Action Items Review Sheet

• Delivered in companion document: MOIC Matrix & SD-IRA Tax Analysis.
• Floor anchored at ~18–25% IRR, ceiling at ~24–40% IRR, scaled by hold period.
• Both floor and ceiling sit above pref-plus-capital baseline so Tier 3 has economic substance.
• Open for client confirmation: floor/ceiling anchors and pref rate (15% vs. 18%).

Draft language for client review (to be re-cast into operating-agreement form by counsel):

Tier 1 — Preferred Return

• Investor receives a preferred return calculated at [15% / 18% — TBD] per year on outstanding invested capital.
• Return compounds daily and accrues continuously until paid in full.
• Preferred return is cumulative (unpaid amounts carry forward) but profit-dependent (paid only when company has profits or other available cash; not a guaranteed obligation of the company).
• This profit-dependent feature is important — it preserves the equity character of the investment for tax purposes.

Tier 2 — Return of Invested Capital

• After preferred return is paid current, investor receives back the original $250,000 invested.
• Treated as redemption of preferred stock or return of capital for tax purposes.

Tier 3 — Multiple on Invested Capital (MOIC True-up)

• After preferred return and capital are returned, investor receives additional distributions until total payments equal the agreed minimum multiple for the hold period (the "MOIC floor").
• Distributions in this tier continue up to the MOIC ceiling for the hold period.
• Floor and ceiling figures are set out in the MOIC matrix (companion document).

Tier 4 — Operator Catch-Up

• After investor reaches MOIC ceiling, operator receives 100% of further distributions until operator's total received from Tiers 1, 3, and 4 equals the investor's total received from Tiers 1 and 3 (parity catch-up).
• This puts both parties on equal footing economically before the back-end split begins.

Tier 5 — 50/50 Profit Split

• All distributions remaining after Tiers 1–4 are split equally (50/50) between investor and operator.
• This is the back-end upside the client identified as the priority of the deal.

Below are the tax-driven concepts the operating agreement and related documents must address. We are not drafting agreement language. These are the substantive tax requirements; counsel is responsible for formalizing them with appropriate legal language and confirming enforceability.

3a. §4975 Disqualified-Person Prohibitions (Tax Requirements)

• No disqualified person to the IRA owner may be employed by, hold an officer/director role at, or receive compensation from the holdco or any subsidiary.
• Definition of "disqualified person" must align with §4975(e)(2) — see DQP reference table later in this document.
• Prohibition extends to indirect compensation arrangements (consulting fees, service fees, vendor relationships at non-arm's-length terms).
• Operator must represent and warrant non-DQP status as condition to closing and on continuing basis.

3b. IRA Ownership Ceiling — Anti-Dilution Floor (Tax Requirements)

• Investor's economic ownership starts at 19% and must not exceed 25% in aggregate or 25% in any single class at any point in time.
• Rationale: 25% is conservative buffer to the 50% §512(b)(13) controlled-organization threshold. Crossing 50% would convert otherwise-excluded passive income (interest, rents, royalties from controlled subs) into UBTI to the IRA.
• Triggering events to monitor: additional capital contributions, share repurchases, conversion of Class A, vesting of management equity, T5 conversion mechanics, changes in capital structure.
• Counsel to draft anti-dilution and ceiling-cap language; we will review for tax integrity.

3c. Treatment of Additional Capital Contributions (Tax Requirements)

• Decision needed: contributions at C-corp parent level vs. subsidiary level.
• Parent-level contributions: simpler for blocker integrity; contributor gets parent equity; waterfall applies cleanly. Preferred default.
• Sub-level contributions: creates minority interests at sub level; complicates waterfall; raises additional structuring questions; generally avoid unless specific reason.
• Whichever path: must not breach 25% ceiling; must not introduce DQPs as new investors; new investments must be on documented arm's-length terms.

3d. Inter-Company Lending and Collateralization (Tax Requirements)

• Inter-company loans between subs and holdco are permitted but must be on arm's-length terms (interest rate at AFR or higher, documented promissory note, formal payment schedule).
• No sub may pledge its assets as collateral for debt of another sub or for personal debt of any DQP.
• Cross-collateralization that benefits a DQP (including operator if operator becomes DQP through any future relationship) is prohibited.
• "Internal bank" concept (redeploying cash from one sub to another instead of distributing) is permissible at the C-corp parent level — the parent receives sub dividends and reinvests into another sub. This does not trigger UBTI because no IRA-level cash flow is involved and the C-corp is the actor.

3e. Annual Valuation Requirement (Tax Requirements)

• SD-IRA custodian requires annual fair market value reporting on Form 5498.
• Recommended: formula-based valuation agreed up front (e.g., trailing 12-month EBITDA × agreed multiple, or revenue × agreed multiple).
• Formula approach reduces cost vs. third-party appraisal and avoids annual valuation disputes.
• Multiple selection should reflect industry comps for each sub: restaurant typically 2–3× EBITDA or 0.3–0.5× revenue; construction typically 3–5× EBITDA; fix-flip more commonly NAV (asset value less debt) given project-by-project nature.
• Formula and multiples to be set in operating agreement; we will support input on industry comps.
• Independent appraisal still recommended at: (a) initial issuance to support arm's-length pricing for §4975 purposes, and (b) any major event (sub acquisition, additional capital raise, exit).

3f. Buy-Sell / Hold-Back Provisions (Tax Concepts; Counsel Drafts)

• Triggering events: death of operator, divorce of operator, voluntary transfer attempt, disability, breach.
• Pricing: most recent annual valuation, with optional adjustment for events occurring since.
• Tax-side concern: any forced sale to IRA must be at FMV (not below) to avoid §4975(c)(1)(A) PT; any forced sale by IRA must be at FMV (not below) to avoid prohibited use of IRA assets.
• Counsel to draft mechanics, hold-back periods, payment terms.

3g. Preferred Return Mechanics — Profit-Dependent Recommendation

• Recommended: profit-dependent (cumulative but only payable from available profits or cash flow), not guaranteed.
• Rationale: a guaranteed return is debt-like. With 15% daily-compounded rate, debt recharacterization risk under §385 is non-trivial. Profit-dependency is a defensible equity feature.
• Cumulative feature preserves economic outcome (unpaid pref accrues and compounds) while preserving equity character for tax purposes.

Bullet checklist for written confirmation memo to client:

• Parent: LLC taxed as C-corp ("Holdco")
• Holdco ownership: 19% to SD-IRA / 81% to operator (subject to 25% IRA ceiling going forward)
• Subsidiaries: single-member LLCs wholly owned by Holdco, disregarded for federal tax purposes (Tavern, Fix-and-Flip, future entities)
• Tax filing: one consolidated C-corp federal return at the Holdco level (subs disregarded; their income/loss flows up to Holdco)
• State filing: Holdco files California return; sub-state filings as required by sub locations
• Fix-and-Flip explicitly included in structure (per call agreement)
• Future subs added at Holdco level only, with documentation amendment
• Personal guarantees on debt: operator only; never IRA owner

Note on sub structure: in the prior MOIC document we flagged a recommendation for C-corp subs over disregarded LLC subs to preserve UBTI blocker integrity in operational dimensions. With single-member LLCs disregarded to a C-corp parent, the C-corp parent is treated as conducting the activities directly — UBTI blocker still works because the C-corp itself is the taxpayer for federal purposes. Either structure works for UBTI blocking; disregarded LLCs are simpler administratively (one consolidated return). Confirm preference with client; flag for counsel.

We can build this once client confirms inputs from Item 6 below. Model will show:

• Year 1: $250K invested, pref accrual, no capital return, no distributions to IRA
• Year 2: Tavern generates profit; Holdco redeploys cash into Fix-and-Flip acquisition rather than distributing — illustrating "internal bank" mechanic; pref continues to accrue at IRA level; no UBTI because no distribution
• Year 3: Sub exit; cash flows up to Holdco; Holdco distributes through waterfall — Tier 1 pref paid, Tier 2 capital returned, Tier 3 MOIC paid
• Year 4+: Tier 4 catch-up, Tier 5 50/50 begins
• Tax impact at each year at Holdco level (federal + CA) and at SD-IRA level (zero, by design)
• Cash retained vs. distributed at each year showing how the C-corp acts as a deferral vehicle

Suggested format: HTML interactive modeler matching the existing investment-modeler tool style — toggle pref rate, hold period, sub-level profit projections, watch waterfall populate live.

Send these to client for written response: