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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

TAX ANALYSIS MEMORANDUM

CALDERWOOD & HARKNESS LLP 1900 K Street NW, Suite 1100 Washington, DC 20006 Engagement Number: 20250527-SDILP-PLR

June 16, 2025

TO: Leonard Cross, Responsible Partner, Tax Sylvia Hartwell, Billing Partner, Tax

FROM: Robert Jansen, Lead Associate, Tax Garrett Simmons, Working Associate, Tax

RE: IRC § 704(c) Built-In Gain and Loss Carryover in Connection with the Cross-Border Fund-Platform Reorganization of Solara Digital Infrastructure LP

CLIENT: Solara Digital Infrastructure LP (EIN: 82-4917366)

MATTER: Private Letter Ruling Request — Cross-Border Fund-Platform Reorganization

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I. Executive Summary

This memorandum analyzes the treatment of built-in gain ("BIG") and built-in loss ("BIL") accounts under Section 704(c) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"),1 in connection with the proposed multi-step reorganization of Solara Digital Infrastructure LP's cross-border fund platform (the "Reorganization"). This analysis has been prepared in anticipation of the submission of a Private Letter Ruling ("PLR") request to the Internal Revenue Service ("IRS") Office of the Associate Chief Counsel (International), CC:INTL, with secondary jurisdiction in CC:PSI, and addresses, in particular, the substantive analysis underpinning proposed Ruling 6 of that PLR request.

1 Unless otherwise indicated, all references to "Section" or "§" refer to the Internal Revenue Code of 1986, as amended, and all references to "Treas. Reg. §" refer to the Treasury Regulations promulgated thereunder.

The Reorganization involves contributions by four Legacy Offshore Vehicles — (i) Solara Digital Partners Fund IV-A (Cayman) LP (EIN: 98-6241503) ("Fund IV-A Cayman"), (ii) Solara Digital Partners Fund IV-B (Luxembourg) SCSp (EIN: 98-6241571) ("Fund IV-B Lux"), (iii) Solara Digital Partners Fund V-A (Cayman) LP (EIN: 98-7891234) ("Fund V-A Cayman"), and (iv) Solara Digital Partners Fund V-B (Luxembourg) SCSp (EIN: 98-7891267) ("Fund V-B Lux," and together with Fund IV-A Cayman, Fund IV-B Lux, and Fund V-A Cayman, the "Legacy Offshore Vehicles") — of their respective portfolio company interests to the newly formed Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership. The contributions are to be carried out over a series of sequential steps during the fourth quarter of 2025, with a target effective date of December 1, 2025.

The aggregate built-in gain across all contributed properties is approximately $1.72 billion, representing the excess of total fair market value ("FMV") of $7.75 billion over total adjusted tax basis of $6.03 billion. This BIG is concentrated in the Legacy Offshore Vehicles' holdings across 23 portfolio companies operating in the digital infrastructure and enterprise SaaS verticals.

Central Conclusion. Based on the analysis set forth herein, we conclude that the § 704(c) built-in gain and loss accounts maintained by the Legacy Offshore Vehicles with respect to contributed properties carry over to the Master Fund, and the Master Fund is required to continue tracking and allocating those BIG/BIL accounts in accordance with § 704(c) principles. Specifically:

• The contributions from the Legacy Offshore Vehicles to the Master Fund, each intended to qualify as a tax-free contribution under IRC § 721(a), result in the Master Fund taking a carryover basis under IRC § 723 in each contributed property. The excess of FMV over carryover basis creates a new § 704(c) layer at the Master Fund level for each contributed property.

• The remedial allocation method under Treas. Reg. § 1.704-3(d), currently used by each Legacy Offshore Vehicle for all § 704(c) properties, may continue to be applied by the Master Fund with respect to the contributed properties, provided the Master Fund properly elects and documents that method in its limited partnership agreement.

• Pre-existing "inner" § 704(c) layers at the Legacy Offshore Vehicle level, including any reverse § 704(c) layers arising from partnership revaluations, must be addressed in the tiered partnership context pursuant to Treas. Reg. § 1.704-3(a)(6)(i).

• Upon dissolution of the Legacy Offshore Vehicles in Step 5 of the Reorganization and the distribution of Master Fund partnership interests to the existing limited partners ("LPs"), the § 704(c) allocation obligations flow through to the successor holders via the tiered partnership structure and the newly formed feeder vehicles.

This memorandum supports Ruling 6 of the PLR request and should be read in conjunction with the companion memoranda addressing IRC § 721(a) (Ruling 1), IRC § 721(b) (Ruling 2), IRC § 731 (Ruling 4), IRC § 752 (Ruling 5), IRC § 1446 (Ruling 7), and entity classification under Treas. Reg. § 301.7701-3 (Ruling 8), each of which is being prepared concurrently by the engagement team.

II. Statement of Facts

A. Background — Existing Fund Structure

Solara Digital Infrastructure LP ("Solara" or "SDILP") is a Delaware limited partnership, organized and existing under the Delaware Revised Uniform Limited Partnership Act, originally formed on March 17, 2014. Solara's principal offices are located at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801. As of March 31, 2025, Solara manages approximately $14.7 billion in assets under management across digital infrastructure (including data centers, fiber-optic networks, and edge computing platforms) and enterprise software-as-a-service ("SaaS") verticals.

Solara Digital Infrastructure GP LLC ("Solara GP"), a Delaware limited liability company (EIN: 82-4917365), serves as the general partner of Solara. Viktor Raines is the Managing Partner and Founder of the Solara platform. Stefan Dalmqvist serves as Head of Tax, responsible for the platform's global tax strategy and compliance oversight.

Solara currently operates through six parallel fund vehicles across three jurisdictions — Delaware, the Cayman Islands, and the Grand Duchy of Luxembourg — to accommodate three distinct investor pools: (i) U.S. taxable investors, (ii) U.S. tax-exempt investors, and (iii) non-U.S. investors. The parallel structure was implemented to address concerns related to unrelated business taxable income ("UBTI") for tax-exempt investors, effectively connected income ("ECI") for non-U.S. investors, and the withholding requirements under Sections 1441, 1442, 1445, and 1446 of the Code, as well as to comply with applicable non-U.S. regulatory requirements.

The six fund vehicles are organized into two fund families:

Fund IV Family (Vintage 2021; Final Close June 15, 2021):

• Solara Digital Partners Fund IV LP — a Delaware limited partnership (EIN: 85-2103748) with total committed capital of $4.2 billion; the primary domestic vehicle for U.S. taxable investors; approximately 72% deployed as of the date hereof.

• Solara Digital Partners Fund IV-A (Cayman) LP ("Fund IV-A Cayman") — a Cayman Islands exempted limited partnership (EIN: 98-6241503; CIMA Registration No. MF-72491) with total committed capital of $1.85 billion; the primary offshore vehicle for non-U.S. investors in the Fund IV family. The general partner of Fund IV-A Cayman is Solara Offshore GP Ltd., a Cayman Islands exempted company.

• Solara Digital Partners Fund IV-B (Luxembourg) SCSp ("Fund IV-B Lux") — a Luxembourg société en commandite spéciale (EIN: 98-6241571; RCS Luxembourg No. B 248193) with total committed capital of €1.15 billion (approximately $1.24 billion at a EUR/USD exchange rate of 1.08); the European vehicle for non-U.S. investors requiring a Luxembourg-domiciled structure. The general partner of Fund IV-B Lux is Solara Luxembourg Management S.à r.l., a Luxembourg private limited liability company (RCS Luxembourg No. B 248194).

Fund V Family (Vintage 2023; Final Close September 30, 2023):

• Solara Digital Partners Fund V LP — a Delaware limited partnership (EIN: 88-3467219) with total committed capital of $5.6 billion; the primary domestic vehicle for U.S. taxable investors; approximately 38% deployed as of the date hereof.

• Solara Digital Partners Fund V-A (Cayman) LP ("Fund V-A Cayman") — a Cayman Islands exempted limited partnership (EIN: 98-7891234; CIMA Registration No. MF-89103) with total committed capital of $2.45 billion; the primary offshore vehicle for non-U.S. investors in the Fund V family.

• Solara Digital Partners Fund V-B (Luxembourg) SCSp ("Fund V-B Lux") — a Luxembourg société en commandite spéciale (EIN: 98-7891267; RCS Luxembourg No. B 271056) with total committed capital of €1.38 billion (approximately $1.49 billion at a EUR/USD exchange rate of 1.08); the European vehicle for non-U.S. investors in the Fund V family.

The fund platform's limited partner base encompasses a diverse mix of institutional investors spanning multiple categories and jurisdictions. Representative key limited partners include:

• Pinnacle State Employees' Retirement System — a U.S. tax-exempt governmental pension plan; committed capital of $275 million in Fund IV and $340 million in Fund V.

• Grandview University Endowment — a U.S. tax-exempt university endowment; committed capital of $120 million in Fund IV and $185 million in Fund V.

• Nordhaven Sovereign Wealth Fund — a non-U.S. sovereign wealth fund; committed capital of $380 million in Fund IV-A Cayman and $500 million in Fund V-A Cayman.

• Kestrel Pacific Insurance Group — a non-U.S. insurer domiciled in Singapore; committed capital of €200 million in Fund IV-B Lux and €275 million in Fund V-B Lux.

• Argyle Family Office Holdings LLC — a U.S. taxable family office vehicle; committed capital of $95 million in Fund IV and $130 million in Fund V.

The parallel fund structure, while effective in accommodating the varying tax and regulatory requirements of the investor base, has resulted in increasing administrative complexity, duplicative audit and regulatory compliance costs, and governance challenges that have prompted the proposed Reorganization described below.

B. Proposed Reorganization — Five-Step Transaction

The proposed Reorganization contemplates a five-step transaction sequence to consolidate the four Legacy Offshore Vehicles into a single Master Fund, with newly formed feeder vehicles to preserve the tax structuring benefits currently provided by the separate offshore vehicles. The five steps are planned for the fourth quarter of 2025, with the Reorganization to be effective as of December 1, 2025. Each step is described in detail below.

Step 1 — Entity Formation (September 15, 2025). Solara will form the following new entities:

(i) Solara Consolidated Master Fund GP LLC, a Delaware limited liability company, to serve as the general partner of the Master Fund;

(ii) Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership, to serve as the consolidated investment vehicle receiving the portfolio company interests from the Legacy Offshore Vehicles;

(iii) Solara International Feeder (Cayman) LP (the "Int'l Feeder"), a Cayman Islands exempted limited partnership, to serve as the feeder vehicle for non-U.S. investors; and

(iv) Solara Tax-Exempt Feeder (Cayman) LP (the "TE Feeder"), a Cayman Islands exempted limited partnership, to serve as the feeder vehicle for U.S. tax-exempt investors.

Contemporaneously with formation, Solara will file IRS Form 8832 (Entity Classification Election) under Treas. Reg. § 301.7701-3 for each new entity, electing partnership classification for U.S. federal income tax purposes.

Step 2 — Fund IV-A Cayman Contribution (October 1, 2025). Fund IV-A Cayman will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest in the Master Fund. The contributed properties have an aggregate FMV of approximately $2.31 billion and an aggregate adjusted tax basis of approximately $1.62 billion, resulting in aggregate built-in gain of approximately $690 million. The contribution is intended to qualify as a tax-free contribution under IRC § 721(a), with the Master Fund taking a carryover basis under IRC § 723 in each contributed property.

Step 3 — Fund IV-B Lux Contribution (October 15, 2025). Fund IV-B Lux will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest in the Master Fund. The contributed properties have an aggregate FMV of approximately €1.07 billion ($1.16 billion at 1.08 EUR/USD) and an aggregate adjusted tax basis of approximately €782 million ($844.6 million), resulting in aggregate built-in gain of approximately €288 million ($311 million). The contribution is intended to qualify as a tax-free contribution under IRC § 721(a).

Step 4 — Fund V-A Cayman and Fund V-B Lux Contributions (November 1, 2025). Fund V-A Cayman will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest. The contributed properties have an aggregate FMV of approximately $2.89 billion and an aggregate adjusted tax basis of approximately $2.34 billion, resulting in aggregate built-in gain of approximately $550 million. Simultaneously, Fund V-B Lux will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest. Fund V-B Lux's contributed properties have an aggregate FMV of approximately €1.29 billion ($1.39 billion at 1.08 EUR/USD) and an aggregate adjusted tax basis of approximately €1.14 billion ($1.23 billion), resulting in aggregate built-in gain of approximately €150 million ($162 million). Both contributions are intended to qualify as tax-free contributions under IRC § 721(a).

Step 5 — Dissolution and LP Migration (December 1, 2025). Each of the four Legacy Offshore Vehicles will dissolve and distribute its Master Fund partnership interests to its existing LPs in liquidation. The distributions are intended to qualify as tax-free distributions under IRC § 731(a). Following dissolution, non-U.S. LPs will hold their Master Fund interests through the Int'l Feeder, and U.S. tax-exempt LPs will hold their Master Fund interests through the TE Feeder. U.S. taxable investors will continue to hold their interests directly in Fund IV LP and Fund V LP, which will co-invest alongside the Master Fund but are not otherwise affected by the Reorganization.

In the aggregate, the Master Fund will assume liabilities of approximately $1.34 billion in connection with the contributions in Steps 2 through 4. The treatment of these assumed liabilities under IRC § 752 and their interaction with the § 721(a) analysis are addressed in a separate memorandum and are subject to detailed modeling by the engagement team.

The total portfolio across all Legacy Offshore Vehicles encompasses 23 portfolio companies — 11 held by the Fund IV vehicles and 12 held by the Fund V vehicles. All portfolio companies are actively operating businesses in the digital infrastructure and enterprise SaaS sectors.

C. Current § 704(c) Accounting by Legacy Offshore Vehicles

Each of the four Legacy Offshore Vehicles currently maintains § 704(c) BIG/BIL accounts with respect to properties contributed to it by its respective partners upon initial formation and subsequent capital call deployment. Each Legacy Offshore Vehicle has elected, and has consistently used since its inception, the remedial allocation method under Treas. Reg. § 1.704-3(d) for all contributed properties.

The § 704(c) layers at the Legacy Offshore Vehicle level were established at the time each portfolio company interest was acquired and funded by capital calls from the limited partners. In the typical private equity fund context, LP contributions are made in cash and are used by the fund vehicle to acquire portfolio assets at their then-current fair market value. As a result, the initial § 704(c) layer at the time of asset acquisition is generally zero, because the adjusted tax basis of the acquired asset (cost basis) equals its FMV at the time of purchase.

However, § 704(c) layers may subsequently arise at the Legacy Offshore Vehicle level in two circumstances. First, if additional LPs are admitted to a Legacy Offshore Vehicle at a subsequent closing (or if capital commitments are increased), the partnership may be required to revalue its assets under Treas. Reg. § 1.704-1(b)(2)(iv)(f) (a so-called "book-up"), which creates "reverse § 704(c)" layers reflecting the difference between the revalued book value and the adjusted tax basis of the partnership's assets. Each of the Legacy Offshore Vehicles held multiple closings during their respective commitment periods, and reverse § 704(c) layers may exist to the extent asset values appreciated between closings. Second, if a Legacy Offshore Vehicle has received property contributions from its LPs in kind (rather than cash), traditional § 704(c) layers would arise. We are not aware of any in-kind contributions by LPs to the Legacy Offshore Vehicles, and the engagement team should confirm this fact with Solara's Head of Tax.

This memorandum focuses primarily on the "outer layer" of § 704(c) gain that will arise when the Legacy Offshore Vehicles contribute their portfolio assets to the Master Fund in Steps 2 through 4 — i.e., the difference between each asset's FMV at the time of contribution to the Master Fund and its then-current adjusted tax basis in the hands of the contributing Legacy Offshore Vehicle. This outer layer represents the economically significant BIG that must be tracked and allocated by the Master Fund going forward. Additionally, as noted above, pre-existing "inner" § 704(c) layers at the Legacy Offshore Vehicle level (reflecting historic contributions by LPs or revaluation events) must be addressed in the tiered partnership context, as discussed in Section V.B.2 below.

D. Key Portfolio Company Interests and Built-In Gain

The following table summarizes the five most significant portfolio company interests being contributed to the Master Fund, with their respective built-in gain details:

The FMV and adjusted tax basis figures set forth in the table above represent the total values attributable to each portfolio company's equity across all holding vehicles. The ownership split column identifies the percentage of each portfolio company held by the relevant Legacy Offshore Vehicle and thus contributed to the Master Fund, versus the percentage retained by the domestic Delaware fund vehicles (Fund IV LP and Fund V LP), which are not party to the Reorganization.

The five named portfolio companies together account for aggregate BIG of approximately $1.181 billion ($370M + $340M + $180M + $156M + $135M). The remaining 18 portfolio companies across the four Legacy Offshore Vehicles have aggregate BIG of approximately $539 million ($1.72B total BIG less $1.181B attributable to the five named portfolio companies). All portfolio companies are operating businesses in the digital infrastructure and enterprise SaaS verticals — not passive investment assets — a characterization that is relevant to the analysis of IRC § 721(b) (the "investment company" exception) set forth in a separate memorandum.

A complete schedule of all 23 portfolio companies, including FMV, adjusted tax basis, BIG, contributing vehicle, and step of contribution, is set forth in Appendix A to this memorandum.

III. Issues Presented

This memorandum addresses the following four issues:

1. Carryover of § 704(c) Accounts. Whether the built-in gain and loss accounts tracked under IRC § 704(c) by the Legacy Offshore Vehicles with respect to contributed properties carry over to the Consolidated Master Fund LP when the Legacy Offshore Vehicles contribute their portfolio company interests to the Master Fund in exchange for partnership interests under IRC § 721(a) in Steps 2 through 4 of the Reorganization.

2. Establishment and Interaction of § 704(c) Layers. Whether the Master Fund is required to establish new § 704(c) layers upon receipt of the contributed properties, and how those new layers interact with pre-existing § 704(c) layers (including reverse § 704(c) layers) maintained at the Legacy Offshore Vehicle level.

3. Continuation of Remedial Allocation Method. Whether the Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property, consistent with the method previously elected and consistently applied by the Legacy Offshore Vehicles.

4. Impact of Step 5 Dissolution on § 704(c) Obligations. How the § 704(c) accounts are maintained and the allocation obligations are preserved when the Legacy Offshore Vehicles dissolve in Step 5 of the Reorganization and distribute their Master Fund partnership interests to their respective LPs, who then hold interests in the Master Fund either directly or through the Int'l Feeder or TE Feeder vehicles.

IV. Summary of Conclusions

Based on the analysis set forth in Section V below, we reach the following conclusions with respect to each of the issues presented:

1. Carryover of § 704(c) Accounts. The § 704(c) BIG and BIL accounts maintained by the Legacy Offshore Vehicles carry over and must be preserved in the Master Fund upon contribution of the portfolio company interests under IRC § 721(a). Each contribution creates a new § 704(c) layer at the Master Fund level reflecting the difference between the FMV of the contributed property at the time of contribution and the carryover basis assumed by the Master Fund under IRC § 723. The aggregate new § 704(c) BIG layer created at the Master Fund level is $1.72 billion. The Master Fund is obligated under § 704(c)(1)(A) and the Treasury Regulations thereunder to allocate income, gain, loss, and deduction with respect to each contributed property in a manner that takes into account the variation between the property's adjusted tax basis and its FMV at the time of contribution.

2. Establishment and Interaction of § 704(c) Layers. The Master Fund must maintain § 704(c) accounts that reflect both the "outer" BIG arising from the contribution to the Master Fund and, to the extent applicable in the tiered partnership context, the allocation obligations inherited from the Legacy Offshore Vehicles. Under Treas. Reg. § 1.704-3(a)(6)(i), the contribution of § 704(c) property by a Legacy Offshore Vehicle to the Master Fund (a lower-tier partnership) does not relieve the Legacy Offshore Vehicle (or its successor holders after dissolution) of its obligation to allocate BIG to its historic partners. The Master Fund's § 704(c) allocations flow up through the tiered partnership structure to the Legacy Offshore Vehicles (and, after dissolution, to the successor LPs through the feeder vehicles).

3. Continuation of Remedial Allocation Method. The Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property. Because the contribution to the Master Fund creates new § 704(c) layers, the Master Fund has the right to elect a § 704(c) method for each contributed property at the time it receives them. We recommend that the Master Fund elect the remedial allocation method to maintain consistency with the Legacy Offshore Vehicles' prior method, to provide the most accurate allocation of BIG to the historic partners, and to avoid ceiling rule distortions that could arise under the traditional or curative methods given the magnitude of the aggregate BIG ($1.72 billion). The election must be properly documented in the Master Fund's limited partnership agreement.

4. Impact of Step 5 Dissolution. Upon dissolution of the Legacy Offshore Vehicles in Step 5 and distribution of Master Fund interests to LPs (intended as tax-free distributions under IRC § 731(a)), the § 704(c) allocation obligations flow through to the successor holders via the tiered partnership structure and the feeder vehicles (Int'l Feeder and TE Feeder). The distributed Master Fund partnership interests carry with them the § 704(c) obligations, and the LPs who receive Master Fund interests (or interests in the feeder vehicles that hold Master Fund interests) step into the shoes of the Legacy Offshore Vehicles for § 704(c) purposes. The Master Fund must maintain records sufficient to track the § 704(c) allocation obligations to specific historic contributing vehicles and their successor LPs.

V. Legal Analysis

A. Overview of IRC § 704(c) — Statutory Framework

1. Statutory Text and Purpose

Section 704(c)(1)(A) of the Code provides:

"Under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution."

The purpose of § 704(c) is to prevent the shifting of tax consequences among partners when property with a built-in gain or built-in loss is contributed to a partnership. Absent § 704(c), a partner who contributes appreciated property could effectively shift the pre-contribution appreciation to the other partners by causing the partnership to sell the property and allocating the resulting gain pro rata among all partners (including those who did not contribute the property). Section 704(c) prevents this result by requiring that the built-in gain or loss be allocated to the contributing partner — ensuring that the contributing partner bears the tax consequences of the appreciation or depreciation that accrued prior to the contribution.

The statute operates in conjunction with the general partnership allocation rules of § 704(a) and (b). Under § 704(b), partnership allocations must have "substantial economic effect" or, failing that, must be in accordance with the partners' interests in the partnership. Section 704(c) functions as a mandatory overlay on the § 704(b) allocations, requiring that the partnership's allocations of items attributable to contributed property take account of the built-in gain or loss, regardless of what the partnership agreement otherwise provides.

2. Reverse § 704(c) Allocations

In addition to its application to contributed property, § 704(c) principles apply whenever partnership property is revalued under Treas. Reg. § 1.704-1(b)(2)(iv)(f) — commonly referred to as a "book-up" or "book-down." When a revaluation event occurs (e.g., admission of a new partner, additional capital contribution, or distribution of property in partial liquidation), the partnership's capital accounts are adjusted to reflect the fair market value of partnership property, and "reverse § 704(c)" allocations are required to account for the difference between the revalued book value and the adjusted tax basis of the partnership's assets. The purpose is the same as for contributed property: to prevent shifting of the pre-existing appreciation (or depreciation) from the historic partners to the new or continuing partners.

In the context of the Legacy Offshore Vehicles, reverse § 704(c) layers may have arisen at the time of subsequent closings, when new LPs were admitted and existing partnership assets had appreciated in value since the initial closing. These layers constitute the "inner" § 704(c) layers referenced in Section II.C above.

3. The Ceiling Rule and Methods of Allocation

The Treasury Regulations under § 704(c) establish three permissible methods for making § 704(c) allocations, each of which addresses the "ceiling rule" limitation in a different manner:

The Ceiling Rule. As a threshold matter, Treas. Reg. § 1.704-3(b)(1) provides that the total income, gain, loss, or deduction allocated to the partners with respect to a contributed property for any year cannot exceed the total partnership income, gain, loss, or deduction with respect to that property for the year (the "ceiling rule"). The ceiling rule can create distortions when the amount of tax gain or loss that the partnership recognizes on a disposition of the contributed property (or the amount of depreciation or amortization the partnership claims with respect to the property) is less than the amount of book gain or loss (or book depreciation or amortization) because of the difference between the property's tax basis and its book value. In such cases, the non-contributing partner may be allocated less than its full economic share of the tax item, resulting in a ceiling rule distortion.

(a) Traditional Method — Treas. Reg. § 1.704-3(b). Under the traditional method, the partnership makes § 704(c) allocations using the contributed property's adjusted tax basis. The ceiling rule applies without modification, meaning that in certain cases the non-contributing partner may be allocated less tax depreciation (or more tax gain) than its economic share would warrant. No corrective allocations are made to compensate for ceiling rule distortions.

(b) Traditional Method with Curative Allocations — Treas. Reg. § 1.704-3(c). Under the traditional method with curative allocations, the partnership is permitted to make "curative" allocations of other partnership tax items (of the same character) to offset ceiling rule distortions. For example, if the ceiling rule limits the amount of depreciation that can be allocated to the non-contributing partner with respect to the contributed property, the partnership may allocate additional depreciation from other partnership properties to the non-contributing partner to make up the shortfall.

(c) Remedial Allocation Method — Treas. Reg. § 1.704-3(d). Under the remedial allocation method, the partnership creates notional tax items — termed "remedial allocations" — to offset any ceiling rule limitations. The remedial method permits the partnership to create two equal and offsetting notional tax items: one allocated to the non-contributing partner to compensate for the ceiling rule distortion, and an equal but opposite item allocated to the contributing partner. The remedial method is the most flexible and economically accurate of the three methods, as it is not dependent upon the existence of other partnership tax items of the appropriate character and ensures that the non-contributing partner is fully compensated for any ceiling rule limitation.

Under Treas. Reg. § 1.704-3(a)(2), the partnership may select any reasonable method on a property-by-property basis, but the selected method must be applied consistently to each property once elected. The partnership's choice of method must be reasonable under all the facts and circumstances, and a method is not reasonable if it is "adopted with a principal purpose of shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value of the partners' aggregate tax liability."

4. Anti-Abuse Rule

Treas. Reg. § 1.704-3(a)(9) provides a broad anti-abuse rule under which the Commissioner may recast the tax consequences of a transaction involving § 704(c) property if the allocation method chosen, or the transaction structure, has the effect of shifting the tax consequences of § 704(c) property away from the contributing partner in a manner inconsistent with the purpose of § 704(c). This provision is analyzed in detail in Section V.G below in the context of the proposed Reorganization.

B. Application of § 704(c) to Contributions by the Legacy Offshore Vehicles to the Master Fund

1. Creation of New § 704(c) Layer at the Master Fund Level

When Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux each contribute their portfolio company interests to the Master Fund in Steps 2 through 4, each contribution is intended to qualify as a tax-free contribution to a partnership under IRC § 721(a). The analysis supporting the § 721(a) qualification is set forth in a separate memorandum (Ruling 1) being prepared concurrently; this memorandum assumes that each contribution so qualifies.

Under IRC § 723, when a partner contributes property to a partnership in a transaction described in § 721(a), the partnership's adjusted basis in the contributed property equals the contributing partner's adjusted basis in the property immediately before the contribution — i.e., the basis carries over. In the present case, the Master Fund will take a carryover basis in each contributed portfolio company interest equal to the Legacy Offshore Vehicle's adjusted tax basis in that interest immediately prior to the contribution.

At the time of each contribution, the FMV of each contributed portfolio company interest exceeds its carryover basis, creating a new § 704(c) layer at the Master Fund level. The Master Fund is required, under § 704(c)(1)(A) and the Treasury Regulations thereunder, to track the difference between the FMV and the carryover basis of each contributed property and to allocate income, gain, loss, and deduction with respect to each contributed property in a manner that takes account of that variation.

The aggregate new § 704(c) BIG layer created at the Master Fund level across all contributed properties is approximately $1.72 billion, computed as follows:

The specific new § 704(c) layers for the five representative portfolio companies are as follows:

(a) NovaBright Data Systems Inc. — Fund IV-A Cayman holds a 60% interest in NovaBright; the remaining 40% is held by Fund IV LP (the domestic Delaware vehicle) and is not contributed to the Master Fund. The total FMV of NovaBright is $890 million and the total adjusted tax basis is $520 million, yielding total BIG of $370 million. Fund IV-A Cayman's proportional 60% share of these values implies FMV of approximately $534 million, adjusted tax basis of approximately $312 million, and BIG of approximately $222 million attributable to the interest contributed to the Master Fund.2 The remaining $148 million of BIG (attributable to Fund IV LP's 40% interest) is not affected by the Reorganization and remains with Fund IV LP.

(b) Veridian Edge Computing Corp. — Fund V-A Cayman holds a 55% interest in Veridian; the remaining 45% is held by Fund V LP. Applying the same proportional analysis, Fund V-A Cayman's 55% share of the total $340 million BIG yields approximately $187 million in BIG attributable to the interest contributed to the Master Fund. The remaining $153 million of BIG stays with Fund V LP.

(c) Thorngate Fiber Networks LP — Fund IV-A Cayman holds a 100% interest in Thorngate. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $180 million (FMV $670 million less basis $490 million).

(d) Crestline Cloud Solutions LLC — Fund IV-B Lux holds a 100% interest in Crestline, a Delaware LLC classified as a disregarded entity for U.S. federal income tax purposes. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $156 million (€145 million at 1.08 EUR/USD). Because Crestline is a disregarded entity, its underlying assets (rather than the LLC interest itself) are deemed contributed for tax purposes; the § 704(c) analysis applies to the underlying assets.

(e) Helix SaaS Holdings Ltd. — Fund V-A Cayman holds a 100% interest in Helix. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $135 million (FMV $445 million less basis $310 million).

2 We note that the $370 million figure set forth in the fact section as the total BIG for NovaBright represents the company-wide BIG. In the § 704(c) analysis at the Master Fund level, the relevant BIG is only the portion attributable to the interest actually contributed — i.e., Fund IV-A Cayman's 60% share, or approximately $222 million. The engagement team should confirm with Solara whether the stated BIG figures represent company-wide amounts or vehicle-specific amounts, and adjust the analysis accordingly. For purposes of this memorandum, we treat the stated figures as company-wide amounts and apply proportional allocation.

The Master Fund will be required to maintain separate § 704(c) accounts for each contributed property, organized by the contributing Legacy Offshore Vehicle and the step in which the contribution occurs. This layered tracking is essential for the accurate allocation of § 704(c) items to the contributing vehicles (and, after dissolution, to their successor LPs) and is discussed further in Section VII below.

2. Carryover of Pre-Existing "Inner" § 704(c) Layers

As discussed in Section II.C, each Legacy Offshore Vehicle may have pre-existing § 704(c) layers — specifically, reverse § 704(c) layers arising from partnership revaluations at the time of subsequent closings. The treatment of these inner layers in the tiered partnership context is governed by Treas. Reg. § 1.704-3(a)(6)(i).

Treas. Reg. § 1.704-3(a)(6)(i) provides that if a partnership (the "upper-tier partnership") contributes § 704(c) property to another partnership (the "lower-tier partnership"), the upper-tier partnership must continue to allocate the built-in gain or loss attributable to the contributed property to its own partners in a manner consistent with § 704(c). The contribution to the lower-tier partnership does not relieve the upper-tier partnership of its § 704(c) obligation; rather, when the lower-tier partnership subsequently recognizes gain or loss with respect to the contributed property (or claims depreciation or amortization), the resulting items flow up to the upper-tier partnership, which must then allocate those items among its own partners in accordance with § 704(c).

In the present case, the Legacy Offshore Vehicles serve as the upper-tier partnerships and the Master Fund serves as the lower-tier partnership. When the Legacy Offshore Vehicles contribute their portfolio company interests to the Master Fund:

(i) The Master Fund takes a carryover basis under § 723 and establishes a new "outer" § 704(c) layer reflecting the FMV-basis spread at the time of contribution.

(ii) The Legacy Offshore Vehicles retain their § 704(c) obligations with respect to any pre-existing "inner" layers — i.e., reverse § 704(c) layers arising from prior revaluation events at the Legacy Offshore Vehicle level.

(iii) When the Master Fund subsequently recognizes items of income, gain, loss, or deduction with respect to the contributed properties, those items flow up to the Legacy Offshore Vehicles (as partners in the Master Fund), and each Legacy Offshore Vehicle must then allocate those items among its own LPs in accordance with its existing § 704(c) obligations.

After Step 5, when the Legacy Offshore Vehicles dissolve and their LPs receive Master Fund interests (directly or through the feeder vehicles), the inner § 704(c) obligations do not disappear. Rather, the obligation to allocate § 704(c) items to the "historic" partners of the Legacy Offshore Vehicles continues and must be tracked at the Master Fund and feeder vehicle levels. The mechanism for this tracking is discussed in Section V.B.3 and V.D below.

In a typical private equity fund structure where LP contributions are made in cash and used to acquire assets at cost, the initial § 704(c) layer is zero. However, to the extent any of the Legacy Offshore Vehicles conducted multiple closings at which asset values had appreciated, reverse § 704(c) layers may exist. These layers reflect the appreciation in asset values between the initial closing and subsequent closings, which must be allocated to the partners who were admitted at the initial closing (the "early-close" partners) and not to the partners admitted at the subsequent closing (the "late-close" partners). The engagement team should confirm with Solara's Head of Tax, Stefan Dalmqvist, the extent of any such reverse § 704(c) layers and the identity of the affected partners.

3. Tiered Partnership Considerations

Post-Reorganization, the fund structure will be tiered, with the following chain of ownership:

LPs → Feeder Vehicles (Int'l Feeder and TE Feeder, both Cayman Islands exempted LPs classified as partnerships for U.S. federal income tax purposes) → Master Fund (Delaware LP)

U.S. taxable investors will not participate in the tiered structure; they will remain directly in Fund IV LP and Fund V LP, which co-invest alongside the Master Fund but hold their portfolio company interests directly (not through the Master Fund).

In the tiered partnership context, § 704(c) allocations must flow through each level of the structure to reach the ultimate beneficial owners. The Master Fund's § 704(c) obligation requires it to make allocations that take into account the BIG with respect to each contributed property. When the Master Fund allocates items to its partners — which include the Int'l Feeder and the TE Feeder (and, initially, the Legacy Offshore Vehicles themselves) — those partners must, in turn, allocate the § 704(c) items to their own partners in a manner consistent with the § 704(c) principles.

Anti-Abuse Considerations in Tiered Structures. Treas. Reg. § 1.704-3(a)(9) provides that the Commissioner may treat the contribution of § 704(c) property from one partnership to another in a tiered structure as abusive if the structure has the effect of shifting the tax consequences of built-in gain away from the contributing partner. In the present case, the BIG is not being shifted away from the contributing partners; rather, it is being preserved and allocated to the historic partners (the Legacy Offshore Vehicles and, after dissolution, their successor LPs) through the tiered structure. The remedial allocation method ensures that no ceiling rule distortion shifts BIG away from the contributing partners. Accordingly, we do not believe the anti-abuse rule is implicated. This analysis is discussed further in Section V.G below.

Look-Through Approach. After Step 5, the Legacy Offshore Vehicles will cease to exist. The § 704(c) obligation at the Master Fund level must then be allocated to the correct "historic" partners — i.e., the partners who were the Legacy Offshore Vehicles' LPs at the time the portfolio company interests were contributed to the Master Fund in Steps 2 through 4. Because the successor LPs will hold their Master Fund interests through the feeder vehicles, the Master Fund must "look through" the feeders to the underlying LPs for purposes of § 704(c) allocations.

The feeder vehicles themselves will function as partnerships for U.S. federal income tax purposes and will have their own § 704(c) obligations to the extent their assets (Master Fund interests) have built-in gain. The feeder vehicles must allocate the § 704(c) items they receive from the Master Fund to their respective LPs in a manner that preserves the BIG allocation to the historic contributing partners. This requires coordination between the Master Fund and the feeder vehicles in their respective partnership agreements and tax accounting systems.

C. Remedial Allocation Method — Continuation Post-Reorganization

1. Current Practice of the Legacy Offshore Vehicles

Each Legacy Offshore Vehicle currently uses the remedial allocation method under Treas. Reg. § 1.704-3(d) for all § 704(c) properties. This election was made at the inception of each Legacy Offshore Vehicle and has been consistently applied. The remedial method was chosen for the Legacy Offshore Vehicles because it is the most economically accurate method for allocating BIG, particularly in a private equity fund context where the contributed properties are expected to appreciate significantly over the hold period and where the ceiling rule limitations under the traditional method could result in material distortions.

2. Application of the Remedial Method at the Master Fund Level

Under the remedial allocation method, the partnership creates notional tax items to offset any ceiling rule limitations, ensuring that the non-contributing partner is allocated its full economic share of tax items and that the contributing partner bears the full tax consequences of the built-in gain. Specifically, under Treas. Reg. § 1.704-3(d)(1), the partnership first determines the amount of book items (depreciation, amortization, gain, or loss) that would be allocated to each partner. The partnership then determines the amount of tax items that can be allocated to the non-contributing partners based on the property's adjusted tax basis. If the tax items are insufficient to match the book items allocated to the non-contributing partners (the ceiling rule limitation), the partnership creates remedial allocations: a notional tax item in favor of the non-contributing partner (to make up the shortfall) and an equal and offsetting notional tax item to the contributing partner.

Under Treas. Reg. § 1.704-3(d)(2), the partnership applies the remedial method by treating the contributed property as if it consisted of two assets: (i) a "tax asset" equal to the property's adjusted tax basis, which is depreciated or amortized over the remaining recovery period of the contributed property, and (ii) a "book-only asset" equal to the difference between the property's book value and its tax basis, which is depreciated or amortized over a newly commenced recovery period as if the property were newly acquired.

3. Election of the Remedial Method by the Master Fund

Because the contributions to the Master Fund create new § 704(c) layers, the Master Fund has the right — and indeed the obligation — to elect a § 704(c) method for each contributed property at the time it receives them. Under Treas. Reg. § 1.704-3(a)(2), the partnership may adopt any of the three permissible methods on a property-by-property basis, provided the method is reasonable.

We recommend that the Master Fund elect the remedial allocation method for all properties received from the Legacy Offshore Vehicles for the following reasons:

(a) Consistency. Electing the remedial method maintains consistency with the Legacy Offshore Vehicles' prior elections. While the Master Fund is not legally required to adopt the same method as the contributing vehicle, doing so simplifies the § 704(c) accounting and reduces the risk of allocation errors or disputes.

(b) Economic Accuracy. The remedial method is the most economically accurate of the three methods, as it eliminates ceiling rule distortions entirely. Given the magnitude of the aggregate BIG ($1.72 billion) and the diversity of contributing vehicles (four offshore vehicles across two fund families and two jurisdictions), the ceiling rule limitations that could arise under the traditional or curative methods would be particularly significant and could result in material misallocations of taxable income.

(c) Flexibility. The remedial method does not depend upon the availability of other partnership tax items of the appropriate character (as the curative method does), making it reliably applicable regardless of the Master Fund's overall tax profile in any given year.

(d) PLR Supportability. The remedial method is well-established in the Treasury Regulations and is widely recognized as the gold standard for § 704(c) allocations in the private equity and real estate fund context. Electing this method strengthens the PLR request by demonstrating that the Reorganization is not designed to shift BIG away from the contributing partners.

4. Notional Asset Creation Under the Remedial Method

Upon receiving the contributed properties, the Master Fund will create notional assets under Treas. Reg. § 1.704-3(d)(2) for purposes of computing remedial allocations. For each contributed property, the Master Fund will treat the property as consisting of two components:

(i) A tax component equal to the property's carryover basis (under § 723), which will be depreciated or amortized over the remaining recovery period of the contributed property (if applicable) in the same manner as if the Legacy Offshore Vehicle had continued to hold the property.

(ii) A notional book component equal to the BIG — i.e., the difference between the contributed property's FMV and its carryover basis at the time of contribution — which will be depreciated or amortized over the applicable recovery period as if the property were newly placed in service on the date of contribution.

For portfolio company interests that are stock (such as NovaBright Data Systems Inc. and Helix SaaS Holdings Ltd.), which are not depreciable or amortizable, the remedial method operates principally at the time of sale or disposition. Upon the Master Fund's sale of a contributed portfolio company interest, the Master Fund will allocate the built-in gain to the contributing vehicle (and, after dissolution, to its successor LPs) through the § 704(c) remedial allocation framework.

For portfolio company interests that are partnership interests (such as Thorngate Fiber Networks LP), the remedial method may require the Master Fund to track its share of the underlying partnership's depreciable or amortizable assets, applying the remedial method at the asset level through the tiered partnership structure. This is discussed further in Section V.F.3 below.

D. Impact of Step 5 Dissolution on § 704(c) Accounts

1. Distribution of Master Fund Interests

When the Legacy Offshore Vehicles dissolve in Step 5 and distribute their Master Fund partnership interests to their respective LPs, the distributions are intended to qualify as tax-free distributions under IRC § 731(a). Under § 731(a)(1), no gain is recognized by a partner upon a distribution from a partnership, except to the extent that any money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. Because the distributions consist of partnership interests (not money), no gain recognition is expected under § 731(a) (subject to the separate analysis in the § 731 memorandum).

2. Carryover of § 704(c) Obligations

The critical question for purposes of this memorandum is whether the § 704(c) obligations associated with the contributed properties survive the dissolution of the Legacy Offshore Vehicles and attach to the successor holders of the Master Fund interests.

We conclude that the § 704(c) obligations do survive and must be tracked by the Master Fund and the feeder vehicles. The basis for this conclusion is as follows:

(a) The § 704(c) layer at the Master Fund level was created when the Legacy Offshore Vehicles contributed property to the Master Fund. The Master Fund's obligation under § 704(c)(1)(A) runs to the Master Fund itself — it is the partnership that must allocate the BIG to the "contributing partner." The contributing partner, at the time of contribution, was the Legacy Offshore Vehicle.

(b) Upon dissolution of the Legacy Offshore Vehicle and distribution of the Master Fund interest to the Legacy Offshore Vehicle's LPs, those LPs step into the shoes of the Legacy Offshore Vehicle with respect to the Master Fund interest. The LPs effectively succeed to the Legacy Offshore Vehicle's position as a partner in the Master Fund.

(c) The Master Fund's § 704(c) obligation does not terminate upon dissolution of the contributing partner. Rather, the § 704(c) items must continue to be allocated to the successor holders of the Master Fund interest — i.e., the LPs who received the interest in dissolution.

(d) Where the LPs hold their Master Fund interests through a feeder vehicle (Int'l Feeder or TE Feeder), the feeder vehicle itself becomes a partner in the Master Fund, and the Master Fund allocates § 704(c) items to the feeder. The feeder must then further allocate those items to its own LPs in a manner that preserves the § 704(c) obligation — i.e., allocating the BIG items to the LPs who were historic partners of the Legacy Offshore Vehicle that originally contributed the property.

3. Tracking and Administrative Requirements

The preservation of § 704(c) obligations through the dissolution and LP migration process creates significant administrative complexity. The Master Fund must maintain records sufficient to:

(i) Identify each contributed property and its associated § 704(c) layer (FMV, carryover basis, BIG/BIL, and remedial allocation notional asset);

(ii) Track the contributing Legacy Offshore Vehicle for each property;

(iii) Associate each contributing Legacy Offshore Vehicle's § 704(c) layer with the specific successor LPs who received the Master Fund interest upon dissolution;

(iv) Coordinate with the feeder vehicles to ensure that § 704(c) items flowing from the Master Fund to the feeders are properly allocated by the feeders to the appropriate LPs; and

(v) Maintain the separation of § 704(c) layers attributable to different contributing vehicles and different steps of the Reorganization.

With 23 portfolio companies, four contributing vehicles, and multiple layers of BIG — all flowing through a tiered partnership structure to the ultimate LPs — the Master Fund's § 704(c) accounting will be among the most complex aspects of post-Reorganization tax compliance. We recommend that the engagement team coordinate early with Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax), the independent accounting firm responsible for tax compliance across all fund vehicles, to design and implement the necessary § 704(c) tracking systems. This coordination is discussed further in Section VII below.

E. Interaction with § 752 Liability Shifts

The $1.34 billion in aggregate liabilities assumed by the Master Fund in connection with the portfolio company contributions interact with the § 704(c) analysis in several important respects.

1. Impact on § 704(c) Layer Computation

Under Treas. Reg. § 1.704-3(a)(7), if a partner's share of liabilities increases or decreases in connection with a contribution of § 704(c) property, the deemed contribution or distribution under § 752(a) or § 752(b) does not independently trigger gain recognition if the § 721(a) contribution is otherwise tax-free. However, the liability shift must be considered in computing the § 704(c) layer. Specifically, the Master Fund's assumption of liabilities that were previously allocable to the contributing Legacy Offshore Vehicle's other partners could affect the net equity value attributable to each contributing vehicle's interest in the Master Fund, which in turn affects the computation of the § 704(c) layer.

The detailed modeling of the liability shifts and their impact on the § 704(c) layer computations is set forth in the separate § 752 Liability Shifting Analysis memorandum being prepared by the engagement team. This memorandum assumes the liability shift modeling is consistent with the aggregate BIG figures presented in Section II.D and the table in Section V.B.1 above.

2. Minimum Gain Chargeback Provisions

The Master Fund's allocation of liabilities under Treas. Reg. §§ 1.752-1, 1.752-2, and 1.752-3 (distinguishing between recourse and nonrecourse liabilities) will affect the operation of the § 704(c) minimum gain chargeback and partner nonrecourse debt minimum gain chargeback provisions under Treas. Reg. §§ 1.704-2(f) and 1.704-2(i). To the extent that contributed properties are encumbered by nonrecourse liabilities, the Master Fund must track partnership minimum gain and partner nonrecourse debt minimum gain attributable to those properties, and the § 704(c) allocations must be coordinated with the minimum gain chargeback requirements.

The interaction between § 704(c) and § 752 is inherently fact-intensive and dependent upon the specific liability allocation methodology adopted by the Master Fund. We defer to the § 752 memorandum for the detailed analysis and note only that the § 704(c) tracking systems implemented by the Master Fund must be integrated with the § 752 liability allocation framework.

F. Specific Portfolio Company Analysis

This Section provides a more detailed § 704(c) analysis for each of the five representative portfolio companies identified in Section II.D.

1. NovaBright Data Systems Inc.

NovaBright Data Systems Inc. is a Delaware corporation operating as a data center operator and developer. The company operates 14 data center facilities across the United States and Western Europe, with aggregate capacity of approximately 285 megawatts.

Ownership and Contribution. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP. Only the Fund IV-A Cayman 60% interest is contributed to the Master Fund in Step 2 (October 1, 2025). The Fund IV LP 40% interest remains directly held by Fund IV LP and is not affected by the Reorganization.

Built-In Gain Computation. The total FMV of NovaBright is $890 million and the total adjusted tax basis is $520 million, yielding total BIG of $370 million. The $890 million and $520 million figures represent total company values across both holding vehicles. Applying the 60% proportional allocation to Fund IV-A Cayman's interest yields:

• FMV of 60% interest: approximately $534 million

• Adjusted tax basis of 60% interest: approximately $312 million

• Built-in gain: approximately $222 million

The remaining $148 million of BIG ($370 million × 40%) is attributable to Fund IV LP's 40% interest and stays with Fund IV LP, unaffected by the Reorganization.

§ 704(c) Treatment at Master Fund Level. The Master Fund takes a carryover basis of approximately $312 million in the NovaBright 60% interest under § 723 and establishes a § 704(c) layer of approximately $222 million. Because NovaBright is a corporation, the contributed interest is stock for § 704(c) purposes. Stock is not depreciable or amortizable, so the remedial allocation method will principally operate upon a sale or disposition of the NovaBright interest by the Master Fund. At that time, the Master Fund must allocate the built-in gain to Fund IV-A Cayman (and, after dissolution, to Fund IV-A Cayman's successor LPs through the feeder vehicles).

The Master Fund will create a notional asset under Treas. Reg. § 1.704-3(d)(2) reflecting the $222 million BIG. Because the NovaBright interest is non-depreciable, the notional asset will not generate periodic remedial allocations; instead, the full BIG will be recognized and allocated upon disposition.

2. Veridian Edge Computing Corp.

Veridian Edge Computing Corp. is a Delaware corporation operating an edge computing infrastructure platform with 47 micro-data center nodes deployed across 22 metropolitan areas in North America.

Ownership and Contribution. Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP. Only the Fund V-A Cayman 55% interest is contributed to the Master Fund in Step 4 (November 1, 2025). The Fund V LP 45% interest remains directly held.

Built-In Gain Computation. The total FMV of Veridian is $1.12 billion and the total adjusted tax basis is $780 million, yielding total BIG of $340 million. Applying the 55% proportional allocation to Fund V-A Cayman's interest:

• FMV of 55% interest: approximately $616 million

• Adjusted tax basis of 55% interest: approximately $429 million

• Built-in gain: approximately $187 million

The remaining $153 million of BIG ($340 million × 45%) is attributable to Fund V LP's 45% interest and is unaffected by the Reorganization.

§ 704(c) Treatment at Master Fund Level. The analysis parallels NovaBright: the Master Fund takes a carryover basis of approximately $429 million, establishes a § 704(c) layer of approximately $187 million, and creates a notional asset under the remedial method. As with NovaBright, the Veridian interest is corporate stock and is non-depreciable, so the remedial method will principally operate upon disposition.

3. Thorngate Fiber Networks LP

Thorngate Fiber Networks LP is a Delaware limited partnership operating approximately 18,000 miles of metro and long-haul fiber-optic network across the eastern seaboard and Gulf Coast regions.

Ownership and Contribution. Thorngate is held 100% by Fund IV-A Cayman. The entire interest is contributed to the Master Fund in Step 2 (October 1, 2025).

Built-In Gain Computation. The FMV of the Thorngate interest is $670 million and the adjusted tax basis is $490 milli

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TAX ANALYSIS MEMORANDUM
CALDERWOOD & HARKNESS LLP 1900 K Street NW, Suite 1100 Washington, DC 20006 Engagement Number: 20250527-SDILP-PLR
June 16, 2025
TO: Leonard Cross, Responsible Partner, Tax Sylvia Hartwell, Billing Partner, Tax
FROM: Robert Jansen, Lead Associate, Tax Garrett Simmons, Working Associate, Tax
RE: IRC § 704(c) Built-In Gain and Loss Carryover in Connection with the Cross-Border Fund-Platform Reorganization of Solara Digital Infrastructure LP
CLIENT: Solara Digital Infrastructure LP (EIN: 82-4917366)
MATTER: Private Letter Ruling Request — Cross-Border Fund-Platform Reorganization
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I. Executive Summary
This memorandum analyzes the treatment of built-in gain ("BIG") and built-in loss ("BIL") accounts under Section 704(c) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"),1 in connection with the proposed multi-step reorganization of Solara Digital Infrastructure LP's cross-border fund platform (the "Reorganization"). This analysis has been prepared in anticipation of the submission of a Private Letter Ruling ("PLR") request to the Internal Revenue Service ("IRS") Office of the Associate Chief Counsel (International), CC:INTL, with secondary jurisdiction in CC:PSI, and addresses, in particular, the substantive analysis underpinning proposed Ruling 6 of that PLR request.
1 Unless otherwise indicated, all references to "Section" or "§" refer to the Internal Revenue Code of 1986, as amended, and all references to "Treas. Reg. §" refer to the Treasury Regulations promulgated thereunder.
The Reorganization involves contributions by four Legacy Offshore Vehicles — (i) Solara Digital Partners Fund IV-A (Cayman) LP (EIN: 98-6241503) ("Fund IV-A Cayman"), (ii) Solara Digital Partners Fund IV-B (Luxembourg) SCSp (EIN: 98-6241571) ("Fund IV-B Lux"), (iii) Solara Digital Partners Fund V-A (Cayman) LP (EIN: 98-7891234) ("Fund V-A Cayman"), and (iv) Solara Digital Partners Fund V-B (Luxembourg) SCSp (EIN: 98-7891267) ("Fund V-B Lux," and together with Fund IV-A Cayman, Fund IV-B Lux, and Fund V-A Cayman, the "Legacy Offshore Vehicles") — of their respective portfolio company interests to the newly formed Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership. The contributions are to be carried out over a series of sequential steps during the fourth quarter of 2025, with a target effective date of December 1, 2025.
The aggregate built-in gain across all contributed properties is approximately $1.72 billion, representing the excess of total fair market value ("FMV") of $7.75 billion over total adjusted tax basis of $6.03 billion. This BIG is concentrated in the Legacy Offshore Vehicles' holdings across 23 portfolio companies operating in the digital infrastructure and enterprise SaaS verticals.
Central Conclusion. Based on the analysis set forth herein, we conclude that the § 704(c) built-in gain and loss accounts maintained by the Legacy Offshore Vehicles with respect to contributed properties carry over to the Master Fund, and the Master Fund is required to continue tracking and allocating those BIG/BIL accounts in accordance with § 704(c) principles. Specifically:
• The contributions from the Legacy Offshore Vehicles to the Master Fund, each intended to qualify as a tax-free contribution under IRC § 721(a), result in the Master Fund taking a carryover basis under IRC § 723 in each contributed property. The excess of FMV over carryover basis creates a new § 704(c) layer at the Master Fund level for each contributed property.
• The remedial allocation method under Treas. Reg. § 1.704-3(d), currently used by each Legacy Offshore Vehicle for all § 704(c) properties, may continue to be applied by the Master Fund with respect to the contributed properties, provided the Master Fund properly elects and documents that method in its limited partnership agreement.
• Pre-existing "inner" § 704(c) layers at the Legacy Offshore Vehicle level, including any reverse § 704(c) layers arising from partnership revaluations, must be addressed in the tiered partnership context pursuant to Treas. Reg. § 1.704-3(a)(6)(i).
• Upon dissolution of the Legacy Offshore Vehicles in Step 5 of the Reorganization and the distribution of Master Fund partnership interests to the existing limited partners ("LPs"), the § 704(c) allocation obligations flow through to the successor holders via the tiered partnership structure and the newly formed feeder vehicles.
This memorandum supports Ruling 6 of the PLR request and should be read in conjunction with the companion memoranda addressing IRC § 721(a) (Ruling 1), IRC § 721(b) (Ruling 2), IRC § 731 (Ruling 4), IRC § 752 (Ruling 5), IRC § 1446 (Ruling 7), and entity classification under Treas. Reg. § 301.7701-3 (Ruling 8), each of which is being prepared concurrently by the engagement team.
II. Statement of Facts
A. Background — Existing Fund Structure
Solara Digital Infrastructure LP ("Solara" or "SDILP") is a Delaware limited partnership, organized and existing under the Delaware Revised Uniform Limited Partnership Act, originally formed on March 17, 2014. Solara's principal offices are located at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801. As of March 31, 2025, Solara manages approximately $14.7 billion in assets under management across digital infrastructure (including data centers, fiber-optic networks, and edge computing platforms) and enterprise software-as-a-service ("SaaS") verticals.
Solara Digital Infrastructure GP LLC ("Solara GP"), a Delaware limited liability company (EIN: 82-4917365), serves as the general partner of Solara. Viktor Raines is the Managing Partner and Founder of the Solara platform. Stefan Dalmqvist serves as Head of Tax, responsible for the platform's global tax strategy and compliance oversight.
Solara currently operates through six parallel fund vehicles across three jurisdictions — Delaware, the Cayman Islands, and the Grand Duchy of Luxembourg — to accommodate three distinct investor pools: (i) U.S. taxable investors, (ii) U.S. tax-exempt investors, and (iii) non-U.S. investors. The parallel structure was implemented to address concerns related to unrelated business taxable income ("UBTI") for tax-exempt investors, effectively connected income ("ECI") for non-U.S. investors, and the withholding requirements under Sections 1441, 1442, 1445, and 1446 of the Code, as well as to comply with applicable non-U.S. regulatory requirements.
The six fund vehicles are organized into two fund families:
Fund IV Family (Vintage 2021; Final Close June 15, 2021):
• Solara Digital Partners Fund IV LP — a Delaware limited partnership (EIN: 85-2103748) with total committed capital of $4.2 billion; the primary domestic vehicle for U.S. taxable investors; approximately 72% deployed as of the date hereof.
• Solara Digital Partners Fund IV-A (Cayman) LP ("Fund IV-A Cayman") — a Cayman Islands exempted limited partnership (EIN: 98-6241503; CIMA Registration No. MF-72491) with total committed capital of $1.85 billion; the primary offshore vehicle for non-U.S. investors in the Fund IV family. The general partner of Fund IV-A Cayman is Solara Offshore GP Ltd., a Cayman Islands exempted company.
• Solara Digital Partners Fund IV-B (Luxembourg) SCSp ("Fund IV-B Lux") — a Luxembourg société en commandite spéciale (EIN: 98-6241571; RCS Luxembourg No. B 248193) with total committed capital of €1.15 billion (approximately $1.24 billion at a EUR/USD exchange rate of 1.08); the European vehicle for non-U.S. investors requiring a Luxembourg-domiciled structure. The general partner of Fund IV-B Lux is Solara Luxembourg Management S.à r.l., a Luxembourg private limited liability company (RCS Luxembourg No. B 248194).
Fund V Family (Vintage 2023; Final Close September 30, 2023):
• Solara Digital Partners Fund V LP — a Delaware limited partnership (EIN: 88-3467219) with total committed capital of $5.6 billion; the primary domestic vehicle for U.S. taxable investors; approximately 38% deployed as of the date hereof.
• Solara Digital Partners Fund V-A (Cayman) LP ("Fund V-A Cayman") — a Cayman Islands exempted limited partnership (EIN: 98-7891234; CIMA Registration No. MF-89103) with total committed capital of $2.45 billion; the primary offshore vehicle for non-U.S. investors in the Fund V family.
• Solara Digital Partners Fund V-B (Luxembourg) SCSp ("Fund V-B Lux") — a Luxembourg société en commandite spéciale (EIN: 98-7891267; RCS Luxembourg No. B 271056) with total committed capital of €1.38 billion (approximately $1.49 billion at a EUR/USD exchange rate of 1.08); the European vehicle for non-U.S. investors in the Fund V family.
The fund platform's limited partner base encompasses a diverse mix of institutional investors spanning multiple categories and jurisdictions. Representative key limited partners include:
• Pinnacle State Employees' Retirement System — a U.S. tax-exempt governmental pension plan; committed capital of $275 million in Fund IV and $340 million in Fund V.
• Grandview University Endowment — a U.S. tax-exempt university endowment; committed capital of $120 million in Fund IV and $185 million in Fund V.
• Nordhaven Sovereign Wealth Fund — a non-U.S. sovereign wealth fund; committed capital of $380 million in Fund IV-A Cayman and $500 million in Fund V-A Cayman.
• Kestrel Pacific Insurance Group — a non-U.S. insurer domiciled in Singapore; committed capital of €200 million in Fund IV-B Lux and €275 million in Fund V-B Lux.
• Argyle Family Office Holdings LLC — a U.S. taxable family office vehicle; committed capital of $95 million in Fund IV and $130 million in Fund V.
The parallel fund structure, while effective in accommodating the varying tax and regulatory requirements of the investor base, has resulted in increasing administrative complexity, duplicative audit and regulatory compliance costs, and governance challenges that have prompted the proposed Reorganization described below.
B. Proposed Reorganization — Five-Step Transaction
The proposed Reorganization contemplates a five-step transaction sequence to consolidate the four Legacy Offshore Vehicles into a single Master Fund, with newly formed feeder vehicles to preserve the tax structuring benefits currently provided by the separate offshore vehicles. The five steps are planned for the fourth quarter of 2025, with the Reorganization to be effective as of December 1, 2025. Each step is described in detail below.
Step 1 — Entity Formation (September 15, 2025). Solara will form the following new entities:
(i) Solara Consolidated Master Fund GP LLC, a Delaware limited liability company, to serve as the general partner of the Master Fund;
(ii) Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership, to serve as the consolidated investment vehicle receiving the portfolio company interests from the Legacy Offshore Vehicles;
(iii) Solara International Feeder (Cayman) LP (the "Int'l Feeder"), a Cayman Islands exempted limited partnership, to serve as the feeder vehicle for non-U.S. investors; and
(iv) Solara Tax-Exempt Feeder (Cayman) LP (the "TE Feeder"), a Cayman Islands exempted limited partnership, to serve as the feeder vehicle for U.S. tax-exempt investors.
Contemporaneously with formation, Solara will file IRS Form 8832 (Entity Classification Election) under Treas. Reg. § 301.7701-3 for each new entity, electing partnership classification for U.S. federal income tax purposes.
Step 2 — Fund IV-A Cayman Contribution (October 1, 2025). Fund IV-A Cayman will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest in the Master Fund. The contributed properties have an aggregate FMV of approximately $2.31 billion and an aggregate adjusted tax basis of approximately $1.62 billion, resulting in aggregate built-in gain of approximately $690 million. The contribution is intended to qualify as a tax-free contribution under IRC § 721(a), with the Master Fund taking a carryover basis under IRC § 723 in each contributed property.
Step 3 — Fund IV-B Lux Contribution (October 15, 2025). Fund IV-B Lux will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest in the Master Fund. The contributed properties have an aggregate FMV of approximately €1.07 billion ($1.16 billion at 1.08 EUR/USD) and an aggregate adjusted tax basis of approximately €782 million ($844.6 million), resulting in aggregate built-in gain of approximately €288 million ($311 million). The contribution is intended to qualify as a tax-free contribution under IRC § 721(a).
Step 4 — Fund V-A Cayman and Fund V-B Lux Contributions (November 1, 2025). Fund V-A Cayman will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest. The contributed properties have an aggregate FMV of approximately $2.89 billion and an aggregate adjusted tax basis of approximately $2.34 billion, resulting in aggregate built-in gain of approximately $550 million. Simultaneously, Fund V-B Lux will contribute all of its portfolio assets to the Master Fund in exchange for a limited partnership interest. Fund V-B Lux's contributed properties have an aggregate FMV of approximately €1.29 billion ($1.39 billion at 1.08 EUR/USD) and an aggregate adjusted tax basis of approximately €1.14 billion ($1.23 billion), resulting in aggregate built-in gain of approximately €150 million ($162 million). Both contributions are intended to qualify as tax-free contributions under IRC § 721(a).
Step 5 — Dissolution and LP Migration (December 1, 2025). Each of the four Legacy Offshore Vehicles will dissolve and distribute its Master Fund partnership interests to its existing LPs in liquidation. The distributions are intended to qualify as tax-free distributions under IRC § 731(a). Following dissolution, non-U.S. LPs will hold their Master Fund interests through the Int'l Feeder, and U.S. tax-exempt LPs will hold their Master Fund interests through the TE Feeder. U.S. taxable investors will continue to hold their interests directly in Fund IV LP and Fund V LP, which will co-invest alongside the Master Fund but are not otherwise affected by the Reorganization.
In the aggregate, the Master Fund will assume liabilities of approximately $1.34 billion in connection with the contributions in Steps 2 through 4. The treatment of these assumed liabilities under IRC § 752 and their interaction with the § 721(a) analysis are addressed in a separate memorandum and are subject to detailed modeling by the engagement team.
The total portfolio across all Legacy Offshore Vehicles encompasses 23 portfolio companies — 11 held by the Fund IV vehicles and 12 held by the Fund V vehicles. All portfolio companies are actively operating businesses in the digital infrastructure and enterprise SaaS sectors.
C. Current § 704(c) Accounting by Legacy Offshore Vehicles
Each of the four Legacy Offshore Vehicles currently maintains § 704(c) BIG/BIL accounts with respect to properties contributed to it by its respective partners upon initial formation and subsequent capital call deployment. Each Legacy Offshore Vehicle has elected, and has consistently used since its inception, the remedial allocation method under Treas. Reg. § 1.704-3(d) for all contributed properties.
The § 704(c) layers at the Legacy Offshore Vehicle level were established at the time each portfolio company interest was acquired and funded by capital calls from the limited partners. In the typical private equity fund context, LP contributions are made in cash and are used by the fund vehicle to acquire portfolio assets at their then-current fair market value. As a result, the initial § 704(c) layer at the time of asset acquisition is generally zero, because the adjusted tax basis of the acquired asset (cost basis) equals its FMV at the time of purchase.
However, § 704(c) layers may subsequently arise at the Legacy Offshore Vehicle level in two circumstances. First, if additional LPs are admitted to a Legacy Offshore Vehicle at a subsequent closing (or if capital commitments are increased), the partnership may be required to revalue its assets under Treas. Reg. § 1.704-1(b)(2)(iv)(f) (a so-called "book-up"), which creates "reverse § 704(c)" layers reflecting the difference between the revalued book value and the adjusted tax basis of the partnership's assets. Each of the Legacy Offshore Vehicles held multiple closings during their respective commitment periods, and reverse § 704(c) layers may exist to the extent asset values appreciated between closings. Second, if a Legacy Offshore Vehicle has received property contributions from its LPs in kind (rather than cash), traditional § 704(c) layers would arise. We are not aware of any in-kind contributions by LPs to the Legacy Offshore Vehicles, and the engagement team should confirm this fact with Solara's Head of Tax.
This memorandum focuses primarily on the "outer layer" of § 704(c) gain that will arise when the Legacy Offshore Vehicles contribute their portfolio assets to the Master Fund in Steps 2 through 4 — i.e., the difference between each asset's FMV at the time of contribution to the Master Fund and its then-current adjusted tax basis in the hands of the contributing Legacy Offshore Vehicle. This outer layer represents the economically significant BIG that must be tracked and allocated by the Master Fund going forward. Additionally, as noted above, pre-existing "inner" § 704(c) layers at the Legacy Offshore Vehicle level (reflecting historic contributions by LPs or revaluation events) must be addressed in the tiered partnership context, as discussed in Section V.B.2 below.
D. Key Portfolio Company Interests and Built-In Gain
The following table summarizes the five most significant portfolio company interests being contributed to the Master Fund, with their respective built-in gain details:
The FMV and adjusted tax basis figures set forth in the table above represent the total values attributable to each portfolio company's equity across all holding vehicles. The ownership split column identifies the percentage of each portfolio company held by the relevant Legacy Offshore Vehicle and thus contributed to the Master Fund, versus the percentage retained by the domestic Delaware fund vehicles (Fund IV LP and Fund V LP), which are not party to the Reorganization.
The five named portfolio companies together account for aggregate BIG of approximately $1.181 billion ($370M + $340M + $180M + $156M + $135M). The remaining 18 portfolio companies across the four Legacy Offshore Vehicles have aggregate BIG of approximately $539 million ($1.72B total BIG less $1.181B attributable to the five named portfolio companies). All portfolio companies are operating businesses in the digital infrastructure and enterprise SaaS verticals — not passive investment assets — a characterization that is relevant to the analysis of IRC § 721(b) (the "investment company" exception) set forth in a separate memorandum.
A complete schedule of all 23 portfolio companies, including FMV, adjusted tax basis, BIG, contributing vehicle, and step of contribution, is set forth in Appendix A to this memorandum.
III. Issues Presented
This memorandum addresses the following four issues:
1. Carryover of § 704(c) Accounts. Whether the built-in gain and loss accounts tracked under IRC § 704(c) by the Legacy Offshore Vehicles with respect to contributed properties carry over to the Consolidated Master Fund LP when the Legacy Offshore Vehicles contribute their portfolio company interests to the Master Fund in exchange for partnership interests under IRC § 721(a) in Steps 2 through 4 of the Reorganization.
2. Establishment and Interaction of § 704(c) Layers. Whether the Master Fund is required to establish new § 704(c) layers upon receipt of the contributed properties, and how those new layers interact with pre-existing § 704(c) layers (including reverse § 704(c) layers) maintained at the Legacy Offshore Vehicle level.
3. Continuation of Remedial Allocation Method. Whether the Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property, consistent with the method previously elected and consistently applied by the Legacy Offshore Vehicles.
4. Impact of Step 5 Dissolution on § 704(c) Obligations. How the § 704(c) accounts are maintained and the allocation obligations are preserved when the Legacy Offshore Vehicles dissolve in Step 5 of the Reorganization and distribute their Master Fund partnership interests to their respective LPs, who then hold interests in the Master Fund either directly or through the Int'l Feeder or TE Feeder vehicles.
IV. Summary of Conclusions
Based on the analysis set forth in Section V below, we reach the following conclusions with respect to each of the issues presented:
1. Carryover of § 704(c) Accounts. The § 704(c) BIG and BIL accounts maintained by the Legacy Offshore Vehicles carry over and must be preserved in the Master Fund upon contribution of the portfolio company interests under IRC § 721(a). Each contribution creates a new § 704(c) layer at the Master Fund level reflecting the difference between the FMV of the contributed property at the time of contribution and the carryover basis assumed by the Master Fund under IRC § 723. The aggregate new § 704(c) BIG layer created at the Master Fund level is $1.72 billion. The Master Fund is obligated under § 704(c)(1)(A) and the Treasury Regulations thereunder to allocate income, gain, loss, and deduction with respect to each contributed property in a manner that takes into account the variation between the property's adjusted tax basis and its FMV at the time of contribution.
2. Establishment and Interaction of § 704(c) Layers. The Master Fund must maintain § 704(c) accounts that reflect both the "outer" BIG arising from the contribution to the Master Fund and, to the extent applicable in the tiered partnership context, the allocation obligations inherited from the Legacy Offshore Vehicles. Under Treas. Reg. § 1.704-3(a)(6)(i), the contribution of § 704(c) property by a Legacy Offshore Vehicle to the Master Fund (a lower-tier partnership) does not relieve the Legacy Offshore Vehicle (or its successor holders after dissolution) of its obligation to allocate BIG to its historic partners. The Master Fund's § 704(c) allocations flow up through the tiered partnership structure to the Legacy Offshore Vehicles (and, after dissolution, to the successor LPs through the feeder vehicles).
3. Continuation of Remedial Allocation Method. The Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property. Because the contribution to the Master Fund creates new § 704(c) layers, the Master Fund has the right to elect a § 704(c) method for each contributed property at the time it receives them. We recommend that the Master Fund elect the remedial allocation method to maintain consistency with the Legacy Offshore Vehicles' prior method, to provide the most accurate allocation of BIG to the historic partners, and to avoid ceiling rule distortions that could arise under the traditional or curative methods given the magnitude of the aggregate BIG ($1.72 billion). The election must be properly documented in the Master Fund's limited partnership agreement.
4. Impact of Step 5 Dissolution. Upon dissolution of the Legacy Offshore Vehicles in Step 5 and distribution of Master Fund interests to LPs (intended as tax-free distributions under IRC § 731(a)), the § 704(c) allocation obligations flow through to the successor holders via the tiered partnership structure and the feeder vehicles (Int'l Feeder and TE Feeder). The distributed Master Fund partnership interests carry with them the § 704(c) obligations, and the LPs who receive Master Fund interests (or interests in the feeder vehicles that hold Master Fund interests) step into the shoes of the Legacy Offshore Vehicles for § 704(c) purposes. The Master Fund must maintain records sufficient to track the § 704(c) allocation obligations to specific historic contributing vehicles and their successor LPs.
V. Legal Analysis
A. Overview of IRC § 704(c) — Statutory Framework
1. Statutory Text and Purpose
Section 704(c)(1)(A) of the Code provides:
"Under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution."
The purpose of § 704(c) is to prevent the shifting of tax consequences among partners when property with a built-in gain or built-in loss is contributed to a partnership. Absent § 704(c), a partner who contributes appreciated property could effectively shift the pre-contribution appreciation to the other partners by causing the partnership to sell the property and allocating the resulting gain pro rata among all partners (including those who did not contribute the property). Section 704(c) prevents this result by requiring that the built-in gain or loss be allocated to the contributing partner — ensuring that the contributing partner bears the tax consequences of the appreciation or depreciation that accrued prior to the contribution.
The statute operates in conjunction with the general partnership allocation rules of § 704(a) and (b). Under § 704(b), partnership allocations must have "substantial economic effect" or, failing that, must be in accordance with the partners' interests in the partnership. Section 704(c) functions as a mandatory overlay on the § 704(b) allocations, requiring that the partnership's allocations of items attributable to contributed property take account of the built-in gain or loss, regardless of what the partnership agreement otherwise provides.
2. Reverse § 704(c) Allocations
In addition to its application to contributed property, § 704(c) principles apply whenever partnership property is revalued under Treas. Reg. § 1.704-1(b)(2)(iv)(f) — commonly referred to as a "book-up" or "book-down." When a revaluation event occurs (e.g., admission of a new partner, additional capital contribution, or distribution of property in partial liquidation), the partnership's capital accounts are adjusted to reflect the fair market value of partnership property, and "reverse § 704(c)" allocations are required to account for the difference between the revalued book value and the adjusted tax basis of the partnership's assets. The purpose is the same as for contributed property: to prevent shifting of the pre-existing appreciation (or depreciation) from the historic partners to the new or continuing partners.
In the context of the Legacy Offshore Vehicles, reverse § 704(c) layers may have arisen at the time of subsequent closings, when new LPs were admitted and existing partnership assets had appreciated in value since the initial closing. These layers constitute the "inner" § 704(c) layers referenced in Section II.C above.
3. The Ceiling Rule and Methods of Allocation
The Treasury Regulations under § 704(c) establish three permissible methods for making § 704(c) allocations, each of which addresses the "ceiling rule" limitation in a different manner:
The Ceiling Rule. As a threshold matter, Treas. Reg. § 1.704-3(b)(1) provides that the total income, gain, loss, or deduction allocated to the partners with respect to a contributed property for any year cannot exceed the total partnership income, gain, loss, or deduction with respect to that property for the year (the "ceiling rule"). The ceiling rule can create distortions when the amount of tax gain or loss that the partnership recognizes on a disposition of the contributed property (or the amount of depreciation or amortization the partnership claims with respect to the property) is less than the amount of book gain or loss (or book depreciation or amortization) because of the difference between the property's tax basis and its book value. In such cases, the non-contributing partner may be allocated less than its full economic share of the tax item, resulting in a ceiling rule distortion.
(a) Traditional Method — Treas. Reg. § 1.704-3(b). Under the traditional method, the partnership makes § 704(c) allocations using the contributed property's adjusted tax basis. The ceiling rule applies without modification, meaning that in certain cases the non-contributing partner may be allocated less tax depreciation (or more tax gain) than its economic share would warrant. No corrective allocations are made to compensate for ceiling rule distortions.
(b) Traditional Method with Curative Allocations — Treas. Reg. § 1.704-3(c). Under the traditional method with curative allocations, the partnership is permitted to make "curative" allocations of other partnership tax items (of the same character) to offset ceiling rule distortions. For example, if the ceiling rule limits the amount of depreciation that can be allocated to the non-contributing partner with respect to the contributed property, the partnership may allocate additional depreciation from other partnership properties to the non-contributing partner to make up the shortfall.
(c) Remedial Allocation Method — Treas. Reg. § 1.704-3(d). Under the remedial allocation method, the partnership creates notional tax items — termed "remedial allocations" — to offset any ceiling rule limitations. The remedial method permits the partnership to create two equal and offsetting notional tax items: one allocated to the non-contributing partner to compensate for the ceiling rule distortion, and an equal but opposite item allocated to the contributing partner. The remedial method is the most flexible and economically accurate of the three methods, as it is not dependent upon the existence of other partnership tax items of the appropriate character and ensures that the non-contributing partner is fully compensated for any ceiling rule limitation.
Under Treas. Reg. § 1.704-3(a)(2), the partnership may select any reasonable method on a property-by-property basis, but the selected method must be applied consistently to each property once elected. The partnership's choice of method must be reasonable under all the facts and circumstances, and a method is not reasonable if it is "adopted with a principal purpose of shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value of the partners' aggregate tax liability."
4. Anti-Abuse Rule
Treas. Reg. § 1.704-3(a)(9) provides a broad anti-abuse rule under which the Commissioner may recast the tax consequences of a transaction involving § 704(c) property if the allocation method chosen, or the transaction structure, has the effect of shifting the tax consequences of § 704(c) property away from the contributing partner in a manner inconsistent with the purpose of § 704(c). This provision is analyzed in detail in Section V.G below in the context of the proposed Reorganization.
B. Application of § 704(c) to Contributions by the Legacy Offshore Vehicles to the Master Fund
1. Creation of New § 704(c) Layer at the Master Fund Level
When Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux each contribute their portfolio company interests to the Master Fund in Steps 2 through 4, each contribution is intended to qualify as a tax-free contribution to a partnership under IRC § 721(a). The analysis supporting the § 721(a) qualification is set forth in a separate memorandum (Ruling 1) being prepared concurrently; this memorandum assumes that each contribution so qualifies.
Under IRC § 723, when a partner contributes property to a partnership in a transaction described in § 721(a), the partnership's adjusted basis in the contributed property equals the contributing partner's adjusted basis in the property immediately before the contribution — i.e., the basis carries over. In the present case, the Master Fund will take a carryover basis in each contributed portfolio company interest equal to the Legacy Offshore Vehicle's adjusted tax basis in that interest immediately prior to the contribution.
At the time of each contribution, the FMV of each contributed portfolio company interest exceeds its carryover basis, creating a new § 704(c) layer at the Master Fund level. The Master Fund is required, under § 704(c)(1)(A) and the Treasury Regulations thereunder, to track the difference between the FMV and the carryover basis of each contributed property and to allocate income, gain, loss, and deduction with respect to each contributed property in a manner that takes account of that variation.
The aggregate new § 704(c) BIG layer created at the Master Fund level across all contributed properties is approximately $1.72 billion, computed as follows:
The specific new § 704(c) layers for the five representative portfolio companies are as follows:
(a) NovaBright Data Systems Inc. — Fund IV-A Cayman holds a 60% interest in NovaBright; the remaining 40% is held by Fund IV LP (the domestic Delaware vehicle) and is not contributed to the Master Fund. The total FMV of NovaBright is $890 million and the total adjusted tax basis is $520 million, yielding total BIG of $370 million. Fund IV-A Cayman's proportional 60% share of these values implies FMV of approximately $534 million, adjusted tax basis of approximately $312 million, and BIG of approximately $222 million attributable to the interest contributed to the Master Fund.2 The remaining $148 million of BIG (attributable to Fund IV LP's 40% interest) is not affected by the Reorganization and remains with Fund IV LP.
(b) Veridian Edge Computing Corp. — Fund V-A Cayman holds a 55% interest in Veridian; the remaining 45% is held by Fund V LP. Applying the same proportional analysis, Fund V-A Cayman's 55% share of the total $340 million BIG yields approximately $187 million in BIG attributable to the interest contributed to the Master Fund. The remaining $153 million of BIG stays with Fund V LP.
(c) Thorngate Fiber Networks LP — Fund IV-A Cayman holds a 100% interest in Thorngate. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $180 million (FMV $670 million less basis $490 million).
(d) Crestline Cloud Solutions LLC — Fund IV-B Lux holds a 100% interest in Crestline, a Delaware LLC classified as a disregarded entity for U.S. federal income tax purposes. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $156 million (€145 million at 1.08 EUR/USD). Because Crestline is a disregarded entity, its underlying assets (rather than the LLC interest itself) are deemed contributed for tax purposes; the § 704(c) analysis applies to the underlying assets.
(e) Helix SaaS Holdings Ltd. — Fund V-A Cayman holds a 100% interest in Helix. The entire interest is contributed to the Master Fund, creating a § 704(c) layer of $135 million (FMV $445 million less basis $310 million).
2 We note that the $370 million figure set forth in the fact section as the total BIG for NovaBright represents the company-wide BIG. In the § 704(c) analysis at the Master Fund level, the relevant BIG is only the portion attributable to the interest actually contributed — i.e., Fund IV-A Cayman's 60% share, or approximately $222 million. The engagement team should confirm with Solara whether the stated BIG figures represent company-wide amounts or vehicle-specific amounts, and adjust the analysis accordingly. For purposes of this memorandum, we treat the stated figures as company-wide amounts and apply proportional allocation.
The Master Fund will be required to maintain separate § 704(c) accounts for each contributed property, organized by the contributing Legacy Offshore Vehicle and the step in which the contribution occurs. This layered tracking is essential for the accurate allocation of § 704(c) items to the contributing vehicles (and, after dissolution, to their successor LPs) and is discussed further in Section VII below.
2. Carryover of Pre-Existing "Inner" § 704(c) Layers
As discussed in Section II.C, each Legacy Offshore Vehicle may have pre-existing § 704(c) layers — specifically, reverse § 704(c) layers arising from partnership revaluations at the time of subsequent closings. The treatment of these inner layers in the tiered partnership context is governed by Treas. Reg. § 1.704-3(a)(6)(i).
Treas. Reg. § 1.704-3(a)(6)(i) provides that if a partnership (the "upper-tier partnership") contributes § 704(c) property to another partnership (the "lower-tier partnership"), the upper-tier partnership must continue to allocate the built-in gain or loss attributable to the contributed property to its own partners in a manner consistent with § 704(c). The contribution to the lower-tier partnership does not relieve the upper-tier partnership of its § 704(c) obligation; rather, when the lower-tier partnership subsequently recognizes gain or loss with respect to the contributed property (or claims depreciation or amortization), the resulting items flow up to the upper-tier partnership, which must then allocate those items among its own partners in accordance with § 704(c).
In the present case, the Legacy Offshore Vehicles serve as the upper-tier partnerships and the Master Fund serves as the lower-tier partnership. When the Legacy Offshore Vehicles contribute their portfolio company interests to the Master Fund:
(i) The Master Fund takes a carryover basis under § 723 and establishes a new "outer" § 704(c) layer reflecting the FMV-basis spread at the time of contribution.
(ii) The Legacy Offshore Vehicles retain their § 704(c) obligations with respect to any pre-existing "inner" layers — i.e., reverse § 704(c) layers arising from prior revaluation events at the Legacy Offshore Vehicle level.
(iii) When the Master Fund subsequently recognizes items of income, gain, loss, or deduction with respect to the contributed properties, those items flow up to the Legacy Offshore Vehicles (as partners in the Master Fund), and each Legacy Offshore Vehicle must then allocate those items among its own LPs in accordance with its existing § 704(c) obligations.
After Step 5, when the Legacy Offshore Vehicles dissolve and their LPs receive Master Fund interests (directly or through the feeder vehicles), the inner § 704(c) obligations do not disappear. Rather, the obligation to allocate § 704(c) items to the "historic" partners of the Legacy Offshore Vehicles continues and must be tracked at the Master Fund and feeder vehicle levels. The mechanism for this tracking is discussed in Section V.B.3 and V.D below.
In a typical private equity fund structure where LP contributions are made in cash and used to acquire assets at cost, the initial § 704(c) layer is zero. However, to the extent any of the Legacy Offshore Vehicles conducted multiple closings at which asset values had appreciated, reverse § 704(c) layers may exist. These layers reflect the appreciation in asset values between the initial closing and subsequent closings, which must be allocated to the partners who were admitted at the initial closing (the "early-close" partners) and not to the partners admitted at the subsequent closing (the "late-close" partners). The engagement team should confirm with Solara's Head of Tax, Stefan Dalmqvist, the extent of any such reverse § 704(c) layers and the identity of the affected partners.
3. Tiered Partnership Considerations
Post-Reorganization, the fund structure will be tiered, with the following chain of ownership:
LPs → Feeder Vehicles (Int'l Feeder and TE Feeder, both Cayman Islands exempted LPs classified as partnerships for U.S. federal income tax purposes) → Master Fund (Delaware LP)
U.S. taxable investors will not participate in the tiered structure; they will remain directly in Fund IV LP and Fund V LP, which co-invest alongside the Master Fund but hold their portfolio company interests directly (not through the Master Fund).
In the tiered partnership context, § 704(c) allocations must flow through each level of the structure to reach the ultimate beneficial owners. The Master Fund's § 704(c) obligation requires it to make allocations that take into account the BIG with respect to each contributed property. When the Master Fund allocates items to its partners — which include the Int'l Feeder and the TE Feeder (and, initially, the Legacy Offshore Vehicles themselves) — those partners must, in turn, allocate the § 704(c) items to their own partners in a manner consistent with the § 704(c) principles.
Anti-Abuse Considerations in Tiered Structures. Treas. Reg. § 1.704-3(a)(9) provides that the Commissioner may treat the contribution of § 704(c) property from one partnership to another in a tiered structure as abusive if the structure has the effect of shifting the tax consequences of built-in gain away from the contributing partner. In the present case, the BIG is not being shifted away from the contributing partners; rather, it is being preserved and allocated to the historic partners (the Legacy Offshore Vehicles and, after dissolution, their successor LPs) through the tiered structure. The remedial allocation method ensures that no ceiling rule distortion shifts BIG away from the contributing partners. Accordingly, we do not believe the anti-abuse rule is implicated. This analysis is discussed further in Section V.G below.
Look-Through Approach. After Step 5, the Legacy Offshore Vehicles will cease to exist. The § 704(c) obligation at the Master Fund level must then be allocated to the correct "historic" partners — i.e., the partners who were the Legacy Offshore Vehicles' LPs at the time the portfolio company interests were contributed to the Master Fund in Steps 2 through 4. Because the successor LPs will hold their Master Fund interests through the feeder vehicles, the Master Fund must "look through" the feeders to the underlying LPs for purposes of § 704(c) allocations.
The feeder vehicles themselves will function as partnerships for U.S. federal income tax purposes and will have their own § 704(c) obligations to the extent their assets (Master Fund interests) have built-in gain. The feeder vehicles must allocate the § 704(c) items they receive from the Master Fund to their respective LPs in a manner that preserves the BIG allocation to the historic contributing partners. This requires coordination between the Master Fund and the feeder vehicles in their respective partnership agreements and tax accounting systems.
C. Remedial Allocation Method — Continuation Post-Reorganization
1. Current Practice of the Legacy Offshore Vehicles
Each Legacy Offshore Vehicle currently uses the remedial allocation method under Treas. Reg. § 1.704-3(d) for all § 704(c) properties. This election was made at the inception of each Legacy Offshore Vehicle and has been consistently applied. The remedial method was chosen for the Legacy Offshore Vehicles because it is the most economically accurate method for allocating BIG, particularly in a private equity fund context where the contributed properties are expected to appreciate significantly over the hold period and where the ceiling rule limitations under the traditional method could result in material distortions.
2. Application of the Remedial Method at the Master Fund Level
Under the remedial allocation method, the partnership creates notional tax items to offset any ceiling rule limitations, ensuring that the non-contributing partner is allocated its full economic share of tax items and that the contributing partner bears the full tax consequences of the built-in gain. Specifically, under Treas. Reg. § 1.704-3(d)(1), the partnership first determines the amount of book items (depreciation, amortization, gain, or loss) that would be allocated to each partner. The partnership then determines the amount of tax items that can be allocated to the non-contributing partners based on the property's adjusted tax basis. If the tax items are insufficient to match the book items allocated to the non-contributing partners (the ceiling rule limitation), the partnership creates remedial allocations: a notional tax item in favor of the non-contributing partner (to make up the shortfall) and an equal and offsetting notional tax item to the contributing partner.
Under Treas. Reg. § 1.704-3(d)(2), the partnership applies the remedial method by treating the contributed property as if it consisted of two assets: (i) a "tax asset" equal to the property's adjusted tax basis, which is depreciated or amortized over the remaining recovery period of the contributed property, and (ii) a "book-only asset" equal to the difference between the property's book value and its tax basis, which is depreciated or amortized over a newly commenced recovery period as if the property were newly acquired.
3. Election of the Remedial Method by the Master Fund
Because the contributions to the Master Fund create new § 704(c) layers, the Master Fund has the right — and indeed the obligation — to elect a § 704(c) method for each contributed property at the time it receives them. Under Treas. Reg. § 1.704-3(a)(2), the partnership may adopt any of the three permissible methods on a property-by-property basis, provided the method is reasonable.
We recommend that the Master Fund elect the remedial allocation method for all properties received from the Legacy Offshore Vehicles for the following reasons:
(a) Consistency. Electing the remedial method maintains consistency with the Legacy Offshore Vehicles' prior elections. While the Master Fund is not legally required to adopt the same method as the contributing vehicle, doing so simplifies the § 704(c) accounting and reduces the risk of allocation errors or disputes.
(b) Economic Accuracy. The remedial method is the most economically accurate of the three methods, as it eliminates ceiling rule distortions entirely. Given the magnitude of the aggregate BIG ($1.72 billion) and the diversity of contributing vehicles (four offshore vehicles across two fund families and two jurisdictions), the ceiling rule limitations that could arise under the traditional or curative methods would be particularly significant and could result in material misallocations of taxable income.
(c) Flexibility. The remedial method does not depend upon the availability of other partnership tax items of the appropriate character (as the curative method does), making it reliably applicable regardless of the Master Fund's overall tax profile in any given year.
(d) PLR Supportability. The remedial method is well-established in the Treasury Regulations and is widely recognized as the gold standard for § 704(c) allocations in the private equity and real estate fund context. Electing this method strengthens the PLR request by demonstrating that the Reorganization is not designed to shift BIG away from the contributing partners.
4. Notional Asset Creation Under the Remedial Method
Upon receiving the contributed properties, the Master Fund will create notional assets under Treas. Reg. § 1.704-3(d)(2) for purposes of computing remedial allocations. For each contributed property, the Master Fund will treat the property as consisting of two components:
(i) A tax component equal to the property's carryover basis (under § 723), which will be depreciated or amortized over the remaining recovery period of the contributed property (if applicable) in the same manner as if the Legacy Offshore Vehicle had continued to hold the property.
(ii) A notional book component equal to the BIG — i.e., the difference between the contributed property's FMV and its carryover basis at the time of contribution — which will be depreciated or amortized over the applicable recovery period as if the property were newly placed in service on the date of contribution.
For portfolio company interests that are stock (such as NovaBright Data Systems Inc. and Helix SaaS Holdings Ltd.), which are not depreciable or amortizable, the remedial method operates principally at the time of sale or disposition. Upon the Master Fund's sale of a contributed portfolio company interest, the Master Fund will allocate the built-in gain to the contributing vehicle (and, after dissolution, to its successor LPs) through the § 704(c) remedial allocation framework.
For portfolio company interests that are partnership interests (such as Thorngate Fiber Networks LP), the remedial method may require the Master Fund to track its share of the underlying partnership's depreciable or amortizable assets, applying the remedial method at the asset level through the tiered partnership structure. This is discussed further in Section V.F.3 below.
D. Impact of Step 5 Dissolution on § 704(c) Accounts
1. Distribution of Master Fund Interests
When the Legacy Offshore Vehicles dissolve in Step 5 and distribute their Master Fund partnership interests to their respective LPs, the distributions are intended to qualify as tax-free distributions under IRC § 731(a). Under § 731(a)(1), no gain is recognized by a partner upon a distribution from a partnership, except to the extent that any money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. Because the distributions consist of partnership interests (not money), no gain recognition is expected under § 731(a) (subject to the separate analysis in the § 731 memorandum).
2. Carryover of § 704(c) Obligations
The critical question for purposes of this memorandum is whether the § 704(c) obligations associated with the contributed properties survive the dissolution of the Legacy Offshore Vehicles and attach to the successor holders of the Master Fund interests.
We conclude that the § 704(c) obligations do survive and must be tracked by the Master Fund and the feeder vehicles. The basis for this conclusion is as follows:
(a) The § 704(c) layer at the Master Fund level was created when the Legacy Offshore Vehicles contributed property to the Master Fund. The Master Fund's obligation under § 704(c)(1)(A) runs to the Master Fund itself — it is the partnership that must allocate the BIG to the "contributing partner." The contributing partner, at the time of contribution, was the Legacy Offshore Vehicle.
(b) Upon dissolution of the Legacy Offshore Vehicle and distribution of the Master Fund interest to the Legacy Offshore Vehicle's LPs, those LPs step into the shoes of the Legacy Offshore Vehicle with respect to the Master Fund interest. The LPs effectively succeed to the Legacy Offshore Vehicle's position as a partner in the Master Fund.
(c) The Master Fund's § 704(c) obligation does not terminate upon dissolution of the contributing partner. Rather, the § 704(c) items must continue to be allocated to the successor holders of the Master Fund interest — i.e., the LPs who received the interest in dissolution.
(d) Where the LPs hold their Master Fund interests through a feeder vehicle (Int'l Feeder or TE Feeder), the feeder vehicle itself becomes a partner in the Master Fund, and the Master Fund allocates § 704(c) items to the feeder. The feeder must then further allocate those items to its own LPs in a manner that preserves the § 704(c) obligation — i.e., allocating the BIG items to the LPs who were historic partners of the Legacy Offshore Vehicle that originally contributed the property.
3. Tracking and Administrative Requirements
The preservation of § 704(c) obligations through the dissolution and LP migration process creates significant administrative complexity. The Master Fund must maintain records sufficient to:
(i) Identify each contributed property and its associated § 704(c) layer (FMV, carryover basis, BIG/BIL, and remedial allocation notional asset);
(ii) Track the contributing Legacy Offshore Vehicle for each property;
(iii) Associate each contributing Legacy Offshore Vehicle's § 704(c) layer with the specific successor LPs who received the Master Fund interest upon dissolution;
(iv) Coordinate with the feeder vehicles to ensure that § 704(c) items flowing from the Master Fund to the feeders are properly allocated by the feeders to the appropriate LPs; and
(v) Maintain the separation of § 704(c) layers attributable to different contributing vehicles and different steps of the Reorganization.
With 23 portfolio companies, four contributing vehicles, and multiple layers of BIG — all flowing through a tiered partnership structure to the ultimate LPs — the Master Fund's § 704(c) accounting will be among the most complex aspects of post-Reorganization tax compliance. We recommend that the engagement team coordinate early with Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax), the independent accounting firm responsible for tax compliance across all fund vehicles, to design and implement the necessary § 704(c) tracking systems. This coordination is discussed further in Section VII below.
E. Interaction with § 752 Liability Shifts
The $1.34 billion in aggregate liabilities assumed by the Master Fund in connection with the portfolio company contributions interact with the § 704(c) analysis in several important respects.
1. Impact on § 704(c) Layer Computation
Under Treas. Reg. § 1.704-3(a)(7), if a partner's share of liabilities increases or decreases in connection with a contribution of § 704(c) property, the deemed contribution or distribution under § 752(a) or § 752(b) does not independently trigger gain recognition if the § 721(a) contribution is otherwise tax-free. However, the liability shift must be considered in computing the § 704(c) layer. Specifically, the Master Fund's assumption of liabilities that were previously allocable to the contributing Legacy Offshore Vehicle's other partners could affect the net equity value attributable to each contributing vehicle's interest in the Master Fund, which in turn affects the computation of the § 704(c) layer.
The detailed modeling of the liability shifts and their impact on the § 704(c) layer computations is set forth in the separate § 752 Liability Shifting Analysis memorandum being prepared by the engagement team. This memorandum assumes the liability shift modeling is consistent with the aggregate BIG figures presented in Section II.D and the table in Section V.B.1 above.
2. Minimum Gain Chargeback Provisions
The Master Fund's allocation of liabilities under Treas. Reg. §§ 1.752-1, 1.752-2, and 1.752-3 (distinguishing between recourse and nonrecourse liabilities) will affect the operation of the § 704(c) minimum gain chargeback and partner nonrecourse debt minimum gain chargeback provisions under Treas. Reg. §§ 1.704-2(f) and 1.704-2(i). To the extent that contributed properties are encumbered by nonrecourse liabilities, the Master Fund must track partnership minimum gain and partner nonrecourse debt minimum gain attributable to those properties, and the § 704(c) allocations must be coordinated with the minimum gain chargeback requirements.
The interaction between § 704(c) and § 752 is inherently fact-intensive and dependent upon the specific liability allocation methodology adopted by the Master Fund. We defer to the § 752 memorandum for the detailed analysis and note only that the § 704(c) tracking systems implemented by the Master Fund must be integrated with the § 752 liability allocation framework.
F. Specific Portfolio Company Analysis
This Section provides a more detailed § 704(c) analysis for each of the five representative portfolio companies identified in Section II.D.
1. NovaBright Data Systems Inc.
NovaBright Data Systems Inc. is a Delaware corporation operating as a data center operator and developer. The company operates 14 data center facilities across the United States and Western Europe, with aggregate capacity of approximately 285 megawatts.
Ownership and Contribution. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP. Only the Fund IV-A Cayman 60% interest is contributed to the Master Fund in Step 2 (October 1, 2025). The Fund IV LP 40% interest remains directly held by Fund IV LP and is not affected by the Reorganization.
Built-In Gain Computation. The total FMV of NovaBright is $890 million and the total adjusted tax basis is $520 million, yielding total BIG of $370 million. The $890 million and $520 million figures represent total company values across both holding vehicles. Applying the 60% proportional allocation to Fund IV-A Cayman's interest yields:
• FMV of 60% interest: approximately $534 million
• Adjusted tax basis of 60% interest: approximately $312 million
• Built-in gain: approximately $222 million
The remaining $148 million of BIG ($370 million × 40%) is attributable to Fund IV LP's 40% interest and stays with Fund IV LP, unaffected by the Reorganization.
§ 704(c) Treatment at Master Fund Level. The Master Fund takes a carryover basis of approximately $312 million in the NovaBright 60% interest under § 723 and establishes a § 704(c) layer of approximately $222 million. Because NovaBright is a corporation, the contributed interest is stock for § 704(c) purposes. Stock is not depreciable or amortizable, so the remedial allocation method will principally operate upon a sale or disposition of the NovaBright interest by the Master Fund. At that time, the Master Fund must allocate the built-in gain to Fund IV-A Cayman (and, after dissolution, to Fund IV-A Cayman's successor LPs through the feeder vehicles).
The Master Fund will create a notional asset under Treas. Reg. § 1.704-3(d)(2) reflecting the $222 million BIG. Because the NovaBright interest is non-depreciable, the notional asset will not generate periodic remedial allocations; instead, the full BIG will be recognized and allocated upon disposition.
2. Veridian Edge Computing Corp.
Veridian Edge Computing Corp. is a Delaware corporation operating an edge computing infrastructure platform with 47 micro-data center nodes deployed across 22 metropolitan areas in North America.
Ownership and Contribution. Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP. Only the Fund V-A Cayman 55% interest is contributed to the Master Fund in Step 4 (November 1, 2025). The Fund V LP 45% interest remains directly held.
Built-In Gain Computation. The total FMV of Veridian is $1.12 billion and the total adjusted tax basis is $780 million, yielding total BIG of $340 million. Applying the 55% proportional allocation to Fund V-A Cayman's interest:
• FMV of 55% interest: approximately $616 million
• Adjusted tax basis of 55% interest: approximately $429 million
• Built-in gain: approximately $187 million
The remaining $153 million of BIG ($340 million × 45%) is attributable to Fund V LP's 45% interest and is unaffected by the Reorganization.
§ 704(c) Treatment at Master Fund Level. The analysis parallels NovaBright: the Master Fund takes a carryover basis of approximately $429 million, establishes a § 704(c) layer of approximately $187 million, and creates a notional asset under the remedial method. As with NovaBright, the Veridian interest is corporate stock and is non-depreciable, so the remedial method will principally operate upon disposition.
3. Thorngate Fiber Networks LP
Thorngate Fiber Networks LP is a Delaware limited partnership operating approximately 18,000 miles of metro and long-haul fiber-optic network across the eastern seaboard and Gulf Coast regions.
Ownership and Contribution. Thorngate is held 100% by Fund IV-A Cayman. The entire interest is contributed to the Master Fund in Step 2 (October 1, 2025).
Built-In Gain Computation. The FMV of the Thorngate interest is $670 million and the adjusted tax basis is $490 milli

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