SOF III - 1081 Southern Financial LLC basis will be adjusted for this purpose by its allocable share of the Onshore Feeder Fund's income or loss for the year of such sale. Any gain or loss recognized with respect to such a sale generally will be treated as a capital gain or loss (except that the gain will be ordinary income to the extent attributable to the Investor's allocable share of certain ordinary income assets of the Master Fund) and will be long-term capital gain or loss if the Interest has been held for more than one year (except if the selling Investor made an additional capital contribution to the Onshore Feeder Fund within the one-year period ending on the date of the sale, part of such gain or loss will be short-term). Limitations on Deductions and Losses. Investors who are (i) individuals, (ii) certain closely held corporations, (iii) trusts and estates or (iv) partnerships that have one of the foregoing as a partner should be aware that they could be subject to various limitations on their ability to use their allocable share of Onshore Feeder Fund deductions and losses. The net effect of these limitations is to potentially increase the effective tax rate on distributions from the Onshore Feeder Fund (although many of these limitations defer rather than disallow the use of losses, so the Investor may suffer only a timing detriment with respect to taxes payable on the income of the Onshore Feeder Fund). Such limitations include those relating to amounts "at risk," "passive activity losses," "investment interest," and "miscellaneous itemized deductions." If the Onshore Feeder Fund borrows funds to make up its over-commitment to the Master Fund, interest on such borrowings will be subject to these limitations. The Onshore Feeder Fund Management Fees and the General Partner's Fee will generally be classified as miscellaneous itemized deductions that may be deducted only to the extent that the sum of all such deductions exceed 2% of