the pro rata share of the entity-level value.

The recognized discount categories applicable to the interests addressed in this memorandum are:

(a) discount for Lack of Marketability ("DLOM"). A DLOM reflects the reduction in value attributable to the absence of a public market for the interest being valued. Interests in closely held entities cannot be readily sold on an exchange or in an organized market, and prospective buyers face significant transaction costs, information asymmetries, and holding period uncertainty. Empirical studies, including restricted stock studies and pre-IPO studies, have consistently demonstrated that the lack of marketability results in significant price reductions relative to freely tradable securities.

(b) discount for Lack of Control / Minority Interest discount ("DLOC"). A DLOC reflects the reduction in value attributable to the absence of control over entity operations, investment decisions, distributions, liquidation, and other key governance matters. A holder who lacks the ability to compel distributions, force a sale of assets, or influence management decisions will pay less for an interest than a holder who possesses such control. The DLOC is particularly significant for passive limited partnership interests, where the limited partner has no management authority whatsoever.

(c) Combined or Blended discount. Where both DLOM and DLOC are present, the discounts may be expressed as a combined or blended discount. The combined discount reflects the cumulative effect of both lack of marketability and lack of control on the value of the interest. Care must be taken to avoid double-counting of factors that are already reflected in the underlying valuation methodology (as discussed in Section V with respect to the Fund VI carried interest).

All discounts must be supported by empirical data, market studies, and comparable judicial precedent. Unsupported or arbitrary discounts will not withstand IRS scrutiny. In the present case, Ashford's discount determinations are supported by a comprehensive analysis of relevant empirical studies, comparable transaction data, and Tax Court case law, as discussed in detail below.

III. STONECREST REALTY HOLDINGS LLC — MEMBERSHIP INTEREST VALUATION

A. Entity Description and Asset Overview

Stonecrest Realty Holdings LLC ("Stonecrest") is a New York limited liability company with its principal office at 330 Madison Avenue, Suite 2401, New York, New York 10017. Stonecrest is managed on a day-to-day basis by Robert M. Sinclair, who serves as Chief Operating Officer. Mr. Sinclair oversees property management, leasing, maintenance, capital improvements, and tenant relations across the Stonecrest portfolio. Stonecrest's legal counsel for entity and real estate matters is Baxter, Holt & Quelston LLP.

Jonathan R. Caldwell holds 100% of the membership interests in Stonecrest. Stonecrest is treated as a disregarded entity for federal income tax purposes, and all income, deductions, gains, and losses from Stonecrest's operations flow through to Mr. Caldwell's individual income tax return (Form 1040).

Stonecrest holds ownership interests in eleven commercial and residential real estate properties located across the New York metropolitan area, including properties in New York City, New Jersey, Connecticut, and Westchester County. The total estimated fair market value of the Stonecrest real estate portfolio, as determined by Ashford in coordination with independent real estate appraisals, is approximately $134,000,000. The individual properties and their estimated fair market values are as follows:

A detailed property-by-property schedule, including property descriptions, lease terms, occupancy rates, capitalization rates, and valuation methodology, is set forth in Appendix D to this memorandum.

The Stonecrest portfolio is diversified across property types (office, retail, residential, industrial, and land) and geographic locations (Manhattan, Northern New Jersey, Fairfield County, and Westchester County). The portfolio generates substantial rental income, and the commercial properties are generally well-leased with institutional-quality tenants. The residential properties include both luxury condominiums in Tribeca and a 120-unit multi-family complex in Stamford, Connecticut.

Mortgages on the Stonecrest properties are held at the entity level and are non-recourse to Mr. Caldwell personally. The aggregate outstanding mortgage indebtedness as of May 1, 2023 is approximately $52,000,000, which is reflected in Ashford's net asset value calculation for Stonecrest. The entity-level net asset value (total property FMV of $134,000,000 less outstanding mortgage debt of approximately $52,000,000, plus other net assets) was used as the starting point for the membership interest valuation.

B. Interest Contributed to GRAT B

On May 1, 2023, Mr. Caldwell contributed an approximate 59.7% membership interest in Stonecrest to the Caldwell 2023 Realty GRAT ("GRAT B"). Prior to the contribution, Mr. Caldwell held 100% of the Stonecrest membership interests. Following the contribution, Mr. Caldwell (individually or through the Caldwell Revocable Trust) retains the remaining approximate 40.3% membership interest in Stonecrest.

The pre-discount fair market value of the 59.7% membership interest is determined as Mr. Caldwell's pro rata share of Stonecrest's total entity-level fair market value: $134,000,000 × 59.7% ≈ $80,000,000. This figure represents the starting point for the discount analysis, before application of any DLOM or DLOC.

It is important to note that the contribution of a 59.7% interest — rather than the full 100% interest — was a deliberate planning decision. By contributing a fractional interest to the GRAT, Mr. Caldwell creates a basis for the application of valuation discounts that would not be available if the entire entity were contributed. The IRS has acknowledged that the fair market value standard requires valuation of the specific interest transferred, not the value of the underlying assets or the whole entity. See, e.g., Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982); Treasury Regulation § 25.2512-1.

C. Discount for Lack of Control (DLOC) — 10%

Although Mr. Caldwell holds 100% of the membership interests in Stonecrest prior to the contribution, the interest being valued for gift tax purposes is only the 59.7% membership interest contributed to GRAT B. The fair market value standard requires that the interest be valued from the perspective of a hypothetical willing buyer who would acquire a 59.7% membership interest in Stonecrest — not from the perspective of Mr. Caldwell, who holds the remaining interests.

A hypothetical willing buyer of a 59.7% membership interest would acquire a majority interest in Stonecrest, but not a 100% interest. While a majority holder generally has significant governance rights, the Stonecrest LLC Operating Agreement (as amended and restated effective January 1, 2020) imposes limitations on the majority holder's ability to exercise unilateral control over certain key decisions. Specifically, the Operating Agreement provides that the following actions require super-majority approval (defined as 75% or more of the outstanding membership interests) or unanimous consent of all members:

(a) Sale, exchange, or other disposition of all or substantially all of Stonecrest's assets (unanimous consent required);

(b) Dissolution and winding up of Stonecrest (unanimous consent required);

(d) Admission of new members or issuance of additional membership interests (super-majority consent required);

(e) Incurrence of indebtedness in excess of $5,000,000 in any single transaction or series of related transactions (super-majority consent required); and

(f) Entry into any transaction with an affiliate of any member (super-majority consent required).

Because a 59.7% holder would lack the ability to take any of these actions unilaterally — particularly the sale of all assets, dissolution, or amendment of the Operating Agreement, each of which would require the consent of the remaining 40.3% holder — a hypothetical willing buyer would demand a discount to compensate for the limitations on effective control. This is true even though the 59.7% interest represents a majority position. The Tax Court has consistently held that even majority interests in closely held entities warrant a control-related discount when the holder cannot unilaterally exercise all governance rights. See, e.g., Estate of Simplot v. Commissioner, 112 T.C. 130 (1999) (applying a lack-of-control discount to a majority interest in a closely held entity where the holder lacked the ability to liquidate the entity or compel distributions); Estate of Jones v. Commissioner, T.C. Memo 2019-101 (applying a minority interest discount to a controlling interest in a family-held LLC where the operating agreement restricted key governance actions).

Ashford's analysis also considered comparable LLC operating agreement restrictions and governance structures drawn from its proprietary database of closely held real estate holding company transactions. Ashford further reviewed data from the Sterling Reach Corporation studies and Tidewater Services Inc. database, which compile transaction data for comparable real estate holding company interests. Based on this analysis, Ashford concluded that a 10% DLOC is appropriate for the 59.7% Stonecrest membership interest. This discount is conservative in light of the restrictions described above and is at the lower end of the range that would be supported by the empirical data.

D. Discount for Lack of Marketability (DLOM) — 15%

In addition to the DLOC, a discount for lack of marketability is warranted because there is no public market for membership interests in Stonecrest or any other private real estate holding LLC. A hypothetical willing buyer of a 59.7% membership interest in Stonecrest would face significant obstacles to liquidity that would not be present with respect to a publicly traded REIT interest or other marketable security.

The specific factors supporting the application of a DLOM to the Stonecrest membership interest include:

Restricted Transferability. The Stonecrest LLC Operating Agreement contains substantial transfer restrictions that significantly limit the ability of a member to transfer its interest. These restrictions include: (i) a right of first refusal in favor of the non-transferring member(s), requiring notice and a sixty-day option period before any proposed transfer to a third party; (ii) a requirement that any proposed transferee be approved by the non-transferring member(s), with approval not to be unreasonably withheld but subject to the non-transferring member's reasonable business judgment; (iii) a prohibition on any transfer that would result in a termination of the LLC under IRC Section 708(b) (as applicable prior to the repeal of the "technical termination" rule, certain restrictions remain in the agreement); and (iv) a prohibition on any transfer that would violate applicable federal or state securities laws. These restrictions would significantly reduce the pool of potential buyers and increase the time and cost required to consummate a sale.

Lack of Information. Stonecrest is a private entity with no obligation to file public financial statements or make disclosures to prospective buyers beyond what is required by the Operating Agreement. While the Operating Agreement provides for annual financial statements to be prepared by Stonecrest's accountants, the level of disclosure is significantly less than what would be available for a publicly traded entity. A hypothetical buyer would need to conduct extensive due diligence on the underlying real estate portfolio, including review of individual property appraisals, lease agreements, environmental reports, title insurance policies, and property condition assessments. The cost and burden of this due diligence would be borne by the buyer and would further reduce the price the buyer would be willing to pay.

Holding Period Uncertainty. There is no defined exit or liquidity event for a Stonecrest membership interest. Unlike a publicly traded security that can be sold on any trading day, or a private equity fund that has a defined term and liquidation date, a membership interest in a real estate holding LLC has no predetermined exit mechanism. The holder may be required to hold the interest indefinitely, subject to the transfer restrictions described above. This holding period uncertainty is a significant factor supporting a DLOM.

Transaction Costs. Any sale of a Stonecrest membership interest would involve substantial transaction costs, including legal fees, accounting fees, brokerage commissions, and potential transfer taxes. These costs would further reduce the net proceeds to the seller and, accordingly, the price a hypothetical buyer would be willing to pay.

Ashford's DLOM determination is supported by the following empirical data and studies:

Restricted Stock Studies. Numerous empirical studies have examined the discounts observed in transactions involving restricted securities of publicly traded companies. These studies, including the FMV Opinions Inc. study (2001–2019) and the Silber study (1991), document median discounts for restricted securities in the range of 20% to 35% relative to the freely traded price. Importantly, these studies measure the discount for securities of publicly traded companies that are subject only to transfer restrictions — not the complete absence of a public market. Interests in private entities, which lack even the reference point of a publicly traded price, would logically warrant higher discounts than those observed in the restricted stock studies.

Pre-IPO Studies. Studies examining the discounts at which private company shares trade prior to an initial public offering, such as those conducted by Beaumont Strategy Partners and the Valuation Advisors' Lack of Marketability discount Study, have documented discounts in the range of 30% to 50% or higher. These studies provide a more directly comparable benchmark for the illiquidity of interests in closely held entities, although they may overstate the discount for a well-established real estate holding company with a stable income stream and identifiable asset values.

Ashford considered the full range of empirical data and adjusted downward from the typical pre-IPO discount range in recognition of several factors that mitigate the degree of illiquidity: (i) the quality and diversification of the underlying real estate portfolio, which provides a relatively stable and predictable income stream; (ii) the identifiable and appraisable nature of the underlying assets (real property), which reduces information asymmetry relative to operating businesses; and (iii) the majority nature of the 59.7% interest, which provides the holder with significant (though not complete) governance rights. After these adjustments, Ashford concluded that a 15% DLOM is appropriate.

The DLOM is applied in conjunction with the 10% DLOC to produce a combined overall discount of 25%. Ashford expressed the combined discount as a blended figure rather than applying the discounts multiplicatively (which would produce a combined discount of approximately 23.5%), reflecting Ashford's judgment that the combined 25% discount accurately captures the cumulative effect of both lack of marketability and lack of control on the value of the interest.

E. Combined discount — 25%

Based on the analysis described above, Ashford has applied a combined lack-of-marketability and lack-of-control discount of 25% to the pro rata share of Stonecrest's net asset value represented by the 59.7% membership interest. The post-discount fair market value is calculated as follows:

Pre-discount FMV: $80,000,000

Combined discount: 25%

Post-discount FMV: $80,000,000 × (1 – 0.25) = $60,000,000

Dollar Amount of discount: $20,000,000

The post-discount fair market value of $60,000,000 is the amount that will be reported as the fair market value of the Stonecrest membership interest for gift tax purposes on Mr. Caldwell's 2023 Form 709.

F. Assessment of Supportability

We have reviewed the 25% combined discount applied by Ashford and conclude that it is supportable, conservative, and defensible in the event of IRS audit. Our assessment is based on the following considerations:

Consistency with Tax Court Precedent. The 25% combined discount falls within the range of discounts accepted by the Tax Court in analogous cases involving interests in closely held real estate holding companies. In Estate of Litchfield v. Commissioner, T.C. Memo 2009-21, the Tax Court accepted a combined discount of 31% for an interest in a family-held real estate holding company with a diversified portfolio of commercial and residential properties. In Estate of Jelke v. Commissioner, T.C. Memo 2005-131, the Tax Court considered discounts in the range of 26% to 35% for interests in a closely held entity holding a portfolio of marketable and non-marketable assets. While no two cases are factually identical, the range of discounts accepted by the Tax Court in real estate holding company cases consistently falls between 20% and 40%, with the specific discount depending on the nature of the underlying assets, the governance restrictions, and the degree of marketability. The 25% discount applied here is at the conservative end of this range.

IRS Guidance. The IRS Job Aid on Valuation discounts, prepared by the IRS Engineering/Valuation Program for use by IRS examiners, expressly acknowledges the legitimacy of both DLOM and DLOC for interests in closely held real estate entities. The Job Aid notes that "[d]iscounts are a legitimate feature of the valuation process" and that "the key question is not whether a discount should be applied, but whether the amount of the discount is supported by the facts and circumstances of the particular case." The 25% combined discount applied here is well within the range that the IRS Job Aid identifies as supportable for interests in closely held real estate holding companies.

Conservative Positioning. As noted above, the 25% combined discount is below the midpoint of the empirical ranges documented in the restricted stock studies (20%–35%), pre-IPO studies (30%–50%), and comparable Tax Court cases (20%–40%). A more aggressive approach might support a combined discount of 30% to 35% or higher, particularly given the significant transfer restrictions in the Stonecrest Operating Agreement and the complete absence of a public market for the interest. Ashford's conservative positioning reflects a deliberate judgment to minimize audit risk while still accurately reflecting the fair market value of the interest.

IV. CALDWELL RIDGELINE CAPITAL — LP INTERESTS (FUND IV AND FUND V)

A. Entity Description

Caldwell Ridgeline Capital LLC ("CRC") is a Delaware limited liability company with its principal office at 280 Park Avenue, 35th Floor, New York, New York 10017. CRC is a private equity and alternative investment management firm with approximately $2.1 billion in assets under management as of June 1, 2023. The firm's Chief Financial Officer is Gregory S. Fenton, who served as the primary point of contact for Ashford in connection with the appraisals of the Fund IV, Fund V, and Fund VI interests.

Jonathan R. Caldwell is the founder of CRC and served as its Managing Partner from the firm's inception in 2005 until his retirement from active management in 2019. Following his retirement, Mr. Caldwell ceased to participate in the day-to-day management and investment decision-making of CRC but retained his economic interests in the firm's fund vehicles, including limited partnership interests in Fund IV and Fund V and a carried-interest position in Fund VI.

CRC manages a series of private equity and real estate-focused investment funds organized as Delaware limited partnerships. The funds relevant to this memorandum are:

Fund IV — Caldwell Ridgeline Fund IV LP. Fund IV is a Delaware limited partnership with a 2015 vintage year. Fund IV is currently in its harvest and wind-down phase, with the majority of its portfolio investments having been realized or marked to market. The fund's limited partnership agreement provides for a ten-year fund term with two optional one-year extensions at the discretion of the general partner. As of June 1, 2023, Fund IV is in year eight of its term.

Fund V — Caldwell Ridgeline Fund V LP. Fund V is a Delaware limited partnership with a 2018 vintage year. Fund V is currently in its active investment and hold phase, with capital partially deployed and several portfolio investments in various stages of development and maturation. The fund's limited partnership agreement provides for a ten-year fund term with two optional one-year extensions. As of June 1, 2023, Fund V is in year five of its term.

Both Fund IV and Fund V are managed by their respective general partners, which are wholly owned subsidiaries of CRC. The general partners exercise exclusive control over all investment decisions, capital calls, distributions, and fund operations. Limited partners in each fund have no management authority and are passive investors entitled only to their pro rata share of fund distributions in accordance with the distribution waterfall provisions of the applicable limited partnership agreement.

B. Interests Contributed to GRAT C

On June 1, 2023, Mr. Caldwell contributed his limited partnership interests in Fund IV and Fund V to the Caldwell 2023 Carried Interest GRAT ("GRAT C"). The pre-discount fair market values of these interests, as determined by Ashford, are as follows:

Fund IV LP Interest: $12,000,000 pre-discount FMV

Fund V LP Interest: $14,000,000 pre-discount FMV

Aggregate LP Interests: $26,000,000 pre-discount FMV

Ashford determined the pre-discount fair market values based on the reported net asset values ("NAV") of each fund as of May 31, 2023 (the most recent NAV calculation preceding the June 1, 2023 valuation date), adjusted for any known events or transactions occurring between the NAV calculation date and the valuation date. The NAV-based approach is the standard methodology for valuing LP interests in private equity funds, as it reflects the general partner's best estimate of the fair market value of the fund's portfolio investments on a going-concern basis. Ashford independently reviewed the fund financial statements, portfolio company valuations, and auditor reports to confirm the reasonableness of the reported NAVs.

C. Discount for Lack of Control / Minority Interest discount — 15%

The Fund IV and Fund V LP interests are passive limited partnership positions with no management authority. Under the terms of the fund partnership agreements, the limited partners have no right to:

(a) Participate in the management or investment decision-making of the fund;

(b) Direct or influence the selection, acquisition, holding, or disposition of portfolio investments;

(d) Force the liquidation or winding up of the fund prior to the expiration of the fund term;

(e) Remove or replace the general partner (except in the case of cause, as narrowly defined in the partnership agreement, and then only upon a vote of limited partners holding 75% or more of the outstanding limited partnership interests); or

(f) Participate in the day-to-day administration, operations, or governance of the fund.

The limited partners' rights are essentially limited to: (i) receiving distributions as and when declared by the general partner in accordance with the distribution waterfall; (ii) receiving periodic financial reports (typically quarterly unaudited and annual audited); (iii) voting on certain extraordinary matters requiring limited partner approval (e.g., extension of the fund term, material amendment to the partnership agreement); and (iv) transferring their interests subject to the restrictions described below.

A hypothetical willing buyer of Mr. Caldwell's LP interests would be acquiring a purely passive economic position with no ability to influence the timing or amount of distributions, the investment strategy of the fund, or the disposition of portfolio investments. The buyer would be entirely dependent on the judgment and performance of the general partner. This lack of control represents a significant value-reducing factor and supports the application of a DLOC.

The Tax Court has consistently applied minority interest discounts to passive LP interests in investment fund structures. In Estate of McCord v. Commissioner, 120 T.C. 358 (2003), rev'd on other grounds, 461 F.3d 614 (5th Cir. 2006), the Tax Court applied a minority interest discount to limited partnership interests in a family investment partnership. In Astleford v. Commissioner, T.C. Memo 2008-128, the Tax Court accepted a minority interest discount for limited partnership interests in a real estate investment partnership. The range of DLOC applied in comparable cases is typically 10% to 25%, depending on the specific restrictions and governance rights (or lack thereof) applicable to the limited partnership interest.

Ashford applied a 15% DLOC to each of the Fund IV and Fund V LP interests. This discount is at the midpoint of the typical range and appropriately reflects the complete absence of management authority on the part of the limited partners. The 15% DLOC is consistent with the empirical data and judicial precedent and is well-supported.

D. Discount for Lack of Marketability (DLOM) — 20%

In addition to the DLOC, a substantial DLOM is warranted for the Fund IV and Fund V LP interests. The factors supporting the DLOM are as follows:

Absence of a Public Market. There is no public market for limited partnership interests in private equity funds. While a small secondary market for private equity LP interests has developed in recent years, this market remains limited, illiquid, and subject to significant transaction costs and information asymmetries. A seller of an LP interest on the secondary market typically incurs discounts of 5% to 20% or more relative to the reported NAV, even for interests in well-established funds with strong track records.

Transfer Restrictions. The Fund IV and Fund V partnership agreements contain significant transfer restrictions that limit the ability of a limited partner to sell, assign, or transfer its interest. These restrictions include: (i) a requirement that any proposed transfer receive the prior written consent of the general partner, which consent may be withheld in the general partner's sole and absolute discretion; (ii) a right of first refusal in favor of the general partner and the other limited partners; (iii) a requirement that any proposed transfer comply with applicable federal and state securities laws, including the requirement that the transfer be exempt from registration under the Securities Act of 1933, as amended; and (iv) provisions that a transferee who does not receive full admission as a substitute limited partner may have limited economic rights and no governance rights. These restrictions significantly reduce the pool of potential buyers and increase the cost and complexity of any transfer.

Extended and Uncertain Holding Period. Fund IV, with a 2015 vintage, is currently in its harvest and wind-down phase. While the majority of Fund IV's portfolio investments have been realized, there is no fixed liquidation date, and the general partner retains the discretion to extend the fund term and to retain portfolio investments for as long as it deems appropriate. A buyer of Mr. Caldwell's Fund IV LP interest would have no ability to compel the general partner to accelerate distributions or liquidate the remaining portfolio. Fund V, with a 2018 vintage, is still in its active investment and hold phase, with several years remaining before the expected commencement of the harvest phase. The holding period uncertainty is even greater for Fund V than for Fund IV.

Limited Information Rights. Limited partners receive periodic financial reports, but the level of detail and frequency of reporting is significantly less than what is available for publicly traded securities. A prospective buyer would need to rely on the general partner's representations and the limited partnership's audited financial statements, which may not provide the level of granularity that a buyer would require to fully assess the risk and value of the portfolio.

Secondary Market Transaction Data. Ashford reviewed available secondary market transaction data for private equity LP interests, including data compiled by intermediaries such as Ridgeway Industries, Ashgrove Group, and the Private Capital Markets Association. This data indicates that LP interests in private equity funds typically trade at discounts to NAV ranging from 5% to 30% or more, depending on the vintage, strategy, fund performance, and remaining fund life. The median discount observed in secondary market transactions for buyout-focused funds in the 2020–2023 period was approximately 10% to 15% of NAV. However, this figure reflects the discount for interests that are actually sold on the secondary market — i.e., interests that have already overcome the significant hurdle of obtaining general partner consent and completing the transfer process. The "implicit" Discount for interests that have not been marketed on the secondary market — and which may not receive general partner consent for transfer — is likely higher.

Based on this analysis, Ashford applied a 20% DLOM to the Fund IV and Fund V LP interests. The 20% DLOM is combined with the 15% DLOC to yield a total combined discount of 35%. This combined discount reflects the cumulative effect of the passive minority status and severe transfer restrictions applicable to the LP interests.

E. Combined discount — 35%

The combined lack-of-marketability and lack-of-control discount for the Fund IV and Fund V LP interests is 35%. The post-discount fair market values are calculated as follows:

Fund IV LP Interest:

Pre-discount FMV: $12,000,000

Combined discount: 35%

Post-discount FMV: $12,000,000 × (1 – 0.35) = $7,800,000

Dollar Amount of discount: $4,200,000

Fund V LP Interest:

Pre-discount FMV: $14,000,000

Combined discount: 35%

Post-discount FMV: $14,000,000 × (1 – 0.35) = $9,100,000

Dollar Amount of discount: $4,900,000

Aggregate LP Interests:

Pre-discount FMV: $26,000,000

Post-discount FMV: $16,900,000

Total Dollar Amount of discount: $9,100,000

F. Assessment of Supportability

The 35% combined discount for the Fund IV and Fund V LP interests is well-supported and defensible. Our assessment is based on the following considerations:

Tax Court Precedent. The Tax Court has accepted combined discounts in the range of 25% to 45% for passive limited partnership interests in investment fund structures. In Estate of Jelke v. Commissioner, T.C. Memo 2005-131, the Tax Court accepted a combined discount of approximately 32% for a minority interest in a closely held investment partnership. In Holman v. Commissioner, 130 T.C. 170 (2008), aff'd, 601 F.3d 763 (8th Cir. 2010), the Tax Court applied combined discounts to partnership interests in a family-held investment partnership, with the specific discount varying based on the characteristics of the interest. In Peracchio v. Commissioner, T.C. Memo 2003-280, the Tax Court accepted a combined discount of approximately 29% for a minority interest in a family investment partnership. The 35% combined discount applied here is within the range accepted in these and other comparable cases.

IRS Guidance. The IRS Audit Technique Guide on Valuation of Interests in Pass-Through Entities (ATG), published by the IRS Large Business and International Division, expressly acknowledges the application of both DLOM and DLOC to interests in closely held partnerships where transfer restrictions and lack of management rights are present. The ATG notes that "the appropriate discount must be determined based on the specific facts and circumstances of the particular interest" and that "Discounts in the range of 25% to 40% are commonly observed for minority interests in closely held partnerships." The 35% discount applied here is squarely within this range.

Central Positioning Within Empirical Ranges. The 35% combined discount falls within the central range — rather than the aggressive end — of the empirical data derived from restricted stock studies, pre-IPO studies, and secondary market transaction data. Many practitioners would support a higher discount, particularly for the Fund V LP interest, which has a longer expected holding period and greater uncertainty regarding future fund performance. Ashford's 35% discount is moderate and well-calibrated to the specific characteristics of the interests being valued.

A summary of comparable Tax Court case law is set forth in Appendix B to this memorandum.

V. CALDWELL RIDGELINE CAPITAL — CARRIED INTEREST (FUND VI)

A. Nature of Carried Interest

Caldwell Ridgeline Fund VI LP ("Fund VI") is a Delaware limited partnership with a 2021 vintage year. Fund VI is the most recent of the Caldwell Ridgeline fund series and is currently in its active capital deployment phase, with approximately 45% of committed capital deployed as of June 1, 2023. The fund's investment strategy focuses on middle-market buyouts and growth equity investments in the healthcare services, technology-enabled services, and consumer products sectors.

Mr. Caldwell holds a carried-interest position (also referred to as a "profits interest" or "incentive allocation") in Fund VI. Unlike his limited partnership interests in Fund IV and Fund V, which entitle him to a pro rata share of all fund distributions (including return of capital and preferred return), the carried interest in Fund VI is a performance-based allocation that entitles Mr. Caldwell to a share of fund profits above a specified hurdle rate. Specifically, the carried interest is structured under the standard "2 and 20" model:

• The general partner of Fund VI is entitled to a management fee of 2% per annum on committed capital during the investment period and 2% per annum on invested capital thereafter;

• The carried interest allocation entitles the carry holders (including Mr. Caldwell) to 20% of fund profits above an 8% annual preferred return to the limited partners (the "hurdle rate"), subject to a general partner catch-up provision; and

• Mr. Caldwell's share of the total carried interest pool is determined by his participation percentage as set forth in the carry allocation agreement among the carry holders. Ashford determined Mr. Caldwell's allocable share based on the carry allocation agreement and the related schedules provided by CRC.

The carried interest is distinct from a capital investment in the fund. Mr. Caldwell's carried interest entitles him to a share of profits only if and to the extent the fund generates returns in excess of the hurdle rate. If Fund VI fails to exceed the 8% preferred return to limited partners, Mr. Caldwell's carried interest will have no value. This contingent and performance-dependent nature distinguishes the carried interest from the LP interests in Fund IV and Fund V, which have value regardless of whether the fund exceeds a performance threshold.

Ashford determined the pre-discount fair market value of Mr. Caldwell's carried interest in Fund VI to be $12,000,000 as of June 1, 2023. This valuation is based on a discounted cash flow analysis, as described below.

B. Valuation Methodology

Because the carried interest represents a contingent economic right — the value of which depends entirely on the future performance of Fund VI — the standard net asset value approach used to value the Fund IV and Fund V LP interests is not appropriate. Instead, Ashford performed a discounted cash flow ("DCF") analysis to estimate the present value of the expected future cash flows from Mr. Caldwell's carried-interest position.

The DCF analysis involved the following steps:

(a) Projection of Fund Returns. Ashford projected Fund VI's future investment returns based on: (i) the current composition and risk profile of the fund's portfolio (approximately 45% deployed as of the valuation date); (ii) the fund's expected capital deployment schedule for the remaining commitment period; (iii) historical performance data for CRC's prior fund vintages; (iv) market-level return expectations for middle-market private equity funds; and (v) fund-specific risk factors, including concentration risk, sector exposure, and vintage year considerations. Ashford modeled multiple return scenarios (base case, upside, and downside) and probability-weighted the projected cash flows to arrive at an expected return profile.

(b) Distribution Waterfall Modeling. Ashford modeled the Fund VI distribution waterfall to determine the timing and amount of carried-interest distributions to Mr. Caldwell under each return scenario. The waterfall model incorporates the 8% preferred return, the general partner catch-up provision, and the 80/20 profit split above the catch-up. The model also accounts for the clawback provision under which carry holders may be required to return previously distributed carried interest if the fund's overall returns fall below the preferred return threshold.

(c) discount Rate. Ashford applied a risk-adjusted discount rate to the projected carried-interest cash flows to determine their present value as of the valuation date. The discount rate reflects the inherent risk and uncertainty associated with the carried interest, including the contingent nature of the cash flows, the extended expected holding period, and the illiquidity of the interest. The discount rate applied by Ashford is significantly higher than the discount rate that would be applied to the fund's underlying portfolio investments, reflecting the additional risk borne by the carry holder (who is subordinate to the limited partners in the distribution waterfall and receives no return unless the hurdle rate is exceeded).

(d) Concluded Value. After applying the probability-weighted DCF analysis, Ashford concluded that the pre-discount fair market value of Mr. Caldwell's carried interest in Fund VI is $12,000,000 as of June 1, 2023.

It is important to note that the DCF methodology inherently incorporates a number of the risk factors that would otherwise be captured by a valuation discount. Specifically, the higher discount rate applied to the carried-interest cash flows already reflects, to a significant degree, the risk associated with the contingent and subordinate nature of the carried interest. This has implications for the magnitude of the discount applied to the pre-discount FMV, as discussed below.

C. Discount for Lack of Marketability — Primary Component (30%)

Even after application of the DCF methodology (which already incorporates significant risk adjustments), a substantial discount for lack of marketability is warranted for the carried interest. The carried interest is, in many respects, even more illiquid than the Fund IV and Fund V LP interests, for the following reasons:

Personal and Non-Transferable Nature. The carried interest is fundamentally personal to the holder. Under the terms of the Fund VI partnership agreement and the carry allocation agreement, the carried interest may not be sold, assigned, transferred, pledged, or otherwise disposed of without the prior written consent of the general partner, which consent may be withheld in the general partner's sole and absolute discretion. In practice, carried-interest positions are rarely, if ever, transferred during the life of a fund. The carried interest may also be subject to vesting provisions and forfeiture conditions (e.g., forfeiture upon departure from the firm or breach of non-compete obligations), which further limit its transferability and reduce its value to a hypothetical buyer.

Absence of an Organized Secondary Market. While a small but growing secondary market exists for LP interests in private equity funds, there is no comparable organized secondary market for carried-interest positions. The secondary market intermediaries that facilitate LP interest transfers (e.g., Ridgeway Industries, Ashgrove Group, Northgate Group) generally do not handle carried-interest transactions, and there is no established pricing convention or transaction volume data for carry transfers. This absence of market infrastructure means that a holder seeking to monetize a carried-interest position would face extreme difficulty in identifying a willing buyer and negotiating a transfer.

Contingent and Binary Nature of Cash Flows. The carried interest has a fundamentally different risk profile than an LP interest. While an LP interest entitles the holder to a return of capital and a preferred return before any profits are shared, the carried interest entitles the holder to nothing unless and until the fund's returns exceed the hurdle rate. This creates a binary or option-like payoff structure: if the fund performs well, the carried interest may be extremely valuable; if the fund underperforms, the carried interest may be worthless. This binary risk profile, while partially reflected in the DCF valuation through the probability-weighted scenario analysis and higher discount rate, is a factor that would cause a hypothetical buyer to demand a significant discount.

Clawback Risk. The carried interest is subject to a clawback provision under which Mr. Caldwell may be required to return previously distributed carried interest if the fund's aggregate returns, measured at the end of the fund's life, fall below the preferred return threshold. This clawback obligation creates additional downside risk for the carry holder and further reduces the value of the carried interest to a hypothetical buyer.

Ashford's DLOM determination is supported by the limited available comparable transaction data for carried-interest transfers. Academic literature on the illiquidity of performance-based compensation in alternative investment vehicles, including the work of Professors Metrick and Yasuda (2010) and Phalippou and Gottschalg (2009), has documented the significant illiquidity premium associated with carried interest and similar performance-based allocations. While this literature does not provide a precise discount percentage, it supports the conclusion that carried-interest positions are among the most illiquid of all alternative investment interests and warrant a substantial DLOM.

Based on this analysis, Ashford applied a 30% combined discount to the carried interest, reflecting primarily the extreme illiquidity and contingent nature of the interest.

D. Discount for Lack of Control — Embedded in Combined discount

Like the Fund IV and Fund V LP interests, the carried interest carries no management authority. The carried-interest holder has no right to participate in investment decisions, influence distribution timing, compel liquidation, or otherwise control the operations of the fund. The lack-of-control factors applicable to t

CALDERWOOD & HARKNESS LLP Counselors at Law
One World Financial Center, 200 Liberty Street, 48th Floor New York, New York 10281
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
June 20, 2023
TO: Jonathan R. Caldwell
FROM: Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP
CC: Victoria Chambers, Responsible Partner; Monica Reyes, Lead Associate; Elliot Nguyen, Working Associate
RE: Valuation discount Analysis — GRAT Funding Transfers (Stonecrest Realty Holdings LLC Membership Interests; Caldwell Ridgeline Capital Fund IV, Fund V, and Fund VI Interests)
MATTER NO.: 1034-00004
BILLING CODE: 78412-JRC
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of Jonathan R. Caldwell and his advisors. This memorandum reflects the legal analysis and conclusions of counsel and is protected from disclosure under the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
I. EXECUTIVE SUMMARY
The purpose of this memorandum is to analyze and substantiate the valuation discounts applied to the illiquid assets contributed to the three Grantor Retained Annuity Trusts ("GRATs") established as part of Jonathan R. Caldwell's comprehensive generational estate plan. As discussed in our prior correspondence and planning memoranda, the GRAT strategy is designed to transfer future appreciation in excess of the applicable Section 7520 hurdle rate to the Caldwell Family Dynasty Trust while minimizing gift tax cost. The effectiveness of this strategy depends, in significant part, on the accurate determination of the fair market value of the contributed assets — including the application of appropriate valuation discounts for interests in closely held entities that lack marketability, liquidity, and, in certain instances, control attributes.
This memorandum addresses three categories of discounted assets contributed to the GRATs:
Stonecrest Realty Holdings LLC Membership Interests (GRAT B). On May 1, 2023, Mr. Caldwell contributed an approximate 59.7% membership interest in Stonecrest Realty Holdings LLC ("Stonecrest") to the Caldwell 2023 Realty GRAT ("GRAT B"). Ashford Valuation Group LLC ("Ashford") has determined that a combined lack-of-marketability and lack-of-control discount of 25% is appropriate for this interest. On a pre-discount basis, the 59.7% membership interest has a fair market value of approximately $80,000,000. After application of the 25% combined discount, the post-discount fair market value for gift tax reporting purposes is $60,000,000. The dollar amount of the discount is $20,000,000.
Caldwell Ridgeline Fund IV LP and Fund V LP Interests (GRAT C). On June 1, 2023, Mr. Caldwell contributed his limited partnership interests in Caldwell Ridgeline Fund IV LP ("Fund IV") and Caldwell Ridgeline Fund V LP ("Fund V") to the Caldwell 2023 Carried Interest GRAT ("GRAT C"). Ashford has determined that a combined lack-of-marketability and lack-of-control discount of 35% is appropriate for each of these passive limited partnership interests. On a pre-discount basis, the aggregate fair market value of the Fund IV and Fund V LP interests is $26,000,000 ($12,000,000 for Fund IV and $14,000,000 for Fund V). After application of the 35% combined discount, the aggregate post-discount fair market value is $16,900,000 ($7,800,000 for Fund IV and $9,100,000 for Fund V). The dollar amount of the aggregate discount is $9,100,000.
Caldwell Ridgeline Fund VI Carried Interest (GRAT C). Also on June 1, 2023, Mr. Caldwell contributed his carried-interest position (profits interest / incentive allocation) in Caldwell Ridgeline Fund VI LP ("Fund VI") to GRAT C. Ashford has determined that a combined discount of 30% is appropriate for this interest. On a pre-discount basis, the carried interest has a fair market value of $12,000,000. After application of the 30% discount, the post-discount fair market value is $8,400,000. The dollar amount of the discount is $3,600,000.
The blended post-discount fair market value of all interests contributed to GRAT C is $25,300,000 (i.e., $16,900,000 for the Fund IV and Fund V LP interests, plus $8,400,000 for the Fund VI carried interest).
In reaching these conclusions, we have reviewed the independent appraisal reports prepared by Ashford Valuation Group LLC. The appraisals were performed under the direction of Dr. Leonard K. Whitfield, ASA, Managing Partner of Ashford, whose office is located at 1120 Avenue of the Americas, Suite 3500, New York, New York 10036. Ashford's appraisal reports were received by this firm on June 15, 2023. Dr. Whitfield is an Accredited Senior Appraiser of the American Society of Appraisers with more than twenty-five years of experience in the valuation of interests in closely held entities, real estate holding companies, and alternative investment fund interests.
Our conclusion, after thorough review of the Ashford appraisal reports, applicable empirical data, and relevant judicial and administrative authority, is that all discount levels applied by Ashford are supportable, fall within the range of accepted valuation practice, and are consistent with Tax Court precedent and Internal Revenue Service guidance. The discounts are neither aggressive nor unreasonable; indeed, they fall at or below the midpoint of the ranges typically observed in the empirical studies and comparable judicial decisions. We believe these discount levels are defensible in the event of IRS audit.
The post-discount fair market values discussed in this memorandum will be used for gift tax reporting purposes on Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) for the calendar year 2023. The Form 709 is being prepared by Calderwood & Harkness LLP in coordination with Strathmore Corporation & Greaves LLP (Martin J. Prescott, CPA), which serves as Mr. Caldwell's accounting firm for federal and state income tax compliance purposes.
II. SCOPE AND METHODOLOGY
A. Purpose and Context
This valuation discount analysis is undertaken in connection with Mr. Caldwell's comprehensive generational estate plan, the structure and implementation of which have been described in detail in our prior planning memoranda dated February 15, 2023 and March 30, 2023. As context for the present analysis, Mr. Caldwell's gross estate is estimated at approximately $300,000,000 as of the date of the GRAT funding transactions. The composition of the estate is as follows:
• Liquid Securities: Approximately $112,000,000 in publicly traded equities, fixed income instruments, and cash equivalents held in brokerage and advisory accounts.
• Real Estate (via Stonecrest): Approximately $134,000,000 in real estate assets held through Stonecrest Realty Holdings LLC, a New York limited liability company that owns a portfolio of eleven commercial and residential properties in New York, New Jersey, and Connecticut.
• Carried Interest and Fund Stakes (Caldwell Ridgeline Capital): Approximately $38,000,000 in limited partnership interests and carried-interest positions in Caldwell Ridgeline Capital's fund vehicles (Fund IV LP, Fund V LP, and Fund VI LP).
• Art and Collectibles: Approximately $9,000,000 in fine art, decorative arts, and collectible items.
• Other Assets: Approximately $7,000,000 in miscellaneous assets, including personal property, vehicles, and other holdings.
As part of the estate plan, three zeroed-out GRATs were created under Internal Revenue Code ("IRC") Section 2702 to transfer appreciation in excess of the applicable Section 7520 hurdle rate to the Caldwell Family Dynasty Trust, a Delaware situs irrevocable trust with Northgate Trust Company of Delaware serving as institutional co-trustee. Each GRAT is structured as a two-year or three-year annuity trust designed to "zero out" the taxable gift at inception, such that the annuity payments to Mr. Caldwell over the GRAT term, discounted at the Section 7520 rate, equal the initial fair market value of the contributed assets. To the extent the contributed assets appreciate at a rate in excess of the 5.0% Section 7520 hurdle rate applicable to each of the three GRATs, the excess appreciation will pass to the Dynasty Trust free of gift and estate tax.
The three GRATs and their respective funding are summarized as follows:
GRAT A — Caldwell 2023 Securities GRAT. GRAT A was funded on April 15, 2023 with $60,000,000 in publicly traded securities. Because the contributed assets are liquid and publicly traded, no valuation discount is applicable. The fair market value of the contributed securities is determined by reference to publicly available market prices on the funding date. GRAT A is not the subject of this memorandum.
GRAT B — Caldwell 2023 Realty GRAT. GRAT B was funded on May 1, 2023 with an approximate 59.7% membership interest in Stonecrest Realty Holdings LLC, having a pre-discount fair market value of $80,000,000. A valuation discount analysis is required for this contribution, and it is addressed in detail in Section III of this memorandum.
GRAT C — Caldwell 2023 Carried Interest GRAT. GRAT C was funded on June 1, 2023 with limited partnership interests in Fund IV LP and Fund V LP (aggregate pre-discount fair market value of $26,000,000) and a carried-interest position in Fund VI LP (pre-discount fair market value of $12,000,000), for a total pre-discount fair market value of $38,000,000. A valuation discount analysis is required for all three interests contributed to GRAT C. The LP interest analysis is addressed in Section IV and the carried interest analysis is addressed in Section V.
Valuation discounts are critical for two distinct but related purposes. First, the discounts determine the fair market value of the contributed interests for gift tax purposes, which in turn determines the amount of the taxable gift, if any, associated with the GRAT funding. Second, and equally important, the annuity payments required to "zero out" the GRAT are computed based on the pre-discount fair market value of the contributed assets (i.e., the full undiscounted value of the contributed interests), not the post-discount value. The effect of the discounts is to reduce the gift tax value of the transfer while preserving the economic benefit of the full pre-discount value within the GRAT structure. This is a well-established and IRS-recognized consequence of funding a GRAT with discounted assets.
B. Valuation Standard
All valuations discussed in this memorandum are prepared in accordance with the fair market value standard applicable to federal gift tax purposes. Under IRC Section 2512 and Treasury Regulation Section 25.2512-1, the fair market value of property transferred by gift is defined as:
"[T]he price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."
This standard requires that the property be valued from the perspective of a hypothetical willing buyer and a hypothetical willing seller, each acting in their own self-interest and with full knowledge of all relevant facts. The standard does not contemplate a specific buyer or seller, nor does it account for the unique circumstances, motivations, or financial positions of any particular market participant. The property is valued as of the date of the gift, which is the date of the contribution to the GRAT.
The appraisals prepared by Ashford Valuation Group comply with the qualified appraisal requirements applicable under IRC Section 170(f)(11)(E) and Treasury Regulation Section 1.170A-17, which, while technically applicable to charitable contribution deductions, are applied by analogy to gift tax appraisals and represent the benchmark for appraisal quality and completeness in the gift tax context. The Ashford appraisals also comply with the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by The Appraisal Foundation.
The relevant valuation dates are May 1, 2023, for the Stonecrest membership interests contributed to GRAT B, and June 1, 2023, for the Caldwell Ridgeline Fund IV, Fund V, and Fund VI interests contributed to GRAT C. All fair market value determinations discussed in this memorandum are as of the applicable valuation date.
C. Engagement of Ashford Valuation Group LLC
Ashford Valuation Group LLC was retained by Calderwood & Harkness LLP pursuant to an appraisal engagement letter dated April 20, 2023. Ashford was retained through counsel to preserve the attorney-client privilege and work-product protection with respect to the appraisal engagement and communications between Ashford and this firm. Ashford is a nationally recognized valuation firm with extensive experience in the valuation of closely held business interests, real estate holding company interests, and alternative investment fund interests for estate, gift, and income tax purposes.
The engagement was supervised by Dr. Leonard K. Whitfield, ASA, Managing Partner of Ashford. Dr. Whitfield is an Accredited Senior Appraiser of the American Society of Appraisers, with a designation in Business Valuation. He holds a Ph.D. in finance from Columbia University and has more than twenty-five years of experience in the valuation of closely held entities and illiquid investment interests. Dr. Whitfield has been qualified as an expert witness in valuation matters in the United States Tax Court, the United States District Court for the Southern District of New York, and numerous state courts. His curriculum vitae is attached to each of the Ashford appraisal reports.
Ashford was instructed to appraise the following interests:
(a) The approximate 59.7% membership interest in Stonecrest Realty Holdings LLC contributed to GRAT B as of May 1, 2023;
(b) The limited partnership interest in Caldwell Ridgeline Fund IV LP contributed to GRAT C as of June 1, 2023;
(c) The limited partnership interest in Caldwell Ridgeline Fund V LP contributed to GRAT C as of June 1, 2023; and
(d) The carried-interest position (profits interest / incentive allocation) in Caldwell Ridgeline Fund VI LP contributed to GRAT C as of June 1, 2023.
Ashford's three appraisal reports (one for the Stonecrest interest and two covering the Caldwell Ridgeline interests, including both the LP interests and the carried interest) were received by this firm on June 15, 2023. Summaries of the appraisal reports are set forth in Appendix A to this memorandum.
In preparing the appraisals, Ashford coordinated with Gregory S. Fenton, Chief Financial Officer of Caldwell Ridgeline Capital LLC, for financial data, fund performance reports, partnership agreements, and other documentation relating to the Fund IV, Fund V, and Fund VI interests. Ashford also coordinated with Robert M. Sinclair, Chief Operating Officer of Stonecrest Realty Holdings LLC, for financial statements, property appraisals, rent rolls, operating data, and governance documents relating to Stonecrest and its portfolio of real estate assets. All data furnished to Ashford was reviewed by this firm for completeness and accuracy.
D. Analytical Framework
The valuation of interests in closely held entities for gift tax purposes generally involves a two-tier analytical framework:
Tier 1: Entity-Level or Asset-Level Value. The first step is to determine the fair market value of the underlying entity or its assets. For a real estate holding company such as Stonecrest, this involves determining the fair market value of the real estate portfolio (net of liabilities) and any other assets held by the entity. For an investment fund such as the Caldwell Ridgeline funds, this involves determining the net asset value of the fund (or, in the case of carried interest, the present value of projected future cash flows from the performance allocation). The entity-level value is then allocated pro rata to the interest being valued based on the holder's ownership percentage.
Tier 2: Application of Holder-Level discounts. The second step is to apply appropriate discounts to the pro rata share of entity-level value to reflect the specific characteristics of the interest being transferred. These characteristics include, but are not limited to, the lack of a public market for the interest (lack of marketability), the absence of control over entity operations and decision-making (lack of control or minority interest discount), and any other factors that would cause a hypothetical willing buyer to pay less than the pro rata share of the entity-level value.
The recognized discount categories applicable to the interests addressed in this memorandum are:
(a) discount for Lack of Marketability ("DLOM"). A DLOM reflects the reduction in value attributable to the absence of a public market for the interest being valued. Interests in closely held entities cannot be readily sold on an exchange or in an organized market, and prospective buyers face significant transaction costs, information asymmetries, and holding period uncertainty. Empirical studies, including restricted stock studies and pre-IPO studies, have consistently demonstrated that the lack of marketability results in significant price reductions relative to freely tradable securities.
(b) discount for Lack of Control / Minority Interest discount ("DLOC"). A DLOC reflects the reduction in value attributable to the absence of control over entity operations, investment decisions, distributions, liquidation, and other key governance matters. A holder who lacks the ability to compel distributions, force a sale of assets, or influence management decisions will pay less for an interest than a holder who possesses such control. The DLOC is particularly significant for passive limited partnership interests, where the limited partner has no management authority whatsoever.
(c) Combined or Blended discount. Where both DLOM and DLOC are present, the discounts may be expressed as a combined or blended discount. The combined discount reflects the cumulative effect of both lack of marketability and lack of control on the value of the interest. Care must be taken to avoid double-counting of factors that are already reflected in the underlying valuation methodology (as discussed in Section V with respect to the Fund VI carried interest).
All discounts must be supported by empirical data, market studies, and comparable judicial precedent. Unsupported or arbitrary discounts will not withstand IRS scrutiny. In the present case, Ashford's discount determinations are supported by a comprehensive analysis of relevant empirical studies, comparable transaction data, and Tax Court case law, as discussed in detail below.
III. STONECREST REALTY HOLDINGS LLC — MEMBERSHIP INTEREST VALUATION
A. Entity Description and Asset Overview
Stonecrest Realty Holdings LLC ("Stonecrest") is a New York limited liability company with its principal office at 330 Madison Avenue, Suite 2401, New York, New York 10017. Stonecrest is managed on a day-to-day basis by Robert M. Sinclair, who serves as Chief Operating Officer. Mr. Sinclair oversees property management, leasing, maintenance, capital improvements, and tenant relations across the Stonecrest portfolio. Stonecrest's legal counsel for entity and real estate matters is Baxter, Holt & Quelston LLP.
Jonathan R. Caldwell holds 100% of the membership interests in Stonecrest. Stonecrest is treated as a disregarded entity for federal income tax purposes, and all income, deductions, gains, and losses from Stonecrest's operations flow through to Mr. Caldwell's individual income tax return (Form 1040).
Stonecrest holds ownership interests in eleven commercial and residential real estate properties located across the New York metropolitan area, including properties in New York City, New Jersey, Connecticut, and Westchester County. The total estimated fair market value of the Stonecrest real estate portfolio, as determined by Ashford in coordination with independent real estate appraisals, is approximately $134,000,000. The individual properties and their estimated fair market values are as follows:
A detailed property-by-property schedule, including property descriptions, lease terms, occupancy rates, capitalization rates, and valuation methodology, is set forth in Appendix D to this memorandum.
The Stonecrest portfolio is diversified across property types (office, retail, residential, industrial, and land) and geographic locations (Manhattan, Northern New Jersey, Fairfield County, and Westchester County). The portfolio generates substantial rental income, and the commercial properties are generally well-leased with institutional-quality tenants. The residential properties include both luxury condominiums in Tribeca and a 120-unit multi-family complex in Stamford, Connecticut.
Mortgages on the Stonecrest properties are held at the entity level and are non-recourse to Mr. Caldwell personally. The aggregate outstanding mortgage indebtedness as of May 1, 2023 is approximately $52,000,000, which is reflected in Ashford's net asset value calculation for Stonecrest. The entity-level net asset value (total property FMV of $134,000,000 less outstanding mortgage debt of approximately $52,000,000, plus other net assets) was used as the starting point for the membership interest valuation.
B. Interest Contributed to GRAT B
On May 1, 2023, Mr. Caldwell contributed an approximate 59.7% membership interest in Stonecrest to the Caldwell 2023 Realty GRAT ("GRAT B"). Prior to the contribution, Mr. Caldwell held 100% of the Stonecrest membership interests. Following the contribution, Mr. Caldwell (individually or through the Caldwell Revocable Trust) retains the remaining approximate 40.3% membership interest in Stonecrest.
The pre-discount fair market value of the 59.7% membership interest is determined as Mr. Caldwell's pro rata share of Stonecrest's total entity-level fair market value: $134,000,000 × 59.7% ≈ $80,000,000. This figure represents the starting point for the discount analysis, before application of any DLOM or DLOC.
It is important to note that the contribution of a 59.7% interest — rather than the full 100% interest — was a deliberate planning decision. By contributing a fractional interest to the GRAT, Mr. Caldwell creates a basis for the application of valuation discounts that would not be available if the entire entity were contributed. The IRS has acknowledged that the fair market value standard requires valuation of the specific interest transferred, not the value of the underlying assets or the whole entity. See, e.g., Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982); Treasury Regulation § 25.2512-1.
C. Discount for Lack of Control (DLOC) — 10%
Although Mr. Caldwell holds 100% of the membership interests in Stonecrest prior to the contribution, the interest being valued for gift tax purposes is only the 59.7% membership interest contributed to GRAT B. The fair market value standard requires that the interest be valued from the perspective of a hypothetical willing buyer who would acquire a 59.7% membership interest in Stonecrest — not from the perspective of Mr. Caldwell, who holds the remaining interests.
A hypothetical willing buyer of a 59.7% membership interest would acquire a majority interest in Stonecrest, but not a 100% interest. While a majority holder generally has significant governance rights, the Stonecrest LLC Operating Agreement (as amended and restated effective January 1, 2020) imposes limitations on the majority holder's ability to exercise unilateral control over certain key decisions. Specifically, the Operating Agreement provides that the following actions require super-majority approval (defined as 75% or more of the outstanding membership interests) or unanimous consent of all members:
(a) Sale, exchange, or other disposition of all or substantially all of Stonecrest's assets (unanimous consent required);
(b) Dissolution and winding up of Stonecrest (unanimous consent required);
(c) Amendment to the Operating Agreement (super-majority consent required);
(d) Admission of new members or issuance of additional membership interests (super-majority consent required);
(e) Incurrence of indebtedness in excess of $5,000,000 in any single transaction or series of related transactions (super-majority consent required); and
(f) Entry into any transaction with an affiliate of any member (super-majority consent required).
Because a 59.7% holder would lack the ability to take any of these actions unilaterally — particularly the sale of all assets, dissolution, or amendment of the Operating Agreement, each of which would require the consent of the remaining 40.3% holder — a hypothetical willing buyer would demand a discount to compensate for the limitations on effective control. This is true even though the 59.7% interest represents a majority position. The Tax Court has consistently held that even majority interests in closely held entities warrant a control-related discount when the holder cannot unilaterally exercise all governance rights. See, e.g., Estate of Simplot v. Commissioner, 112 T.C. 130 (1999) (applying a lack-of-control discount to a majority interest in a closely held entity where the holder lacked the ability to liquidate the entity or compel distributions); Estate of Jones v. Commissioner, T.C. Memo 2019-101 (applying a minority interest discount to a controlling interest in a family-held LLC where the operating agreement restricted key governance actions).
Ashford's analysis also considered comparable LLC operating agreement restrictions and governance structures drawn from its proprietary database of closely held real estate holding company transactions. Ashford further reviewed data from the Sterling Reach Corporation studies and Tidewater Services Inc. database, which compile transaction data for comparable real estate holding company interests. Based on this analysis, Ashford concluded that a 10% DLOC is appropriate for the 59.7% Stonecrest membership interest. This discount is conservative in light of the restrictions described above and is at the lower end of the range that would be supported by the empirical data.
D. Discount for Lack of Marketability (DLOM) — 15%
In addition to the DLOC, a discount for lack of marketability is warranted because there is no public market for membership interests in Stonecrest or any other private real estate holding LLC. A hypothetical willing buyer of a 59.7% membership interest in Stonecrest would face significant obstacles to liquidity that would not be present with respect to a publicly traded REIT interest or other marketable security.
The specific factors supporting the application of a DLOM to the Stonecrest membership interest include:
Restricted Transferability. The Stonecrest LLC Operating Agreement contains substantial transfer restrictions that significantly limit the ability of a member to transfer its interest. These restrictions include: (i) a right of first refusal in favor of the non-transferring member(s), requiring notice and a sixty-day option period before any proposed transfer to a third party; (ii) a requirement that any proposed transferee be approved by the non-transferring member(s), with approval not to be unreasonably withheld but subject to the non-transferring member's reasonable business judgment; (iii) a prohibition on any transfer that would result in a termination of the LLC under IRC Section 708(b) (as applicable prior to the repeal of the "technical termination" rule, certain restrictions remain in the agreement); and (iv) a prohibition on any transfer that would violate applicable federal or state securities laws. These restrictions would significantly reduce the pool of potential buyers and increase the time and cost required to consummate a sale.
Lack of Information. Stonecrest is a private entity with no obligation to file public financial statements or make disclosures to prospective buyers beyond what is required by the Operating Agreement. While the Operating Agreement provides for annual financial statements to be prepared by Stonecrest's accountants, the level of disclosure is significantly less than what would be available for a publicly traded entity. A hypothetical buyer would need to conduct extensive due diligence on the underlying real estate portfolio, including review of individual property appraisals, lease agreements, environmental reports, title insurance policies, and property condition assessments. The cost and burden of this due diligence would be borne by the buyer and would further reduce the price the buyer would be willing to pay.
Holding Period Uncertainty. There is no defined exit or liquidity event for a Stonecrest membership interest. Unlike a publicly traded security that can be sold on any trading day, or a private equity fund that has a defined term and liquidation date, a membership interest in a real estate holding LLC has no predetermined exit mechanism. The holder may be required to hold the interest indefinitely, subject to the transfer restrictions described above. This holding period uncertainty is a significant factor supporting a DLOM.
Transaction Costs. Any sale of a Stonecrest membership interest would involve substantial transaction costs, including legal fees, accounting fees, brokerage commissions, and potential transfer taxes. These costs would further reduce the net proceeds to the seller and, accordingly, the price a hypothetical buyer would be willing to pay.
Ashford's DLOM determination is supported by the following empirical data and studies:
Restricted Stock Studies. Numerous empirical studies have examined the discounts observed in transactions involving restricted securities of publicly traded companies. These studies, including the FMV Opinions Inc. study (2001–2019) and the Silber study (1991), document median discounts for restricted securities in the range of 20% to 35% relative to the freely traded price. Importantly, these studies measure the discount for securities of publicly traded companies that are subject only to transfer restrictions — not the complete absence of a public market. Interests in private entities, which lack even the reference point of a publicly traded price, would logically warrant higher discounts than those observed in the restricted stock studies.
Pre-IPO Studies. Studies examining the discounts at which private company shares trade prior to an initial public offering, such as those conducted by Beaumont Strategy Partners and the Valuation Advisors' Lack of Marketability discount Study, have documented discounts in the range of 30% to 50% or higher. These studies provide a more directly comparable benchmark for the illiquidity of interests in closely held entities, although they may overstate the discount for a well-established real estate holding company with a stable income stream and identifiable asset values.
Ashford considered the full range of empirical data and adjusted downward from the typical pre-IPO discount range in recognition of several factors that mitigate the degree of illiquidity: (i) the quality and diversification of the underlying real estate portfolio, which provides a relatively stable and predictable income stream; (ii) the identifiable and appraisable nature of the underlying assets (real property), which reduces information asymmetry relative to operating businesses; and (iii) the majority nature of the 59.7% interest, which provides the holder with significant (though not complete) governance rights. After these adjustments, Ashford concluded that a 15% DLOM is appropriate.
The DLOM is applied in conjunction with the 10% DLOC to produce a combined overall discount of 25%. Ashford expressed the combined discount as a blended figure rather than applying the discounts multiplicatively (which would produce a combined discount of approximately 23.5%), reflecting Ashford's judgment that the combined 25% discount accurately captures the cumulative effect of both lack of marketability and lack of control on the value of the interest.
E. Combined discount — 25%
Based on the analysis described above, Ashford has applied a combined lack-of-marketability and lack-of-control discount of 25% to the pro rata share of Stonecrest's net asset value represented by the 59.7% membership interest. The post-discount fair market value is calculated as follows:
Pre-discount FMV: $80,000,000
Combined discount: 25%
Post-discount FMV: $80,000,000 × (1 – 0.25) = $60,000,000
Dollar Amount of discount: $20,000,000
The post-discount fair market value of $60,000,000 is the amount that will be reported as the fair market value of the Stonecrest membership interest for gift tax purposes on Mr. Caldwell's 2023 Form 709.
F. Assessment of Supportability
We have reviewed the 25% combined discount applied by Ashford and conclude that it is supportable, conservative, and defensible in the event of IRS audit. Our assessment is based on the following considerations:
Consistency with Tax Court Precedent. The 25% combined discount falls within the range of discounts accepted by the Tax Court in analogous cases involving interests in closely held real estate holding companies. In Estate of Litchfield v. Commissioner, T.C. Memo 2009-21, the Tax Court accepted a combined discount of 31% for an interest in a family-held real estate holding company with a diversified portfolio of commercial and residential properties. In Estate of Jelke v. Commissioner, T.C. Memo 2005-131, the Tax Court considered discounts in the range of 26% to 35% for interests in a closely held entity holding a portfolio of marketable and non-marketable assets. While no two cases are factually identical, the range of discounts accepted by the Tax Court in real estate holding company cases consistently falls between 20% and 40%, with the specific discount depending on the nature of the underlying assets, the governance restrictions, and the degree of marketability. The 25% discount applied here is at the conservative end of this range.
IRS Guidance. The IRS Job Aid on Valuation discounts, prepared by the IRS Engineering/Valuation Program for use by IRS examiners, expressly acknowledges the legitimacy of both DLOM and DLOC for interests in closely held real estate entities. The Job Aid notes that "[d]iscounts are a legitimate feature of the valuation process" and that "the key question is not whether a discount should be applied, but whether the amount of the discount is supported by the facts and circumstances of the particular case." The 25% combined discount applied here is well within the range that the IRS Job Aid identifies as supportable for interests in closely held real estate holding companies.
Conservative Positioning. As noted above, the 25% combined discount is below the midpoint of the empirical ranges documented in the restricted stock studies (20%–35%), pre-IPO studies (30%–50%), and comparable Tax Court cases (20%–40%). A more aggressive approach might support a combined discount of 30% to 35% or higher, particularly given the significant transfer restrictions in the Stonecrest Operating Agreement and the complete absence of a public market for the interest. Ashford's conservative positioning reflects a deliberate judgment to minimize audit risk while still accurately reflecting the fair market value of the interest.
IV. CALDWELL RIDGELINE CAPITAL — LP INTERESTS (FUND IV AND FUND V)
A. Entity Description
Caldwell Ridgeline Capital LLC ("CRC") is a Delaware limited liability company with its principal office at 280 Park Avenue, 35th Floor, New York, New York 10017. CRC is a private equity and alternative investment management firm with approximately $2.1 billion in assets under management as of June 1, 2023. The firm's Chief Financial Officer is Gregory S. Fenton, who served as the primary point of contact for Ashford in connection with the appraisals of the Fund IV, Fund V, and Fund VI interests.
Jonathan R. Caldwell is the founder of CRC and served as its Managing Partner from the firm's inception in 2005 until his retirement from active management in 2019. Following his retirement, Mr. Caldwell ceased to participate in the day-to-day management and investment decision-making of CRC but retained his economic interests in the firm's fund vehicles, including limited partnership interests in Fund IV and Fund V and a carried-interest position in Fund VI.
CRC manages a series of private equity and real estate-focused investment funds organized as Delaware limited partnerships. The funds relevant to this memorandum are:
Fund IV — Caldwell Ridgeline Fund IV LP. Fund IV is a Delaware limited partnership with a 2015 vintage year. Fund IV is currently in its harvest and wind-down phase, with the majority of its portfolio investments having been realized or marked to market. The fund's limited partnership agreement provides for a ten-year fund term with two optional one-year extensions at the discretion of the general partner. As of June 1, 2023, Fund IV is in year eight of its term.
Fund V — Caldwell Ridgeline Fund V LP. Fund V is a Delaware limited partnership with a 2018 vintage year. Fund V is currently in its active investment and hold phase, with capital partially deployed and several portfolio investments in various stages of development and maturation. The fund's limited partnership agreement provides for a ten-year fund term with two optional one-year extensions. As of June 1, 2023, Fund V is in year five of its term.
Both Fund IV and Fund V are managed by their respective general partners, which are wholly owned subsidiaries of CRC. The general partners exercise exclusive control over all investment decisions, capital calls, distributions, and fund operations. Limited partners in each fund have no management authority and are passive investors entitled only to their pro rata share of fund distributions in accordance with the distribution waterfall provisions of the applicable limited partnership agreement.
B. Interests Contributed to GRAT C
On June 1, 2023, Mr. Caldwell contributed his limited partnership interests in Fund IV and Fund V to the Caldwell 2023 Carried Interest GRAT ("GRAT C"). The pre-discount fair market values of these interests, as determined by Ashford, are as follows:
Fund IV LP Interest: $12,000,000 pre-discount FMV
Fund V LP Interest: $14,000,000 pre-discount FMV
Aggregate LP Interests: $26,000,000 pre-discount FMV
Ashford determined the pre-discount fair market values based on the reported net asset values ("NAV") of each fund as of May 31, 2023 (the most recent NAV calculation preceding the June 1, 2023 valuation date), adjusted for any known events or transactions occurring between the NAV calculation date and the valuation date. The NAV-based approach is the standard methodology for valuing LP interests in private equity funds, as it reflects the general partner's best estimate of the fair market value of the fund's portfolio investments on a going-concern basis. Ashford independently reviewed the fund financial statements, portfolio company valuations, and auditor reports to confirm the reasonableness of the reported NAVs.
C. Discount for Lack of Control / Minority Interest discount — 15%
The Fund IV and Fund V LP interests are passive limited partnership positions with no management authority. Under the terms of the fund partnership agreements, the limited partners have no right to:
(a) Participate in the management or investment decision-making of the fund;
(b) Direct or influence the selection, acquisition, holding, or disposition of portfolio investments;
(c) Compel the general partner to make distributions or return capital;
(d) Force the liquidation or winding up of the fund prior to the expiration of the fund term;
(e) Remove or replace the general partner (except in the case of cause, as narrowly defined in the partnership agreement, and then only upon a vote of limited partners holding 75% or more of the outstanding limited partnership interests); or
(f) Participate in the day-to-day administration, operations, or governance of the fund.
The limited partners' rights are essentially limited to: (i) receiving distributions as and when declared by the general partner in accordance with the distribution waterfall; (ii) receiving periodic financial reports (typically quarterly unaudited and annual audited); (iii) voting on certain extraordinary matters requiring limited partner approval (e.g., extension of the fund term, material amendment to the partnership agreement); and (iv) transferring their interests subject to the restrictions described below.
A hypothetical willing buyer of Mr. Caldwell's LP interests would be acquiring a purely passive economic position with no ability to influence the timing or amount of distributions, the investment strategy of the fund, or the disposition of portfolio investments. The buyer would be entirely dependent on the judgment and performance of the general partner. This lack of control represents a significant value-reducing factor and supports the application of a DLOC.
The Tax Court has consistently applied minority interest discounts to passive LP interests in investment fund structures. In Estate of McCord v. Commissioner, 120 T.C. 358 (2003), rev'd on other grounds, 461 F.3d 614 (5th Cir. 2006), the Tax Court applied a minority interest discount to limited partnership interests in a family investment partnership. In Astleford v. Commissioner, T.C. Memo 2008-128, the Tax Court accepted a minority interest discount for limited partnership interests in a real estate investment partnership. The range of DLOC applied in comparable cases is typically 10% to 25%, depending on the specific restrictions and governance rights (or lack thereof) applicable to the limited partnership interest.
Ashford applied a 15% DLOC to each of the Fund IV and Fund V LP interests. This discount is at the midpoint of the typical range and appropriately reflects the complete absence of management authority on the part of the limited partners. The 15% DLOC is consistent with the empirical data and judicial precedent and is well-supported.
D. Discount for Lack of Marketability (DLOM) — 20%
In addition to the DLOC, a substantial DLOM is warranted for the Fund IV and Fund V LP interests. The factors supporting the DLOM are as follows:
Absence of a Public Market. There is no public market for limited partnership interests in private equity funds. While a small secondary market for private equity LP interests has developed in recent years, this market remains limited, illiquid, and subject to significant transaction costs and information asymmetries. A seller of an LP interest on the secondary market typically incurs discounts of 5% to 20% or more relative to the reported NAV, even for interests in well-established funds with strong track records.
Transfer Restrictions. The Fund IV and Fund V partnership agreements contain significant transfer restrictions that limit the ability of a limited partner to sell, assign, or transfer its interest. These restrictions include: (i) a requirement that any proposed transfer receive the prior written consent of the general partner, which consent may be withheld in the general partner's sole and absolute discretion; (ii) a right of first refusal in favor of the general partner and the other limited partners; (iii) a requirement that any proposed transfer comply with applicable federal and state securities laws, including the requirement that the transfer be exempt from registration under the Securities Act of 1933, as amended; and (iv) provisions that a transferee who does not receive full admission as a substitute limited partner may have limited economic rights and no governance rights. These restrictions significantly reduce the pool of potential buyers and increase the cost and complexity of any transfer.
Extended and Uncertain Holding Period. Fund IV, with a 2015 vintage, is currently in its harvest and wind-down phase. While the majority of Fund IV's portfolio investments have been realized, there is no fixed liquidation date, and the general partner retains the discretion to extend the fund term and to retain portfolio investments for as long as it deems appropriate. A buyer of Mr. Caldwell's Fund IV LP interest would have no ability to compel the general partner to accelerate distributions or liquidate the remaining portfolio. Fund V, with a 2018 vintage, is still in its active investment and hold phase, with several years remaining before the expected commencement of the harvest phase. The holding period uncertainty is even greater for Fund V than for Fund IV.
Limited Information Rights. Limited partners receive periodic financial reports, but the level of detail and frequency of reporting is significantly less than what is available for publicly traded securities. A prospective buyer would need to rely on the general partner's representations and the limited partnership's audited financial statements, which may not provide the level of granularity that a buyer would require to fully assess the risk and value of the portfolio.
Secondary Market Transaction Data. Ashford reviewed available secondary market transaction data for private equity LP interests, including data compiled by intermediaries such as Ridgeway Industries, Ashgrove Group, and the Private Capital Markets Association. This data indicates that LP interests in private equity funds typically trade at discounts to NAV ranging from 5% to 30% or more, depending on the vintage, strategy, fund performance, and remaining fund life. The median discount observed in secondary market transactions for buyout-focused funds in the 2020–2023 period was approximately 10% to 15% of NAV. However, this figure reflects the discount for interests that are actually sold on the secondary market — i.e., interests that have already overcome the significant hurdle of obtaining general partner consent and completing the transfer process. The "implicit" Discount for interests that have not been marketed on the secondary market — and which may not receive general partner consent for transfer — is likely higher.
Based on this analysis, Ashford applied a 20% DLOM to the Fund IV and Fund V LP interests. The 20% DLOM is combined with the 15% DLOC to yield a total combined discount of 35%. This combined discount reflects the cumulative effect of the passive minority status and severe transfer restrictions applicable to the LP interests.
E. Combined discount — 35%
The combined lack-of-marketability and lack-of-control discount for the Fund IV and Fund V LP interests is 35%. The post-discount fair market values are calculated as follows:
Fund IV LP Interest:
Pre-discount FMV: $12,000,000
Combined discount: 35%
Post-discount FMV: $12,000,000 × (1 – 0.35) = $7,800,000
Dollar Amount of discount: $4,200,000
Fund V LP Interest:
Pre-discount FMV: $14,000,000
Combined discount: 35%
Post-discount FMV: $14,000,000 × (1 – 0.35) = $9,100,000
Dollar Amount of discount: $4,900,000
Aggregate LP Interests:
Pre-discount FMV: $26,000,000
Post-discount FMV: $16,900,000
Total Dollar Amount of discount: $9,100,000
F. Assessment of Supportability
The 35% combined discount for the Fund IV and Fund V LP interests is well-supported and defensible. Our assessment is based on the following considerations:
Tax Court Precedent. The Tax Court has accepted combined discounts in the range of 25% to 45% for passive limited partnership interests in investment fund structures. In Estate of Jelke v. Commissioner, T.C. Memo 2005-131, the Tax Court accepted a combined discount of approximately 32% for a minority interest in a closely held investment partnership. In Holman v. Commissioner, 130 T.C. 170 (2008), aff'd, 601 F.3d 763 (8th Cir. 2010), the Tax Court applied combined discounts to partnership interests in a family-held investment partnership, with the specific discount varying based on the characteristics of the interest. In Peracchio v. Commissioner, T.C. Memo 2003-280, the Tax Court accepted a combined discount of approximately 29% for a minority interest in a family investment partnership. The 35% combined discount applied here is within the range accepted in these and other comparable cases.
IRS Guidance. The IRS Audit Technique Guide on Valuation of Interests in Pass-Through Entities (ATG), published by the IRS Large Business and International Division, expressly acknowledges the application of both DLOM and DLOC to interests in closely held partnerships where transfer restrictions and lack of management rights are present. The ATG notes that "the appropriate discount must be determined based on the specific facts and circumstances of the particular interest" and that "Discounts in the range of 25% to 40% are commonly observed for minority interests in closely held partnerships." The 35% discount applied here is squarely within this range.
Central Positioning Within Empirical Ranges. The 35% combined discount falls within the central range — rather than the aggressive end — of the empirical data derived from restricted stock studies, pre-IPO studies, and secondary market transaction data. Many practitioners would support a higher discount, particularly for the Fund V LP interest, which has a longer expected holding period and greater uncertainty regarding future fund performance. Ashford's 35% discount is moderate and well-calibrated to the specific characteristics of the interests being valued.
A summary of comparable Tax Court case law is set forth in Appendix B to this memorandum.
V. CALDWELL RIDGELINE CAPITAL — CARRIED INTEREST (FUND VI)
A. Nature of Carried Interest
Caldwell Ridgeline Fund VI LP ("Fund VI") is a Delaware limited partnership with a 2021 vintage year. Fund VI is the most recent of the Caldwell Ridgeline fund series and is currently in its active capital deployment phase, with approximately 45% of committed capital deployed as of June 1, 2023. The fund's investment strategy focuses on middle-market buyouts and growth equity investments in the healthcare services, technology-enabled services, and consumer products sectors.
Mr. Caldwell holds a carried-interest position (also referred to as a "profits interest" or "incentive allocation") in Fund VI. Unlike his limited partnership interests in Fund IV and Fund V, which entitle him to a pro rata share of all fund distributions (including return of capital and preferred return), the carried interest in Fund VI is a performance-based allocation that entitles Mr. Caldwell to a share of fund profits above a specified hurdle rate. Specifically, the carried interest is structured under the standard "2 and 20" model:
• The general partner of Fund VI is entitled to a management fee of 2% per annum on committed capital during the investment period and 2% per annum on invested capital thereafter;
• The carried interest allocation entitles the carry holders (including Mr. Caldwell) to 20% of fund profits above an 8% annual preferred return to the limited partners (the "hurdle rate"), subject to a general partner catch-up provision; and
• Mr. Caldwell's share of the total carried interest pool is determined by his participation percentage as set forth in the carry allocation agreement among the carry holders. Ashford determined Mr. Caldwell's allocable share based on the carry allocation agreement and the related schedules provided by CRC.
The carried interest is distinct from a capital investment in the fund. Mr. Caldwell's carried interest entitles him to a share of profits only if and to the extent the fund generates returns in excess of the hurdle rate. If Fund VI fails to exceed the 8% preferred return to limited partners, Mr. Caldwell's carried interest will have no value. This contingent and performance-dependent nature distinguishes the carried interest from the LP interests in Fund IV and Fund V, which have value regardless of whether the fund exceeds a performance threshold.
Ashford determined the pre-discount fair market value of Mr. Caldwell's carried interest in Fund VI to be $12,000,000 as of June 1, 2023. This valuation is based on a discounted cash flow analysis, as described below.
B. Valuation Methodology
Because the carried interest represents a contingent economic right — the value of which depends entirely on the future performance of Fund VI — the standard net asset value approach used to value the Fund IV and Fund V LP interests is not appropriate. Instead, Ashford performed a discounted cash flow ("DCF") analysis to estimate the present value of the expected future cash flows from Mr. Caldwell's carried-interest position.
The DCF analysis involved the following steps:
(a) Projection of Fund Returns. Ashford projected Fund VI's future investment returns based on: (i) the current composition and risk profile of the fund's portfolio (approximately 45% deployed as of the valuation date); (ii) the fund's expected capital deployment schedule for the remaining commitment period; (iii) historical performance data for CRC's prior fund vintages; (iv) market-level return expectations for middle-market private equity funds; and (v) fund-specific risk factors, including concentration risk, sector exposure, and vintage year considerations. Ashford modeled multiple return scenarios (base case, upside, and downside) and probability-weighted the projected cash flows to arrive at an expected return profile.
(b) Distribution Waterfall Modeling. Ashford modeled the Fund VI distribution waterfall to determine the timing and amount of carried-interest distributions to Mr. Caldwell under each return scenario. The waterfall model incorporates the 8% preferred return, the general partner catch-up provision, and the 80/20 profit split above the catch-up. The model also accounts for the clawback provision under which carry holders may be required to return previously distributed carried interest if the fund's overall returns fall below the preferred return threshold.
(c) discount Rate. Ashford applied a risk-adjusted discount rate to the projected carried-interest cash flows to determine their present value as of the valuation date. The discount rate reflects the inherent risk and uncertainty associated with the carried interest, including the contingent nature of the cash flows, the extended expected holding period, and the illiquidity of the interest. The discount rate applied by Ashford is significantly higher than the discount rate that would be applied to the fund's underlying portfolio investments, reflecting the additional risk borne by the carry holder (who is subordinate to the limited partners in the distribution waterfall and receives no return unless the hurdle rate is exceeded).
(d) Concluded Value. After applying the probability-weighted DCF analysis, Ashford concluded that the pre-discount fair market value of Mr. Caldwell's carried interest in Fund VI is $12,000,000 as of June 1, 2023.
It is important to note that the DCF methodology inherently incorporates a number of the risk factors that would otherwise be captured by a valuation discount. Specifically, the higher discount rate applied to the carried-interest cash flows already reflects, to a significant degree, the risk associated with the contingent and subordinate nature of the carried interest. This has implications for the magnitude of the discount applied to the pre-discount FMV, as discussed below.
C. Discount for Lack of Marketability — Primary Component (30%)
Even after application of the DCF methodology (which already incorporates significant risk adjustments), a substantial discount for lack of marketability is warranted for the carried interest. The carried interest is, in many respects, even more illiquid than the Fund IV and Fund V LP interests, for the following reasons:
Personal and Non-Transferable Nature. The carried interest is fundamentally personal to the holder. Under the terms of the Fund VI partnership agreement and the carry allocation agreement, the carried interest may not be sold, assigned, transferred, pledged, or otherwise disposed of without the prior written consent of the general partner, which consent may be withheld in the general partner's sole and absolute discretion. In practice, carried-interest positions are rarely, if ever, transferred during the life of a fund. The carried interest may also be subject to vesting provisions and forfeiture conditions (e.g., forfeiture upon departure from the firm or breach of non-compete obligations), which further limit its transferability and reduce its value to a hypothetical buyer.
Absence of an Organized Secondary Market. While a small but growing secondary market exists for LP interests in private equity funds, there is no comparable organized secondary market for carried-interest positions. The secondary market intermediaries that facilitate LP interest transfers (e.g., Ridgeway Industries, Ashgrove Group, Northgate Group) generally do not handle carried-interest transactions, and there is no established pricing convention or transaction volume data for carry transfers. This absence of market infrastructure means that a holder seeking to monetize a carried-interest position would face extreme difficulty in identifying a willing buyer and negotiating a transfer.
Contingent and Binary Nature of Cash Flows. The carried interest has a fundamentally different risk profile than an LP interest. While an LP interest entitles the holder to a return of capital and a preferred return before any profits are shared, the carried interest entitles the holder to nothing unless and until the fund's returns exceed the hurdle rate. This creates a binary or option-like payoff structure: if the fund performs well, the carried interest may be extremely valuable; if the fund underperforms, the carried interest may be worthless. This binary risk profile, while partially reflected in the DCF valuation through the probability-weighted scenario analysis and higher discount rate, is a factor that would cause a hypothetical buyer to demand a significant discount.
Clawback Risk. The carried interest is subject to a clawback provision under which Mr. Caldwell may be required to return previously distributed carried interest if the fund's aggregate returns, measured at the end of the fund's life, fall below the preferred return threshold. This clawback obligation creates additional downside risk for the carry holder and further reduces the value of the carried interest to a hypothetical buyer.
Ashford's DLOM determination is supported by the limited available comparable transaction data for carried-interest transfers. Academic literature on the illiquidity of performance-based compensation in alternative investment vehicles, including the work of Professors Metrick and Yasuda (2010) and Phalippou and Gottschalg (2009), has documented the significant illiquidity premium associated with carried interest and similar performance-based allocations. While this literature does not provide a precise discount percentage, it supports the conclusion that carried-interest positions are among the most illiquid of all alternative investment interests and warrant a substantial DLOM.
Based on this analysis, Ashford applied a 30% combined discount to the carried interest, reflecting primarily the extreme illiquidity and contingent nature of the interest.
D. Discount for Lack of Control — Embedded in Combined discount
Like the Fund IV and Fund V LP interests, the carried interest carries no management authority. The carried-interest holder has no right to participate in investment decisions, influence distribution timing, compel liquidation, or otherwise control the operations of the fund. The lack-of-control factors applicable to t

CALDERWOOD & HARKNESS LLP Counselors at Law

MEMORANDUM

MATTER NO.: 1034-00004

BILLING CODE: 78412-JRC

I. EXECUTIVE SUMMARY

II. SCOPE AND METHODOLOGY

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