THE MANAGER

ROLE OF THE MANAGER

The Manager of the Fund is Big Sky Capital Group LLC, a Montana limited liability company. Pursuant to the Limited Partnership Agreement, the Fund has appointed the Manager to manage the business, properties and affairs of the Fund.

MANAGEMENT TEAM

The following persons serve as officers of the General Partner or provide key services to the Fund and the General Partner:

Wayne Ebersole:

Scott Rohrer:

 

SERVICE PROVIDERS

The Fund or the General Partner may negotiate consulting or independent contractor agreements with a variety of professional service providers, including, but not limited to, engineers, geologists, miners, managers, realtors, mortgage bankers, surveyors, appraisers, analysts, investment advisors, accountants, money managers, accountants, attorneys, risk managers, brokers, dealers, statisticians, computer technicians, bankers, and consultants. The Fund may also enlist the services of other professionals if deemed in the best interest of the Fund by the General Partner, in its sole discretion.

COMPENSATION

The General Partner and its affiliates will be paid in connection with their management of Fund affairs pursuant to the Limited Partnership Agreement.  

Carried Interest

The Carried Interest allocation to be made to the General Partner may create an incentive for the General Partner to make Investments that are riskier or more speculative than the Investments the General Partner would otherwise recommend if its compensation did not include a Carried Interest component.

Reimbursement of Expenses

The Fund will pay or reimburse a General Partner and its affiliates (to the extent actually paid by the General Partner or its affiliates) for, all fees, costs, and expenses incurred or paid on behalf of the Fund relating to the formation, operation, dissolution, winding up, or termination of the Fund. The General Partner has a profits interest in the Fund and intends to cover its expenses, including those listed below, through its portion of Fund profits. The General Partner and its affiliates will not be reimbursed by the Fund for the following expenses: (i) salaries, compensation or fringe benefits of the managers, officers or employees of the General Partner and its affiliates; (ii) overhead expenses of the General Partner and its affiliates, including, without limitation, rent and general office expenses; and (iii) the cost of providing any services or goods for which the General Partner or its affiliates are otherwise entitled to compensation.

Compensation for Other Services

The General Partner and its affiliates may be compensated for services performed for or on behalf of the Fund to the extent that the General Partner is not required to render such services without charge to the Fund, provided that the terms and conditions for performing such service, including compensation therefor, on an overall basis, are fair and reasonable to the Fund. Such services may include, but are not limited to, legal, accounting, communications, business development, and administrative support. (See “Conflicts of Interest”). 

Fund Expenses

The Fund shall pay its operating expenses, including but not limited to: (i) all out-of-pocket expenses associated with the organization of the Fund and any of their Subsidiaries; (ii) all costs and expenses related to the day-to-day operations of the Fund and any of their Subsidiaries; (iii) legal, accounting, audit, bookkeeping, custodial, consulting, and other professional fees and expenses; (iv) insurance premiums (including liability insurance and other coverages for the benefit of the Fund, its Subsidiaries, the General Partner and their respective officers, managers and employees), indemnification payments, costs of litigation, and other extraordinary expenses; (v) costs of financial statements and other reports to the Limited Partners as well as costs of all governmental returns, reports, and other filings; (vi) costs of meetings of, and communications with, the Limited Partners; (vii) public notice costs and other costs incurred to comply with applicable law; (viii) fees and expenses to protect or preserve any property held by the Fund as determined by the General Partner; (ix) all fees related to the Fund’s or its Subsidiaries’ use of third party advisors; and (x) all fees and other expenses incurred in connection with the investigation, prosecution or defense of any claims by or against the Fund or any of its Subsidiaries (collectively, “Fund Expenses”).

 

COMPANY MANAGEMENT

Day-to-Day Business Operations

The day-to-day affairs of the Fund are controlled and directed by the General Partner. Currently, the executives of the General Partner are Wayne Ebersole and Scott Rohrer.  In the event of the resignation, termination, or incapacity of an Executive, a successor or succeeding Executive may be appointed by the General Partner’s managers except in limited circumstances as described in the sections of the “Summary” entitled “Protective Provisions” and “Protective Provisions,” the Limited Partners have no voting rights nor do they have any degree of control over management of the Fund’s business affairs or operations (see “Conflicts of Interest”).

Control of the Fund

The Fund is ultimately controlled by the General Partner, who initially holds all of the voting equity interests in the Fund. Ultimate control over the business affairs, policies, and actions of the Fund resides with the General Partner. 

Although the Limited Partners hold a preferred position in the Fund with respect to both liquidation preference and allocation of revenue, capital or other dispositions of Fund assets, they will not participate in the conduct of day‑to‑day operational decisions unless delegated authority from the General Partner in accordance with the Limited Partnership Agreement. The Limited Partnership Agreement and this Memorandum may be amended so long as it does not materially modify the rights of the Limited Partners.

General Partner Actions

Subject to the specific provisions of the Limited Partnership Agreement, the General Partner has the power and authority to take such actions deemed necessary, appropriate, customary or convenient in regard to normal management activities and the conduct of the daily business operations and affairs of the Fund, including, but not limited to, the following:

 

1.       The General Partner will act, first and foremost, to endeavor to secure for the Fund the most desirable terms, prices and conditions and to elicit business relationships with persons who exhibit both competence and high standards of business ethics and morals.

2.       The General Partner will either disburse funds for the employment and retention of contract personnel or otherwise secure, on behalf of the Fund, services involving secretarial and clerical help, legal counsel, office equipment, investor relations, accounting, computers, art, printing, technical evaluation and other related activities, on such terms and at such prices as it finds acceptable.

3.       The General Partner or its designated liaisons may choose to communicate with the Limited Partners in regard to any news, events, situations, opportunities or problems which have or which may have an effect upon the business condition of the Fund.

4.       The General Partner may take any and all other actions which are customary or reasonable related to the acquisition, ownership, development, improvement, management, leasing or disposition of Fund assets.

5.       The General Partner will conduct normal financial transactions, including, but not limited to, the opening of bank accounts and keeping of balances, the issuance of checks for expenses, cash payout, revenue distributions, space lease negotiation, and other normal business transactions.

 Indemnification

The General Partner is accountable to the Fund as a fiduciary and is obligated to exercise duties of care and loyalty as expressly set forth in the Limited Partnership Agreement. The Fund will indemnify the General Partner and its managers, Limited Partners, officers, employees, affiliates and agents, against all claims, liabilities, costs and expenses, including legal fees, judgments and amounts paid in settlement, as incurred by them, by reason of their actions taken or omitted in connection with the Fund’s business or on behalf of the Fund, its subsidiaries, or the Limited Partners of the Fund, other than for recklessness, breach of fiduciary duty, willful misconduct, gross negligence, or knowing violation of the law. Neither the General Partner nor its officers or affiliates guarantee the return of the Limited Partners’ capital or the return of a profit from the operations of the Fund, nor shall the General Partner or its officers or affiliates be responsible to any Limited Partner because of a loss of its capital contribution or a loss in operations, unless it shall have been occasioned by recklessness, willful misconduct or gross negligence.

 Books and records

The Fund shall keep just and true books of account and all other Fund records at the principal place of business or in some other suitable location and shall make these books and records available to all Limited Partners in accordance with the inspection rights as set forth in the Limited Partnership Agreement. The books and records shall include, but shall not be limited to, the designation and identification of any Services in which the Fund owns a legal or beneficial interest.

 Bank accounts

All earnings and returns of principal from the Services of the Fund shall be deposited in its name in an account or accounts maintained at a national or state bank selected for convenience. Checks shall be drawn upon the Fund account or accounts only for purposes of the Fund and shall be signed by the General Partner or a Fund-authorized agent.

Limited Partner Reports

The Fund will retain accountants to provide each Limited Partner with all information reasonably necessary to file their income tax returns. Within ninety (90) days after the end of each taxable year, or as soon as possible thereafter, the Fund shall send to each person who was a Limited Partner at any time during such taxable year a report that will include all information necessary for preparation of such person’s federal, state and local income tax returns for that year. Although not required by law, the Fund will endeavor to furnish Limited Partners with periodic status reports as deemed necessary, most likely quarterly during any fiscal year. During special situations or periods of heightened activity, reports may be issued on a more frequent basis as appropriate.

 Conflicts of Interest

The structure and proposed method of operation of the Fund creates certain inherent conflicts of interest between the Fund and the General Partner and its affiliates. Certain restrictions have been provided in the Limited Partnership Agreement that are designed to protect the interests of the Limited Partners in this regard. Notwithstanding, the Fund will be subject to various conflicts of interest arising out of its relationships with the General Partner and its affiliates.

Since the General Partner initially holds 100% of the Fund’s Units, the ability of the Limited Partners to exercise any degree of control over the Fund will be substantially limited. Furthermore, it is contemplated and expected that the General Partner and their affiliates may engage in other business activities, investments, or ventures, and will only be devoting such time as may be necessary to conduct the business of the Fund. Such persons may have conflicts of interest in allocating time, services, and functions among the Fund and other present and future ventures they may organize or be affiliated with. The General Partner may engage for their own accounts, or for the account of others, in other business ventures without obligation to the Fund or to its Limited Partners.

While the General Partner is accountable to the Fund as a fiduciary in accordance with the Limited Partnership Agreement, Prospective Investors should be aware of the potential for conflicts of interest. The principals of the General Partner will likely manage other entities or ventures in the future, which entities or ventures may directly compete, co-investment along side the Fund for investors and opportunities. Additionally, the principals of the General Partner, if managing another venture related to or ancillary to business of the Fund, may seek to engage third-party investors to finance such opportunities with outside funds. Such other ventures would place the Fund and any other ventures managed by the principals of the General Partner in a legally adverse position to each other, notwithstanding any common business or operational objectives.

The General Partner and its affiliates will participate in other ventures, directly or indirectly, as principals or otherwise, some of which may have the same or similar business objectives as the Fund. The principals of the General Partner may personally invest in the Fund and may co-invest with the Fund. The General Partner and its principals are currently, and in the future, may become committed to other Services or transactions, including without limitation the management of other funds or entities providing ancillary services to the Fund.

The General Partner and its affiliates are eligible for the Administrative Services Fee and reimbursement for general and administrative costs and expenses, due diligence, market research, and pre-acquisition research costs in connection with the pursuit of the Fund’s objectives (See “Use of Proceeds” and “Compensation”). Consequently, such persons may realize profits or monetary income irrespective of whether the Fund generates revenue or whether Limited Partners of the Fund realize a return on their capital contributions.

Legal counsel to the General Partner and certain of their affiliates also may serve as legal counsel to the Fund. In the event that any controversy arises following the termination of the Offering in which the interests of the Fund appear to be in conflict with those of the General Partner or the Limited Partners, it may be necessary to retain other counsel for one or both of these parties.

Certain agreements and arrangements, including those relating to compensation between the Fund and the General Partner and its affiliates, have been established by the General Partner and are not the result of arm’s length negotiations.

The General Partner or its affiliates may purchase Interests on the same terms and conditions as other investors (see “Terms of the Offering”). The General Partner or its affiliates will have all of the rights and powers of a Limited Partner with respect to any such Interests so purchased. Accordingly, the General Partner may have a conflict of interest with respect to Fund decisions if it purchases Interests because of its dual capacity as both the General Partner and a Limited Partner.

 

DESCRIPTION OF SECURITIES

 

The following statements summarize your rights and privileges as a holder of the Interests. Such rights differ from that of the General Partner and are also described in more detail in the Limited Partnership Agreement and elsewhere in this Memorandum. The following summary, including discussions located elsewhere in this Memorandum, does not purport to be complete and is subject to provisions of the Delaware Limited Partnership Act, as amended, and is qualified in its entirety by the terms of the Partnership Agreement.

Interests

The Fund is a limited partnership governed under Delaware law. Each Unit offered hereby represents a limited partnership interest in the Fund.

Upon acceptance of your subscription for Interests, you will be admitted as a Limited Partner of the Fund as provided in the Limited Partnership Agreement. As a Limited Partner, you are not personally liable for the debts of the Fund, but are liable only to the extent of your investment in the Fund, and not more.

As an investor holding Interests you will be entitled to allocations of profits and losses and distributions of distributable cash in accordance with the terms of the Limited Partnership Agreement.

Subject to the terms of the Limited Partnership Agreement, you also are entitled to receive certain information pertaining to the Fund’s affairs although, except for certain limited approval rights set forth in the Limited Partnership Agreement, Limited Partners have no voting, approval, or consent rights.

For a more detailed treatment of the rights and duties of Limited Partners and the General Partner, please refer to the Limited Partnership Agreement attached as Exhibit C of this Memorandum.

CAPITALIZATION

 Capital Contributions and Capital Accounts

 Upon admission to the Fund, each subscriber must commit to contribute to the capital of the Fund the amount provided in such subscriber’s Subscription Agreement which amount shall constitute such subscriber’s capital commitment.  A Limited Partner’s capital commitment will be due and payable not less than 15 days after execution of the Subscription Agreement. A Limited Partner’s Capital Account generally will be (a) increased by capital contributions made to the Fund, and any income and gains (including, where appropriate, unrealized income and gains) allocated by the Fund to such Limited Partner, and (b) decreased by the amount of cash and the fair market value of any assets distributed to such Limited Partner, and any Fund expenses or losses (including, where appropriate, unrealized expenses and losses) allocated by the Fund to such Limited Partner.

 

TRANSFER RESTRICTIONS

The Interests and the Units (in this section, collectively referred to as the “Securities”) are subject to restrictions on transfer. The Securities have not been registered under the Securities Act or any state securities law. The Fund is under no obligation to register the Securities under the Securities Act or any state securities laws. Investors must hold any Securities acquired indefinitely and may not transfer such Securities unless such transfer is permitted, as described in the following paragraph.

Limited Partners of Interests may not transfer any Securities unless (a) a registration statement is in effect under the Securities Act covering the proposed transfer and such transfer is made in accordance with such registration statement or (b) the Securities are transferred in a transaction exempt from the registration requirements of the Securities Act and any related requirements imposed by applicable state securities laws. In the case of any transfer permitted under clause (b), a Limited Partner of Interests must notify the Fund in writing of the proposed transfer and may be required to furnish the Fund with an opinion of counsel, reasonably satisfactory to the Fund, that the transfer will not require registration under the Securities Act or any applicable state securities laws. The Limited Partnership Agreement contains a legend referring to this restriction on transfer and any legends required by state securities laws.

Each Unit issued pursuant to this Offering will be subject to the terms of the Limited Partnership Agreement attached hereto at Exhibit C. Any or all of the terms of the Limited Partnership Agreement may be amended as provided in the Limited Partnership Agreement.

Restrictions on Transfer

Third Party Transfers

No Limited Partner of Interests shall be permitted to transfer any Units except in accordance with the terms of the Limited Partnership Agreement. Before any Limited Partner may transfer any of his, her or its Units in response to a bona fide written offer, the transferring Limited Partner must first offer to sell such Units to the Fund (as defined in the Limited Partnership Agreement) upon the same terms and conditions as the third-party offer.

Permitted Transfers 

Transfer by a Limited Partner of Interests will not be subject to the right of first refusal of the Fund, as defined in the Limited Partnership Agreement, and the other Limited Partners under the following circumstances: (i) in the case of any Limited Partner that is an individual, (A) such Limited Partner’s spouse, parents, lineal descendants (including adopted individuals whenever the terms “lineal descendent” is used), (B) spouses of lineal descendants, (C) lineal descendants of such spouse, (D) any entity, such as a corporation, partnership, limited liability company, or trust, which is controlled by, or for the primary benefit of, such Limited Partner or the Persons identified in items (i)(A), (i)(B) or (i)(C), (ii) in the case of any Limited Partner that is an entity, any other entity that wholly‑owns, or is wholly‑owned by, such entity, (iii) in the case of any Limited Partner that is a trustee of a trust, to any successor trustee of such trust, or (iv) any other Limited Partner; and (b) with respect to an Assignee transferring Units, (i) in the case of any Assignee that is a trustee of a trust, to any successor trustee of such trust, or (ii) any Limited Partner.

 

TAX CONSIDERATIONS

 The following paragraphs summarize certain federal income tax aspects of an investment in the Fund by Prospective Investors. The discussion is based on certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the applicable Treasury Regulations promulgated or proposed thereunder (hereinafter the “Regulations”), current positions of the Internal Revenue Service (the “IRS”) contained in published Revenue Rulings and Revenue Procedures, current administrative positions of the IRS and existing judicial decisions, all of which are subject to changes or modifications at any time. The Fund will not request any rulings from the IRS on the tax consequences described below or any other issues. A court might reach a contrary conclusion with respect to the issues addressed if the matter were contested.

Future legislation, administrative action or court decisions may significantly change the conclusions expressed herein, and any such legislation, action or decisions may have a retroactive effect with respect to the transactions contemplated herein.

THE INCOME TAX LAWS APPLICABLE TO PARTNERSHIPS ARE EXTREMELY COMPLEX, AND THE FOLLOWING SUMMARY IS NOT EXHAUSTIVE AND DOES NOT CONSTITUTE TAX ADVICE. A PERSON CONSIDERING INVESTMENT IN THE COMPANY MUST CONSULT HIS TAX ADVISER IN ORDER TO FULLY UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES OF SUCH AN INVESTMENT IN HIS PARTICULAR SITUATION. NO REPRESENTATION IS MADE AS TO THE TAX CONSEQUENCES OF THE OPERATION OF THE COMPANY.

Classification of the Fund as a Partnership for Tax Purposes

The Fund is organized and operated in accordance with the provisions of the Limited Partnership Agreement and applicable state law. The Fund will not elect to be treated as a corporation.

In certain cases described in Section 7704 of the Code, a “publicly traded partnership” (“PTP”) may be taxed as a corporation for U.S. federal income tax purposes. A PTP is any partnership if the interests in such partnership are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). The Fund does not expect to be treated as a corporation under these rules.

Accordingly, the following discussion is based on the assumption that the Fund will be treated as a partnership, and that the Limited Partners will be treated as partners, for U.S. federal income tax purposes. 

NO RULING HAS BEEN REQUESTED FROM THE IRS WITH RESPECT TO THE COMPANY’S CLASSIFICATION AS A PARTNERSHIP NOR WITH RESPECT TO THE LIMITED PARTNERS’ CLASSIFICATION AS PARTNERS FOR U.S. FEDERAL INCOME TAX PURPOSES. PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX COUNSEL AS TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.

Tax Consequences of Ownership of Units

Flow-through of Taxable Income

No U.S. federal income tax will be paid by the Fund. Instead, the Fund will file annual information returns, and each Limited Partner will be required to report on its U.S. federal income tax return its allocable share of the income, gain, loss and deduction of the Fund without regard to whether the Limited Partner receives any corresponding cash distributions. Consequently, a Limited Partner may be allocated income from the Fund even if it has not received a cash distribution. The Fund will furnish the Limited Partners each year with tax information on IRS Schedule K-1, which will be used by the Limited Partners in completing their respective tax returns. Each Limited Partner is required to treat Fund tax items on its separate return consistently with their treatment on the Fund’s information return. If a Limited Partner intends to treat a Fund item in a manner inconsistent with the Fund’s return, a statement explaining the inconsistency must be filed with the Limited Partner’s separate return.

The characterization of an item of profit or loss (i.e., as capital gain or ordinary income) will usually be determined at the partnership level. Except as limited by the “Tax Considerations-Limitations on Deductibility of Fund Losses” discussed below, a Limited Partner is entitled to deduct on its separate income tax return its allocable share of the Fund’s net losses, if any, to the extent of tax basis in its interest in the Fund at the end of the Fund’s taxable year in which such losses occur.

Treatment of Fund Distributions

Cash distributions from the Fund will not necessarily be equivalent to the Fund’s net income for U.S. federal income tax purposes. Distributions by the Fund to a Limited Partner generally will not be taxable to the Limited Partner for federal income tax purposes to the extent that the amount distributed does not exceed the Limited Partner’s basis in its Units immediately before the distribution. Cash distributions in excess of a Limited Partner’s basis generally will be considered to be a gain from the sale or exchange of the Unit, taxable in accordance with the rules described under “Tax Considerations-Disposition of Units.” A reduction in liabilities of the Fund will be treated as a cash distribution to each Limited Partner to the extent of such Limited Partner’s allocable share of the liability.

Basis of Units

The tax basis of a Limited Partner for its interest in the Fund will be determined initially by the amount of the paid-in capital contributions in respect of such interest. Such basis will then be increased by such Limited Partner’s cumulative distributive share of Fund taxable and tax-exempt income and such Limited Partner’s share of liabilities of the Fund, particularly liabilities, if any, with respect to which no Limited Partner bears the economic risk of loss. A Limited Partner’s basis will be decreased (but not below zero) by cumulative distributions of cash to such Limited Partner (including for this purpose his share of reductions of liabilities of the Fund), and by its cumulative distributive share of Fund net tax losses and non-deductible expenses.

Allocation of Fund Income, Gain, Loss and Deduction

The Code provides that a Limited Partner’s distributive share of income, gain, loss, deduction or credit will be controlled by the Limited Partnership Agreement if the allocations thereunder have “substantial economic effect.” The Regulations elaborate on what constitutes “substantial economic effect” for this purpose. The Limited Partnership Agreement has been designed to comply with the Code and the Regulations. The Limited Partnership Agreement requires that a capital account be established for each Limited Partner, that the capital accounts be maintained in accordance with the tax accounting principles set forth in applicable Regulations, that all allocations to a Limited Partner of income, gain, loss and deduction from the Fund be reflected by appropriate increases or decreases in such Limited Partner’s capital account, and that distributions in liquidation of the Fund be made to the Limited Partners in accordance with positive capital account balances.

If the IRS were to contend successfully that the allocations under the terms of the Limited Partnership Agreement do not have “substantial economic effect,” a Limited Partner’s share of the income, gain, loss, deduction or credit of the Fund would be determined in accordance with the Limited Partner’s interests in the Fund, taking into account all the facts and circumstances. Thus, each Limited Partner might be charged with a greater or lesser share of Fund items of income or loss than that set forth in the Limited Partnership Agreement, and the amount of income taxable to the Limited Partners, the amount of loss allocable to the Limited Partners, the tax bases of their interests and the amount of recognized gain or loss on sale or other disposition of all or substantially all of the Fund assets allocable to the Limited Partners might be affected.

The Code requires that a Limited Partner’s share of items of Fund income, gain, loss, deduction or credit correspond to the portion of the year in which it was a Limited Partner of the Fund. Therefore, all income, gains, losses and deductions of the Fund will be allocated among the Limited Partners based upon the date of their admission to the Fund, as determined in accordance with applicable Regulations (See “Tax Considerations—Admission of New Limited Partners”).

Limitations on Deductibility of Fund Losses

The deduction by a Limited Partner of its share of the Fund’s losses, if any, will be limited to the lesser of (i) the tax basis in its Units or (ii) in the case of a Limited Partner that is an individual or a closely held corporation (a corporation where more than fifty percent (50%) of the value of its stock is owned directly or indirectly by five or fewer individuals or certain tax-exempt organizations), the amount which the Limited Partner is considered to be “at risk” with respect to certain activities of the Fund. In general, the amount at risk includes the Limited Partner’s actual cash investment, plus any debt for which the Limited Partner has personal liability or has pledged property (other than property used in the Fund’s activities) as security and any debt that constitutes “qualified nonrecourse financing.” The amount at risk excludes any amount of money the Limited Partner borrows to acquire or hold its Units if the lender of such borrowed funds owns an interest in the Fund, is related to such a person or can look only to Units for repayment. Losses in excess of the amount at risk must be deferred until years in which the Fund generates additional taxable income against which to offset such carryover losses or until additional capital is placed at risk.

In addition to the limitations described above, the “passive activity loss” limitations generally provide those individuals, estates, trusts and certain closely held corporations and personal service corporations can deduct losses from passive activities (generally, activities in which the taxpayer does not materially participate) only to the extent of the taxpayer’s income from passive activities. Any disallowed passive activity losses may be carried forward to reduce passive activity income in future years or may be deducted in full when the taxpayer disposes of its entire investment in the activity in a fully taxable transaction to an unrelated party. The passive activity loss rules are applied after other applicable limitations on deductions such as the at-risk rules and the basis limitation.

The Code also generally limits the deductions available to certain taxpayers for interest expense on certain kinds of indebtedness allocable to property held for investment. Investment interest expense disallowed under the foregoing rule may be carried forward, subject to the same limitations. The investment interest limitation is expected to apply to Limited Partners with respect to their participation in the Fund only to the extent that the Fund generates investment income and related investment interest expense.

Tax Treatment of Operations

Taxable Year

The Fund will use the calendar year as its taxable year. Each Limited Partner will be required to include in income its allocable share of Fund income, gain, loss and deduction for the fiscal year of the Fund ending within or with the taxable year of the Limited Partner.

Sale or Foreclosure of Fund Assets

Assets disposed of in a taxable transaction will result in gain or loss measured by the difference between the amount realized on the disposition and the adjusted tax basis of such assets. To the extent the Fund owns an equity interest in an asset, it will recognize all or a portion of such taxable gain or loss. Taxable gain or loss is shared as set forth in the Limited Partnership Agreement. The gain recognized by a Limited Partner may exceed any cash proceeds that such Limited Partner receives from the disposition.

Installment Sales

With certain significant limitations, the Code permits gains on certain sales for deferred payment obligations to be reported for tax purposes only as those obligations are paid, rather than at the time of sale.

Tax Treatment of Administrative Expenses

The Fund will pay certain costs and expenses incurred in connection with its activities. The Fund intends to deduct such fees and expenses to the extent that they are reasonable in amount and are not capital in nature or otherwise nondeductible. The tax treatment of these expenses will depend on whether or not the Fund is deemed to be engaged in a trade or business, which is a factual determination. To the extent that the Fund is not deemed to be engaged in a trade or business, such expenses will constitute miscellaneous itemized deductions for individual Limited Partners and will be subject to certain limitations on deductibility which could reduce or eliminate any tax benefits associated with them. Corporate Limited Partners will generally not be subject to these limitations. Organizational and syndication expenses, in general, may not be deducted by either the Fund or any Limited Partner. An election may be made by the Fund to amortize organizational expenses over a 180-month period. Syndication expenses must be capitalized and cannot be amortized or deducted.

Alternative Minimum Tax

Each Limited Partner will be required to take into account its distributive share of any items of Fund income, gain or loss for purposes of the alternative minimum tax applicable to its alternative minimum taxable income. A Limited Partner’s alternative minimum taxable income derived from the Fund may be higher than its share of Fund net income. 

PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE IMPACT OF AN INVESTMENT IN UNITS ON THEIR LIABILITY FOR THE ALTERNATIVE MINIMUM TAX.

Disposition of Units

Recognition of Gain or Loss

The Interests are subject to transfer restrictions contained in the Limited Partnership Agreement. See “Description of Restrictions on Transfer.” A Limited Partner will recognize gain or loss on a sale of such Limited Partner’s Units in an amount equal to the difference between the amount realized and the Limited Partner’s tax basis for the Units. A Limited Partner’s amount realized will be measured by the sum of the cash or the fair market value of other Services received plus its share of Fund debt. Because the amount realized includes a Limited Partner’s share of Fund debt, the gain recognized on the sale of Units may result in a tax liability in excess of any cash received from such sale.

Gain or loss recognized by a Limited Partner on the sale or exchange of a Unit held for more than one year will generally be taxable as long-term capital gain or loss. A portion of this gain or loss, however, will be separately computed and taxed as ordinary income or loss under Section 751 of the Code to the extent attributable to assets giving rise to depreciation recapture or other “unrealized receivables” or to “inventory” owned by the Fund.

Election to Adjust Basis of Fund Assets

Under Section 754 of the Code, the Fund is entitled to make an election, the general effect of which is to afford transferees of Limited Partners, and in certain situations all Limited Partners, adjustments to the basis of assets of the Fund to reflect their values. Such an election, once made, may not be revoked without the consent of the IRS. If the election is not made, any transferee of a Limited Partner will be allocated its share of the Fund’s tax items calculated by reference to the Fund’s pre-transfer basis in its assets, without adjustment to reflect the actual transfer price paid. No Limited Partner has the right to require the Fund to make the election; instead the decision whether or not to make it must be agreed to by all of the Limited Partners. There are a number of complexities and added expense with respect to the tax accounting required to implement a Section 754 election, and the Limited Partnership Agreement provides that the Fund is not required to make an election under Section 754. The failure to make a Section 754 election may have adverse tax effects upon a transferee of an interest in the Fund. Because such transferee’s pro rata share of basis in the Fund’s assets would be less than the transferee’s basis in its interest in the Fund, distortions in the timing and character of income can result. In certain circumstances, the Fund may be required to make an adjustment to the basis of the assets of the Fund in order to reflect their values as if a Section 754 election were in effect.

Liquidation or Termination

Upon a liquidation of the Fund, a Limited Partner generally will recognize gain only to the extent that liquidating cash distributions received by it exceed the adjusted tax basis for its Units, and generally will recognize loss only to the extent that liquidating distributions are in an amount less than the adjusted basis for the Units and are comprised entirely of cash, unrealized receivables and inventory.

Admission of New Limited Partners

The Code precludes a Limited Partner from sharing in tax items incurred by a partnership prior to the Limited Partner’s admission to the partnership.

PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX COUNSEL AS TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF A SALE, EXCHANGE OR OTHER DISPOSAL OF THEIR UNITS IN THE COMPANY.

Tax-Exempt Limited Partners

A tax-exempt Limited Partner, such as a typical U.S. pension company, educational institution or private foundation, is generally exempt from federal income tax on its income, except to the extent of its unrelated business taxable income (“UBTI”). UBTI is generally defined by the Code as the gross income derived from any trade or business which is regularly carried on by a tax-exempt entity and unrelated to its exempt purpose, less any directly connected deductions and subject to certain modifications. The Code generally excludes from UBTI any gain or loss from the sale or other disposition of property (other than stock in trade or property held primarily for sale in the ordinary course of a trade or business), dividends, interest, royalties, rents from real property and certain other items. A tax-exempt Limited Partner’s allocable share of gross income and directly connected deductions from entities treated as partnerships for federal income tax purposes results in UBTI to the tax-exempt Limited Partner to the same extent as if realized directly by the tax-exempt Limited Partner. Incurring “acquisition indebtedness” can cause items of gross income and related deductions from “debt financed property” to be included in UBTI, notwithstanding otherwise applicable exclusions from UBTI. The Fund cannot provide any assurance that a tax-exempt Limited Partner’s allocable share of gross income will not include UBTI.

PROSPECTIVE INVESTORS, WHO ARE TAX-EXEMPT, SHOULD CONSULT THEIR TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THESE AND OTHER ISSUES UNIQUE TO TAX-EXEMPT ORGANIZATIONS.

Non-U.S. Persons

For the purposes of this paragraph, a non-U.S. person is a beneficial owner of our units who is a nonresident alien individual or a non-U.S. corporation for U.S. federal income tax purposes, and a non-U.S. unit holder is a beneficial owner of our units who is a non-U.S. person.

In general, non-U.S. persons will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our units. In cases where a non-U.S. person’s investment in our units is, or is treated as, effectively connected with the non-U.S. person’s conduct of a U.S. trade or business, dividend income received in respect of our units and gain from the sale of our units generally will be “effectively connected income” (“ECI”) subject to U.S. federal income tax at graduated rates in the same manner as if the non-U.S. person were a U.S. person, and such dividend income may also be subject to the 30% branch profits tax (subject to possible reduction under a treaty) on the income after the application of the income tax in the case of a non-U.S. person that is a corporation. Additionally, non-U.S. persons that are nonresident alien individuals who are present in the U.S. for 183 days or more during the taxable year and have a “tax home” in the U.S. are subject to a 30% withholding tax on their capital gains. In addition, other U.S. tax provisions under the Internal Revenue Code and regulations may apply and incur additional tax reporting and compliance obligations.

PROSPECTIVE INVESTORS, WHO ARE NON-U.S. PERSONS, SHOULD CONSULT THEIR TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THESE AND OTHER ISSUES UNIQUE TO NON-U.S. PERSONS.

Administrative Matters.

Partnership Information Returns and Audit Procedures

The IRS may audit the federal income tax returns filed by the Fund. Adjustments resulting from any such audit may require each Limited Partner to adjust a prior year’s tax liability and could result in an audit of the Limited Partner’s own return. Any audit of a Limited Partner’s return could result in adjustments of non-partnership items as well as Fund items. Partnerships are generally treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS, and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined at the partnership level in a unified partnership proceeding rather than in separate proceedings with the Limited Partners. The Code provides for one Person to be designated as the partnership representative (“Partnership Representative”) for these purposes. The Limited Partnership Agreement appoints the Partnership Representative of the Fund.

Registration as a Tax Shelter

The Code requires that “tax shelters” be registered with the Secretary of the Treasury. The Fund has concluded that no registration of the Fund as a tax shelter is required because the Fund is not a tax shelter under temporary Treasury Regulation Section 301.6111-IT, Q&A 4A. It is possible, however, that the IRS could disagree with the Fund as to the requirement to register at the time of this Offering. The penalty for failure to register a “tax shelter” is an amount equal to the greater of (1) $500 or (2) one percent (1%) of the aggregate amount invested in such “tax shelter.”

Disclosure of Tax Information

Notwithstanding the confidential nature of this Memorandum, each Prospective Investor (and each employee, representative, or other agent of the Prospective Investor) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of an investment in the Fund and all materials of any kind (including opinions or other tax analyses) that are provided to the Prospective Investor relating to such tax treatment and tax structure.

Other Tax Considerations

IN ADDITION TO FEDERAL INCOME TAXES AND WITHHOLDING, LIMITED PARTNERS WILL BE SUBJECT TO OTHER TAXES AND WITHHOLDING, SUCH AS STATE AND LOCAL INCOME TAXES AND WITHHOLDING, UNINCORPORATED BUSINESS TAXES, BUSINESS FRANCHISE TAXES, AND ESTATE, INHERITANCE OR INTANGIBLE TAXES THAT MAY BE IMPOSED BY THE VARIOUS JURISDICTIONS IN WHICH THE COMPANY DOES BUSINESS OR OWNS PROPERTY. ALTHOUGH AN ANALYSIS OF THOSE VARIOUS TAXES IS NOT PRESENTED HERE, EACH PROSPECTIVE INVESTOR SHOULD CONSIDER THEIR POTENTIAL IMPACT ON ITS INVESTMENT IN THE COMPANY.

CIRCULAR 230 DISCLOSURE: THE COMPANY INFORMS YOU THAT: (I) ANY TAX ADVICE CONTAINED IN THIS MEMORANDUM (INCLUDING ANY EXHIBITS OR ATTACHMENTS HERETO) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE OR ANY OTHER APPLICABLE TAX LAW; AND (II) ANY SUCH TAX ADVICE WAS WRITTEN TO SUPPORT THE MARKETING OR PROMOTION OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN. 

LEGAL PROCEEDINGS

 

The Fund is unaware of any other material legal proceedings, regulatory or otherwise, that would have a material impact on our prospective activities.

DEFINITIONS

 Capitalized terms as used throughout this Memorandum, together with other terms related to the Fund’s business activities, are set forth in the Limited Partnership Agreement which is incorporated herein by reference. See the Exhibit section of this Memorandum.

WHERE TO OBTAIN MORE INFORMATION

Throughout this Memorandum, reference is made to certain information either not contained in this document or else attached hereto by way of exhibit. If you or your advisors would like additional information regarding the Fund or our objectives, please see the contact information on the cover page of this Memorandum.