Contract analysis

I. INTRODUCTION AND SUMMARY OF PROTEST Penterra Pharmaceuticals Corp. ("PPC" or "Taxpayer"), a Delaware corporation publicly traded on the Nasdaq Global Select Market (ticker symbol: PPCA), hereby files this Formal Protest pursuant to Revenue Procedure 2015-41, §§ 2.01–2.05, and respectfully protests the proposed adjustments set forth in the Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, issued by the

II. IDENTIFICATION OF TAXPAYER AND TAX PERIODS A. Taxpayer Information The Taxpayer filing this Formal Protest is Penterra Pharmaceuticals Corp. The following information identifies the Taxpayer for purposes of this proceeding: PPC is a specialty pharmaceutical and biotechnology company engaged in the research, development, manufacture, and commercialization of innovative therapeutics in the areas of oncology, immuno

III. STATEMENT OF FACTS A. PPC's Corporate Structure and Business Operations Penterra Pharmaceuticals Corp. is a specialty pharmaceutical and biotechnology company headquartered in Princeton Junction, New Jersey. PPC is principally engaged in the research, development, manufacture, and commercialization of innovative therapeutics targeting oncology, immunology, and rare-disease indications. PPC's product portfolio in

IV. SUMMARY OF PROPOSED ADJUSTMENTS AND AMOUNTS IN DISPUTE A. CSA Cost-Sharing Ratio Adjustments ($235,010,000) The IRS proposes to increase PBI's cost-sharing percentage under the CSA by 8 to 12 percentage points in each Exam Year. The IRS asserts that PPC's projections of reasonably anticipated benefits understated the value attributable to the U.S.-based research and development activities and correspondingly over

V. STATEMENT OF LAW A. IRC § 482 — Allocation of Income Among Commonly Controlled Entities

Section 482 of the Internal Revenue Code authorizes the Secretary of the Treasury, in any case of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests, to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses if the Secretary determines that such distribution, apportion

I. Relevant Case Law Several judicial decisions are directly relevant to the issues raised in this Protest: (a) *Altera Corp. v. Commissioner*, 145 T.C. 91 (2015), *rev'd and remanded*, 926 F.3d 1061 (9th Cir. 2019), *cert. denied*, 141 S. Ct. 131 (2020): The Ninth Circuit upheld the validity of Treasury Regulation § 1.482-7(d)(2), requiring the inclusion of stock-based compensation in a CSA cost pool. While Altera a

VI. ARGUMENTS IN OPPOSITION TO THE PROPOSED ADJUSTMENTS A. PPC's CSA Cost-Sharing Ratios Are Arm's-Length (Opposing the $235,010,000 CSA Adjustment)

1. PPC's Reasonably Anticipated Benefits Methodology Is Sound PPC's cost-sharing percentages for the Exam Years — 38.2% (TY 2017), 39.6% (TY 2018), 41.1% (TY 2019), and 42.7% (TY 2020) — were determined based on PBI's share of the reasonably anticipated benefits from the intangible development activities conducted under the CSA, in strict compliance with the methodology prescribed by Treas. Reg. § 1.482-7(e). The rea

2. CPM / TNMM Analysis Confirms Arm's-Length Results Independent economic analysis performed by Whitmore Valuation Group LLC ("Whitmore") provides additional confirmation that PPC's CSA cost-sharing ratios produce arm's-length results. Whitmore was retained under a Kovel arrangement through Calderwood & Harkness LLP. The lead economist for this engagement is Dr. Helena Vasquez, Managing Director, who is supported by

3. The PCT Valuation Supports the CSA Structure The IRS's assertion that the $312,000,000 PCT payment undervalued PPC's pre-existing IP by approximately $540 million (yielding an IRS-proposed PCT value of $852 million) is unsupported by the contemporaneous evidence and employs inappropriate valuation assumptions. Whitmore Valuation Group performed an independent income method / Discounted cash flow ("DCF") analysis o

4. The IRS's Proposed Adjustments Produce Results Inconsistent with the Arm's-Length Standard The IRS's proposed cost-sharing percentages, if applied, would attribute to PBI a disproportionately small residual return that is inconsistent with PBI's substantive functions, assets, and risk-bearing capacity in the non-Americas territory. As demonstrated in Section VI.C below, PBI performs and controls comprehensive DEMP

1. CUT Analysis Confirms 4.5% Is Within the Arm's-Length Range PPC's 4.5% royalty rate on the Legacy IP License was established based on a comparable uncontrolled transaction ("CUT") analysis, and has been validated by the independent economic analysis performed by Whitmore Valuation Group. Whitmore identified 14 comparable uncontrolled pharmaceutical license agreements through a comprehensive search of standard lice

2. The IRS's 11.0% Royalty Rate Is Based on Unreliable Comparables The IRS's proposed royalty rate of 11.0% is based on CUT data selected by IRS Economist Dr. Alan Washburne. PPC submits that Dr. Washburne's selected comparables are materially distinguishable from the PPC-PBI Legacy IP License on multiple critical comparability dimensions, and that the IRS's proposed rate is therefore unreliable. Specifically, the IR