Contract analysis

From: Leonard Cross <lcross@calderwoodharkness.com> To: Marcus Whitfield <mwhitfield@penterra.com> Cc: Deborah Staines <dstaines@penterra.com> Date: Fri, 29 Mar 2024 04:47:00 -0000 Subject: Closing Agreement Executed — IRS Examination Closed (Matter 1018-00009)

I am pleased to confirm that the IRS Form 906 Closing Agreement was fully executed today, March 29, 2024. The agreement bears your signature on behalf of Penterra Pharmaceuticals Corp. ("PPC") and the signature of Appeals Officer Noreen Castañeda on behalf of IRS Appeals. This formally closes the IRS Large Business & International Division examination of PPC for tax years 2017, 2018, 2019, and 2020 (Exam Team ID LB&I

As set forth in the executed Closing Agreement, the total agreed-upon adjustment across all four tax years is $47.6 million, representing approximately 12.51% of the IRS's proposed net adjustment of $380.4 million. The year-by-year allocation of the settlement adjustment is as follows:

- Tax Year 2017: $11.2 million - Tax Year 2018: $12.4 million - Tax Year 2019: $12.8 million - Tax Year 2020: $11.2 million

Importantly, the IRC § 6662(e) substantial valuation misstatement penalty has been fully abated. Appeals accepted PPC's reasonable-cause defense and recognized the sufficiency of PPC's contemporaneous transfer pricing documentation under IRC § 6662(e)(3)(B). No penalty liability will be assessed.

The financial impact of the settlement is as follows:

- Federal income tax due on the $47.6 million adjustment: approximately $10.0 million (at the 21% corporate rate) - Estimated underpayment interest: approximately $2.84 million (computed at the applicable federal underpayment rate over the relevant periods) - **Total cash outlay for tax and interest: approximately $12.84 million**

For context, this outcome compares very favorably to the IRS's full proposed exposure. The proposed $380.4 million adjustment would have resulted in approximately $79.88 million in federal income tax plus a $15.98 million penalty — a total of roughly $95.86 million before interest. The settlement represents an approximately 86.6% reduction in the proposed assessment.

There are several items that will require attention in the near term:

1. **Payment.** PPC should arrange payment of the approximately $10.0 million in tax and $2.84 million in estimated interest. We will coordinate with Martin Ogilvy and Susan Lam at Crestfield & Associates on precise payment instructions and any IRS correspondence regarding payment processing.

2. **Amended Returns.** PPC will need to file amended federal income tax returns (Forms 1120X) for tax years 2017 through 2020 to reflect the settlement adjustments. Garrett Simmons is finalizing a separate memorandum with detailed amended return filing instructions, which he expects to transmit to you shortly.

3. **FIN 48 / ASC 740-10 Reserve.** The settlement should allow PPC to adjust its uncertain tax position reserve from the pre-settlement level of $62.4 million down to approximately $14.8 million. I will be sending an updated FIN 48 analysis to Crestfield for use in PPC's financial statement reporting.

4. **State Tax Implications.** Leila Nazari is preparing a memorandum analyzing potential state income tax consequences of the federal adjustment in PPC's filing states, including New Jersey. This will follow shortly.

5. **Irish Tax Coordination.** Leila has been in contact with Ciarán Thornbury at Thornbury & Keogh regarding any Irish tax consequences for Penterra Biopharma Ireland ("PBI"), including potential impact on Knowledge Development box claims. We will continue to coordinate on whether a competent authority request or mutual agreement procedure under the U.S.-Ireland Income Tax Treaty is advisable.

6. **Hargrove National Bank Covenant Notification.** As you will recall, we previously analyzed the tax-indemnity and material-tax-event covenants in PPC's $1.5 billion revolving credit facility with Hargrove National Bank. At the settlement level, our prior analysis concluded that no reporting trigger or default provision is implicated. That said, I would suggest Deborah confirm this conclusion with PPC's treasury t

7. **SEC Disclosure.** PPC's next periodic filing (whether the 10-Q or 10-K) should reflect the resolution of the examination and the favorable outcome, including the release of the FIN 48 reserve. I would recommend that Deborah coordinate with Crestfield on appropriate disclosure language.

In the coming weeks, we will be transmitting recommendations for going-forward transfer pricing documentation enhancements and PBI substance strengthening, as well as an analysis of whether PPC should consider pursuing a bilateral advance pricing agreement ("APA") with the IRS and Irish Revenue for future tax years. We believe there is a meaningful opportunity to reduce audit risk prospectively, and we look forward t

Marcus, I want to thank you, Deborah, Rajesh, and the broader PPC team — including Aidan Naughton and the PBI team in Dublin — for your cooperation and responsiveness throughout what has been a nearly two-year examination process, from the initial contact letter on May 16, 2022 through today's closure. Your team's diligence in marshaling the factual record and making key personnel available was instrumental to the ou

I also want to acknowledge the contributions of Dr. Helena Vasquez and Dr. Rohan Chakrabarti at Whitmore Valuation Group for their economic analyses, which were central to our defense, and Ciarán Thornbury and his team at Thornbury & Keogh for their coordination on the Irish side.

We will be preparing a formal closing summary letter for PPC's records as well as a matter closing memorandum. In the meantime, please do not hesitate to reach out if you would like to discuss any aspect of the resolution or the next steps outlined above. I am available at your convenience.

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 T: (215) 555-4200 lcross@calderwoodharkness.com

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