MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
TO: James Prentice, Responsible Partner, Calderwood & Harkness LLP Claire Nakamura, Partner & Head of Software Investing, Solara Digital Infrastructure LP
FROM: Sylvia Hartwell, Tax Specialist Partner, Calderwood & Harkness LLP
DATE: February 22, 2026
RE: Preliminary Analysis of Joint Section 338(h)(10) Election — Proposed Acquisition of Meridian FleetWorks, Inc.
Matter No.: 1041-00004 (Project Trident)
Engagement Reference: 1041-00004
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I. Executive Summary
Calderwood & Harkness LLP has been asked to analyze the feasibility and potential economic benefits of making a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), and corresponding Treasury Regulations, in connection with Solara Fleet Holdings LLC's (the "Buyer" or "AcquisitionCo") proposed acquisition of 100% of the issued and outstanding stock of Meridian FleetWorks, Inc. ("MFW" or the "Company"), a Delaware C corporation, for an aggregate purchase price of $350,000,000 (the "Transaction"). This memorandum sets forth our preliminary conclusions and identifies significant structural and eligibility issues requiring further investigation.
A Section 338(h)(10) election, if available and made jointly by the acquiring corporation and the selling shareholders, would treat the stock purchase as a deemed asset sale for federal income tax purposes. This treatment would allow the Buyer to obtain a stepped-up tax basis in MFW's assets equal to the aggregate deemed sale price (approximately $350,000,000, subject to adjustments for assumed liabilities and other items), while MFW would be treated as having sold all of its assets in a single transaction on the acquisition date. The result is that future depreciation and amortization deductions available to the Buyer's post-acquisition entity would be calculated on a tax basis reflecting the full purchase price, rather than on MFW's historical (and significantly lower) inside tax basis.
Preliminary analysis indicates that the election is structurally feasible given the proposed transaction structure — specifically, a qualified stock purchase of 100% of MFW stock by a single corporate or entity acquiror in a single-step closing — but the election requires the consent and cooperation of all selling shareholders. The principal selling shareholders are Pinnacle Bluff Ventures LLC (approximately 34.0% on a fully diluted basis), Garrett Holliday (approximately 32.0% on a fully diluted basis), and Diana Vasquez-Park (approximately 18.0% on a fully diluted basis). Consent from these shareholders is required because the election increases the sellers' aggregate tax burden by converting what would otherwise be capital-gain-on-stock-sale treatment into ordinary income on certain deemed asset sale proceeds, particularly with respect to depreciation recapture items and assets allocated to Classes I through V under the residual allocation method.
The key economic benefit to the Buyer is the present value of incremental depreciation and amortization deductions arising from the step-up in basis of MFW's tangible and intangible assets. This benefit is estimated preliminarily in the range of $30,000,000 to $45,000,000 in present value tax savings, subject to detailed modeling upon receipt of MFW's asset schedules and tax basis data. The key economic cost to the sellers is the incremental tax liability compared to stock-sale treatment, which will need to be offset through a negotiated tax gross-up payment or purchase price adjustment, as is customary in transactions where a Section 338(h)(10) election is sought.
Critically, however, we have identified a threshold eligibility concern. The Section 338(h)(10) election in its traditional form is available only where the target is (i) a subsidiary member of a selling consolidated group, or (ii) an S corporation. MFW does not appear to be a subsidiary of a consolidated group, and is currently taxed as a C corporation, not an S corporation. If MFW is a standalone C corporation with no consolidated group parent, the Section 338(h)(10) election is not available in its traditional form. We discuss this issue at length in Section III.B below and identify several potential restructuring alternatives that could enable the parties to achieve functionally equivalent tax results. This memorandum proceeds with the substantive analysis assuming the election were available (for example, if MFW were to convert to S corporation status prior to closing or the transaction were restructured as an asset purchase) in order to quantify the potential benefits for Solara's consideration and inform the decision regarding alternative transaction structures.
This memorandum is preliminary in nature. Further analysis and financial modeling are pending receipt of MFW's detailed asset schedules, tax basis information, and historical federal and state income tax returns from Glenmore Kessler & Associates PC (MFW's independent auditor, engagement partner Linda Chowdhury, CPA) through the ongoing due diligence process, and coordination with Whitmore Sandoval Group LLC (engagement lead Daniel Ostroff, CPA) on quality of earnings and tax-related findings.
II. Transaction Overview and Relevant Structure
A. Proposed Acquisition Structure
Solara Digital Infrastructure LP, a Delaware limited partnership, acting through its investment vehicle Solara Fund III, LP (EIN 84-6239017), will form a new wholly-owned Delaware limited liability company, Solara Fleet Holdings LLC ("AcquisitionCo"), to serve as the direct purchaser of MFW's stock. AcquisitionCo will be organized under the Delaware Limited Liability Company Act and will serve as the acquisition vehicle for the Transaction.
AcquisitionCo will acquire 100% of all issued and outstanding equity interests in MFW. As of the expected closing date, MFW's capitalization consists of the following:
• Common Stock: 7,850,000 shares of common stock, par value $0.001 per share, issued and outstanding;
• Series A Preferred Stock: 1,500,000 shares of Series A Preferred Stock, par value $0.001 per share, issued and outstanding; and
• Stock Options: 650,000 outstanding stock options issued under the Meridian FleetWorks, Inc. 2016 Stock Incentive Plan, with a weighted-average exercise price of $8.50 per share, all of which are expected to be vested and exercisable as of the closing date.
At closing, all outstanding stock options will be cancelled and cashed out at the per-share deal price of $35.00, less the applicable exercise price. The aggregate net cash-out amount for the option holders is approximately $17,225,000 (650,000 options × ($35.00 − $8.50) = $17,225,000). On a fully diluted basis, MFW has 10,000,000 shares outstanding (7,850,000 common shares + 1,500,000 Series A Preferred shares + 650,000 option shares).
The aggregate purchase price for the Transaction is $350,000,000, calculated on a cash-free, debt-free basis with a customary net working capital adjustment. The net working capital target has been set at $5,800,000, based on a trailing twelve-month average as of December 31, 2025. Any deviation from the NWC target at closing will result in a dollar-for-dollar adjustment to the purchase price, subject to a customary collar or de minimis threshold to be negotiated in the definitive Stock Purchase Agreement.
The per-share price implied by the aggregate purchase price is $35.00 ($350,000,000 ÷ 10,000,000 fully diluted shares).
Garrett Holliday, MFW's co-founder and Chief Executive Officer, who holds approximately 3,200,000 shares of common stock (32.0% fully diluted), will roll over approximately $25,000,000 of equity value (representing approximately 7.14% of the aggregate deal value) into AcquisitionCo. Mr. Holliday's rollover is intended to be structured as a contribution of MFW shares (or cash proceeds immediately reinvested) to AcquisitionCo in exchange for a membership interest in AcquisitionCo. The net cash consideration payable to selling shareholders at closing, after accounting for the Holliday rollover, is approximately $325,000,000.
MFW's existing indebtedness, consisting of approximately $4,200,000 outstanding under a credit facility with Sentinel Commerce Bank, N.A., will be repaid in full at or immediately prior to closing as part of the cash-free, debt-free purchase price adjustment.
An escrow holdback of $17,500,000 (representing 5% of the aggregate deal value) will be deposited with Northgate Escrow Services LLC at closing. The escrow will be available to satisfy post-closing indemnification claims by the Buyer during an 18-month survival period following the closing date. The terms of the escrow arrangement, including release mechanics, claim procedures, and any special carve-outs for fundamental representations, tax representations, or fraud, will be set forth in an Escrow Agreement to be negotiated as part of the definitive transaction documentation.
B. MFW Entity Classification
Meridian FleetWorks, Inc. is a corporation organized and existing under the laws of the State of Delaware (Delaware Secretary of State File Number 5582037). MFW's federal Employer Identification Number is 47-3891205. MFW was incorporated in 2014.
MFW is currently taxed as a C corporation for federal income tax purposes. We are not aware of any election having been made, or currently being in effect, to treat MFW as an S corporation under Subchapter S of the Code, and MFW's capitalization structure (specifically, the existence of Series A Preferred Stock in addition to common stock) may preclude S corporation eligibility under the single-class-of-stock requirement of Section 1361(b)(1)(D) of the Code (discussed further in Section XI.B.2 below).
MFW's fiscal year ends on December 31. Based on information provided in the Confidential Information Memorandum prepared by Redstone Arbor Capital LLC and preliminary due diligence data, MFW's financial performance for the fiscal year ended December 31, 2025 ("FY 2025") is summarized as follows:
• Total Revenue: approximately $67,500,000
• Annual Recurring Revenue (ARR): approximately $62,000,000
• EBITDA: approximately $14,800,000
• Net Revenue Retention (NRR): approximately 112%
• Gross Revenue Retention (GRR): approximately 94%
• Total Customer Accounts: approximately 4,200
MFW's C corporation status is a prerequisite for certain aspects of the Section 338(h)(10) analysis, as discussed in detail in Section III below. In particular, the availability of the Section 338(h)(10) election depends on whether MFW is a member of a selling consolidated group or is an S corporation, rather than simply being any domestic corporation. This distinction is critical and is addressed in Section III.B.
C. AcquisitionCo Entity Classification
Solara Fleet Holdings LLC will be organized as a Delaware limited liability company. Its classification for federal income tax purposes will be governed by Treasury Regulation § 301.7701-3 (the "check-the-box" regulations) and will depend on the number of members and any affirmative classification election made by the entity.
If AcquisitionCo is initially formed as a single-member LLC wholly owned by Solara Fund III, LP, it will be treated as a disregarded entity for federal tax purposes by default under Treas. Reg. § 301.7701-3(b)(1)(ii). A disregarded entity is not a "corporation" for purposes of Section 338 of the Code, and therefore would not satisfy the requirement that the acquiring entity in a qualified stock purchase be a "corporation" as defined in Section 338(d)(1) and Section 7701(a)(3).
To satisfy the Section 338(h)(10) eligibility requirements (assuming the election is otherwise available), AcquisitionCo would need to be treated as a corporation for federal tax purposes. This could be achieved through one of the following mechanisms:
1. Check-the-box Election: AcquisitionCo could file IRS Form 8832 (Entity Classification Election) to elect treatment as an association taxable as a corporation. This election would need to be effective as of or before the acquisition date.
2. Corporate blocker Entity: Alternatively, a newly formed corporation (either a C corporation or, if structurally appropriate, an S corporation) could be interposed between Solara Fund III, LP and AcquisitionCo, or could serve as the direct acquiror of MFW stock. This approach would ensure that the acquiring entity meets the corporate-status requirement without altering AcquisitionCo's default classification.
3. Post-Closing Restructuring: In certain structures, the acquisition may be effected by a corporate entity, with a subsequent conversion or restructuring to achieve the desired post-closing ownership and tax structure.
The choice among these alternatives has significant implications for Solara's overall fund structure, the treatment of Solara Fund III, LP's limited partners (including any tax-exempt investors, foreign investors, or investors with specific tax sensitivities), and the post-closing operating structure. This structural point requires further analysis and close coordination with Solara's tax advisors and fund counsel regarding the fund's overall tax structure and limited partner considerations. We understand that Solara's fund counsel is separately analyzing these issues, and we recommend a joint conference call to align on the entity classification approach before advancing the Section 338(h)(10) analysis further.
Additionally, the Holliday rollover introduces a second member into AcquisitionCo. If AcquisitionCo has two or more members (Solara Fund III, LP and Garrett Holliday), it will be classified as a partnership by default under the check-the-box regulations, unless an affirmative election to be treated as a corporation is made. The interaction between AcquisitionCo's classification and the rollover structure is discussed further in Section IX below.
III. Section 338(h)(10) Election — Legal Framework
A. Statutory and Regulatory Overview
Section 338 of the Code provides a mechanism by which, following a "qualified stock purchase" of a target, the acquiring corporation may elect to treat the stock acquisition as an asset acquisition for federal income tax purposes. The general rule under Section 338(a) permits the acquiring corporation to make a unilateral election (a "Section 338(g) election"), which results in the target being treated as having sold all of its assets at fair market value on the acquisition date. The deemed asset sale triggers a corporate-level tax on the target, and the target is then treated as a "new corporation" that purchased all of the old target's assets at the close of the acquisition date for an amount equal to the "adjusted grossed-up basis" (AGUB).
Section 338(h)(10) of the Code, and Treasury Regulation § 1.338(h)(10)-1, provide a special rule that applies when the target is either (i) a member of a "selling consolidated group" (as defined in Treas. Reg. § 1.338(h)(10)-1(c)), or (ii) an "S corporation target" (as defined in Treas. Reg. § 1.338(h)(10)-1(c)(1)). In these cases, the acquiring corporation and the selling consolidated group (or the S corporation shareholders) may make a joint election under Section 338(h)(10) to treat the qualified stock purchase as a deemed asset sale, with the following key effects:
• Old Target is treated as having sold all of its assets in a single transaction at fair market value as of the close of the acquisition date, recognizing gain or loss on the deemed sale;
• Old Target is then treated as having distributed the proceeds of the deemed sale in complete liquidation of Old Target to the selling shareholders or the selling consolidated group parent;
• The deemed liquidation is generally treated as a tax-free event to the extent it qualifies under Section 332 of the Code (for a subsidiary liquidation within a consolidated group) or Section 331/336 (for an S corporation, with gain flowing through to shareholders under Subchapter S);
• New Target is deemed to have acquired all of Old Target's assets with a tax basis equal to the AGUB; and
• The stock sale between the selling shareholders and the acquiring corporation is disregarded — the sellers do not separately recognize gain or loss on the stock sale (the tax consequences flow exclusively from the deemed asset sale and deemed liquidation).
The election is governed by the following principal statutory and regulatory provisions:
• Section 338 of the Code (general deemed asset sale election);
• Section 338(d)(3) of the Code (definition of "qualified stock purchase");
• Section 338(h)(10) of the Code (special rules for targets in selling consolidated groups and S corporation targets);
• Treasury Regulations §§ 1.338-1 through 1.338-11 (general Section 338 regulations);
• Treasury Regulation § 1.338(h)(10)-1 (specific rules governing the Section 338(h)(10) election);
• Treasury Regulation § 1.338-4 (aggregate deemed sale price);
• Treasury Regulation § 1.338-5 (adjusted grossed-up basis);
• Treasury Regulation § 1.338-6 (allocation of ADSP and AGUB among asset classes under the residual method); and
• Section 1060 of the Code and Treasury Regulation § 1.1060-1 (applicable asset acquisitions — allocation rules).
The critical distinction between a Section 338(g) election and a Section 338(h)(10) election is that, under Section 338(h)(10), the stock sale is disregarded, and the tax consequences are determined solely by reference to the deemed asset sale and deemed liquidation. This avoids the "double tax" that would result from a Section 338(g) election (where the target recognizes gain on the deemed asset sale at the corporate level, and the selling shareholders separately recognize gain on the actual stock sale at the shareholder level). The avoidance of the double tax is what makes the Section 338(h)(10) election economically attractive relative to a Section 338(g) election.
B. Eligibility Requirements
The availability of a Section 338(h)(10) election depends on the satisfaction of several threshold requirements, each of which is analyzed below in the context of the proposed Transaction.
1. Qualified Stock Purchase (QSP)
Under Section 338(d)(3) of the Code, a "qualified stock purchase" means any transaction or series of transactions in which a corporation acquires, by "purchase" (as defined in Section 338(h)(3)), stock meeting the requirements of Section 1504(a)(2) — i.e., stock possessing at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total value of all outstanding stock of the target — within a 12-month acquisition period.
In the proposed Transaction, AcquisitionCo is acquiring 100% of all issued and outstanding shares of MFW (both common stock and Series A Preferred Stock) in a single-step closing. The 80% threshold is therefore clearly and unambiguously satisfied, provided that AcquisitionCo is treated as a "corporation" for federal tax purposes. As discussed in Section II.C above, AcquisitionCo's current default classification as a disregarded entity (single-member LLC) or partnership (multi-member LLC with Holliday rollover) would not satisfy this requirement. A check-the-box election to corporate status, or the interposition of a corporate entity, would be necessary.
Additionally, the term "purchase" under Section 338(h)(3) excludes acquisitions of stock in certain tax-free transactions, including acquisitions pursuant to Section 351 exchanges, Section 721 contributions, and certain other nonrecognition transactions. The Holliday rollover, if structured as a contribution of MFW shares to AcquisitionCo under Section 721 of the Code (or Section 351), would not constitute a "purchase" of those shares. This means that the shares contributed by Holliday in the rollover would not count toward the 80% qualified stock purchase threshold. Because AcquisitionCo is acquiring the remaining shares (approximately 68% on a fully diluted basis, excluding Holliday's 32% position) for cash, the 80% threshold may not be met if Holliday's rollover shares are excluded from the "purchase" calculation. This is a significant structural issue that is discussed in detail in Section IX below.
2. Target Must Be a Domestic Corporation
The target of a Section 338(h)(10) election must be a domestic corporation. MFW is a corporation organized under the laws of the State of Delaware. This requirement is satisfied.
3. Joint Election Requirement — Selling Consolidated Group or S Corporation Target
This is the critical threshold eligibility question for the proposed Transaction.
Treasury Regulation § 1.338(h)(10)-1(c) provides that a Section 338(h)(10) election may be made jointly by the acquiring corporation and either:
(a) The "selling consolidated group" — defined as the selling affiliate (the common parent of the consolidated group of which the target is a member) that disposes of the target's stock in the qualified stock purchase. This requires that the target be a member of a consolidated group filing a consolidated federal income tax return with an affiliated group of corporations under Section 1501 of the Code; or
(b) The shareholders of an "S corporation target" — i.e., a target that is an S corporation on the acquisition date. All shareholders of the S corporation on the acquisition date must consent to the election.
MFW does not appear to satisfy either condition. Based on information available to date:
• Not a member of a selling consolidated group: MFW is not, to our knowledge, a subsidiary of another corporation that is the common parent of an affiliated group filing a consolidated federal income tax return. MFW's largest shareholder is Pinnacle Bluff Ventures LLC, a Virginia limited liability company, which holds approximately 34.0% of MFW's fully diluted equity. Pinnacle Bluff is not a corporation and does not file a consolidated return with MFW. Even if Pinnacle Bluff were a corporation, a 34% ownership stake would not satisfy the 80% affiliation threshold under Section 1504(a)(2) required for consolidated group membership. MFW's other shareholders are individuals (Garrett Holliday, Diana Vasquez-Park, Marcus Trahan, and others) and option holders — none of whom could serve as a consolidated group parent.
• Not an S corporation: MFW is currently taxed as a C corporation. We are not aware of any election under Section 1362 of the Code having been made or currently being in effect to treat MFW as an S corporation.
Preliminary Conclusion on Eligibility: If MFW is a standalone C corporation that is not a member of a selling consolidated group and is not an S corporation, the Section 338(h)(10) election is not available in its traditional form under the current transaction structure.
Alternative Approaches to Consider:
We have identified the following potential alternatives to achieve the economic benefits of a step-up in asset basis:
(i) Regular Section 338(g) Election. The Buyer could make a unilateral Section 338(g) election (which does not require seller consent). This election would achieve the stepped-up basis in MFW's assets. However, it would result in a double tax: MFW would recognize gain on the deemed asset sale at the corporate level (at a 21% federal rate, plus applicable state taxes), and the selling shareholders would separately recognize gain on the actual stock sale at the shareholder level. The aggregate tax burden of the double tax would typically far exceed the present value of the step-up benefit, making the Section 338(g) election generally uneconomic for a C corporation target. We can model the specific economics if requested, but we would expect the result to be significantly value-destructive.
(ii) S Corporation Conversion Prior to Closing. If MFW could convert from C corporation to S corporation status prior to the closing date, the Section 338(h)(10) election would become available (with consent of all S corporation shareholders on the acquisition date). However, S corporation eligibility under Section 1361(b) of the Code imposes several requirements that may be problematic for MFW:
• Single class of stock: Section 1361(b)(1)(D) requires that an S corporation have only one class of stock. MFW has outstanding both common stock (7,850,000 shares) and Series A Preferred Stock (1,500,000 shares). If the Series A Preferred Stock has economic rights (liquidation preferences, dividend preferences, participation rights, or other distribution rights) that differ from the common stock, MFW would have more than one class of stock and would be ineligible for S corporation status. This is likely a disqualifying condition and must be confirmed by reviewing the MFW Certificate of Incorporation and the terms of the Series A Preferred Stock.
• Eligible shareholders: Section 1361(b)(1)(B) limits S corporation shareholders to individuals (who are U.S. citizens or residents), certain trusts, and estates. Corporations, partnerships, and LLCs (unless they are single-member LLCs owned by eligible individuals) are generally not eligible shareholders. Pinnacle Bluff Ventures LLC, a Virginia limited liability company, holds approximately 34% of MFW's stock. Unless Pinnacle Bluff is a single-member LLC treated as a disregarded entity owned by an eligible individual shareholder, its ownership of MFW stock would disqualify MFW from S corporation status.
• Number of shareholders: Section 1361(b)(1)(A) limits S corporation shareholders to 100. This threshold does not appear to be an issue for MFW based on available information.
• Built-in gains tax: If MFW were to convert to S corporation status, it would be subject to the built-in gains tax under Section 1374 of the Code for a period of five years following the conversion. Under Section 1374, any net recognized built-in gain during the recognition period is taxed at the highest corporate rate (currently 21%). This tax applies at the entity level in addition to the pass-through of income to shareholders, effectively replicating the double tax on built-in gains for the five-year period. If the deemed asset sale under Section 338(h)(10) occurred within the recognition period (which it would, since the closing is expected in April 2026), the Section 1374 built-in gains tax would apply to the net recognized built-in gain, substantially increasing the aggregate tax cost of the election.
• Unanimous shareholder consent: The S corporation election under Section 1362(a) requires the consent of all shareholders. Given the diverse shareholder base (including institutional and individual holders), obtaining unanimous consent may be challenging.
For these reasons, S corporation conversion prior to closing faces significant practical and legal obstacles. Further investigation is required to determine whether any of these obstacles can be overcome.
(iii) Restructure as an Asset Purchase. The Transaction could be restructured as a direct purchase of MFW's assets (rather than its stock) by AcquisitionCo. An asset purchase would achieve a stepped-up basis in the acquired assets by operation of the general basis rules under Section 1012 of the Code (cost basis), without the need for a Section 338 election. However, an asset purchase structure would entail the following considerations and potential disadvantages:
• Corporate-level tax on asset sale: MFW, as a C corporation, would recognize gain on the sale of its assets at the corporate level (21% federal rate, plus state taxes). This gain would be paid from the sale proceeds, reducing the net amount distributable to shareholders on liquidation.
• Shareholder-level tax on liquidation: Following the asset sale, MFW would distribute the net proceeds to shareholders in liquidation, triggering a second level of tax at the shareholder level. This results in the same double-tax structure as a Section 338(g) election.
• Contract assignment issues: An asset purchase requires the assignment of MFW's contracts, licenses, and permits to the purchaser. This may require third-party consents, including consent from TerraLink (which we understand is already a critical due diligence issue relating to a change-of-control provision in MFW's agreement with TerraLink). Other material contracts may also contain anti-assignment or consent-required provisions.
• Bulk sale and transfer tax implications: An asset purchase may trigger bulk sale notification requirements and state and local transfer taxes (e.g., real estate transfer taxes on any owned or leased real property).
• Employee and benefit plan matters: An asset purchase structure would require the hiring (or deemed hiring) of MFW's employees by the purchaser, with implications for benefit plan continuity, WARN Act compliance, COBRA obligations, and other employment-related matters. The 25 independent contractors identified in diligence would also need to be addressed.
• intellectual property transfer: All intellectual property would need to be separately assigned. The IP assignment gaps for three former contractors from 2015–2016 (previously identified in due diligence) could complicate or create risk in connection with the transfer of technology assets.
Despite these complications, an asset purchase may be worth exploring if the Section 338(h)(10) election is unavailable and the parties determine that the step-up benefit justifies the additional complexity and cost. The double-tax issue inherent in an asset sale by a C corporation would, however, substantially erode the economic benefit of the step-up, and would need to be modeled carefully.
(iv) Evaluate Pinnacle Bluff as Consolidated Group Parent. We briefly considered whether Pinnacle Bluff Ventures LLC could be structured or recharacterized as a "selling consolidated group" parent for purposes of Treas. Reg. § 1.338(h)(10)-1(c). This approach is not viable. Pinnacle Bluff is a Virginia limited liability company, not a corporation. Even if Pinnacle Bluff were a corporation, it holds only approximately 34% of MFW's stock — well below the 80% ownership threshold required for affiliated group status under Section 1504(a)(2). There is no reasonable basis on which to characterize Pinnacle Bluff as a selling consolidated group parent.
Summary of Eligibility Analysis: The Section 338(h)(10) election may not be available as currently structured if MFW is confirmed to be a standalone C corporation that is not a member of a selling consolidated group and is not an S corporation. The alternatives described above present varying degrees of feasibility, cost, and complexity. Further investigation into MFW's corporate history, capitalization, and tax status is required to confirm these preliminary conclusions.
Notwithstanding the foregoing eligibility concern, the remainder of this memorandum proceeds with the substantive analysis of the Section 338(h)(10) election on the assumption that the eligibility hurdle can be cleared — either through S corporation conversion, transaction restructuring, or some other mechanism — so that the parties can evaluate the potential economic benefits and costs and make an informed decision about whether to pursue the election and, if so, which structural path to take.
C. Deemed Asset Sale Mechanics
If the Section 338(h)(10) election were made, the following deemed transactions would be treated as occurring for federal income tax purposes:
Step 1 — Deemed Asset Sale by Old Target. Immediately before the close of the acquisition date, Old Target (i.e., MFW as it existed prior to the acquisition) is treated as having sold all of its assets to an unrelated party in a single transaction at fair market value. Old Target recognizes gain or loss on the deemed sale, measured as the difference between the "aggregate deemed sale price" (ADSP) and the adjusted tax basis of each of Old Target's assets, determined on an asset-by-asset basis and allocated among asset classes under the residual method prescribed by Treas. Reg. § 1.338-6.
Step 2 — Deemed Liquidation. Immediately following the deemed asset sale, Old Target is treated as having distributed all of the deemed sale proceeds (and any other assets) to its shareholders in complete liquidation. The tax consequences of the deemed liquidation depend on the target's status:
• If the target is a member of a selling consolidated group, the deemed liquidation is generally governed by Section 332 of the Code (tax-free liquidation of a controlled subsidiary), and the selling parent recognizes gain or loss on the disposition of the target's stock in a manner consistent with the consolidated return regulations.
• If the target is an S corporation, the deemed liquidation results in a pass-through of the deemed sale gain to the S corporation shareholders under Subchapter S, with the character of the gain (ordinary or capital) determined at the entity level based on the nature of the assets deemed sold. The actual stock sale between the shareholders and the acquiring corporation is disregarded.
ADSP Calculation. The aggregate deemed sale price is calculated in accordance with Treas. Reg. § 1.338(h)(10)-1(d) and generally equals the sum of:
(a) The grossed-up amount realized on the sale of recently purchased stock of Old Target (generally, the total amount of consideration received by the selling shareholders for their stock); plus
(b) The liabilities of Old Target (including tax liabilities arising from the deemed sale itself, as adjusted iteratively).
In the proposed Transaction, the ADSP would be approximately:
• Amount realized on stock: $350,000,000 (aggregate purchase price)
• Plus: Liabilities of Old Target: ~$4,200,000 (Sentinel Commerce Bank indebtedness) + transaction expenses + other assumed liabilities (to be determined through diligence)
• Less: Adjustments for cash on hand (cash-free basis) and net working capital adjustments
• Approximate ADSP: $354,200,000+ (subject to final determination)
D. Stepped-Up Basis — New Target
Following the deemed asset sale and deemed liquidation, a "New Target" is deemed to have been created and to have acquired all of Old Target's assets at the close of the acquisition date. New Target's tax basis in the acquired assets equals the "adjusted grossed-up basis" (AGUB), calculated in accordance with Treas. Reg. § 1.338-5.
AGUB generally equals the sum of:
(a) The grossed-up basis of the acquiring corporation's recently purchased stock of the target (generally, the total purchase price paid by AcquisitionCo for MFW stock); plus
(b) The liabilities of New Target (the same liabilities used in the ADSP calculation, as adjusted); plus
(c) Other relevant items as prescribed by the regulations.
In the proposed Transaction, AGUB would be approximately $354,200,000+ (the same as ADSP, reflecting the purchase price of $350,000,000 plus assumed liabilities of approximately $4,200,000 plus other identified liabilities). The AGUB is allocated among the seven asset classes under the residual method, as discussed in Section IV below.
The stepped-up basis allows New Target to compute depreciation and amortization deductions on the acquired assets based on the AGUB allocation, rather than on Old Target's historical (and lower) tax basis. This is the principal economic benefit of the election to the Buyer.
IV. Allocation of Aggregate Deemed Sale Price / AGUB
A. Asset Classes Under Section 338 and Section 1060
Both the ADSP (for purposes of computing Old Target's deemed sale gain) and the AGUB (for purposes of determining New Target's stepped-up basis in acquired assets) must be allocated among seven classes of assets in accordance with the "residual method" prescribed by Section 338 of the Code, Section 1060 of the Code, and Treasury Regulation § 1.338-6. The residual method requires that the total consideration be allocated first to the lowest-numbered asset class, up to the fair market value of assets in that class, before any residual is allocated to higher-numbered classes. The seven asset classes are as follows:
The allocation is performed sequentially: the total ADSP or AGUB is first allocated to Class I assets at their fair market value, then to Class II assets, and so on through Class VII. Any amount remaining after allocation to Classes I through VI is allocated entirely to Class VII (goodwill and going concern value). Because goodwill is the residual class, the allocation to Classes I through VI effectively determines the goodwill amount.
B. Preliminary Estimated Allocation
A detailed allocation requires access to MFW's balance sheet as of the closing date, detailed fixed asset and intangible asset schedules with historical cost and accumulated depreciation/amortization, and an independent valuation of identifiable tangible and intangible assets. We have not yet received this data from Glenmore Kessler & Associates PC or through the ongoing due diligence process. However, based on information available in the Confidential Information Memorandum, management presentations, and preliminary diligence findings, we provide the following high-level preliminary estimate of the allocation for illustrative purposes:
Class VI — Section 197 Intangibles. The Class VI allocation is the most significant component of the allocation for both parties (it determines both the character of gain to the sellers and the amortization benefit to the Buyer). The principal Section 197 intangibles expected to be identified in MFW include:
(a) Customer Relationships. MFW serves approximately 4,200 active customer accounts generating approximately $62,000,000 in ARR. The customer base exhibits strong retention metrics (112% net revenue retention, 94% gross revenue retention), suggesting significant value in existing customer relationships. Customer relationships are typically valued using an income approach (multi-period excess earnings method) and would be amortizable over 15 years under Section 197. Preliminary estimate: $60,000,000–$90,000,000.
(b) Developed Technology. MFW's proprietary fleet management SaaS platform is the core asset of the business. The platform includes route optimization algorithms, real-time telematics integration, predictive maintenance modules, fuel management analytics, and a customer-facing mobile application. Technology assets are typically valued using a replacement cost approach or an income approach (relief from royalty method). Note: The due diligence review has identified IP assignment gaps for three former contractors from 2015–2016, which may affect the valuation of technology assets or create risk regarding ownership of certain technology components. Preliminary estimate: $25,000,000–$40,000,000.
(c) Trade Name. The "Meridian FleetWorks" brand has established market recognition within the mid-market fleet management sector. Trade names are typically valued using a relief-from-royalty approach. Preliminary estimate: $5,000,000–$10,000,000.
(d) Non-Compete Covenants. Non-compete agreements with key executives (Garrett Holliday, Diana Vasquez-Park, and potentially other key personnel) would be separately valued based on the economic benefit of the restrictive covenants. The value attributed to non-compete covenants would be treated as ordinary income to the recipients upon deemed sale. Preliminary estimate: $2,000,000–$5,000,000.
(e) Assembled Workforce. While an assembled workforce is a Section 197 intangible, it is generally not separately amortizable when acquired as part of a going-concern business acquisition — its value is subsumed within goodwill. However, it may be relevant for valuation purposes in the multi-period excess earnings analysis.
Class VII — Goodwill and Going Concern Value. The residual amount — estimated at $200,000,000 to $240,000,000 — represents the premium paid for MFW above the fair market value of its identifiable tangible and intangible assets. This residual reflects the going concern value of MFW's business, including its market position, growth prospects, scalable SaaS platform, recurring revenue model, management team, and other factors that contribute to the excess of purchase price over identifiable asset values. Goodwill is amortizable over 15 years under Section 197.
The vast majority of the total AGUB — potentially 85% to 95% — will be allocated to Class VI and Class VII assets, which are amortizable ratably over 15 years under Section 197. This concentration of value in amortizable intangible assets is typical for SaaS business acquisitions and is what drives the substantial present value tax savings from the stepped-up basis.
C. Significance of Allocation
The allocation of ADSP and AGUB among asset classes is significant for both the selling shareholders and the Buyer:
For the Sellers (Old Target / Selling Shareholders):
• The allocation determines the character of gain recognized on the deemed asset sale. Gain on Class I through Class V assets is generally characterized as ordinary income (to the extent of depreciation recapture under Sections 1245 and 1250 of the Code) or capital gain (to the extent of appreciation above recaptured amounts). Gain on Class VI assets (other than non-compete covenants, which produce ordinary income to the recipient) is generally Section 1231 gain or capital gain. Gain on Class VII assets (goodwill) is capital gain.
• For selling shareholders of an S corporation, the character of gain flows through to the individual shareholders, affecting their federal and state tax rates. Ordinary income items are taxed at rates up to 37% (plus 3.8% net investment income tax), while long-term capital gain items are taxed at rates up to 20% (plus 3.8% NIIT). The allocation thus directly affects the sellers' aggregate tax liability.
For the Buyer (New Target):
• The allocation determines the amount and timing of future depreciation and amortization deductions available to New Target. Assets allocated to Class V are depreciable over their applicable recovery periods under the Modified Accelerated Cost Recovery System (MACRS) — generally 5 years for computer equipment and office furniture, 7 years for general-purpose tangible personal property, and 15 years for qualified leasehold improvements (or the lease term, if shorter). Assets allocated to Classes VI and VII (Section 197 intangibles) are amortizable ratably over 15 years.
• A higher allocation to shorter-lived tangible assets (Class V) accelerates the depreciation deductions and increases the present value of tax savings, but the dollar amounts in Class V for a SaaS business like MFW are expected to be relatively modest.
Both the Buyer and the sellers are required to report consistently with the agreed-upon allocation on their respective federal and state income tax returns, and the allocation must be reported on IRS Form 8594 (Asset Acquisition Statement Under Section 1060). Inconsistent reporting by either party may trigger IRS scrutiny and potential adjustments.
The allocation among classes — particularly the division between customer relationships, technology, trade name, and goodwill within Classes VI and VII — will require a formal valuation study (Section 1060 allocation report) to be prepared by a qualified independent appraiser. The definitive Stock Purchase Agreement should include provisions addressing the timing, methodology, and dispute resolution process for the allocation determination.
V. Economic Benefit to the Buyer — Stepped-Up Basis and Tax Savings
A. Incremental Amortization and Depreciation Deductions
The economic rationale for a Section 338(h)(10) election from the Buyer's perspective is straightforward: without the election, MFW's assets retain their existing (historical) tax basis inside the corporation following a stock purchase, and the Buyer receives no incremental depreciation or amortization deductions. With the election, New Target obtains a stepped-up basis equal to the AGUB (approximately $354,200,000), and the Buyer benefits from depreciation and amortization deductions calculated on that stepped-up basis.
Current Inside Tax Basis. MFW's current inside tax basis in its assets is expected to be significantly lower than the proposed purchase price. This expectation is based on the following factors:
• MFW was founded in 2014 with modest initial capitalization. We do not have access to the founding capitalization documents, but we understand that the initial equity contributions were relatively small.
• MFW's total historical equity investment, including the Series A Preferred Stock issuance and retained earnings accumulated over the past eleven years of operations, is estimated to be substantially below the $350,000,000 purchase price. MFW's FY 2025 EBITDA of approximately $14,800,000, while healthy, has been achieved through organic growth rather than capital-intensive investment in depreciable assets.
• MFW is a SaaS business with a relatively asset-light balance sheet. Its principal assets are software intellectual property (largely self-developed, with a tax basis reflecting only the capitalized development costs, if any, rather than fair market value) and customer relationships (which have no tax basis in a stock purchase scenario because they were internally generated).
• Tangible assets (office equipment, leasehold improvements, computer hardware) are expected to have a relatively low net book value and tax basis, reflecting their limited scope and accumulated depreciation.
Estimated Inside Tax Basis: We do not have precise data on MFW's aggregate inside tax basis, and this is a critical data point that must be obtained through the due diligence process. Based on the factors described above and comparisons to similar SaaS companies, we preliminarily estimate MFW's aggregate inside tax basis at approximately $20,000,000 to $50,000,000. This is a rough estimate and is subject to significant revision upon receipt of MFW's tax returns and asset schedules from Glenmore Kessler & Associates PC.
Estimated Incremental Step-Up: The incremental step-up in basis is the difference between the AGUB and the existing inside tax basis. Based on the preliminary estimates above:
• AGUB: ~$354,200,000
• Less: Estimated existing inside tax basis: ~$20,000,000 to $50,000,000
• Incremental step-up: approximately $300,000,000 to $335,000,000
This incremental step-up translates directly into incremental depreciation and amortization deductions that would not be available absent the election.
B. Present Value of Tax Savings
The present value of tax savings from the stepped-up basis depends on four principal variables: (1) the amount of the incremental step-up, (2) the allocation among asset classes (which determines the amortization/depreciation schedule), (3) the applicable tax rate, and (4) the discount rate used to calculate present value.
Section 197 Intangibles (Classes VI and VII). For a SaaS business like MFW, the vast majority of the incremental step-up will reside in Section 197 intangible assets — customer relationships, developed technology, trade name, and goodwill. Section 197 intangibles are amortizable ratably over 15 years, beginning in the month of acquisition.
• Estimated Section 197 intangible step-up: approximately $300,000,000 to $340,000,000 (reflecting the fact that substantially all of the incremental basis will be allocated to Classes VI and VII, with only a modest amount in Class V tangible assets).
• Annual amortization deduction: approximately $20,000,000 to $22,700,000 per year for 15 years ($300M–$340M ÷ 15 years).
• At an assumed combined federal and state effective tax rate of approximately 25% (reflecting a blended rate considering federal tax at 21% and state taxes in Virginia, Delaware, Texas, and Idaho), the annual tax savings would be approximately $5,000,000 to $5,675,000 per year.
• Present value of 15 years of annual tax savings at an 8% discount rate (illustrative, reflecting Solara's weighted average cost of capital): approximately $42,800,000 to $48,600,000.
• Present value at a 10% discount rate: approximately $38,000,000 to $43,200,000.
Class V Tangible Assets (Equipment, Leasehold Improvements). The incremental step-up in Class V tangible assets is estimated at only $3,000,000 to $5,000,000. These assets would be depreciable over shorter lives (generally 5 to 7 years for equipment and computer hardware under MACRS, and 15 years for qualified leasehold improvements or the remaining lease term). The present value of tax savings from the Class V step-up is relatively modest — approximately $600,000 to $1,000,000 — and does not meaningfully move the overall analysis.
Summary — Preliminary Estimate of Total PV Tax Savings to Buyer:
Preliminary estimate of total PV tax savings to Buyer: approximately $30,000,000 to $45,000,000, reflecting the range of uncertainty in the step-up amount, allocation, tax rate, and discount rate assumptions. The lower end of this range reflects a more conservative allocation to Section 197 intangibles (with more residual in goodwill, which has the same 15-year amortization period but may be subject to different risk assumptions) and a higher discount rate; the upper end reflects a more favorable allocation and lower discount rate.
This range will be refined substantially upon receipt of MFW's detailed tax basis information and engagement of a qualified valuation firm to prepare the formal Section 1060 allocation study.
C. Interaction with Debt Financing
The stepped-up amortization deductions would be utilized by New Target (the post-acquisition entity, which for operational purposes will be the surviving MFW entity or the entity resulting from the deemed liquidation and reformation). The amortization deductions will reduce New Target's taxable income and, correspondingly, its federal and state income tax obligations.
However, the utilization of these deductions must be considered in conjunction with other significant deductions available to the post-acquisition entity, particularly interest expense on acquisition indebtedness. We understand that the acquisition financing will include a $125,000,000 Term Loan A (at a floating rate of SOFR plus 400 basis points) and potentially a revolving credit facility. The annual interest expense on the Term Loan A alone, at current SOFR rates, could be in the range of $8,000,000 to $10,000,000.
The Section 163(j) business interest limitation must be considered in modeling the net benefit of both interest and amortization deductions. Under Section 163(j) of the Code, the deduction for business interest expense is generally limited to the sum of (a) business interest income, (b) 30% of the taxpayer's "adjusted taxable income" (ATI) for the taxable year, and (c) floor plan financing interest. For taxable years beginning after December 31, 2021, ATI is computed without adding back depreciation, amortization, or depletion deductions — meaning that the amortization deductions from the step-up will reduce ATI, which in turn reduces the Section 163(j) limitation, potentially limiting the deductibility of interest expense.
The interplay between the stepped-up amortization deductions and the Section 163(j) limitation requires integrated modeling to determine the net tax benefit. If the combination of amortization and interest deductions exceeds the Section 163(j) cap, some portion of the interest deductions may be deferred (carried forward indefinitely under current law), reducing the present value benefit of the step-up slightly. Conversely, the amortization deductions themselves are not subject to the Section 163(j) limitation — only the interest deductions are limited.
We recommend coordinating this integrated modeling with Cobalt Ridge Partners LLC (Owen Prescott, financial advisor) and Whitmore Sandoval Group LLC (Daniel Ostroff, CPA) to ensure that the returns analysis accurately reflects the after-tax cash flow impact of the election in the context of the full capital structure.
VI. Impact on Selling Shareholders
A. Tax Treatment Without the Election (Standard Stock Purchase)
In a standard stock purchase without a Section 338(h)(10) election, each selling shareholder recognizes gain or loss on the sale of its MFW shares equal to the difference between the amount realized (the per-share purchase price of $35.00, or the net cash-out amount for option holders) and the shareholder's adjusted tax basis in the shares sold.
For shareholders who have held their MFW shares for more than one year (which is expected to be the case for all principal shareholders, given that MFW was incorporated in 2014), the gain would be characterized as long-term capital gain. The applicable federal tax rates for long-term capital gains are:
• Individual shareholders (Holliday, Vasquez-Park, Trahan, other individuals): Long-term capital gains are taxed at federal rates of 0%, 15%, or 20%, depending on the taxpayer's taxable income. For high-income taxpayers (which all principal shareholders are expected to be, given the magnitude of the transaction proceeds), the applicable rate is 20%. In addition, the 3.8% net investment income tax (NIIT) under Section 1411 of the Code applies to net investment income of individuals with modified adjusted gross income exceeding $200,000 (single) or $250,000 (married filing jointly). The combined federal rate for long-term capital gains is therefore 23.8% for high-income individuals.
• State taxes vary by shareholder residence:
• Garrett Holliday (Virginia resident): Virginia taxes capital gains as ordinary income at rates up to 5.75%. Including federal and Virginia taxes, Holliday's all-in rate on long-term capital gains would be approximately 29.55% (23.8% federal + 5.75% Virginia).
• Diana Vasquez-Park (Texas resident): Texas does not impose a personal income tax. Vasquez-Park's all-in rate on long-term capital gains would be approximately 23.8% (federal only).
• Pinnacle Bluff Ventures LLC (Virginia LLC, managing member Douglas Irwin): As a pass-through entity, Pinnacle Bluff does not pay entity-level tax. Income flows through to its members, who are taxed at their individual rates based on their respective states of residence. To the extent Pinnacle Bluff's members are Virginia residents, their all-in rate would be similar to Holliday's (~29.55%). The specific membership composition and members' tax profiles are not known to us and should be investigated as part of the gross-up analysis.
• Marcus Trahan: State of residence not confirmed; tax rate depends on state.
• Institutional shareholders and other pass-through entities: Tax consequences depend on the entity type and the tax profiles of the ultimate beneficial owners.
• Option holders (650,000 options, net cash-out of $17,225,000): The tax treatment of the option cash-out depends on the terms of the MFW 2016 Stock Incentive Plan and whether the options are incentive stock options (ISOs) under Section 422 of the Code or non-qualified stock options (NQSOs). If the options are NQSOs (which is more common for private company option plans), the cash-out proceeds (net of exercise price) would be treated as ordinary compensation income under Section 83 of the Code, subject to federal income tax at rates up to 37%, plus the 3.8% NIIT, plus applicable state taxes, and also subject to FICA/Medicare withholding. The character of option cash-out proceeds as ordinary income is generally the same regardless of whether a Section 338(h)(10) election is made. We need to confirm the option plan terms to determine whether the options are ISOs or NQSOs.
B. Tax Treatment With the Election
If a Section 338(h)(10) election were made, the tax treatment of the selling shareholders would differ from the standard stock purchase treatment described above. The specific impact depends on whether MFW is treated as a C corporation target or an S corporation target at the time of the deemed asset sale.
C Corporation Target. If MFW remains a C corporation and a Section 338(h)(10) election were somehow available (notwithstanding the eligibility concerns discussed in Section III.B), the deemed asset sale would trigger corporate-level gain recognition by Old Target. MFW would recognize gain on the deemed sale of all of its assets at the corporate level, with the gain taxed at the federal corporate rate of 21%, plus applicable state corporate income taxes. Following the deemed asset sale, Old Target would be treated as distributing the net proceeds to shareholders in complete liquidation. The shareholders would then recognize gain on the deemed liquidating distribution equal to the excess of the distribution received over their stock basis, taxed at their individual capital gains rates (up to 23.8% federal, plus state taxes).