Contract analysis

From: "Garrett Simmons" To: "Leila Nazari" Cc: "Leonard Cross" Date: Sun, 15 Oct 2023 04:47:00 -0000 Subject: NOPA Review Assignments — Penterra (Matter 1018-00009)

As you're all aware, PPC received the NOPA from LB&I on October 12. The exam team (LB&I-NE-TP-2022-00641, Revenue Agent Patricia Dunleavy and Supervisory Revenue Agent Gerald Meskill) has issued proposed adjustments covering all four examination years (TY 2017–2020), with a net proposed adjustment of $380.4 million. Leonard has already sent an initial communication to Marcus Whitfield at PPC this afternoon, so the cl

**NOPA Summary — Three Adjustment Components**

For everyone's reference, the $380.4M breaks down as follows:

1. **CSA Cost-Sharing Ratio Adjustments — $235.01M.** The IRS proposes increasing PBI's cost-sharing percentage by 8–12 percentage points in each year: - TY 2017: 38.2% → 48.2% ($48.73M) - TY 2018: 39.6% → 50.6% ($57.61M) - TY 2019: 41.1% → 52.3% ($62.85M) - TY 2020: 42.7% → 53.7% ($65.82M)

2. **Royalty Rate Adjustments (Legacy IP) — $188.04M.** The IRS proposes increasing the royalty rate from PPC's 4.5% to 11.0% of net sales, based on the IRS's own CUT selections: - TY 2017: $52.95M - TY 2018: $49.55M - TY 2019: $44.97M - TY 2020: $40.57M

3. **Correlative Offset — ($42.65M).** Allowed by the exam team to avoid double-counting between the CSA and royalty issues.

In addition, the IRS asserts a **substantial valuation misstatement penalty** under IRC § 6662(e) at 20% on the tax attributable to the § 482 allocation — approximately **$15.98M** ($380.4M × 21% × 20%).

The NOPA also advances an **economic substance / DEMPE challenge** to PBI's role as IP owner and CSA participant, asserting that key functions remained in the U.S. The positions rely heavily on the economic analysis prepared by IRS economist Dr. Alan Washburne and legal arguments articulated by IRS Chief Counsel Attorney-Advisor Franklin Rosario. Notably, the IRS uses the PCT undervaluation theory (IRS valued at $852

I need you to prepare a detailed analysis memorandum of the NOPA's legal positions, organized by issue:

- **CSA cost-sharing:** Analyze the IRS's arguments under Treas. Reg. § 1.482-7 regarding reasonably anticipated benefits and the proposed percentage increases. Assess whether the IRS's position on benefit shares is consistent with the regulatory framework and relevant case law — particularly *Altera* and *Harborview Corporation*.

- **Royalty rate:** Analyze the IRS's CUT methodology under Treas. Reg. § 1.482-4 for the legacy IP royalty. Focus on comparability of the IRS's selected agreements versus the Whitmore 14-agreement CUT study (IQR 3.1%–6.8%, median 4.4%). Identify the weaknesses in the assertion that 11.0% is the appropriate arm's-length rate.

- **Economic substance / DEMPE challenge:** Analyze the IRS's argument that PBI lacked sufficient economic substance. Cross-reference the extensive substance evidence assembled during the IDR process — 185 employees, 42 board meetings in Dublin, €47.2M cumulative regulatory spend, independent pricing across 68 country markets, and 18,000 sq ft of office space at Sandyford Business Park.

- **Penalty assertion:** Analyze the § 6662(e) penalty position. Assess the strength of PPC's reasonable-cause defense, including the contemporaneous transfer pricing documentation prepared by Crestfield & Associates (Susan Lam) under § 6662(e)(3)(B).

- **PCT valuation background:** Address how the IRS is leveraging the PCT undervaluation theory to support its ongoing CSA and royalty positions, and whether that theory holds up given the 2012 PCT year falls outside the exam period.

Please also flag any new legal theories or authorities cited in the NOPA that we haven't previously addressed. **Target: draft memo by Friday, October 20.**

**2. Garrett (me) — Economic Rebuttal Coordination with Whitmore**

I will coordinate directly with Dr. Helena Vasquez and Dr. Rohan Chakrabarti at Whitmore Valuation Group to begin preparing the economic rebuttal. Key areas for Whitmore to address:

- Critique of Dr. Washburne's CUT selection criteria for the royalty rate — how do his selected comparables differ from the Whitmore 14-agreement set, and why is the IRS's 11.0% rate outside the defensible arm's-length range? - Rebuttal of the IRS's proposed cost-sharing percentages — review the reasonably anticipated benefit projections and defend the 38.2%–42.7% range. - Defense of the PCT DCF valuation using the 9

I will also pull together the revenue projection analysis for the key products — Veritaxol ($3.12B global / $1.34B non-Americas in 2020), Imvara ($1.87B / $0.79B), and Cerulon ($0.62B / $0.28B) — to support the benefit-share calculations. I'm going to reach out to Dr. Vasquez tomorrow to schedule a call for early in the week. **Target: Whitmore engagement scoped and preliminary economic observations by Friday, Octobe

**3. Leonard & Sylvia — Client Communication and Strategy**

Leonard and Sylvia will manage all client communications with Marcus Whitfield (VP, Global Tax), Deborah Staines (General Counsel), and as needed Rajesh Iyer (CFO). Leonard — since you've already sent the initial heads-up to Whitfield today, let's plan to schedule a client call for early the following week once Leila's legal analysis and my preliminary economic assessment are available.

- Begin formulating the defense strategy for the Protest phase, building on the defense strategy memorandum from July 12, 2022. - Consider whether to loop in CFO Iyer and/or CEO Catherine Falk given the magnitude of the proposed adjustment. $380.4M warrants a conversation about the appropriate level of executive engagement. - Sylvia — please assess any immediate billing/budget implications. We should reference the or

- **IDR tracker / document production index:** Leila and I should cross-reference the IDR tracker (47 IDRs issued between June 2022 and September 2023) and the master document production index to confirm what evidence is already in the IRS's hands that supports PPC's positions. We don't want to build a rebuttal on facts the exam team can argue weren't presented.

- **30-Day Letter / Protest timeline:** Once the 30-Day Letter is issued, we'll need to move quickly on the formal Protest. We should plan to request an extension of the filing deadline as a matter of course, but we want the substantive work well underway before that clock starts.

- **Third-party coordination:** We'll need to coordinate with Ciarán Thornbury at Thornbury & Keogh in Dublin on the Irish-side implications, and with Martin Ogilvy and Susan Lam at Crestfield & Associates for return data and context on the original TP documentation. I'll handle initial outreach to Whitmore; Leonard, can you reach out to Thornbury and Crestfield?

- **FIN 48 reserve:** PPC's current FIN 48 reserve stands at $62.4M (ASC 740-10). We will need to advise PPC on whether that reserve requires updating in light of the NOPA for year-end 2023 financial statements. Leonard — flagging this as a follow-up item for you and the client.

- **Credit facility / SEC disclosure:** The Hargrove National Bank credit facility includes material-tax-event covenant provisions, and there are potential SEC disclosure considerations. These will require separate analysis once we have a fuller picture, but we should keep them on the radar.

- **Friday, October 20:** Leila's legal analysis memo in draft; my Whitmore engagement scoped with preliminary economic observations ready. - **Friday, October 20 (late afternoon):** Internal team meeting (C&H only) to synthesize findings and align on our preliminary assessment before the client call the following week. I'll send a calendar invite. - **Following week:** Client call with Whitfield (and potentially Sta

**A reminder:** All communications regarding this matter are privileged and confidential. Whitmore's work product falls under the Kovel arrangement (reference 1018-00009-KV). Please treat all drafts and analyses accordingly.

I don't need to tell anyone on this team that $380.4 million is a significant proposed adjustment, and the penalty assertion adds another layer. We need to be thorough, well-coordinated, and ready to give PPC clear-eyed advice on the strength of each position before we get into protest strategy. If anyone has questions about assignments or capacity concerns given the timeline, let me know tonight or tomorrow morning

**Garrett Simmons** Senior Associate Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 T: (215) 884-7200 gsimmons@calderwoodharkness.com

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