1041-00005 · Client 1041 · Tax Analysis

tax-memo-section-704c-remedial-method.docx DOCUMENT M&A / Corporate

77 / 86 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

TO: Leonard Cross, Responsible Partner, Tax; Sylvia Hartwell, Billing Partner, Tax — Calderwood & Harkness LLP

FROM: Robert Jansen, Lead Associate, Tax; Garrett Simmons, Working Associate, Tax — Calderwood & Harkness LLP

DATE: June 16, 2025

RE: Solara Digital Infrastructure LP — Cross-Border Fund-Platform Reorganization: Analysis of Continuation of Remedial Allocation Method Under IRC § 704(c) and Treas. Reg. § 1.704-3(d) for Contributed Properties Following Multi-Step Reorganization

ENGAGEMENT: Matter No. 20250527-SDILP-PLR

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

Right-click to update Table of Contents

I. Executive Summary

This memorandum analyzes whether Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership to be formed on or about September 15, 2025, may continue to use the remedial allocation method under Treasury Regulations § 1.704-3(d) for each contributed property received from the Legacy Offshore Vehicles in the proposed five-step cross-border fund-platform reorganization (the "Reorganization"). This analysis directly supports Ruling 6 of the private letter ruling ("PLR") request that Calderwood & Harkness LLP is preparing for submission to the Internal Revenue Service ("IRS") on behalf of Solara Digital Infrastructure LP (the "Client" or "Solara").

The Reorganization contemplates that four offshore fund vehicles — Fund IV-A (Cayman) LP, Fund IV-B (Luxembourg) SCSp, Fund V-A (Cayman) LP, and Fund V-B (Luxembourg) SCSp (collectively, the "Legacy Offshore Vehicles") — will contribute all of their portfolio assets to the Master Fund in exchange for limited partnership interests in the Master Fund. These contributions will occur in Steps 2 through 4 of the Reorganization and are intended to qualify as tax-free contributions under Internal Revenue Code ("IRC") § 721(a). The aggregate fair market value ("FMV") of the contributed properties is approximately $7.75 billion; the aggregate adjusted tax basis of such properties is approximately $6.03 billion; and the total built-in gain ("BIG") attributable to such properties is approximately $1.72 billion.

Each of the four Legacy Offshore Vehicles currently uses the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties with § 704(c) built-in gain or loss. The remedial allocation method was elected at the inception of each Legacy Offshore Vehicle, is documented in the respective limited partnership agreements or partnership agreements (as applicable), and has been consistently applied in the preparation of annual tax returns and maintenance of § 704(c) accounts by Caldwell Pierce & Co. LLP, the Client's tax compliance advisor.

Conclusion. Based on our analysis of the applicable statutory provisions, Treasury Regulations, and relevant authorities, we conclude that the Master Fund may and should continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each property contributed by the Legacy Offshore Vehicles. The existing § 704(c) built-in gain and loss accounts maintained by the Legacy Offshore Vehicles carry over to the Master Fund. No new method election is technically required for properties already subject to § 704(c) in the Legacy Offshore Vehicles; however, as a matter of best practice and to ensure administrative clarity, the Master Fund should affirmatively adopt the remedial allocation method in its limited partnership agreement for all contributed properties. The continuation of the remedial method is consistent with the purpose of § 704(c), does not raise anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10), and should be the subject of a favorable ruling from the IRS. This memorandum supports Ruling 6 of the PLR request (IRC § 704(c) remedial allocation method continuation).

II. Statement of Facts

A. The Solara Fund Platform

Solara Digital Infrastructure LP is a Delaware limited partnership (EIN 82-4917366) that was founded on March 17, 2014. As of March 31, 2025, Solara has approximately $14.7 billion in assets under management ("AUM"). Solara's principal business is sponsoring and managing private equity funds that target investments in digital infrastructure assets, including data centers, fiber-optic networks, edge computing facilities, and enterprise software-as-a-service ("SaaS") platforms.

The key principals of Solara are as follows:

• Managing Partner & Founder: Viktor Raines

• Head of Tax: Stefan Dalmqvist

• General Counsel: Priya Narasimhan

• Chief Financial Officer: Douglas Wexford

The general partner of Solara Digital Infrastructure LP is Solara Digital Infrastructure GP LLC (EIN 82-4917365), a Delaware limited liability company managed by Viktor Raines. The registered agent of Solara Digital Infrastructure GP LLC is Capitol Registered Agents Inc., located at 850 New Burton Road, Suite 201, Dover, Delaware 19904.

B. Existing Fund Vehicles

Solara currently sponsors and manages two fund families — Fund IV and Fund V — each of which comprises a domestic (Delaware) limited partnership and two parallel offshore vehicles. The relevant fund vehicles are described below.

Fund IV Family:

1. Solara Digital Partners Fund IV LP — A Delaware limited partnership (EIN 85-2103748) with a fund size of $4.2 billion (vintage 2021), approximately 72% deployed as of the date of this memorandum. The general partner of Fund IV LP is Solara Digital Infrastructure GP LLC.

2. Fund IV-A (Cayman) LP — A Cayman Islands exempted limited partnership (U.S. EIN 98-6241503; Cayman Islands Monetary Authority ("CIMA") registration number MF-72491), with a fund size of $1.85 billion. Fund IV-A Cayman is a parallel vehicle established for the benefit of non-U.S. investors and certain U.S. tax-exempt investors. The general partner of Fund IV-A Cayman is Solara Offshore GP Ltd., a Cayman Islands exempted company. The registered office of Fund IV-A Cayman is Harborstone Corporate Services Ltd., P.O. Box 2714, 94 Solaris Avenue, George Town, Grand Cayman KY1-1111, Cayman Islands.

3. Fund IV-B (Luxembourg) SCSp — A Luxembourg société en commandite spéciale (U.S. EIN 98-6241571; Luxembourg Registre de Commerce et des Sociétés ("RCS") number B 248193), with a fund size of €1.15 billion (approximately $1.24 billion at a EUR/USD exchange rate of 1.08). The general partner (gérant commandité) of Fund IV-B Lux is Solara Luxembourg Management S.à r.l. (RCS B 248194). The registered office of Fund IV-B Lux is 14, rue Jean-Pierre Brasseur, L-1258 Luxembourg.

Fund V Family:

4. Solara Digital Partners Fund V LP — A Delaware limited partnership (EIN 88-3467219) with a fund size of $5.6 billion (vintage 2023), approximately 38% deployed as of the date of this memorandum. The general partner of Fund V LP is Solara Digital Infrastructure GP LLC.

5. Fund V-A (Cayman) LP — A Cayman Islands exempted limited partnership (U.S. EIN 98-7891234; CIMA registration number MF-89103), with a fund size of $2.45 billion. Fund V-A Cayman is a parallel vehicle with terms and structure substantially similar to those of Fund IV-A Cayman.

6. Fund V-B (Luxembourg) SCSp — A Luxembourg société en commandite spéciale (U.S. EIN 98-7891267; RCS B 271056), with a fund size of €1.38 billion (approximately $1.49 billion at a EUR/USD exchange rate of 1.08).

Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux are referred to collectively in this memorandum as the "Legacy Offshore Vehicles." Fund IV LP and Fund V LP are the domestic vehicles and are not directly involved in the Reorganization contributions to the Master Fund; their portfolio assets will remain in the existing domestic fund structures.

C. Existing § 704(c) Method Elections

Each of the four Legacy Offshore Vehicles has elected the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed by partners with built-in gain or loss. The remedial allocation method was selected at the inception of each fund vehicle — at the time of the initial closing of Fund IV in June 2021 (for Fund IV-A Cayman and Fund IV-B Lux) and at the time of the initial closing of Fund V in September 2023 (for Fund V-A Cayman and Fund V-B Lux). The method election is documented in the respective limited partnership agreements (or, in the case of the Luxembourg SCSps, the contrat de société en commandite spéciale) of each Legacy Offshore Vehicle.

Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax; 400 Renaissance Center, Suite 2500, Detroit, Michigan 48243) has served as the tax compliance advisor for the Solara fund platform since 2017. Caldwell Pierce has maintained § 704(c) built-in gain and loss accounts for all contributed properties within the Legacy Offshore Vehicles on an annual basis. These accounts have been reflected on the Schedules K-1 issued by each Legacy Offshore Vehicle to its partners and on the annual Forms 1065 (and, where applicable, Forms 8865) filed with respect to each entity.

D. Key Portfolio Companies with § 704(c) Built-In Gain

The following five portfolio companies represent the most significant § 704(c) built-in gain positions within the Legacy Offshore Vehicles:

1. NovaBright Data Systems Inc. (a Delaware corporation; data center operator): FMV of $890 million; adjusted tax basis of $520 million; built-in gain of $370 million. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP (the domestic vehicle). Only the 60% interest held by Fund IV-A Cayman is contributed to the Master Fund in the Reorganization; accordingly, the § 704(c) BIG attributable to the Master Fund contribution is $222 million (60% of $370 million).

2. Crestline Cloud Solutions LLC (a Delaware limited liability company, classified as a disregarded entity for U.S. federal income tax purposes; SaaS platform): FMV of €340 million (approximately $367 million at 1.08 EUR/USD); adjusted tax basis of €195 million (approximately $211 million); built-in gain of €145 million (approximately $156 million). Crestline is held 100% by Fund IV-B Lux.

3. Veridian Edge Computing Corp. (a Delaware corporation; edge computing infrastructure): FMV of $1.12 billion; adjusted tax basis of $780 million; built-in gain of $340 million. Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP. Only the 55% interest held by Fund V-A Cayman is contributed to the Master Fund; accordingly, the § 704(c) BIG attributable to the Master Fund contribution is $187 million (55% of $340 million).

4. Thorngate Fiber Networks LP (a Delaware limited partnership; fiber-optic network operator): FMV of $670 million; adjusted tax basis of $490 million; built-in gain of $180 million. Thorngate is held 100% by Fund IV-A Cayman.

5. Helix SaaS Holdings Ltd. (a Cayman Islands exempted company; SaaS holding company): FMV of $445 million; adjusted tax basis of $310 million; built-in gain of $135 million. Helix is held 100% by Fund V-A Cayman.

In addition to these five named portfolio companies, the Legacy Offshore Vehicles hold interests in 18 additional portfolio companies across the Fund IV and Fund V vehicle families (11 portfolio companies in total held by the Fund IV vehicles and 12 portfolio companies in total held by the Fund V vehicles, for a total of 23 portfolio companies across all Legacy Offshore Vehicles). The detailed schedules for each of these 23 portfolio companies, including FMV, adjusted tax basis, and built-in gain or loss, are set forth in PLR Exhibit D.

The total aggregate built-in gain across all 23 contributed properties is approximately $1.72 billion.

E. The Proposed Reorganization (Five-Step Transaction)

The Reorganization consists of five steps, each of which is described below. The target dates for each step are based on the transaction timeline approved by the GP board of Solara Digital Infrastructure GP LLC on March 14, 2025.

Step 1 — Entity Formation (Target: September 15, 2025). Formation of the following new entities: (a) Solara Consolidated Master Fund GP LLC, a Delaware limited liability company that will serve as the general partner of the Master Fund; (b) Solara Consolidated Master Fund LP, a Delaware limited partnership (the "Master Fund"); (c) Solara International Feeder (Cayman) LP, a Cayman Islands exempted limited partnership that will serve as a feeder vehicle for non-U.S. investors; and (d) Solara Tax-Exempt Feeder (Cayman) LP, a Cayman Islands exempted limited partnership that will serve as a feeder vehicle for U.S. tax-exempt investors. Form 8832 check-the-box elections will be filed with the IRS for each new entity, classifying each as a partnership for U.S. federal income tax purposes (with the exception of Solara Consolidated Master Fund GP LLC, which will be classified as a disregarded entity if it has a single owner, or as a partnership if it has multiple members; the entity classification analysis is addressed in the separate Entity Classification memorandum).

Step 2 — Fund IV-A Cayman Contribution (Target: October 1, 2025). Fund IV-A (Cayman) LP will contribute all of its portfolio assets (aggregate FMV of $2.31 billion; aggregate adjusted tax basis of $1.62 billion; aggregate BIG of $690 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. This contribution is intended to qualify as a tax-free contribution under IRC § 721(a).

Step 3 — Fund IV-B Lux Contribution (Target: October 15, 2025). Fund IV-B (Luxembourg) SCSp will contribute all of its portfolio assets (aggregate FMV of $1.16 billion; aggregate adjusted tax basis of $844.6 million; aggregate BIG of $311 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. This contribution is intended to qualify as a tax-free contribution under IRC § 721(a). All amounts denominated in euros will be converted to U.S. dollars at the exchange rate of 1.08 EUR/USD as of the date of contribution, subject to adjustment based on the actual spot rate on the contribution date.

Step 4 — Fund V-A Cayman and Fund V-B Lux Contributions (Target: November 1, 2025). Fund V-A (Cayman) LP will contribute all of its portfolio assets (aggregate FMV of $2.89 billion; aggregate adjusted tax basis of $2.34 billion; aggregate BIG of $550 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. Concurrently, Fund V-B (Luxembourg) SCSp will contribute all of its portfolio assets (aggregate FMV of $1.39 billion; aggregate adjusted tax basis of $1.23 billion; aggregate BIG of $162 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. Both contributions are intended to qualify as tax-free contributions under IRC § 721(a).

Step 5 — Dissolution and LP Migration (Target: December 1, 2025). Following completion of Steps 2 through 4, each Legacy Offshore Vehicle will dissolve and distribute its Master Fund LP interests to its respective limited partners. Upon dissolution, non-U.S. limited partners will roll their interests into Solara International Feeder (Cayman) LP, and U.S. tax-exempt limited partners will roll their interests into Solara Tax-Exempt Feeder (Cayman) LP. Following Step 5, the Legacy Offshore Vehicles will cease to exist, and their former limited partners will hold interests in the Master Fund either directly or through one of the two feeder vehicles.

In connection with Steps 2 through 4, the Master Fund will take a carryover basis in each contributed property under IRC § 723, and holding periods for each contributed property will tack under IRC § 1223(2).

F. Aggregate Liabilities

The aggregate liabilities to be assumed by the Master Fund in connection with the Reorganization are approximately $1.34 billion, consisting of portfolio-level debt across all four Legacy Offshore Vehicles. The § 752 liability-shifting analysis, including the determination of each partner's share of liabilities before and after the Reorganization, is addressed in a separate memorandum (Tax Memorandum — IRC § 752 Liability Shifting Analysis). The interaction between § 752 liability shifts and § 704(c) allocations is discussed briefly in Section V.G.1 of this memorandum.

G. Parties Involved in § 704(c) Analysis

The following parties are directly involved in the § 704(c) analysis:

• Calderwood & Harkness LLP (U.S. tax counsel; offices at 600 Lexington Avenue, 38th Floor, New York, New York 10022, and 1900 K Street NW, Suite 1100, Washington, DC 20006): responsible for preparing the PLR request and providing tax analysis relating to the Reorganization, including this memorandum.

• Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax; 400 Renaissance Center, Suite 2500, Detroit, Michigan 48243): responsible for maintaining § 704(c) accounts and providing historical tax data, tax-basis balance sheets, and Schedule K-1 records for all Legacy Offshore Vehicles.

• Redstone Advisory Group LLC (Marco DeLuca, Managing Director; 750 Seventh Avenue, 21st Floor, New York, New York 10019): responsible for preparing FMV appraisals for all portfolio companies as of each contribution date, which will determine the § 704(c) spread at the time of contribution to the Master Fund.

III. Issues Presented

This memorandum addresses the following five issues:

1. Carryover of § 704(c) Accounts. Whether 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 upon the § 721(a) contributions in Steps 2 through 4 of the Reorganization.

2. Continuation of the Remedial Allocation Method. Whether the Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) — the same method used by the Legacy Offshore Vehicles — for each contributed property, and whether the Master Fund should affirmatively elect the remedial allocation method in its limited partnership agreement.

3. Level of Method Election and Consistency Requirements. Whether the § 704(c) method election is made at the partnership level or on a property-by-property basis, and what consistency requirements apply when properties subject to a particular method are contributed to a newly formed partnership.

4. New "Contribution" for § 704(c) Purposes. Whether the formation of a new partnership (the Master Fund) through contributions from existing partnerships creates a new "contribution" for purposes of § 704(c), and if so, what the implications are for method selection, built-in gain/loss measurement, and layered § 704(c) tracking.

5. Anti-Abuse Considerations in Tiered Structures. Whether the tiered-partnership structure created during the interim period (in which the Legacy Offshore Vehicles hold LP interests in the Master Fund prior to their dissolution in Step 5) raises additional § 704(c) considerations under Treas. Reg. § 1.704-3(a)(9) (anti-abuse rule for tiered partnerships) or Treas. Reg. § 1.704-3(a)(10) (general anti-abuse rule).

IV. Short Conclusion

Based on our analysis of the applicable statutory provisions, Treasury Regulations, and relevant authorities, we reach the following conclusions with respect to each of the issues presented:

First, the § 704(c) built-in gain accounts carry over to the Master Fund. The total $1.72 billion in aggregate BIG does not disappear, diminish, or reset upon the § 721(a) contributions. Under IRC § 723, the Master Fund takes a carryover basis in each contributed property, and the spread between FMV and adjusted tax basis at the time of contribution to the Master Fund becomes the § 704(c) layer at the Master Fund level. Where pre-existing § 704(c) layers exist within the Legacy Offshore Vehicles (i.e., because the underlying property was itself contributed to the Legacy Offshore Vehicle by a limited partner with built-in gain or loss), those layers must also be tracked at the Master Fund level.

Second, the Master Fund may and should elect the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property, consistent with the method used by the Legacy Offshore Vehicles. The continuation of the remedial method is the most administratively sound approach, preserves the integrity of the § 704(c) allocations, and eliminates ceiling-rule distortions that could otherwise arise.

Third, the contributions from the Legacy Offshore Vehicles to the Master Fund constitute "contributions" under § 704(c)(1)(A). The "contributing partner" for § 704(c) purposes is the relevant Legacy Offshore Vehicle. Following the dissolution of the Legacy Offshore Vehicles in Step 5, the tiered partnership rules under Treas. Reg. § 1.704-3(a)(7) allocate § 704(c) responsibilities to the ultimate partners (or to the feeder entities through which such partners hold their interests).

Fourth, no inconsistency or anti-abuse concern arises from the continuation of the remedial method post-Reorganization. The remedial method was in place pre-Reorganization and is not being adopted for purposes of the Reorganization. The Reorganization has independent business purposes — including operational cost savings of approximately $3.8 million annually, compliance with the OECD Pillar Two GloBE Rules for the Luxembourg entities (effective for fiscal years beginning in 2025), simplification of FATCA and CRS compliance, and LP-requested governance improvements — that are unrelated to § 704(c) method selection.

V. Legal Analysis

A. Overview of IRC § 704(c) and Its Purpose

1. Statutory Framework

IRC § 704(c)(1)(A) provides the foundational rule governing the allocation of income, gain, loss, and deduction with respect to property contributed to a partnership by a partner:

"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 into account the variation between the adjusted tax basis of such 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 that would otherwise result from the contribution of property with a built-in gain or loss. Without § 704(c), a contributing partner could effectively shift pre-contribution gain or loss to other partners by contributing appreciated or depreciated property to a partnership and then allocating the gain or loss from the partnership's subsequent disposition of that property (or depreciation deductions with respect to that property) among all partners, rather than solely to the contributing partner.

2. The Ceiling Rule Limitation

A fundamental tension in the application of § 704(c) arises from the so-called "ceiling rule." Under Treas. Reg. § 1.704-3(b)(1), the total amount of tax items allocated to a partner with respect to a particular property cannot exceed the total partnership tax item with respect to that property. In other words, the partnership can allocate only the tax items that actually exist; it cannot create additional tax items. This limitation can result in situations where the noncontributing partners receive less than their full book allocation of a tax item, thereby causing an imperfect correction of the pre-contribution gain or loss. The ceiling rule thus creates a tension between the statutory mandate of § 704(c) (which requires allocations that "take into account" the built-in gain or loss) and the practical constraint that the partnership has a limited pool of tax items to allocate.

3. Three Permissible Allocation Methods

The Treasury Regulations under § 704(c) prescribe three permissible allocation methods, each of which represents a different approach to resolving the tension created by the ceiling rule:

(a) Traditional Method (Treas. Reg. § 1.704-3(b)): Under the traditional method, the partnership makes tax allocations that follow book allocations to the maximum extent permitted by the ceiling rule. To the extent the ceiling rule limits the tax allocation to a noncontributing partner, the resulting distortion is simply left in place. The traditional method is the simplest of the three methods but can result in significant ceiling-rule distortions, particularly for depreciable property.

(b) Traditional Method with Curative Allocations (Treas. Reg. § 1.704-3(c)): Under the curative method, the partnership corrects ceiling-rule distortions by making "curative allocations" of other tax items (such as gain from the sale of other property) to offset the distortion. The curative method reduces ceiling-rule distortions but is constrained by the availability of other tax items of the same type.

(c) Remedial Allocation Method (Treas. Reg. § 1.704-3(d)): Under the remedial method, the partnership eliminates ceiling-rule distortions entirely by creating offsetting "remedial" tax items — notional book items and corresponding tax items — that have no net effect on aggregate partnership income but correctly allocate built-in gain to the contributing partner and the corresponding deduction or loss to the noncontributing partner. The remedial method is the most precise of the three methods and fully implements the statutory purpose of § 704(c).

The remedial allocation method is the method elected by each of the Legacy Offshore Vehicles and is the method at issue in this memorandum.

B. The Remedial Allocation Method Under Treas. Reg. § 1.704-3(d)

1. Mechanics of the Remedial Method

The remedial allocation method operates as follows. When the ceiling rule causes a book allocation of income, gain, loss, or deduction to a noncontributing partner to differ from the corresponding tax allocation to that partner, the partnership makes a "remedial allocation" of an appropriate tax item to the noncontributing partner equal in amount to the full book allocation (i.e., the amount that the noncontributing partner would have received absent the ceiling-rule limitation). Simultaneously, the partnership makes an offsetting remedial allocation of an equal amount of a corresponding tax item to the contributing partner. The remedial allocation to the contributing partner is equal in amount but opposite in character to the remedial allocation made to the noncontributing partner.

For depreciable or amortizable property, the remedial method requires the bifurcation of the contributed property into two components:

(i) The carryover basis component: This component represents the adjusted tax basis of the property at the time of contribution. Depreciation or amortization with respect to this component is computed using the property's historic recovery schedule — that is, the remaining recovery period and method applicable to the property in the hands of the contributing partner prior to contribution.

(ii) The hypothetical-book-value excess component: This component represents the excess of the property's book value (FMV at the time of contribution) over its adjusted tax basis. For purposes of computing remedial allocations, this component is treated as if it were newly purchased property placed in service on the date of contribution, and depreciation or amortization is computed using the applicable recovery period and method that would apply to newly purchased property of the same type.

This bifurcation ensures that the noncontributing partners receive depreciation deductions computed as if they had purchased their proportionate share of the property at its FMV on the date of contribution, while the contributing partner bears the full economic cost of the pre-contribution built-in gain through offsetting remedial allocations of income.

2. Application to Non-Depreciable Property (Equity Interests)

The five named portfolio companies — NovaBright Data Systems Inc., Crestline Cloud Solutions LLC, Veridian Edge Computing Corp., Thorngate Fiber Networks LP, and Helix SaaS Holdings Ltd. — as well as the remaining 18 portfolio companies held by the Legacy Offshore Vehicles, are equity interests in operating companies. Equity interests in operating companies are generally non-depreciable property for purposes of § 704(c).

For non-depreciable property, the ceiling rule typically does not come into play until the property is disposed of. § 704(c) gain or loss is recognized only upon disposition of the property. In the case of non-depreciable property subject to the remedial method, the mechanics are relatively straightforward: upon the sale or other disposition of the property, the built-in gain is allocated first to the contributing partner (to the extent of the § 704(c) built-in gain), with any excess gain allocated in accordance with the partners' sharing ratios. If the ceiling rule would otherwise limit the tax allocation to the noncontributing partners, the partnership makes a remedial allocation of gain to the contributing partner and a corresponding remedial allocation of loss to the noncontributing partners.

The specific built-in gain amounts for the five named portfolio companies are as follows:

• NovaBright Data Systems Inc.: $370 million total BIG ($222 million attributable to the 60% interest held by Fund IV-A Cayman)

• Crestline Cloud Solutions LLC: $156 million BIG (€145 million)

• Veridian Edge Computing Corp.: $340 million total BIG ($187 million attributable to the 55% interest held by Fund V-A Cayman)

• Thorngate Fiber Networks LP: $180 million BIG

• Helix SaaS Holdings Ltd.: $135 million BIG

The remaining 18 portfolio companies contribute additional built-in gain that, together with the amounts listed above, yields an aggregate BIG of $1.72 billion across all contributed properties.

C. Method Election Mechanics

1. Partnership-Level vs. Property-Level Election

Under Treas. Reg. § 1.704-3(a)(2), the § 704(c) allocation method is selected on a property-by-property basis. The regulation provides that a partnership "may use different methods with respect to different items of contributed property," subject to the requirement that the method selected must be "reasonable" under the facts and circumstances. However, as a practical matter, partnerships commonly adopt a single method for all contributed properties, particularly in the fund context where administrative simplicity is a priority and where the nature of the contributed properties (e.g., all equity interests in portfolio companies) is substantially uniform.

The method election is made by the partnership — that is, by the entity — and not by individual partners. Treas. Reg. § 1.704-3(a)(2) states that the election is "made by the partnership." In practice, the general partner of a partnership exercises the authority to select the § 704(c) method on behalf of the partnership, subject to any limitations or requirements set forth in the partnership agreement.

The method election is typically documented in two ways: (a) in the partnership agreement itself, which will contain a provision specifying the § 704(c) method to be applied to contributed properties; and (b) on the partnership's first tax return (Form 1065 or, for a foreign partnership with a U.S. filing obligation, Form 8865) reflecting the contribution of property with a built-in gain or loss.

In the case of the Master Fund, we recommend that the limited partnership agreement include an express provision specifying the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed from the Legacy Offshore Vehicles. Although individual property-level designations are permitted under the regulations, a blanket designation of the remedial method for all contributed properties is sufficient and is consistent with the approach taken by the Legacy Offshore Vehicles. For purposes of administrative clarity, the Master Fund's tax preparer (Caldwell Pierce & Co. LLP) should also maintain property-level records documenting the method applicable to each contributed property.

2. Consistency Requirement

Treas. Reg. § 1.704-3(a)(2) provides that a partnership must use a "reasonable method" that is "consistent with the purpose of section 704(c)." Once a method is adopted for a particular property, the partnership generally may not change methods without satisfying a "reasonable cause" standard. The regulations do not elaborate extensively on what constitutes "reasonable cause" for a change in method, but it is generally understood that a change motivated by tax avoidance considerations — as opposed to legitimate business or administrative reasons — would not satisfy this standard.

A critical question in the context of the Reorganization is whether the contribution of properties from the Legacy Offshore Vehicles to the Master Fund constitutes a "change in method" that would require the Master Fund to satisfy the reasonable cause standard. We believe the answer is no. The Reorganization does not involve a change in the § 704(c) method applicable to any contributed property; rather, the same properties retain the same method (the remedial method), and the only change is the identity of the partnership in which those properties are held. The Master Fund is effectively a successor partnership that continues the same investment program with the same properties, the same economic partners, and the same allocation methodology.

This analysis is supported by the general principle that the § 704(c) method follows the property, not the partnership. When property subject to a § 704(c) allocation is contributed to a new partnership, the contributing partnership's § 704(c) obligation does not vanish; it carries over to the new partnership (as discussed in Section V.D below). The method applicable to the property in the contributing partnership's hands should similarly carry over to the new partnership, absent a change by the new partnership for reasonable cause.

Moreover, even if the Master Fund's adoption of the remedial method were viewed as a new election (rather than a continuation of the existing election), the election would clearly satisfy the reasonableness standard of Treas. Reg. § 1.704-3(a)(2). The remedial method is expressly identified in the regulations as one of the three permissible methods, and it is the method that most precisely implements the statutory purpose of § 704(c) by eliminating ceiling-rule distortions entirely. There is no basis for the IRS to object to the Master Fund's adoption of the same method that was used by the Legacy Offshore Vehicles for the same properties.

D. Carryover of § 704(c) Accounts in Partnership-to-Partnership Contributions

1. General Framework: Tiered Partnerships and § 704(c)

Treas. Reg. § 1.704-3(a)(8) addresses the application of § 704(c) in the context of tiered partnerships. The regulation provides that when property subject to a § 704(c) allocation is contributed by a partnership (the "upper-tier partnership") to another partnership (the "lower-tier partnership"), the upper-tier partnership retains its § 704(c) allocation responsibility with respect to the contributed property. In other words, the upper-tier partnership — as the "contributing partner" of the lower-tier partnership — must continue to take into account the variation between the adjusted tax basis and the FMV of the contributed property.

In the context of the instant Reorganization, the Legacy Offshore Vehicles are the upper-tier partnerships, and the Master Fund is the lower-tier partnership. When the Legacy Offshore Vehicles contribute their portfolio assets to the Master Fund in Steps 2 through 4, the Legacy Offshore Vehicles become "contributing partners" of the Master Fund for § 704(c) purposes. The Master Fund must allocate income, gain, loss, and deduction with respect to each contributed property so as to take into account the variation between the adjusted tax basis of the property (carried over under § 723) and its FMV at the time of contribution to the Master Fund.

After Step 5, the Legacy Offshore Vehicles dissolve and cease to exist. At that point, the upper-tier entities are no longer partners of the Master Fund. The former limited partners of the Legacy Offshore Vehicles become partners of the Master Fund either directly or through the feeder entities. The § 704(c) obligations previously borne by the Legacy Offshore Vehicles as "contributing partners" must then be allocated to the successor partners. This allocation is governed by Treas. Reg. § 1.704-3(a)(7), which provides that when a contributing partner transfers its partnership interest, the transferee partner steps into the shoes of the contributing partner with respect to § 704(c) allocations. The same principle applies when a contributing partner liquidates and distributes its partnership interest to its own partners: the distributee partners assume the § 704(c) obligations of the distributing partnership.

2. Contribution by a Partnership of Property Already Subject to § 704(c)

The contributions from the Legacy Offshore Vehicles to the Master Fund are themselves § 721 nonrecognition transactions. Under IRC § 721(a), no gain or loss is recognized by the Legacy Offshore Vehicles (as contributing partners) or by the Master Fund (as the recipient partnership) upon the contributions. Under IRC § 723, the Master Fund takes a carryover basis in each contributed property — that is, the Master Fund's adjusted tax basis in each property equals the Legacy Offshore Vehicle's adjusted tax basis in the property immediately before the contribution.

The spread between the FMV of each contributed property at the time of contribution to the Master Fund and the Master Fund's carryover basis in such property becomes the § 704(c) layer at the Master Fund level. This layer is sometimes referred to as the "new" § 704(c) layer, as distinguished from any "pre-existing" § 704(c) layers that may have existed within the Legacy Offshore Vehicles.

A pre-existing § 704(c) layer arises when the underlying property was itself contributed to the Legacy Offshore Vehicle by a limited partner with a built-in gain or loss. For example, if a limited partner of Fund IV-A Cayman contributed an equity interest in NovaBright Data Systems Inc. to Fund IV-A Cayman at a time when the interest had a built-in gain, that built-in gain would constitute a § 704(c) layer within Fund IV-A Cayman. When Fund IV-A Cayman subsequently contributes the NovaBright interest to the Master Fund, the pre-existing § 704(c) layer does not merge with the new layer; rather, both layers must be tracked separately at the Master Fund level. This is the so-called "layered § 704(c)" analysis.

In the instant case, the Legacy Offshore Vehicles acquired most of their portfolio assets through direct purchases from third parties (rather than through contributions from limited partners). To the extent any portfolio assets were contributed to a Legacy Offshore Vehicle by a limited partner with a built-in gain or loss, Caldwell Pierce & Co. LLP maintains records of the pre-existing § 704(c) layers. The Master Fund will need to incorporate these records into its own § 704(c) layering schedules.

For the "forward § 704(c)" layer arising at the Master Fund level, the relevant FMV and basis figures are those determined as of the date of contribution to the Master Fund. These figures will be established based on the FMV appraisals prepared by Redstone Advisory Group LLC and the tax-basis records maintained by Caldwell Pierce & Co. LLP.

3. Preservation of Built-In Gain Amounts

The aggregate built-in gain for all contributed properties at the time of contribution to the Master Fund is approximately $1.72 billion. This amount is based on preliminary FMV estimates provided by Redstone Advisory Group LLC and tax-basis records provided by Caldwell Pierce & Co. LLP. The final BIG amounts will be determined based on the FMV appraisals and tax-basis records as of each contribution date (October 1, 2025, for Fund IV-A Cayman; October 15, 2025, for Fund IV-B Lux; and November 1, 2025, for Fund V-A Cayman and Fund V-B Lux).

The FMV and basis schedules for each of the 23 portfolio companies are reflected in PLR Exhibit D. The aggregate BIG of $1.72 billion must be fully tracked and preserved post-Reorganization. The Master Fund's books and records must reflect the BIG for each property, the identity of the contributing Legacy Offshore Vehicle (and, following dissolution, the identity of the successor partner or feeder entity), and the § 704(c) method applicable to each property (the remedial method in all cases).

It bears emphasis that the BIG does not disappear, diminish, or "reset" as a result of the § 721(a) contributions. The very purpose of § 723 (carryover basis) and § 704(c) is to ensure that pre-contribution gain is preserved and allocated to the contributing partner upon disposition of the property. The Reorganization does not alter this fundamental principle; it merely changes the partnership in which the property is held.

E. Application of the Remedial Method Post-Reorganization

1. Continuation of Existing Method

We believe the Master Fund should be permitted to continue using the remedial allocation method for each contributed property for the following reasons:

(a) Same properties. The same properties that were subject to the remedial method in the Legacy Offshore Vehicles will be contributed to the Master Fund. No change in the underlying assets has occurred. The properties are the same equity interests in the same portfolio companies, with the same adjusted tax bases and the same (or, based on updated appraisals, similar) FMVs.

(b) Same economic relationships. The economic relationships among the partners are preserved. The limited partners of the Legacy Offshore Vehicles become, directly or through feeder entities, the limited partners of the Master Fund. The same partners who bore the § 704(c) allocation obligation pre-Reorganization will bear the § 704(c) allocation obligation post-Reorganization. No new economic partners are being introduced as part of the Reorganization, and no existing partners are being cashed out.

(c) Pre-existing method. The remedial method was already in place for each property at the Legacy Offshore Vehicle level. The selection of the remedial method pre-dates the Reorganization and was made at the inception of each Legacy Offshore Vehicle for reasons unrelated to the Reorganization (i.e., to provide the most accurate § 704(c) allocations and to eliminate ceiling-rule distortions for the benefit of all partners).

(d) Continuation of investment program. The Reorganization is a continuation of the same investment program, not a new investment. The Master Fund will hold the same assets, pursue the same investment strategy, be managed by the same sponsor, and serve the same investor base. The structural change from four offshore vehicles to a single master-feeder structure is driven by operational, regulatory, and governance considerations, not by a desire to alter tax allocation methodologies.

(e) No policy reason for a different method. There is no policy reason to require the Master Fund to adopt a different § 704(c) method. The remedial method is the most precise of the three permissible methods and most fully implements the statutory purpose of § 704(c). Requiring the Master Fund to adopt a less precise method (the traditional method or the curative method) would be contrary to the purpose of § 704(c) and would create ceiling-rule distortions that did not previously exist.

We note that the concept of method continuation in the partnership context is analogous to the treatment of accounting methods in corporate reorganizations under IRC § 381. In the corporate context, § 381(c)(4) and (c)(5) provide for the carryover of accounting methods from the transferor corporation to the acquiring corporation in certain tax-free reorganizations. Although there is no direct partnership analogue to § 381, the underlying principle — that methods of accounting should carry over in a reorganization that preserves the economic enterprise — is equally applicable in the partnership context. The combination of § 723 (carryover basis) and § 704(c) (allocation of pre-contribution gain) achieves a result analogous to § 381 by preserving the pre-contribution tax attributes and ensuring continuity of tax treatment.

2. Mechanics for the Master Fund

To implement the continuation of the remedial method, the Master Fund should take the following steps:

Partnership Agreement. The Master Fund's limited partnership agreement (the "LPA") should contain a provision specifying the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed from the Legacy Offshore Vehicles. The provision should be included in the section of the LPA addressing tax allocations and should be drafted to apply not only to the initial contributions from the Legacy Offshore Vehicles but also to any future contributions of property with a built-in gain or loss. A draft provision has been prepared and is included in the draft LPA circulated under separate cover.

Separate § 704(c) Accounts. The Master Fund should maintain separate § 704(c) accounts for each contributed property. These accounts should be inherited from the Legacy Offshore Vehicles' existing § 704(c) records, as maintained by Caldwell Pierce & Co. LLP. For each property, the account should reflect: (i) the FMV at the time of contribution to the Master Fund; (ii) the adjusted tax basis at the time of contribution; (iii) the built-in gain or loss; (iv) the identity of the contributing Legacy Offshore Vehicle; (v) the § 704(c) method (the remedial method); and (vi) any pre-existing § 704(c) layers from the Legacy Offshore Vehicle level.

Contributing Partner Identification. For each property, the contributing Legacy Offshore Vehicle is the "contributing partner" for § 704(c) purposes. After the dissolution of the Legacy Offshore Vehicles in Step 5, the § 704(c) allocation obligations shift to the individual partners or feeder entities that succeed to the Legacy Offshore Vehicles' Master Fund LP interests. Under Treas. Reg. § 1.704-3(a)(7), the Master Fund must continue to track the § 704(c) accounts and make appropriate allocations to the successor partners of the former contributing partners. The feeder entities (Solara International Feeder (Cayman) LP and Solara Tax-Exempt Feeder (Cayman) LP) must in turn flow through appropriate § 704(c) allocations to their respective limited partners.

Documentation. The Master Fund should document the § 704(c) layers in its initial books and records, cross-referencing the historical records maintained by Caldwell Pierce & Co. LLP. The documentation should include the working paper reconciliation referenced in PLR Exhibit D, which reconciles the FMV appraisals prepared by Redstone Advisory Group LLC with the tax-basis records maintained by Caldwell Pierce. This documentation will form the basis for the Master Fund's initial § 704(c) records and should be completed prior to the first contribution date (October 1, 2025).

3. Interaction with IRC § 704(c)(1)(C) — Built-In Loss Limitation

IRC § 704(c)(1)(C), enacted as part of the American Jobs Creation Act of 2004, imposes a limitation on the allocation of built-in losses. Under § 704(c)(1)(C), if property contributed by a partner has an adjusted tax basis in excess of its FMV at the time of contribution (i.e., a built-in loss), the built-in loss may be taken into account only in determining the amount of items allocated to the contributing partner. For purposes of determining the amount of items allocated to other partners, the basis of the contributed property is treated as its FMV at the time of contribution.

In the instant case, the aggregate position of the contributed properties is net built-in gain ($1.72 billion). Based on the preliminary FMV estimates provided by Redstone Advisory Group LLC and the tax-basis records provided by Caldwell Pierce & Co. LLP, no individual portfolio company has a material built-in loss. Accordingly, § 704(c)(1)(C) is not expected to apply to the properties contributed to the Master Fund. If any property is determined to have a built-in loss upon finalization of the FMV appraisals, the remedial method would still apply to that property, but the § 704(c)(1)(C) limitation would require that the built-in loss be allocated solely to the contributing partner (or its successor).

We will confirm the absence of any material built-in loss positions upon receipt of the final FMV appraisals from Redstone Advisory Group LLC and will update this analysis if necessary.

F. Anti-Abuse Rule — Treas. Reg. § 1.704-3(a)(10)

Treas. Reg. § 1.704-3(a)(10) provides a general anti-abuse rule applicable to § 704(c) allocations. Under this rule, an allocation method (or combination of methods) is not reasonable if the contribution of property and the allocation method are made with a view to shifting the tax consequences of built-in gain or loss among partners in a manner that substantially reduces the present value of the aggregate tax liability of the partners. In addition, the Commissioner may require the use of a different allocation method if the method adopted by the partnership is not consistent with the purpose of § 704(c).

We do not believe the Reorganization raises any anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10), for the following reasons:

No shifting of tax consequences. The Reorganization does not shift the tax consequences of built-in gain or loss among partners. The same BIG ($1.72 billion) is allocated to the same economic partners both before and after the Reorganization. The identity of the partners bearing the § 704(c) allocation obligation does not change; the Legacy Offshore Vehicles' limited partners become the Master Fund's limited partners (directly or through feeder entities). The remedial method continues to allocate built-in gain to the contributing partners and eliminates ceiling-rule distortions for the noncontributing partners, exactly as it did in the Legacy Offshore Vehicles.

Independent business purposes. The Reorganization has substantial, independent business purposes that are unrelated to § 704(c) method selection. These business purposes include:

(i) Operational cost reduction. Consolidation of four offshore vehicles into a single master-feeder structure is projected to yield annual operational cost savings of approximately $3.8 million, primarily from reduced audit, compliance, and administration fees.

(ii) Pillar Two GloBE compliance. The OECD Pillar Two Global Anti-Base Erosion ("GloBE") Rules, as implemented into Luxembourg domestic law, are effective for fiscal years beginning on or after January 1, 2025. The consolidation of the Luxembourg SCSps into the master-feeder structure is expected to simplify compliance with the GloBE Rules and reduce the risk of top-up tax exposure.

(iii) FATCA/CRS simplification. The reduction from four offshore reporting entities to two feeder entities will simplify compliance with the Foreign Account Tax Compliance Act ("FATCA") and the Common Reporting Standard ("CRS"), reducing the number of reporting forms and the risk of reporting errors.

(iv) LP-requested governance simplification. The limited partners of the Legacy Offshore Vehicles have requested the consolidation of the offshore fund structure to simplify governance, reduce the number of partnership meetings, and improve transparency. Preliminary LP consent (78% in interest) was obtained at the Limited Partner Advisory Committee ("LPAC") meeting held on April 22, 2025.

GP board approval. The Reorganization was approved by the board of directors (or managing members, as applicable) of Solara Digital Infrastructure GP LLC at a meeting held on March 14, 2025, at which the business purposes described above were discussed and documented in the board minutes.

Pre-existing method. The choice of the remedial method (rather than the traditional method or the curative method) pre-dates the Reorganization by several years and was made at the inception of each Legacy Offshore Vehicle for reasons unrelated to the Reorganization. The remedial method is not being adopted for purposes of the Reorganization; it is being continued.

For these reasons, we conclude that the continuation of the remedial method post-Reorganization does not raise any anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10).

We also note that Treas. Reg. § 1.704-3(a)(9) addresses anti-abuse concerns specific to tiered partnerships. Under this provision, the Commissioner may treat a lower-tier partnership as an aggregate of its partners if the formation or use of the lower-tier partnership is part of a plan to circumvent the requirements of § 704(c). In the instant case, the Master Fund is not being formed to circumvent § 704(c); to the contrary, the Master Fund will fully implement § 704(c) by maintaining the remedial method and tracking § 704(c) accounts for all contributed properties. Accordingly, Treas. Reg. § 1.704-3(a)(9) does not apply.

G. Coordination with Other IRC Provisions

1. Interaction with § 752 Liability Shifts

When properties subject to liabilities are contributed to a partnership, or when a partnership assumes liabilities of a contributing partner, § 752 governs the treatment of such liabilities. Under § 752(a), an increase in a partner's share of partnership liabilities is treated as a contribution of money by such partner to the partnership. Under § 752(b), a decrease in a partner's share of partnership liabilities is treated as a distribution of money by the partnership to such partner. These deemed contributions and distributions can affect partner-level basis and, in extreme cases, could trigger gain recognition under § 731(a) if the deemed distribution exceeds the partner's adjusted basis in its partnership interest.

In the instant Reorganization, the Master Fund will assume aggregate liabilities of approximately $1.34 billion in connection with the contributions from the Legacy Offshore Vehicles. The § 752 liability-shifting analysis — including the determination of each partner's share of liabilities before and after the Reorganization, the classification of liabilities as recourse or nonrecourse, and the potential for deemed contributions or distributions — is addressed in a separate memorandum (Tax Memorandum — IRC § 752 Liability Shifting Analysis).

For purposes of the § 704(c) analysis, the key point is that the remedial method is not affected by § 752 liability shifts. The remedial method relates to property-level allocations of income, gain, loss, and deduction; it operates independently of partner-level basis computations. Even if § 752 liability shifts cause deemed contributions or distributions that alter a partner's outside basis in its Master Fund interest, those adjustments do not change the § 704(c) built-in gain or loss with respect to any contributed property, nor do they alter the method by which such built-in gain or loss is allocated.

2. Interaction with § 704(c) and § 731 Distributions (Step 5)

In Step 5 of the Reorganization, each Legacy Offshore Vehicle dissolves and distributes its Master Fund LP interests to its respective limited partners. These distributions are governed by IRC § 731, which generally provides for nonrecognition of gain or loss on the distribution of property (including partnership interests) by a partnership to a partner. The limited partners of the Legacy Offshore Vehicles will receive Master Fund LP interests with carryover bases under § 732.

From a § 704(c) perspective, the dissolution of the Legacy Offshore Vehicles in Step 5 raises the question of who bears the § 704(c) allocation obligation after the Legacy Offshore Vehicles cease to exist. As discussed in Section V.D.1 above, the Legacy Offshore Vehicles are the "contributing partners" of the Master Fund for § 704(c) purposes. Upon dissolution, the Legacy Offshore Vehicles distribute their Master Fund LP interests to their limited partners (or to feeder entities), and those distributees succeed to the Legacy Offshore Vehicles' status as "contributing partners."

Treas. Reg. § 1.704-3(a)(7) governs this transition. Under this provision, when a contributing partner transfers all or a portion of its partnership interest, the transferee steps into the shoes of the contributing partner for purposes of § 704(c). The same rule applies when a contributing partner distributes its partnership interest in connection with a liquidation: the distributee partners assume the contributing partner's § 704(c) obligations. Accordingly, following Step 5, the Master Fund must continue to track § 704(c) accounts and make appropriate allocations to the successor partners (or feeder entities) of the former contributing partners.

This tracking requirement imposes an administrative burden on the Master Fund, particularly given the large number of properties and partners involved. We recommend that the Master Fund's LPA include provisions authorizing the general partner to maintain § 704(c) accounts and to make § 704(c) allocations to successor partners, and that the Master Fund's tax preparer (Caldwell Pierce & Co. LLP) be engaged to perform this tracking on an ongoing basis.

3. Interaction with Reverse § 704(c) (Revaluation Events)

The contributions from the Legacy Offshore Vehicles to the Master Fund are contributions under IRC § 721, not revaluation events under Treas. Reg. § 1.704-1(b)(2)(iv)(f). A revaluation event occurs when a partnership adjusts its capital accounts to reflect the FMV of partnership property, typically in connection with the admission of a new partner, the liquidation of an existing partner's interest, or the grant of an interest in exchange for services. See Treas. Reg. § 1.704-1(b)(2)(iv)(f)(5). The contributions from the Legacy Offshore Vehicles do not constitute revaluation events because they are initial contributions to a newly formed partnership, not adjustments to the capital accounts of an existing partnership.

However, if the Master Fund subsequently admits new partners, experiences a change in partnership interests, or undergoes other events that constitute revaluation events under Treas. Reg. § 1.704-1(b)(2)(iv)(f), "reverse § 704(c)" allocations may arise. Reverse § 704(c) allocations are allocations made to take into account the variation between the book value and the adjusted tax basis of partnership property following a revaluation of capital accounts. These reverse § 704(c) allocations are separate from, and in addition to, the "forward § 704(c)" allocations analyzed in this memorandum.

The Master Fund's LPA should address the possibility of future revaluation events and specify the § 704(c) method to be applied for reverse § 704(c) allocations. We recommend that the LPA specify the remedial method for reverse § 704(c) as well, to maintain consistency and to eliminate ceiling-rule distortions. This recommendation is consistent with the approach taken by the Legacy Offshore Vehicles, each of which specifies the remedial method for both forward and reverse § 704(c) allocations.

H. Practical Considerations for Implementation

1. Books and Records

The Master Fund's initial capital accounts, § 704(c) layering schedules, and property-by-property BIG tracking must be established at formation (September 15, 2025) and populated with data as contributions occur during the October 1 through November 1, 2025, contribution period. This is a substantial undertaking given the number of properties involved (23 portfolio companies), the number of contributing entities (four Legacy Offshore Vehicles), and the potential for pre-existing § 704(c) layers within the Legacy Offshore Vehicles.

Caldwell Pierce & Co. LLP will provide historical K-1 data, tax-basis balance sheets, and § 704(c) account records for all Legacy Offshore Vehicles. These records will serve as the foundation for the Master Fund's initial § 704(c) ac

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Leonard Cross, Responsible Partner, Tax; Sylvia Hartwell, Billing Partner, Tax — Calderwood & Harkness LLP
FROM: Robert Jansen, Lead Associate, Tax; Garrett Simmons, Working Associate, Tax — Calderwood & Harkness LLP
DATE: June 16, 2025
RE: Solara Digital Infrastructure LP — Cross-Border Fund-Platform Reorganization: Analysis of Continuation of Remedial Allocation Method Under IRC § 704(c) and Treas. Reg. § 1.704-3(d) for Contributed Properties Following Multi-Step Reorganization
ENGAGEMENT: Matter No. 20250527-SDILP-PLR
CLIENT: Solara Digital Infrastructure LP (EIN 82-4917366)
Right-click to update Table of Contents
I. Executive Summary
This memorandum analyzes whether Solara Consolidated Master Fund LP (the "Master Fund"), a Delaware limited partnership to be formed on or about September 15, 2025, may continue to use the remedial allocation method under Treasury Regulations § 1.704-3(d) for each contributed property received from the Legacy Offshore Vehicles in the proposed five-step cross-border fund-platform reorganization (the "Reorganization"). This analysis directly supports Ruling 6 of the private letter ruling ("PLR") request that Calderwood & Harkness LLP is preparing for submission to the Internal Revenue Service ("IRS") on behalf of Solara Digital Infrastructure LP (the "Client" or "Solara").
The Reorganization contemplates that four offshore fund vehicles — Fund IV-A (Cayman) LP, Fund IV-B (Luxembourg) SCSp, Fund V-A (Cayman) LP, and Fund V-B (Luxembourg) SCSp (collectively, the "Legacy Offshore Vehicles") — will contribute all of their portfolio assets to the Master Fund in exchange for limited partnership interests in the Master Fund. These contributions will occur in Steps 2 through 4 of the Reorganization and are intended to qualify as tax-free contributions under Internal Revenue Code ("IRC") § 721(a). The aggregate fair market value ("FMV") of the contributed properties is approximately $7.75 billion; the aggregate adjusted tax basis of such properties is approximately $6.03 billion; and the total built-in gain ("BIG") attributable to such properties is approximately $1.72 billion.
Each of the four Legacy Offshore Vehicles currently uses the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties with § 704(c) built-in gain or loss. The remedial allocation method was elected at the inception of each Legacy Offshore Vehicle, is documented in the respective limited partnership agreements or partnership agreements (as applicable), and has been consistently applied in the preparation of annual tax returns and maintenance of § 704(c) accounts by Caldwell Pierce & Co. LLP, the Client's tax compliance advisor.
Conclusion. Based on our analysis of the applicable statutory provisions, Treasury Regulations, and relevant authorities, we conclude that the Master Fund may and should continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) for each property contributed by the Legacy Offshore Vehicles. The existing § 704(c) built-in gain and loss accounts maintained by the Legacy Offshore Vehicles carry over to the Master Fund. No new method election is technically required for properties already subject to § 704(c) in the Legacy Offshore Vehicles; however, as a matter of best practice and to ensure administrative clarity, the Master Fund should affirmatively adopt the remedial allocation method in its limited partnership agreement for all contributed properties. The continuation of the remedial method is consistent with the purpose of § 704(c), does not raise anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10), and should be the subject of a favorable ruling from the IRS. This memorandum supports Ruling 6 of the PLR request (IRC § 704(c) remedial allocation method continuation).
II. Statement of Facts
A. The Solara Fund Platform
Solara Digital Infrastructure LP is a Delaware limited partnership (EIN 82-4917366) that was founded on March 17, 2014. As of March 31, 2025, Solara has approximately $14.7 billion in assets under management ("AUM"). Solara's principal business is sponsoring and managing private equity funds that target investments in digital infrastructure assets, including data centers, fiber-optic networks, edge computing facilities, and enterprise software-as-a-service ("SaaS") platforms.
The key principals of Solara are as follows:
• Managing Partner & Founder: Viktor Raines
• Head of Tax: Stefan Dalmqvist
• General Counsel: Priya Narasimhan
• Chief Financial Officer: Douglas Wexford
The general partner of Solara Digital Infrastructure LP is Solara Digital Infrastructure GP LLC (EIN 82-4917365), a Delaware limited liability company managed by Viktor Raines. The registered agent of Solara Digital Infrastructure GP LLC is Capitol Registered Agents Inc., located at 850 New Burton Road, Suite 201, Dover, Delaware 19904.
B. Existing Fund Vehicles
Solara currently sponsors and manages two fund families — Fund IV and Fund V — each of which comprises a domestic (Delaware) limited partnership and two parallel offshore vehicles. The relevant fund vehicles are described below.
Fund IV Family:
1. Solara Digital Partners Fund IV LP — A Delaware limited partnership (EIN 85-2103748) with a fund size of $4.2 billion (vintage 2021), approximately 72% deployed as of the date of this memorandum. The general partner of Fund IV LP is Solara Digital Infrastructure GP LLC.
2. Fund IV-A (Cayman) LP — A Cayman Islands exempted limited partnership (U.S. EIN 98-6241503; Cayman Islands Monetary Authority ("CIMA") registration number MF-72491), with a fund size of $1.85 billion. Fund IV-A Cayman is a parallel vehicle established for the benefit of non-U.S. investors and certain U.S. tax-exempt investors. The general partner of Fund IV-A Cayman is Solara Offshore GP Ltd., a Cayman Islands exempted company. The registered office of Fund IV-A Cayman is Harborstone Corporate Services Ltd., P.O. Box 2714, 94 Solaris Avenue, George Town, Grand Cayman KY1-1111, Cayman Islands.
3. Fund IV-B (Luxembourg) SCSp — A Luxembourg société en commandite spéciale (U.S. EIN 98-6241571; Luxembourg Registre de Commerce et des Sociétés ("RCS") number B 248193), with a fund size of €1.15 billion (approximately $1.24 billion at a EUR/USD exchange rate of 1.08). The general partner (gérant commandité) of Fund IV-B Lux is Solara Luxembourg Management S.à r.l. (RCS B 248194). The registered office of Fund IV-B Lux is 14, rue Jean-Pierre Brasseur, L-1258 Luxembourg.
Fund V Family:
4. Solara Digital Partners Fund V LP — A Delaware limited partnership (EIN 88-3467219) with a fund size of $5.6 billion (vintage 2023), approximately 38% deployed as of the date of this memorandum. The general partner of Fund V LP is Solara Digital Infrastructure GP LLC.
5. Fund V-A (Cayman) LP — A Cayman Islands exempted limited partnership (U.S. EIN 98-7891234; CIMA registration number MF-89103), with a fund size of $2.45 billion. Fund V-A Cayman is a parallel vehicle with terms and structure substantially similar to those of Fund IV-A Cayman.
6. Fund V-B (Luxembourg) SCSp — A Luxembourg société en commandite spéciale (U.S. EIN 98-7891267; RCS B 271056), with a fund size of €1.38 billion (approximately $1.49 billion at a EUR/USD exchange rate of 1.08).
Fund IV-A Cayman, Fund IV-B Lux, Fund V-A Cayman, and Fund V-B Lux are referred to collectively in this memorandum as the "Legacy Offshore Vehicles." Fund IV LP and Fund V LP are the domestic vehicles and are not directly involved in the Reorganization contributions to the Master Fund; their portfolio assets will remain in the existing domestic fund structures.
C. Existing § 704(c) Method Elections
Each of the four Legacy Offshore Vehicles has elected the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed by partners with built-in gain or loss. The remedial allocation method was selected at the inception of each fund vehicle — at the time of the initial closing of Fund IV in June 2021 (for Fund IV-A Cayman and Fund IV-B Lux) and at the time of the initial closing of Fund V in September 2023 (for Fund V-A Cayman and Fund V-B Lux). The method election is documented in the respective limited partnership agreements (or, in the case of the Luxembourg SCSps, the contrat de société en commandite spéciale) of each Legacy Offshore Vehicle.
Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax; 400 Renaissance Center, Suite 2500, Detroit, Michigan 48243) has served as the tax compliance advisor for the Solara fund platform since 2017. Caldwell Pierce has maintained § 704(c) built-in gain and loss accounts for all contributed properties within the Legacy Offshore Vehicles on an annual basis. These accounts have been reflected on the Schedules K-1 issued by each Legacy Offshore Vehicle to its partners and on the annual Forms 1065 (and, where applicable, Forms 8865) filed with respect to each entity.
D. Key Portfolio Companies with § 704(c) Built-In Gain
The following five portfolio companies represent the most significant § 704(c) built-in gain positions within the Legacy Offshore Vehicles:
1. NovaBright Data Systems Inc. (a Delaware corporation; data center operator): FMV of $890 million; adjusted tax basis of $520 million; built-in gain of $370 million. NovaBright is held 60% by Fund IV-A Cayman and 40% by Fund IV LP (the domestic vehicle). Only the 60% interest held by Fund IV-A Cayman is contributed to the Master Fund in the Reorganization; accordingly, the § 704(c) BIG attributable to the Master Fund contribution is $222 million (60% of $370 million).
2. Crestline Cloud Solutions LLC (a Delaware limited liability company, classified as a disregarded entity for U.S. federal income tax purposes; SaaS platform): FMV of €340 million (approximately $367 million at 1.08 EUR/USD); adjusted tax basis of €195 million (approximately $211 million); built-in gain of €145 million (approximately $156 million). Crestline is held 100% by Fund IV-B Lux.
3. Veridian Edge Computing Corp. (a Delaware corporation; edge computing infrastructure): FMV of $1.12 billion; adjusted tax basis of $780 million; built-in gain of $340 million. Veridian is held 55% by Fund V-A Cayman and 45% by Fund V LP. Only the 55% interest held by Fund V-A Cayman is contributed to the Master Fund; accordingly, the § 704(c) BIG attributable to the Master Fund contribution is $187 million (55% of $340 million).
4. Thorngate Fiber Networks LP (a Delaware limited partnership; fiber-optic network operator): FMV of $670 million; adjusted tax basis of $490 million; built-in gain of $180 million. Thorngate is held 100% by Fund IV-A Cayman.
5. Helix SaaS Holdings Ltd. (a Cayman Islands exempted company; SaaS holding company): FMV of $445 million; adjusted tax basis of $310 million; built-in gain of $135 million. Helix is held 100% by Fund V-A Cayman.
In addition to these five named portfolio companies, the Legacy Offshore Vehicles hold interests in 18 additional portfolio companies across the Fund IV and Fund V vehicle families (11 portfolio companies in total held by the Fund IV vehicles and 12 portfolio companies in total held by the Fund V vehicles, for a total of 23 portfolio companies across all Legacy Offshore Vehicles). The detailed schedules for each of these 23 portfolio companies, including FMV, adjusted tax basis, and built-in gain or loss, are set forth in PLR Exhibit D.
The total aggregate built-in gain across all 23 contributed properties is approximately $1.72 billion.
E. The Proposed Reorganization (Five-Step Transaction)
The Reorganization consists of five steps, each of which is described below. The target dates for each step are based on the transaction timeline approved by the GP board of Solara Digital Infrastructure GP LLC on March 14, 2025.
Step 1 — Entity Formation (Target: September 15, 2025). Formation of the following new entities: (a) Solara Consolidated Master Fund GP LLC, a Delaware limited liability company that will serve as the general partner of the Master Fund; (b) Solara Consolidated Master Fund LP, a Delaware limited partnership (the "Master Fund"); (c) Solara International Feeder (Cayman) LP, a Cayman Islands exempted limited partnership that will serve as a feeder vehicle for non-U.S. investors; and (d) Solara Tax-Exempt Feeder (Cayman) LP, a Cayman Islands exempted limited partnership that will serve as a feeder vehicle for U.S. tax-exempt investors. Form 8832 check-the-box elections will be filed with the IRS for each new entity, classifying each as a partnership for U.S. federal income tax purposes (with the exception of Solara Consolidated Master Fund GP LLC, which will be classified as a disregarded entity if it has a single owner, or as a partnership if it has multiple members; the entity classification analysis is addressed in the separate Entity Classification memorandum).
Step 2 — Fund IV-A Cayman Contribution (Target: October 1, 2025). Fund IV-A (Cayman) LP will contribute all of its portfolio assets (aggregate FMV of $2.31 billion; aggregate adjusted tax basis of $1.62 billion; aggregate BIG of $690 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. This contribution is intended to qualify as a tax-free contribution under IRC § 721(a).
Step 3 — Fund IV-B Lux Contribution (Target: October 15, 2025). Fund IV-B (Luxembourg) SCSp will contribute all of its portfolio assets (aggregate FMV of $1.16 billion; aggregate adjusted tax basis of $844.6 million; aggregate BIG of $311 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. This contribution is intended to qualify as a tax-free contribution under IRC § 721(a). All amounts denominated in euros will be converted to U.S. dollars at the exchange rate of 1.08 EUR/USD as of the date of contribution, subject to adjustment based on the actual spot rate on the contribution date.
Step 4 — Fund V-A Cayman and Fund V-B Lux Contributions (Target: November 1, 2025). Fund V-A (Cayman) LP will contribute all of its portfolio assets (aggregate FMV of $2.89 billion; aggregate adjusted tax basis of $2.34 billion; aggregate BIG of $550 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. Concurrently, Fund V-B (Luxembourg) SCSp will contribute all of its portfolio assets (aggregate FMV of $1.39 billion; aggregate adjusted tax basis of $1.23 billion; aggregate BIG of $162 million) to the Master Fund in exchange for a limited partnership interest in the Master Fund. Both contributions are intended to qualify as tax-free contributions under IRC § 721(a).
Step 5 — Dissolution and LP Migration (Target: December 1, 2025). Following completion of Steps 2 through 4, each Legacy Offshore Vehicle will dissolve and distribute its Master Fund LP interests to its respective limited partners. Upon dissolution, non-U.S. limited partners will roll their interests into Solara International Feeder (Cayman) LP, and U.S. tax-exempt limited partners will roll their interests into Solara Tax-Exempt Feeder (Cayman) LP. Following Step 5, the Legacy Offshore Vehicles will cease to exist, and their former limited partners will hold interests in the Master Fund either directly or through one of the two feeder vehicles.
In connection with Steps 2 through 4, the Master Fund will take a carryover basis in each contributed property under IRC § 723, and holding periods for each contributed property will tack under IRC § 1223(2).
F. Aggregate Liabilities
The aggregate liabilities to be assumed by the Master Fund in connection with the Reorganization are approximately $1.34 billion, consisting of portfolio-level debt across all four Legacy Offshore Vehicles. The § 752 liability-shifting analysis, including the determination of each partner's share of liabilities before and after the Reorganization, is addressed in a separate memorandum (Tax Memorandum — IRC § 752 Liability Shifting Analysis). The interaction between § 752 liability shifts and § 704(c) allocations is discussed briefly in Section V.G.1 of this memorandum.
G. Parties Involved in § 704(c) Analysis
The following parties are directly involved in the § 704(c) analysis:
• Calderwood & Harkness LLP (U.S. tax counsel; offices at 600 Lexington Avenue, 38th Floor, New York, New York 10022, and 1900 K Street NW, Suite 1100, Washington, DC 20006): responsible for preparing the PLR request and providing tax analysis relating to the Reorganization, including this memorandum.
• Caldwell Pierce & Co. LLP (Helen Okamoto, Partner, Financial Services Tax; 400 Renaissance Center, Suite 2500, Detroit, Michigan 48243): responsible for maintaining § 704(c) accounts and providing historical tax data, tax-basis balance sheets, and Schedule K-1 records for all Legacy Offshore Vehicles.
• Redstone Advisory Group LLC (Marco DeLuca, Managing Director; 750 Seventh Avenue, 21st Floor, New York, New York 10019): responsible for preparing FMV appraisals for all portfolio companies as of each contribution date, which will determine the § 704(c) spread at the time of contribution to the Master Fund.
III. Issues Presented
This memorandum addresses the following five issues:
1. Carryover of § 704(c) Accounts. Whether 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 upon the § 721(a) contributions in Steps 2 through 4 of the Reorganization.
2. Continuation of the Remedial Allocation Method. Whether the Master Fund may continue to use the remedial allocation method under Treas. Reg. § 1.704-3(d) — the same method used by the Legacy Offshore Vehicles — for each contributed property, and whether the Master Fund should affirmatively elect the remedial allocation method in its limited partnership agreement.
3. Level of Method Election and Consistency Requirements. Whether the § 704(c) method election is made at the partnership level or on a property-by-property basis, and what consistency requirements apply when properties subject to a particular method are contributed to a newly formed partnership.
4. New "Contribution" for § 704(c) Purposes. Whether the formation of a new partnership (the Master Fund) through contributions from existing partnerships creates a new "contribution" for purposes of § 704(c), and if so, what the implications are for method selection, built-in gain/loss measurement, and layered § 704(c) tracking.
5. Anti-Abuse Considerations in Tiered Structures. Whether the tiered-partnership structure created during the interim period (in which the Legacy Offshore Vehicles hold LP interests in the Master Fund prior to their dissolution in Step 5) raises additional § 704(c) considerations under Treas. Reg. § 1.704-3(a)(9) (anti-abuse rule for tiered partnerships) or Treas. Reg. § 1.704-3(a)(10) (general anti-abuse rule).
IV. Short Conclusion
Based on our analysis of the applicable statutory provisions, Treasury Regulations, and relevant authorities, we reach the following conclusions with respect to each of the issues presented:
First, the § 704(c) built-in gain accounts carry over to the Master Fund. The total $1.72 billion in aggregate BIG does not disappear, diminish, or reset upon the § 721(a) contributions. Under IRC § 723, the Master Fund takes a carryover basis in each contributed property, and the spread between FMV and adjusted tax basis at the time of contribution to the Master Fund becomes the § 704(c) layer at the Master Fund level. Where pre-existing § 704(c) layers exist within the Legacy Offshore Vehicles (i.e., because the underlying property was itself contributed to the Legacy Offshore Vehicle by a limited partner with built-in gain or loss), those layers must also be tracked at the Master Fund level.
Second, the Master Fund may and should elect the remedial allocation method under Treas. Reg. § 1.704-3(d) for each contributed property, consistent with the method used by the Legacy Offshore Vehicles. The continuation of the remedial method is the most administratively sound approach, preserves the integrity of the § 704(c) allocations, and eliminates ceiling-rule distortions that could otherwise arise.
Third, the contributions from the Legacy Offshore Vehicles to the Master Fund constitute "contributions" under § 704(c)(1)(A). The "contributing partner" for § 704(c) purposes is the relevant Legacy Offshore Vehicle. Following the dissolution of the Legacy Offshore Vehicles in Step 5, the tiered partnership rules under Treas. Reg. § 1.704-3(a)(7) allocate § 704(c) responsibilities to the ultimate partners (or to the feeder entities through which such partners hold their interests).
Fourth, no inconsistency or anti-abuse concern arises from the continuation of the remedial method post-Reorganization. The remedial method was in place pre-Reorganization and is not being adopted for purposes of the Reorganization. The Reorganization has independent business purposes — including operational cost savings of approximately $3.8 million annually, compliance with the OECD Pillar Two GloBE Rules for the Luxembourg entities (effective for fiscal years beginning in 2025), simplification of FATCA and CRS compliance, and LP-requested governance improvements — that are unrelated to § 704(c) method selection.
V. Legal Analysis
A. Overview of IRC § 704(c) and Its Purpose
1. Statutory Framework
IRC § 704(c)(1)(A) provides the foundational rule governing the allocation of income, gain, loss, and deduction with respect to property contributed to a partnership by a partner:
"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 into account the variation between the adjusted tax basis of such 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 that would otherwise result from the contribution of property with a built-in gain or loss. Without § 704(c), a contributing partner could effectively shift pre-contribution gain or loss to other partners by contributing appreciated or depreciated property to a partnership and then allocating the gain or loss from the partnership's subsequent disposition of that property (or depreciation deductions with respect to that property) among all partners, rather than solely to the contributing partner.
2. The Ceiling Rule Limitation
A fundamental tension in the application of § 704(c) arises from the so-called "ceiling rule." Under Treas. Reg. § 1.704-3(b)(1), the total amount of tax items allocated to a partner with respect to a particular property cannot exceed the total partnership tax item with respect to that property. In other words, the partnership can allocate only the tax items that actually exist; it cannot create additional tax items. This limitation can result in situations where the noncontributing partners receive less than their full book allocation of a tax item, thereby causing an imperfect correction of the pre-contribution gain or loss. The ceiling rule thus creates a tension between the statutory mandate of § 704(c) (which requires allocations that "take into account" the built-in gain or loss) and the practical constraint that the partnership has a limited pool of tax items to allocate.
3. Three Permissible Allocation Methods
The Treasury Regulations under § 704(c) prescribe three permissible allocation methods, each of which represents a different approach to resolving the tension created by the ceiling rule:
(a) Traditional Method (Treas. Reg. § 1.704-3(b)): Under the traditional method, the partnership makes tax allocations that follow book allocations to the maximum extent permitted by the ceiling rule. To the extent the ceiling rule limits the tax allocation to a noncontributing partner, the resulting distortion is simply left in place. The traditional method is the simplest of the three methods but can result in significant ceiling-rule distortions, particularly for depreciable property.
(b) Traditional Method with Curative Allocations (Treas. Reg. § 1.704-3(c)): Under the curative method, the partnership corrects ceiling-rule distortions by making "curative allocations" of other tax items (such as gain from the sale of other property) to offset the distortion. The curative method reduces ceiling-rule distortions but is constrained by the availability of other tax items of the same type.
(c) Remedial Allocation Method (Treas. Reg. § 1.704-3(d)): Under the remedial method, the partnership eliminates ceiling-rule distortions entirely by creating offsetting "remedial" tax items — notional book items and corresponding tax items — that have no net effect on aggregate partnership income but correctly allocate built-in gain to the contributing partner and the corresponding deduction or loss to the noncontributing partner. The remedial method is the most precise of the three methods and fully implements the statutory purpose of § 704(c).
The remedial allocation method is the method elected by each of the Legacy Offshore Vehicles and is the method at issue in this memorandum.
B. The Remedial Allocation Method Under Treas. Reg. § 1.704-3(d)
1. Mechanics of the Remedial Method
The remedial allocation method operates as follows. When the ceiling rule causes a book allocation of income, gain, loss, or deduction to a noncontributing partner to differ from the corresponding tax allocation to that partner, the partnership makes a "remedial allocation" of an appropriate tax item to the noncontributing partner equal in amount to the full book allocation (i.e., the amount that the noncontributing partner would have received absent the ceiling-rule limitation). Simultaneously, the partnership makes an offsetting remedial allocation of an equal amount of a corresponding tax item to the contributing partner. The remedial allocation to the contributing partner is equal in amount but opposite in character to the remedial allocation made to the noncontributing partner.
For depreciable or amortizable property, the remedial method requires the bifurcation of the contributed property into two components:
(i) The carryover basis component: This component represents the adjusted tax basis of the property at the time of contribution. Depreciation or amortization with respect to this component is computed using the property's historic recovery schedule — that is, the remaining recovery period and method applicable to the property in the hands of the contributing partner prior to contribution.
(ii) The hypothetical-book-value excess component: This component represents the excess of the property's book value (FMV at the time of contribution) over its adjusted tax basis. For purposes of computing remedial allocations, this component is treated as if it were newly purchased property placed in service on the date of contribution, and depreciation or amortization is computed using the applicable recovery period and method that would apply to newly purchased property of the same type.
This bifurcation ensures that the noncontributing partners receive depreciation deductions computed as if they had purchased their proportionate share of the property at its FMV on the date of contribution, while the contributing partner bears the full economic cost of the pre-contribution built-in gain through offsetting remedial allocations of income.
2. Application to Non-Depreciable Property (Equity Interests)
The five named portfolio companies — NovaBright Data Systems Inc., Crestline Cloud Solutions LLC, Veridian Edge Computing Corp., Thorngate Fiber Networks LP, and Helix SaaS Holdings Ltd. — as well as the remaining 18 portfolio companies held by the Legacy Offshore Vehicles, are equity interests in operating companies. Equity interests in operating companies are generally non-depreciable property for purposes of § 704(c).
For non-depreciable property, the ceiling rule typically does not come into play until the property is disposed of. § 704(c) gain or loss is recognized only upon disposition of the property. In the case of non-depreciable property subject to the remedial method, the mechanics are relatively straightforward: upon the sale or other disposition of the property, the built-in gain is allocated first to the contributing partner (to the extent of the § 704(c) built-in gain), with any excess gain allocated in accordance with the partners' sharing ratios. If the ceiling rule would otherwise limit the tax allocation to the noncontributing partners, the partnership makes a remedial allocation of gain to the contributing partner and a corresponding remedial allocation of loss to the noncontributing partners.
The specific built-in gain amounts for the five named portfolio companies are as follows:
• NovaBright Data Systems Inc.: $370 million total BIG ($222 million attributable to the 60% interest held by Fund IV-A Cayman)
• Crestline Cloud Solutions LLC: $156 million BIG (€145 million)
• Veridian Edge Computing Corp.: $340 million total BIG ($187 million attributable to the 55% interest held by Fund V-A Cayman)
• Thorngate Fiber Networks LP: $180 million BIG
• Helix SaaS Holdings Ltd.: $135 million BIG
The remaining 18 portfolio companies contribute additional built-in gain that, together with the amounts listed above, yields an aggregate BIG of $1.72 billion across all contributed properties.
C. Method Election Mechanics
1. Partnership-Level vs. Property-Level Election
Under Treas. Reg. § 1.704-3(a)(2), the § 704(c) allocation method is selected on a property-by-property basis. The regulation provides that a partnership "may use different methods with respect to different items of contributed property," subject to the requirement that the method selected must be "reasonable" under the facts and circumstances. However, as a practical matter, partnerships commonly adopt a single method for all contributed properties, particularly in the fund context where administrative simplicity is a priority and where the nature of the contributed properties (e.g., all equity interests in portfolio companies) is substantially uniform.
The method election is made by the partnership — that is, by the entity — and not by individual partners. Treas. Reg. § 1.704-3(a)(2) states that the election is "made by the partnership." In practice, the general partner of a partnership exercises the authority to select the § 704(c) method on behalf of the partnership, subject to any limitations or requirements set forth in the partnership agreement.
The method election is typically documented in two ways: (a) in the partnership agreement itself, which will contain a provision specifying the § 704(c) method to be applied to contributed properties; and (b) on the partnership's first tax return (Form 1065 or, for a foreign partnership with a U.S. filing obligation, Form 8865) reflecting the contribution of property with a built-in gain or loss.
In the case of the Master Fund, we recommend that the limited partnership agreement include an express provision specifying the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed from the Legacy Offshore Vehicles. Although individual property-level designations are permitted under the regulations, a blanket designation of the remedial method for all contributed properties is sufficient and is consistent with the approach taken by the Legacy Offshore Vehicles. For purposes of administrative clarity, the Master Fund's tax preparer (Caldwell Pierce & Co. LLP) should also maintain property-level records documenting the method applicable to each contributed property.
2. Consistency Requirement
Treas. Reg. § 1.704-3(a)(2) provides that a partnership must use a "reasonable method" that is "consistent with the purpose of section 704(c)." Once a method is adopted for a particular property, the partnership generally may not change methods without satisfying a "reasonable cause" standard. The regulations do not elaborate extensively on what constitutes "reasonable cause" for a change in method, but it is generally understood that a change motivated by tax avoidance considerations — as opposed to legitimate business or administrative reasons — would not satisfy this standard.
A critical question in the context of the Reorganization is whether the contribution of properties from the Legacy Offshore Vehicles to the Master Fund constitutes a "change in method" that would require the Master Fund to satisfy the reasonable cause standard. We believe the answer is no. The Reorganization does not involve a change in the § 704(c) method applicable to any contributed property; rather, the same properties retain the same method (the remedial method), and the only change is the identity of the partnership in which those properties are held. The Master Fund is effectively a successor partnership that continues the same investment program with the same properties, the same economic partners, and the same allocation methodology.
This analysis is supported by the general principle that the § 704(c) method follows the property, not the partnership. When property subject to a § 704(c) allocation is contributed to a new partnership, the contributing partnership's § 704(c) obligation does not vanish; it carries over to the new partnership (as discussed in Section V.D below). The method applicable to the property in the contributing partnership's hands should similarly carry over to the new partnership, absent a change by the new partnership for reasonable cause.
Moreover, even if the Master Fund's adoption of the remedial method were viewed as a new election (rather than a continuation of the existing election), the election would clearly satisfy the reasonableness standard of Treas. Reg. § 1.704-3(a)(2). The remedial method is expressly identified in the regulations as one of the three permissible methods, and it is the method that most precisely implements the statutory purpose of § 704(c) by eliminating ceiling-rule distortions entirely. There is no basis for the IRS to object to the Master Fund's adoption of the same method that was used by the Legacy Offshore Vehicles for the same properties.
D. Carryover of § 704(c) Accounts in Partnership-to-Partnership Contributions
1. General Framework: Tiered Partnerships and § 704(c)
Treas. Reg. § 1.704-3(a)(8) addresses the application of § 704(c) in the context of tiered partnerships. The regulation provides that when property subject to a § 704(c) allocation is contributed by a partnership (the "upper-tier partnership") to another partnership (the "lower-tier partnership"), the upper-tier partnership retains its § 704(c) allocation responsibility with respect to the contributed property. In other words, the upper-tier partnership — as the "contributing partner" of the lower-tier partnership — must continue to take into account the variation between the adjusted tax basis and the FMV of the contributed property.
In the context of the instant Reorganization, the Legacy Offshore Vehicles are the upper-tier partnerships, and the Master Fund is the lower-tier partnership. When the Legacy Offshore Vehicles contribute their portfolio assets to the Master Fund in Steps 2 through 4, the Legacy Offshore Vehicles become "contributing partners" of the Master Fund for § 704(c) purposes. The Master Fund must allocate income, gain, loss, and deduction with respect to each contributed property so as to take into account the variation between the adjusted tax basis of the property (carried over under § 723) and its FMV at the time of contribution to the Master Fund.
After Step 5, the Legacy Offshore Vehicles dissolve and cease to exist. At that point, the upper-tier entities are no longer partners of the Master Fund. The former limited partners of the Legacy Offshore Vehicles become partners of the Master Fund either directly or through the feeder entities. The § 704(c) obligations previously borne by the Legacy Offshore Vehicles as "contributing partners" must then be allocated to the successor partners. This allocation is governed by Treas. Reg. § 1.704-3(a)(7), which provides that when a contributing partner transfers its partnership interest, the transferee partner steps into the shoes of the contributing partner with respect to § 704(c) allocations. The same principle applies when a contributing partner liquidates and distributes its partnership interest to its own partners: the distributee partners assume the § 704(c) obligations of the distributing partnership.
2. Contribution by a Partnership of Property Already Subject to § 704(c)
The contributions from the Legacy Offshore Vehicles to the Master Fund are themselves § 721 nonrecognition transactions. Under IRC § 721(a), no gain or loss is recognized by the Legacy Offshore Vehicles (as contributing partners) or by the Master Fund (as the recipient partnership) upon the contributions. Under IRC § 723, the Master Fund takes a carryover basis in each contributed property — that is, the Master Fund's adjusted tax basis in each property equals the Legacy Offshore Vehicle's adjusted tax basis in the property immediately before the contribution.
The spread between the FMV of each contributed property at the time of contribution to the Master Fund and the Master Fund's carryover basis in such property becomes the § 704(c) layer at the Master Fund level. This layer is sometimes referred to as the "new" § 704(c) layer, as distinguished from any "pre-existing" § 704(c) layers that may have existed within the Legacy Offshore Vehicles.
A pre-existing § 704(c) layer arises when the underlying property was itself contributed to the Legacy Offshore Vehicle by a limited partner with a built-in gain or loss. For example, if a limited partner of Fund IV-A Cayman contributed an equity interest in NovaBright Data Systems Inc. to Fund IV-A Cayman at a time when the interest had a built-in gain, that built-in gain would constitute a § 704(c) layer within Fund IV-A Cayman. When Fund IV-A Cayman subsequently contributes the NovaBright interest to the Master Fund, the pre-existing § 704(c) layer does not merge with the new layer; rather, both layers must be tracked separately at the Master Fund level. This is the so-called "layered § 704(c)" analysis.
In the instant case, the Legacy Offshore Vehicles acquired most of their portfolio assets through direct purchases from third parties (rather than through contributions from limited partners). To the extent any portfolio assets were contributed to a Legacy Offshore Vehicle by a limited partner with a built-in gain or loss, Caldwell Pierce & Co. LLP maintains records of the pre-existing § 704(c) layers. The Master Fund will need to incorporate these records into its own § 704(c) layering schedules.
For the "forward § 704(c)" layer arising at the Master Fund level, the relevant FMV and basis figures are those determined as of the date of contribution to the Master Fund. These figures will be established based on the FMV appraisals prepared by Redstone Advisory Group LLC and the tax-basis records maintained by Caldwell Pierce & Co. LLP.
3. Preservation of Built-In Gain Amounts
The aggregate built-in gain for all contributed properties at the time of contribution to the Master Fund is approximately $1.72 billion. This amount is based on preliminary FMV estimates provided by Redstone Advisory Group LLC and tax-basis records provided by Caldwell Pierce & Co. LLP. The final BIG amounts will be determined based on the FMV appraisals and tax-basis records as of each contribution date (October 1, 2025, for Fund IV-A Cayman; October 15, 2025, for Fund IV-B Lux; and November 1, 2025, for Fund V-A Cayman and Fund V-B Lux).
The FMV and basis schedules for each of the 23 portfolio companies are reflected in PLR Exhibit D. The aggregate BIG of $1.72 billion must be fully tracked and preserved post-Reorganization. The Master Fund's books and records must reflect the BIG for each property, the identity of the contributing Legacy Offshore Vehicle (and, following dissolution, the identity of the successor partner or feeder entity), and the § 704(c) method applicable to each property (the remedial method in all cases).
It bears emphasis that the BIG does not disappear, diminish, or "reset" as a result of the § 721(a) contributions. The very purpose of § 723 (carryover basis) and § 704(c) is to ensure that pre-contribution gain is preserved and allocated to the contributing partner upon disposition of the property. The Reorganization does not alter this fundamental principle; it merely changes the partnership in which the property is held.
E. Application of the Remedial Method Post-Reorganization
1. Continuation of Existing Method
We believe the Master Fund should be permitted to continue using the remedial allocation method for each contributed property for the following reasons:
(a) Same properties. The same properties that were subject to the remedial method in the Legacy Offshore Vehicles will be contributed to the Master Fund. No change in the underlying assets has occurred. The properties are the same equity interests in the same portfolio companies, with the same adjusted tax bases and the same (or, based on updated appraisals, similar) FMVs.
(b) Same economic relationships. The economic relationships among the partners are preserved. The limited partners of the Legacy Offshore Vehicles become, directly or through feeder entities, the limited partners of the Master Fund. The same partners who bore the § 704(c) allocation obligation pre-Reorganization will bear the § 704(c) allocation obligation post-Reorganization. No new economic partners are being introduced as part of the Reorganization, and no existing partners are being cashed out.
(c) Pre-existing method. The remedial method was already in place for each property at the Legacy Offshore Vehicle level. The selection of the remedial method pre-dates the Reorganization and was made at the inception of each Legacy Offshore Vehicle for reasons unrelated to the Reorganization (i.e., to provide the most accurate § 704(c) allocations and to eliminate ceiling-rule distortions for the benefit of all partners).
(d) Continuation of investment program. The Reorganization is a continuation of the same investment program, not a new investment. The Master Fund will hold the same assets, pursue the same investment strategy, be managed by the same sponsor, and serve the same investor base. The structural change from four offshore vehicles to a single master-feeder structure is driven by operational, regulatory, and governance considerations, not by a desire to alter tax allocation methodologies.
(e) No policy reason for a different method. There is no policy reason to require the Master Fund to adopt a different § 704(c) method. The remedial method is the most precise of the three permissible methods and most fully implements the statutory purpose of § 704(c). Requiring the Master Fund to adopt a less precise method (the traditional method or the curative method) would be contrary to the purpose of § 704(c) and would create ceiling-rule distortions that did not previously exist.
We note that the concept of method continuation in the partnership context is analogous to the treatment of accounting methods in corporate reorganizations under IRC § 381. In the corporate context, § 381(c)(4) and (c)(5) provide for the carryover of accounting methods from the transferor corporation to the acquiring corporation in certain tax-free reorganizations. Although there is no direct partnership analogue to § 381, the underlying principle — that methods of accounting should carry over in a reorganization that preserves the economic enterprise — is equally applicable in the partnership context. The combination of § 723 (carryover basis) and § 704(c) (allocation of pre-contribution gain) achieves a result analogous to § 381 by preserving the pre-contribution tax attributes and ensuring continuity of tax treatment.
2. Mechanics for the Master Fund
To implement the continuation of the remedial method, the Master Fund should take the following steps:
Partnership Agreement. The Master Fund's limited partnership agreement (the "LPA") should contain a provision specifying the remedial allocation method under Treas. Reg. § 1.704-3(d) for all properties contributed from the Legacy Offshore Vehicles. The provision should be included in the section of the LPA addressing tax allocations and should be drafted to apply not only to the initial contributions from the Legacy Offshore Vehicles but also to any future contributions of property with a built-in gain or loss. A draft provision has been prepared and is included in the draft LPA circulated under separate cover.
Separate § 704(c) Accounts. The Master Fund should maintain separate § 704(c) accounts for each contributed property. These accounts should be inherited from the Legacy Offshore Vehicles' existing § 704(c) records, as maintained by Caldwell Pierce & Co. LLP. For each property, the account should reflect: (i) the FMV at the time of contribution to the Master Fund; (ii) the adjusted tax basis at the time of contribution; (iii) the built-in gain or loss; (iv) the identity of the contributing Legacy Offshore Vehicle; (v) the § 704(c) method (the remedial method); and (vi) any pre-existing § 704(c) layers from the Legacy Offshore Vehicle level.
Contributing Partner Identification. For each property, the contributing Legacy Offshore Vehicle is the "contributing partner" for § 704(c) purposes. After the dissolution of the Legacy Offshore Vehicles in Step 5, the § 704(c) allocation obligations shift to the individual partners or feeder entities that succeed to the Legacy Offshore Vehicles' Master Fund LP interests. Under Treas. Reg. § 1.704-3(a)(7), the Master Fund must continue to track the § 704(c) accounts and make appropriate allocations to the successor partners of the former contributing partners. The feeder entities (Solara International Feeder (Cayman) LP and Solara Tax-Exempt Feeder (Cayman) LP) must in turn flow through appropriate § 704(c) allocations to their respective limited partners.
Documentation. The Master Fund should document the § 704(c) layers in its initial books and records, cross-referencing the historical records maintained by Caldwell Pierce & Co. LLP. The documentation should include the working paper reconciliation referenced in PLR Exhibit D, which reconciles the FMV appraisals prepared by Redstone Advisory Group LLC with the tax-basis records maintained by Caldwell Pierce. This documentation will form the basis for the Master Fund's initial § 704(c) records and should be completed prior to the first contribution date (October 1, 2025).
3. Interaction with IRC § 704(c)(1)(C) — Built-In Loss Limitation
IRC § 704(c)(1)(C), enacted as part of the American Jobs Creation Act of 2004, imposes a limitation on the allocation of built-in losses. Under § 704(c)(1)(C), if property contributed by a partner has an adjusted tax basis in excess of its FMV at the time of contribution (i.e., a built-in loss), the built-in loss may be taken into account only in determining the amount of items allocated to the contributing partner. For purposes of determining the amount of items allocated to other partners, the basis of the contributed property is treated as its FMV at the time of contribution.
In the instant case, the aggregate position of the contributed properties is net built-in gain ($1.72 billion). Based on the preliminary FMV estimates provided by Redstone Advisory Group LLC and the tax-basis records provided by Caldwell Pierce & Co. LLP, no individual portfolio company has a material built-in loss. Accordingly, § 704(c)(1)(C) is not expected to apply to the properties contributed to the Master Fund. If any property is determined to have a built-in loss upon finalization of the FMV appraisals, the remedial method would still apply to that property, but the § 704(c)(1)(C) limitation would require that the built-in loss be allocated solely to the contributing partner (or its successor).
We will confirm the absence of any material built-in loss positions upon receipt of the final FMV appraisals from Redstone Advisory Group LLC and will update this analysis if necessary.
F. Anti-Abuse Rule — Treas. Reg. § 1.704-3(a)(10)
Treas. Reg. § 1.704-3(a)(10) provides a general anti-abuse rule applicable to § 704(c) allocations. Under this rule, an allocation method (or combination of methods) is not reasonable if the contribution of property and the allocation method are made with a view to shifting the tax consequences of built-in gain or loss among partners in a manner that substantially reduces the present value of the aggregate tax liability of the partners. In addition, the Commissioner may require the use of a different allocation method if the method adopted by the partnership is not consistent with the purpose of § 704(c).
We do not believe the Reorganization raises any anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10), for the following reasons:
No shifting of tax consequences. The Reorganization does not shift the tax consequences of built-in gain or loss among partners. The same BIG ($1.72 billion) is allocated to the same economic partners both before and after the Reorganization. The identity of the partners bearing the § 704(c) allocation obligation does not change; the Legacy Offshore Vehicles' limited partners become the Master Fund's limited partners (directly or through feeder entities). The remedial method continues to allocate built-in gain to the contributing partners and eliminates ceiling-rule distortions for the noncontributing partners, exactly as it did in the Legacy Offshore Vehicles.
Independent business purposes. The Reorganization has substantial, independent business purposes that are unrelated to § 704(c) method selection. These business purposes include:
(i) Operational cost reduction. Consolidation of four offshore vehicles into a single master-feeder structure is projected to yield annual operational cost savings of approximately $3.8 million, primarily from reduced audit, compliance, and administration fees.
(ii) Pillar Two GloBE compliance. The OECD Pillar Two Global Anti-Base Erosion ("GloBE") Rules, as implemented into Luxembourg domestic law, are effective for fiscal years beginning on or after January 1, 2025. The consolidation of the Luxembourg SCSps into the master-feeder structure is expected to simplify compliance with the GloBE Rules and reduce the risk of top-up tax exposure.
(iii) FATCA/CRS simplification. The reduction from four offshore reporting entities to two feeder entities will simplify compliance with the Foreign Account Tax Compliance Act ("FATCA") and the Common Reporting Standard ("CRS"), reducing the number of reporting forms and the risk of reporting errors.
(iv) LP-requested governance simplification. The limited partners of the Legacy Offshore Vehicles have requested the consolidation of the offshore fund structure to simplify governance, reduce the number of partnership meetings, and improve transparency. Preliminary LP consent (78% in interest) was obtained at the Limited Partner Advisory Committee ("LPAC") meeting held on April 22, 2025.
GP board approval. The Reorganization was approved by the board of directors (or managing members, as applicable) of Solara Digital Infrastructure GP LLC at a meeting held on March 14, 2025, at which the business purposes described above were discussed and documented in the board minutes.
Pre-existing method. The choice of the remedial method (rather than the traditional method or the curative method) pre-dates the Reorganization by several years and was made at the inception of each Legacy Offshore Vehicle for reasons unrelated to the Reorganization. The remedial method is not being adopted for purposes of the Reorganization; it is being continued.
For these reasons, we conclude that the continuation of the remedial method post-Reorganization does not raise any anti-abuse concerns under Treas. Reg. § 1.704-3(a)(10).
We also note that Treas. Reg. § 1.704-3(a)(9) addresses anti-abuse concerns specific to tiered partnerships. Under this provision, the Commissioner may treat a lower-tier partnership as an aggregate of its partners if the formation or use of the lower-tier partnership is part of a plan to circumvent the requirements of § 704(c). In the instant case, the Master Fund is not being formed to circumvent § 704(c); to the contrary, the Master Fund will fully implement § 704(c) by maintaining the remedial method and tracking § 704(c) accounts for all contributed properties. Accordingly, Treas. Reg. § 1.704-3(a)(9) does not apply.
G. Coordination with Other IRC Provisions
1. Interaction with § 752 Liability Shifts
When properties subject to liabilities are contributed to a partnership, or when a partnership assumes liabilities of a contributing partner, § 752 governs the treatment of such liabilities. Under § 752(a), an increase in a partner's share of partnership liabilities is treated as a contribution of money by such partner to the partnership. Under § 752(b), a decrease in a partner's share of partnership liabilities is treated as a distribution of money by the partnership to such partner. These deemed contributions and distributions can affect partner-level basis and, in extreme cases, could trigger gain recognition under § 731(a) if the deemed distribution exceeds the partner's adjusted basis in its partnership interest.
In the instant Reorganization, the Master Fund will assume aggregate liabilities of approximately $1.34 billion in connection with the contributions from the Legacy Offshore Vehicles. The § 752 liability-shifting analysis — including the determination of each partner's share of liabilities before and after the Reorganization, the classification of liabilities as recourse or nonrecourse, and the potential for deemed contributions or distributions — is addressed in a separate memorandum (Tax Memorandum — IRC § 752 Liability Shifting Analysis).
For purposes of the § 704(c) analysis, the key point is that the remedial method is not affected by § 752 liability shifts. The remedial method relates to property-level allocations of income, gain, loss, and deduction; it operates independently of partner-level basis computations. Even if § 752 liability shifts cause deemed contributions or distributions that alter a partner's outside basis in its Master Fund interest, those adjustments do not change the § 704(c) built-in gain or loss with respect to any contributed property, nor do they alter the method by which such built-in gain or loss is allocated.
2. Interaction with § 704(c) and § 731 Distributions (Step 5)
In Step 5 of the Reorganization, each Legacy Offshore Vehicle dissolves and distributes its Master Fund LP interests to its respective limited partners. These distributions are governed by IRC § 731, which generally provides for nonrecognition of gain or loss on the distribution of property (including partnership interests) by a partnership to a partner. The limited partners of the Legacy Offshore Vehicles will receive Master Fund LP interests with carryover bases under § 732.
From a § 704(c) perspective, the dissolution of the Legacy Offshore Vehicles in Step 5 raises the question of who bears the § 704(c) allocation obligation after the Legacy Offshore Vehicles cease to exist. As discussed in Section V.D.1 above, the Legacy Offshore Vehicles are the "contributing partners" of the Master Fund for § 704(c) purposes. Upon dissolution, the Legacy Offshore Vehicles distribute their Master Fund LP interests to their limited partners (or to feeder entities), and those distributees succeed to the Legacy Offshore Vehicles' status as "contributing partners."
Treas. Reg. § 1.704-3(a)(7) governs this transition. Under this provision, when a contributing partner transfers all or a portion of its partnership interest, the transferee steps into the shoes of the contributing partner for purposes of § 704(c). The same rule applies when a contributing partner distributes its partnership interest in connection with a liquidation: the distributee partners assume the contributing partner's § 704(c) obligations. Accordingly, following Step 5, the Master Fund must continue to track § 704(c) accounts and make appropriate allocations to the successor partners (or feeder entities) of the former contributing partners.
This tracking requirement imposes an administrative burden on the Master Fund, particularly given the large number of properties and partners involved. We recommend that the Master Fund's LPA include provisions authorizing the general partner to maintain § 704(c) accounts and to make § 704(c) allocations to successor partners, and that the Master Fund's tax preparer (Caldwell Pierce & Co. LLP) be engaged to perform this tracking on an ongoing basis.
3. Interaction with Reverse § 704(c) (Revaluation Events)
The contributions from the Legacy Offshore Vehicles to the Master Fund are contributions under IRC § 721, not revaluation events under Treas. Reg. § 1.704-1(b)(2)(iv)(f). A revaluation event occurs when a partnership adjusts its capital accounts to reflect the FMV of partnership property, typically in connection with the admission of a new partner, the liquidation of an existing partner's interest, or the grant of an interest in exchange for services. See Treas. Reg. § 1.704-1(b)(2)(iv)(f)(5). The contributions from the Legacy Offshore Vehicles do not constitute revaluation events because they are initial contributions to a newly formed partnership, not adjustments to the capital accounts of an existing partnership.
However, if the Master Fund subsequently admits new partners, experiences a change in partnership interests, or undergoes other events that constitute revaluation events under Treas. Reg. § 1.704-1(b)(2)(iv)(f), "reverse § 704(c)" allocations may arise. Reverse § 704(c) allocations are allocations made to take into account the variation between the book value and the adjusted tax basis of partnership property following a revaluation of capital accounts. These reverse § 704(c) allocations are separate from, and in addition to, the "forward § 704(c)" allocations analyzed in this memorandum.
The Master Fund's LPA should address the possibility of future revaluation events and specify the § 704(c) method to be applied for reverse § 704(c) allocations. We recommend that the LPA specify the remedial method for reverse § 704(c) as well, to maintain consistency and to eliminate ceiling-rule distortions. This recommendation is consistent with the approach taken by the Legacy Offshore Vehicles, each of which specifies the remedial method for both forward and reverse § 704(c) allocations.
H. Practical Considerations for Implementation
1. Books and Records
The Master Fund's initial capital accounts, § 704(c) layering schedules, and property-by-property BIG tracking must be established at formation (September 15, 2025) and populated with data as contributions occur during the October 1 through November 1, 2025, contribution period. This is a substantial undertaking given the number of properties involved (23 portfolio companies), the number of contributing entities (four Legacy Offshore Vehicles), and the potential for pre-existing § 704(c) layers within the Legacy Offshore Vehicles.
Caldwell Pierce & Co. LLP will provide historical K-1 data, tax-basis balance sheets, and § 704(c) account records for all Legacy Offshore Vehicles. These records will serve as the foundation for the Master Fund's initial § 704(c) ac

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

Record

Parties

Dates

Amounts