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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

January 5, 2024

MEMORANDUM

FROM: Leonard Cross, Responsible Partner, and Sylvia Hartwell, Billing Partner, Calderwood & Harkness LLP

TO: Marcus Whitfield, Vice President — Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp.

RE: Quarterly Status Report — Q4 2023 (October 1 – December 31, 2023) Matter No. 1018-00009: IRS Transfer Pricing Examination Defense Penterra Pharmaceuticals Corp. (EIN: 22-3741856) Tax Years 2017–2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641

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I. Executive Summary

The fourth quarter of 2023 (October 1 – December 31, 2023) was the most consequential quarter of this engagement since its inception. During this period, three critical milestones were reached: (1) the Internal Revenue Service issued a Notice of Proposed Adjustment ("NOPA") proposing net adjustments of $380.4 million across Tax Years 2017 through 2020; (2) the IRS issued a 30-Day Letter formally advising Penterra Pharmaceuticals Corp. ("PPC") of its right to protest the proposed adjustments and request consideration by the IRS Office of Appeals; and (3) Calderwood & Harkness LLP ("C&H") prepared and filed, on behalf of PPC, a comprehensive Formal Protest contesting the entirety of the proposed adjustments and initiating the transition of this matter to IRS Appeals.

The NOPA, issued on October 12, 2023, sets forth the IRS examination team's position across three principal adjustment categories. First, the IRS proposes adjustments to PPC's cost-sharing arrangement ("CSA") cost-sharing ratios, totaling $235.01 million for the four-year period, contending that PPC's share of intangible development costs should have been significantly higher than reported. Second, the IRS proposes adjustments to the royalty rate applied to legacy intellectual property licensed from PPC to its Irish subsidiary, Penterra Biosciences Ireland Ltd. ("PBI"), totaling $188.04 million, asserting that the arm's-length royalty rate should be 11.0% of net sales rather than the 4.5% rate applied by PPC. Third, the IRS has allowed a correlative offset of negative $42.65 million to avoid double-counting between the CSA and royalty adjustments, resulting in a net proposed adjustment of $380.40 million. In addition, the IRS has proposed a substantial valuation misstatement penalty under IRC § 6662(e) of approximately $15.98 million, calculated at 20% of the underpayment of tax attributable to the proposed § 482 allocation (i.e., $380.4 million × 21% × 20%).

The 30-Day Letter was issued on November 8, 2023, providing PPC with the right to file a formal administrative protest and request a conference with IRS Appeals. By agreement with the IRS, C&H secured an extension of the protest deadline from December 8, 2023 to December 22, 2023. The Formal Protest was filed on December 22, 2023, well within the extended deadline. The Protest comprehensively addresses each of the IRS's proposed adjustments and sets forth PPC's factual record and legal arguments in defense of its transfer pricing positions, its CSA structure, and the economic substance of PBI's operations. The Protest also advances a robust penalty protection argument grounded in PPC's contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP.

Following the filing of the Formal Protest, the case is expected to be assigned to an IRS Appeals Officer in January 2024. C&H has already filed a letter with IRS Appeals, dated January 10, 2024, requesting the scheduling of an Appeals conference and proposing dates in late February 2024.

It is C&H's assessment, based on our comprehensive review of the factual record, the applicable legal authorities, and the strengths and weaknesses of the IRS's positions, that PPC holds strong factual and legal positions on all three of the IRS's challenges — the CSA cost-sharing ratio adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge. We are confident that PPC can achieve a substantial reduction of the proposed adjustments at the Appeals level. Our preliminary hazards-of-litigation analysis supports a target settlement in the range of 10–15% of the proposed $380.4 million adjustment, which would result in a total adjusted amount of approximately $38.0 million to $57.1 million, with a corresponding tax liability of approximately $8.0 million to $12.0 million at the applicable corporate rates.

The sections that follow provide a detailed discussion of each of these developments.

II. Examination Status and Procedural Posture

A. Notice of Proposed Adjustment (NOPA) — Issued October 12, 2023

On October 12, 2023, the IRS Large Business & International Division ("LB&I") examination team issued the NOPA for all four tax years under examination (2017, 2018, 2019, and 2020). The NOPA was issued under the signatures of Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy, who have led the IRS examination since its formal commencement in 2022. The NOPA reflects the combined work product of the examination team, which has been supplemented throughout the examination by attorneys from the IRS Office of Chief Counsel — specifically, Attorney-Advisor Franklin Rosario and Senior Counsel Donna Hirabayashi — as well as IRS Economist Dr. Alan Washburne, who prepared the economic analyses underlying the IRS's proposed adjustments.

The NOPA proposes aggregate net adjustments of $380.40 million across the four tax years, organized into three principal adjustment categories, as summarized below.

1. CSA Cost-Sharing Ratio Adjustments ($235.01 Million Total)

The IRS contends that PPC understated its share of intangible development costs ("Coss") under the CSA between PPC and PBI. The CSA, which became effective on July 1, 2012, allocates coss between PPC and PBI based on each party's share of reasonably anticipated benefits ("RAB") from the intangible property developed under the arrangement. The IRS asserts that PPC's cost-sharing percentages, as reported on its returns, materially understate PPC's share of RAB and should be increased as follows:

The IRS's proposed cost-sharing percentages are derived from Dr. Washburne's analysis of the RAB projections underlying the CSA, which the IRS contends overstate the future benefits attributable to PBI's participation and understate the contribution of PPC's U.S.-based research and development activities to the value of the developed intangibles. C&H's analysis of the weaknesses in the IRS's RAB methodology is discussed in Section II.B below.

2. Legacy IP Royalty Rate Adjustments ($188.04 Million Total)

Independently of the CSA adjustments, the IRS proposes to increase the royalty rate applicable to the license of legacy intellectual property (i.e., pre-CSA intangible property) from PPC to PBI. PPC licensed certain legacy pharmaceutical intangible property to PBI at a royalty rate of 4.5% of net sales, a rate that PPC has consistently maintained is within the arm's-length range based on the comparable uncontrolled transaction ("CUT") method analysis prepared by Whitmore Valuation Group LLC ("WVG"). The IRS proposes to increase this royalty rate from 4.5% to 11.0% of net sales, an increase of 6.5 percentage points. The resulting adjustments by year are as follows:

The IRS bases its proposed 11.0% royalty rate on a set of purportedly comparable uncontrolled license agreements that Dr. Washburne identified through searches of publicly available licensing databases. As discussed in Section II.B, C&H has identified significant deficiencies in the IRS's CUT comparables, which we believe are readily distinguishable from the PPC-PBI license and do not support the proposed rate.

3. Correlative Offset (-$42.65 Million)

The IRS examination team has recognized that the simultaneous assertion of both the CSA cost-sharing adjustments and the legacy IP royalty rate adjustments creates a potential for double-counting of certain income items. To address this overlap, the NOPA includes a correlative offset of negative $42.65 million, reducing the aggregate proposed adjustment from $423.05 million ($235.01M + $188.04M) to a net proposed adjustment of $380.40 million.

4. Economic Substance Challenge

In addition to the quantitative adjustments described above, the NOPA asserts that PBI lacked sufficient economic substance to support PPC's transfer pricing positions. Specifically, the IRS contends that the key development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions with respect to PPC's pharmaceutical intangible property remained in the United States throughout the examination period, and that PBI served as little more than a conduit entity lacking genuine decision-making authority over the exploitation of the licensed and cost-shared intangibles. The IRS's economic substance challenge, while not generating an independent numerical adjustment, serves as a foundational predicate for the IRS's assertion that the arm's-length compensation attributable to PBI should be significantly lower than PPC has reported.

5. Proposed Penalty

The NOPA proposes the assertion of a substantial valuation misstatement penalty under IRC § 6662(e). The penalty is calculated at 20% of the underpayment of tax attributable to the proposed § 482 allocation. At a corporate tax rate of 21% (applicable to TY 2018–2020), the proposed penalty is approximately $15.98 million ($380.4M × 21% × 20%). We note that the IRS reserved, but did not assert, the IRC § 6662(h) gross valuation misstatement penalty, which would impose a 40% penalty rate. The non-assertion of the § 6662(h) penalty may reflect the IRS's own uncertainty regarding the magnitude of its proposed adjustments, a factor we intend to leverage in Appeals proceedings.

B. C&H Analysis of the NOPA

Upon receipt of the NOPA, C&H undertook an immediate and thorough analysis of the IRS's proposed adjustments. A detailed analysis memorandum was prepared by Garrett Simmons, Senior Associate, and Leila Nazari, Senior Associate, and was finalized on October 20, 2023. The memorandum was circulated to the full C&H engagement team and provided to PPC's in-house tax team on October 23, 2023.

The analysis identified several critical weaknesses in the IRS's positions across all three adjustment categories:

Royalty Rate — CUT Comparables. The IRS's proposed 11.0% royalty rate is derived from a set of comparable uncontrolled license agreements that are materially distinguishable from the PPC-PBI legacy IP license. In particular, several of the IRS's purported comparables involve early-stage pharmaceutical compounds with significantly different risk profiles, market exclusivity characteristics, and therapeutic areas. By contrast, WVG's analysis, which was prepared contemporaneously and updated for the examination, identified 14 comparable uncontrolled pharmaceutical license agreements that are closely analogous to the PPC-PBI arrangement. WVG's CUT analysis yields an interquartile range ("IQR") of 3.1% to 6.8%, with a median of 4.4%. PPC's 4.5% royalty rate falls squarely within this arm's-length range and is nearly identical to the median of WVG's comparable set.

CSA Cost-Sharing Percentages — RAB Methodology. The IRS's proposed cost-sharing percentages are based on Dr. Washburne's analysis of the RAB projections underlying the CSA. C&H's review has identified flawed assumptions in Dr. Washburne's RAB projections, which systematically overstate the value of U.S.-sourced activities and understate PBI's contributions to the development and commercialization of cost-shared intangibles. Specifically, Dr. Washburne's revenue projections for PBI's territory fail to account for the significantly different regulatory timelines, pricing environments, and market access dynamics applicable to PBI's 68 country markets outside the Americas. The IRS's proposed adjustments of 10.0 to 11.2 percentage points per year are not supported by the contemporaneous RAB analysis or by any recognized arm's-length methodology.

PCT Valuation — Discount Rate. The IRS's PCT valuation of $852 million is based on a discounted cash flow ("DCF") analysis using a weighted average cost of capital ("WACC") of 7.2%. C&H, in coordination with WVG, has determined that this discount rate materially understates the risk inherent in the cost-shared intangibles at the time the CSA was entered into. WVG's DCF analysis, which employs a WACC of 9.8% — reflecting a more appropriate risk-adjusted discount rate for early- to mid-stage pharmaceutical intangible development — supports a PCT payment range of $278 million to $361 million. PPC's actual PCT payment of $312 million falls within this range. The difference between the IRS's 7.2% WACC and WVG's 9.8% WACC is the single most significant driver of the divergence between the parties' PCT valuations.

PBI Economic Substance. The IRS's contention that PBI lacked sufficient economic substance is contradicted by extensive documentary evidence that C&H compiled and presented to the examination team over the course of the IDR process. At year-end 2020, PBI employed 185 personnel in Dublin, Ireland. PBI's board of directors convened 42 meetings in Dublin over the 2017–2020 period, during which substantive strategic, commercial, and operational decisions were made. PBI incurred cumulative regulatory expenditures of approximately €47.2 million across the four tax years, reflecting its direct engagement with the European Medicines Agency, the UK Medicines and Healthcare Products Regulatory Agency, and numerous national regulatory authorities. PBI maintained independent pricing authority across its 68 country markets, operated out of approximately 18,000 square feet of office space at Sandyford Business Park in Dublin, maintained independent banking relationships with Glenmore Bank Ireland plc, and was led by its Managing Director, Aidan Naughton, who exercised day-to-day operational authority. This evidence, which was presented to the examination team through IDR responses and supporting documentation, demonstrates that PBI performed meaningful DEMPE functions and was a bona fide operating entity, not a conduit.

C. 30-Day Letter — Issued November 8, 2023

On November 8, 2023, the IRS examination team issued a formal 30-Day Letter communicating PPC's right to file a Protest with the IRS and to request consideration of the proposed adjustments by the IRS Office of Appeals. The 30-Day Letter accompanied a copy of the NOPA and a copy of IRS Publication 5, Your Appeal Rights and How to Prepare a Protest, and specified a 30-day deadline from the date of issuance — i.e., originally December 8, 2023 — for the filing of any protest.

Upon receipt of the 30-Day Letter, C&H prepared an analysis memorandum, authored by Leila Nazari and dated November 12, 2023, assessing PPC's procedural options. The memorandum evaluated two principal alternatives: (1) filing a Formal Protest and pursuing resolution through IRS Appeals, or (2) declining to protest at the administrative level and proceeding directly to litigation in the United States Tax Court upon issuance of a Statutory Notice of Deficiency (90-Day Letter). The memorandum concluded, and C&H recommended, that PPC file a Formal Protest and pursue resolution at the Appeals level. This recommendation was based on several factors, including the strength of PPC's substantive positions, the historically favorable resolution rates for transfer pricing disputes at IRS Appeals, the significantly lower cost and time burden of an Appeals resolution relative to Tax Court litigation, and the opportunity to present PPC's economic analyses and factual evidence directly to an Appeals Officer with settlement authority in a non-adversarial setting.

This recommendation was communicated to Marcus Whitfield and Deborah Staines during a conference call on November 14, 2023, and was approved by PPC on the same date.

On November 15, 2023, Cross filed a letter with the IRS examination team requesting an extension of the Protest deadline from December 8, 2023 to December 22, 2023, citing the complexity of the proposed adjustments and the need for adequate time to prepare a comprehensive protest. The extension request was granted by the IRS.

D. Initial Response to NOPA

On October 25, 2023, Cross transmitted a letter to Supervisory Revenue Agent Meskill and Lead Revenue Agent Dunleavy formally acknowledging PPC's receipt of the NOPA, reserving all of PPC's rights with respect to the proposed adjustments, and advising the IRS that PPC intended to file a Formal Protest. The letter also served as an initial preservation of PPC's positions and set the stage for the subsequent extension request and Protest filing.

III. Formal Protest — Filed December 22, 2023

A. Protest Preparation Process

The preparation of the Formal Protest was the principal focus of C&H's engagement team during the months of November and December 2023. Given the complexity of the issues, the magnitude of the proposed adjustments, and the importance of establishing a comprehensive administrative record for Appeals, the Protest underwent a rigorous multi-stage drafting and review process.

Draft Version 1 was prepared by Garrett Simmons and Leila Nazari and circulated internally within C&H on December 5, 2023. This initial draft set forth the complete factual narrative and legal arguments and was subjected to review by the full C&H engagement team.

Draft Version 2 was prepared incorporating comments from Leonard Cross and Sylvia Hartwell, including revisions to the legal argument sections, refinements to the presentation of PBI's economic substance evidence, and adjustments to the penalty protection argument. Draft Version 2 was circulated on December 12, 2023, together with a redline showing all revisions from Version 1 to Version 2.

Draft Version 3 (near-final) was prepared on December 16, 2023, and transmitted to Marcus Whitfield and Deborah Staines for client review. A redline from Version 2 to Version 3 was provided concurrently to facilitate efficient client review.

Client comments were received from Whitfield on December 19, 2023. Whitfield approved the filing of the Protest with minor revisions, principally relating to the factual description of PBI's commercial operations and the characterization of certain intercompany transactions. These revisions were incorporated by the C&H team on December 20 and 21, 2023.

The final Formal Protest was filed with the IRS on December 22, 2023, within the extended deadline.

B. Protest Content Summary

The Formal Protest was filed on behalf of Penterra Pharmaceuticals Corp. and contests the entirety of the $380.40 million in proposed adjustments for Tax Years 2017 through 2020 as set forth in the NOPA. The Protest is a substantial document, running approximately 85 pages exclusive of exhibits, and is organized into the following principal sections:

Statement of Facts. The Protest opens with a comprehensive statement of facts establishing the relevant corporate structure, the CSA, and PBI's operations. The statement describes PPC's corporate structure, including the chain from Penterra Pharmaceuticals Corp. (the U.S. parent) through Penterra Holdings Ltd. ("PHL"), a disregarded entity, to Penterra Biosciences Ireland Ltd. ("PBI"), the Irish operating subsidiary, and to Penterra Manufacturing Ireland Ltd. ("PMI"), the Irish contract manufacturing entity. The statement describes in detail the CSA, which became effective on July 1, 2012, pursuant to which PPC and PBI agreed to share the costs and risks of developing pharmaceutical intangible property in exchange for the rights to exploit such property in their respective territories. The statement describes the platform contribution transaction ("PCT") payment of $312 million made by PBI to PPC at the inception of the CSA, representing compensation for PBI's use of pre-existing intangible property as a platform for further development. The statement also describes the legacy IP license agreement under which PPC licenses certain pre-CSA intangible property to PBI at a royalty rate of 4.5% of net sales. Finally, the statement sets forth detailed evidence of PBI's substantive operations in Ireland, including its personnel, facilities, regulatory activities, commercial operations, and governance.

Legal Arguments. The legal argument section of the Protest presents PPC's defense of its transfer pricing positions under the following provisions:

(a) IRC § 482 — The Protest argues that PPC's intercompany transactions, including the CSA cost-sharing ratios, the legacy IP royalty rate, and the PCT payment, are consistent with arm's-length standards and do not warrant adjustment under § 482.

(b) Treas. Reg. § 1.482-4 (Arm's-Length Royalty Rates) — The Protest defends the 4.5% royalty rate as arm's-length, supported by WVG's CUT analysis of 14 comparable uncontrolled pharmaceutical license agreements yielding an IQR of 3.1% to 6.8% and a median of 4.4%.

(c) Treas. Reg. § 1.482-7 (Qualified Cost-Sharing Arrangements) — The Protest defends PPC's cost-sharing ratios (38.2% to 42.7% for TY 2017–2020) as consistent with the RAB methodology prescribed by the regulations, and demonstrates that the IRS's proposed ratios are based on flawed RAB projections.

(d) Treas. Reg. § 1.482-1(d) (Best Method Rule) — The Protest argues that the CUT method is the best method for determining the arm's-length royalty rate and that the IRS's selection of comparables fails to satisfy the comparability requirements under the best method rule.

Defense of CSA Cost-Sharing Ratios. The Protest provides a year-by-year defense of PPC's reported cost-sharing percentages of 38.2%, 39.6%, 41.1%, and 42.7% for TY 2017 through 2020, respectively. The defense is grounded in PPC's contemporaneous RAB analysis, which accounts for the distinct market characteristics, regulatory timelines, and pricing dynamics applicable to PBI's non-Americas territory. The Protest demonstrates that the IRS's proposed increases of 10.0 to 11.2 percentage points per year are unsupported by the contemporaneous economic evidence and reflect a fundamental misallocation of RAB between the parties.

Defense of 4.5% Arm's-Length Royalty Rate. The Protest presents WVG's CUT analysis in detail, including descriptions of the 14 comparable uncontrolled pharmaceutical license agreements, a comparability analysis demonstrating the reliability of the comparables, and a statistical presentation of the IQR (3.1%–6.8%) and median (4.4%). The Protest argues that PPC's 4.5% royalty rate is squarely within the arm's-length range and is strongly supported by the most reliable comparable data available.

Defense of PCT Valuation. The Protest defends PBI's $312 million PCT payment as arm's-length, citing WVG's DCF analysis using a 9.8% WACC, which produces a valuation range of $278 million to $361 million. The Protest demonstrates that the IRS's proposed PCT valuation of $852 million is based on a materially understated discount rate (7.2% WACC) that fails to appropriately reflect the risk profile of early- to mid-stage pharmaceutical intangible development at the time the CSA was entered into.

Rebuttal of IRS Economic Substance Challenge. The Protest presents a comprehensive rebuttal of the IRS's assertion that PBI lacked economic substance. The rebuttal is supported by detailed evidence of PBI's DEMPE functions, including its workforce of 185 employees as of year-end 2020, its 42 board meetings held in Dublin over the examination period, its cumulative regulatory expenditures of approximately €47.2 million, its independent pricing authority across 68 country markets, its 18,000-square-foot Dublin office facility at Sandyford Business Park, its independent banking relationships with Glenmore Bank Ireland plc, and the leadership of its Managing Director, Aidan Naughton.

Penalty Protection Argument. The Protest advances a defense against the proposed IRC § 6662(e) substantial valuation misstatement penalty under the reasonable cause and good faith exception of IRC § 6662(e)(3)(B). The penalty protection argument is grounded in PPC's contemporaneous transfer pricing documentation, which was prepared by Crestfield & Associates LLP (Susan Lam, Transfer Pricing Partner) for each of the four tax years under examination. The documentation satisfies the requirements of IRC § 6662(e)(3)(B) and Treas. Reg. § 1.6662-6 and demonstrates that PPC's transfer pricing positions were based on a thorough analysis of the relevant facts and applicable legal authorities, prepared by qualified professionals, and maintained contemporaneously with the filing of each return. The Protest also sets forth the factors supporting a reasonable-cause defense, including the qualifications and independence of PPC's advisors, the thoroughness of the economic analyses performed, and PPC's good faith reliance on the advice of its professional advisors.

C. Protest Exhibits

The Formal Protest was accompanied by five exhibits, which are summarized below:

Exhibit A: PPC Corporate Structure Chart. A graphic organizational chart depicting PPC's relevant corporate structure, including the ownership chain from Penterra Pharmaceuticals Corp. (U.S. parent) through Penterra Holdings Ltd. (disregarded entity) to Penterra Biosciences Ireland Ltd. (Irish operating subsidiary) and Penterra Manufacturing Ireland Ltd. (Irish contract manufacturer).

Exhibit B: Summary of Cost-Sharing Arrangement. A summary of the material terms of the CSA between PPC and PBI, including the effective date (July 1, 2012), the scope of intangible development activities covered, the PCT payment of $312 million, and the cost-sharing percentages for each year from inception through TY 2020, with particular focus on the TY 2017–2020 examination period.

Exhibit C: Summary of Economic Analyses. A compilation of the economic analyses prepared by Whitmore Valuation Group LLC in support of PPC's transfer pricing positions, including the CUT analysis (14 comparables, IQR 3.1%–6.8%, median 4.4%), the comparable profits method / transactional net margin method ("CPM/TNMM") analysis, and the DCF analysis (9.8% WACC, PCT valuation range $278M–$361M).

Exhibit D: Evidence of PBI Economic Substance. A comprehensive compilation of evidence supporting PBI's economic substance, including organizational charts, employee headcount data (185 employees as of year-end 2020), a schedule of 42 board meetings held in Dublin during the examination period, a summary of €47.2 million in cumulative regulatory expenditures, documentation of PBI's 18,000-square-foot office at Sandyford Business Park, evidence of independent pricing across 68 country markets, banking documentation from Glenmore Bank Ireland plc, and the curriculum vitae and responsibilities of Managing Director Aidan Naughton.

Exhibit E: Penalty Protection Documentation. A summary of PPC's contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for TY 2017 through 2020, together with a discussion of the reasonable-cause factors supporting penalty abatement.

IV. IRS Appeals Transition

A. Case Referral to Appeals

The filing of the Formal Protest on December 22, 2023, triggers the formal referral of PPC's case from the LB&I examination team to the IRS Office of Appeals. Under established IRS procedures, the examination team will prepare an administrative case file — including the NOPA, the Protest, supporting workpapers, and the Revenue Agent's Report — and transmit it to the IRS Appeals Office for assignment to an Appeals Officer. Based on the complexity and dollar magnitude of this case, C&H anticipates that it will be assigned to an Appeals Officer from the IRS Appeals Office in Manhattan, which handles large-case transfer pricing disputes in the Northeast region.

C&H anticipates that the case will be assigned to an Appeals Officer in January 2024. On January 10, 2024, Cross filed a letter with the IRS Office of Appeals requesting the scheduling of the initial Appeals conference and proposing available dates in late February 2024. The letter also identified the anticipated participants on behalf of PPC, including Cross, Hartwell, Simmons, Whitfield, Staines, and Dr. Helena Vasquez of WVG.

B. Appeals Strategy Development

In anticipation of the transition to Appeals, C&H has commenced the development of a comprehensive Appeals strategy. The following documents have been prepared or are in progress:

Appeals Strategy Memorandum. An Appeals strategy memorandum was prepared by Cross and Hartwell, dated December 1, 2023, and provided to PPC's in-house team. The memorandum outlines C&H's recommended approach to the Appeals process, including the following:

(a) Settlement Posture and Hazards-of-Litigation Analysis. The memorandum sets forth C&H's assessment of the strengths and weaknesses of both PPC's and the IRS's positions, framed in terms of the "hazards of litigation" — i.e., the risk to each party of an adverse outcome if the case were to proceed to the United States Tax Court.

(b) Recommended Negotiating Positions. The memorandum identifies recommended opening, target, and walk-away positions for settlement negotiations.

(c) Conference Preparation Plan. The memorandum outlines the steps required to prepare for the Appeals conference, including the preparation of a conference presentation, a document binder, and talking points, as well as witness preparation for key PPC and WVG personnel.

Hazards-of-Litigation Analysis. A detailed hazards-of-litigation analysis was prepared by Cross, dated December 5, 2023, and is subject to attorney-client privilege and work-product protection. The analysis assigns probability-weighted ranges to potential Tax Court outcomes on each of the three IRS positions — the CSA cost-sharing adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge — and models the expected value of each position under various scenarios. The analysis concludes that the IRS's positions carry significant litigation risk and that a Tax Court would, more likely than not, sustain PPC's positions on the royalty rate and economic substance issues and sustain only a modest portion of the CSA adjustment.

Settlement Authority Memorandum. A settlement authority memorandum was prepared by Cross and transmitted to Whitfield and Staines on December 10, 2023. The memorandum recommends the following settlement parameters:

• Target Resolution: 10–15% of the proposed $380.4 million adjustment, or approximately $38.0 million to $57.1 million.

• Hard Ceiling: 20% of the proposed adjustment, or approximately $76.1 million.

• Illustrative Calculation: At the midpoint of the target range (12.5% of $380.4 million), the total adjustment would be approximately $47.6 million, resulting in an estimated federal income tax liability of approximately $10.0 million at the 21% corporate rate (applicable to TY 2018–2020).

The settlement authority memorandum has been discussed with Whitfield and Staines, and PPC has authorized C&H to negotiate within the parameters outlined above, subject to PPC's final approval of any settlement terms prior to execution.

Coordination with Whitmore Valuation Group. On January 5, 2024, Cross formally requested that Dr. Helena Vasquez and Dr. Rohan Chakrabarti at Whitmore Valuation Group prepare a rebuttal memorandum addressing the specific economic analyses and assumptions underlying IRS Economist Dr. Washburne's work. The rebuttal memorandum is expected to focus on Dr. Washburne's CUT selection criteria and the comparability of the IRS's purported comparable license agreements, Dr. Washburne's discount rate assumptions (the 7.2% WACC versus WVG's 9.8% WACC and the basis for the divergence), and Dr. Washburne's projected revenue growth rates for PBI's territory, which C&H believes are materially overstated. The rebuttal memorandum is anticipated to be completed in late January or early February 2024 for use in the Appeals conference.

C. Anticipated Next Steps for Q1 2024

Based on the current procedural posture, C&H anticipates the following key activities during the first quarter of 2024:

1. Assignment of Appeals Officer. The IRS Appeals Office is expected to assign an Appeals Officer to the case in January 2024. Upon assignment, C&H will promptly establish contact with the assigned officer and coordinate scheduling.

2. Appeals Conference. C&H has proposed dates for the Appeals conference in late February 2024 and anticipates that the conference will be scheduled for this timeframe. The conference is expected to be held in person at the IRS Appeals Office in Manhattan, though videoconference participation may be accommodated for certain participants.

3. Conference Preparation. C&H will prepare a comprehensive Appeals conference presentation (in Northgate Services Inc. format), a document binder containing all relevant exhibits, workpapers, and economic analyses, and detailed talking points for each presenter. These materials will be provided to PPC's in-house team for review and comment prior to the conference.

4. Witness Preparation. C&H will conduct witness preparation sessions for Marcus Whitfield, who is anticipated to address PPC's intercompany pricing decisions and PBI's operational history, and Dr. Helena Vasquez, who is anticipated to present WVG's economic analyses and to rebut Dr. Washburne's positions.

5. Supplemental Submissions. Depending on the outcome of the initial conference and any requests from the Appeals Officer, C&H may prepare supplemental written submissions addressing specific issues raised during the conference.

6. Settlement Negotiation. If the Appeals conference progresses productively, C&H anticipates entering settlement negotiations with the Appeals Officer, with the goal of reaching an agreed resolution within the settlement parameters authorized by PPC. If a settlement is reached, the parties would execute an IRS Form 906 (Closing Agreement on Final Determination Covering Specific Matters) or an equivalent agreement memorializing the terms of the resolution.

V. Coordination with Third Parties

A. Whitmore Valuation Group LLC

Dr. Helena Vasquez and Dr. Rohan Chakrabarti of Whitmore Valuation Group LLC ("WVG") have served as PPC's economic experts throughout this engagement. WVG was retained under a Kovel arrangement pursuant to a Kovel letter executed on June 20, 2022 (reference number 1018-00009-KV), which provides that WVG's work is performed at the direction of C&H and is protected by the attorney-client privilege and the work-product doctrine.

WVG's work product has been central to PPC's defense on all three of the IRS's proposed adjustment categories. WVG prepared the CUT analysis supporting the 4.5% arm's-length royalty rate, the DCF analysis supporting the $312 million PCT payment, and the RAB analysis supporting PPC's cost-sharing percentages. WVG has also provided invaluable support throughout the IDR process, including the preparation of responses to the IRS's economic information requests and the review and analysis of Dr. Washburne's work product as disclosed through the examination process.

As noted above, on January 5, 2024, Cross requested that Dr. Vasquez and Dr. Chakrabarti prepare a rebuttal memorandum of Dr. Washburne's analysis for use in the Appeals proceedings. The rebuttal will specifically address Dr. Washburne's CUT selection criteria and the comparability deficiencies in the IRS's purported comparable license agreements, Dr. Washburne's discount rate assumptions (7.2% WACC versus WVG's 9.8% WACC) and the methodological basis for the divergence, and Dr. Washburne's projected revenue growth rates for PBI's territory markets.

WVG's professional fees billed through December 31, 2023, are running at a total approaching $2.1 million, calculated at a blended hourly rate of approximately $650 per hour. Remaining WVG work in connection with this engagement is expected to include the completion of the rebuttal memorandum and support for the Appeals conference, including potential testimony by Dr. Vasquez.

B. Crestfield & Associates LLP

Crestfield & Associates LLP ("Crestfield") serves as PPC's transfer pricing documentation provider and has prepared contemporaneous transfer pricing documentation for PPC for each of the four tax years under examination. The documentation was prepared under the direction of Susan Lam, Transfer Pricing Partner at Crestfield. As described in Section III.B, this contemporaneous documentation is a critical element of PPC's penalty protection argument under IRC § 6662(e)(3)(B).

During Q4 2023, Crestfield provided an updated FIN 48 / ASC 740-10 support letter to Martin Ogilvy (PPC's Director of Tax Reporting) on November 20, 2023. The support letter provides revised legal conclusions regarding the technical merits of PPC's transfer pricing positions following the issuance of the NOPA, for use by PPC in connection with its year-end 2023 financial statement uncertain tax position reserve analysis. Based on PPC's assessment, supported by the Crestfield analysis and C&H's legal conclusions, PPC has established a pre-settlement FIN 48 reserve for its transfer pricing positions of $62.4 million.

C&H continues to coordinate with Crestfield on an ongoing basis regarding return data, contemporaneous documentation updates, and the integration of Crestfield's documentation into the Protest and Appeals submissions.

C. Thornbury & Keogh (Irish Tax Advisors)

Thornbury & Keogh ("T&K"), an Irish tax advisory firm based in Dublin, has been engaged to advise on dual-jurisdiction aspects of PPC's defense. Ciarán Thornbury, the firm's managing partner, has served as the primary advisor. T&K's role has focused on the Irish tax implications of the IRS's proposed adjustments and any potential settlement, with particular attention to the following issues:

(a) The impact of any agreed adjustment on PBI's eligibility for, and the quantum of benefits under, Ireland's Knowledge Development box ("KDB") regime, which provides an effective corporate tax rate of 6.25% on qualifying income derived from qualifying intellectual property.

(b) The interaction of any adjustment with PBI's Irish standard trading income, which is subject to the 12.5% Irish corporate tax rate.

(c) The potential availability of relief under the Mutual Agreement Procedure ("MAP") provisions of the U.S.-Ireland Income Tax Treaty (discussed further in Section VI.C below).

T&K's professional fees billed through December 31, 2023, are approximately €280,000.

VI. Collateral Matters

A. SEC Disclosure Considerations

In November 2023, Garrett Simmons prepared an analysis memorandum assessing PPC's disclosure obligations under the federal securities laws in connection with the IRS's proposed $380.4 million adjustment. The memorandum evaluated PPC's obligations under Item 303 of Regulation S-K (Management's Discussion and Analysis), ASC 450 (Contingencies), and ASC 740-10 (Accounting for Uncertainty in Income Taxes) as they relate to the disclosure of the IRS examination and the proposed adjustments in PPC's Form 10-K for the fiscal year ending December 31, 2023, and any interim Form 10-Q filings.

The memorandum noted that PPC's institutional shareholder base includes significant sophisticated investors, including Ridgeview Capital Management LP (an 8.3% institutional shareholder managed by Douglas Everett), who actively monitor FIN 48 / ASC 740-10 disclosures and uncertain tax position reserves. The memorandum recommended that PPC ensure that its disclosure language appropriately reflects the existence of the IRS examination, the proposed adjustments, and PPC's position that it has meritorious defenses, while avoiding disclosure of privileged settlement positions or legal strategy.

Guidance based on this analysis was provided to Deborah Staines, General Counsel, via email dated November 25, 2023. C&H remains available to review draft disclosure language for PPC's year-end filings.

B. Hargrove National Bank Credit Facility Covenants

In November 2023, Leila Nazari prepared an analysis memorandum reviewing the potential impact of the IRS's proposed adjustments on PPC's obligations under its $1.5 billion revolving credit facility with Hargrove National Bank, N.A. (Christine Bellucci, SVP, Relationship Manager). The memorandum focused on two provisions of the credit agreement that could potentially be implicated by the IRS examination:

(a) Tax Indemnity Covenants. The credit agreement contains representations and covenants relating to PPC's tax compliance and the absence of material tax liabilities not reflected in PPC's financial statements. The memorandum analyzed whether the NOPA constitutes a breach of any such representation or covenant.

(b) Material Tax Event Covenants. The credit agreement defines "Material Tax Event" and includes notification and potential default provisions triggered by the occurrence of a Material Tax Event. The memorandum analyzed whether the NOPA constitutes a Material Tax Event as defined in the credit agreement.

The memorandum concluded that the issuance of the NOPA does not constitute a "Material Tax Event" as defined in the credit agreement, principally because the NOPA is a proposed adjustment that has not been agreed to by PPC and is not a final assessment or determination. Accordingly, the NOPA does not trigger a default or mandatory prepayment obligation under the credit facility. However, the memorandum recommended that PPC continue to monitor the status of the IRS examination and be prepared to provide notice to Hargrove National Bank in the event that a final assessment is issued, a closing agreement is executed, or a Tax Court petition is filed, any of which could potentially constitute a Material Tax Event depending on the amounts involved.

C. TCJA Considerations

The Tax Cuts and Jobs Act of 2017 ("TCJA") has significant implications for this engagement, given that the examination period spans both the pre-TCJA and post-TCJA environments. Tax Year 2017 is subject to the 35% corporate tax rate in effect prior to the enactment of the TCJA, while Tax Years 2018 through 2020 are subject to the 21% corporate tax rate enacted by the TCJA. This rate differential affects the calculation of tax deficiencies and penalties associated with the proposed adjustments and must be considered in any settlement negotiation.

In addition, the TCJA introduced the global intangible low-taxed income ("GILTI") provisions under IRC § 951A and the base erosion and anti-abuse tax ("BEAT") provisions under IRC § 59A, both of which interact with the proposed § 482 adjustments for TY 2018–2020. The interaction of GILTI and BEAT with the proposed adjustments was previously analyzed in a memorandum prepared by Leila Nazari in October 2022, which assessed the secondary effects of the proposed adjustments on PPC's GILTI inclusion and BEAT liability. That analysis remains current and has been incorporated into C&H's overall assessment of PPC's exposure.

Finally, Cross prepared an analysis in December 2023 evaluating the potential availability of relief under the competent authority / Mutual Agreement Procedure ("MAP") provisions of the U.S.-Ireland Income Tax Treaty (Article 25). Under the MAP, if a U.S. transfer pricing adjustment results in double taxation of the same income — i.e., taxation by the United States on income that has already been taxed by Ireland in the hands of PBI — PPC may request that the U.S. and Irish competent authorities negotiate a correlative adjustment to eliminate the double taxation. Cross's analysis concluded that MAP relief may be available and may be a valuable tool if PPC is unable to achieve a satisfactory resolution at the Appeals level. However, MAP proceedings are typically lengthy and uncertain, and C&H recommends pursuing them only as a fallback if Appeals negotiations do not result in a satisfactory outcome.

D. Statute of Limitations

The statute of limitations for assessment of additional tax is a critical consideration for the timing of any resolution. The current status of the statute for each tax year is as follows:

PPC and the IRS have executed Form 872 (Consent to Extend the Time to Assess Tax) for Tax Year 2017 and Tax Year 2018, extending the assessment statute of limitations through December 31, 2024. This date represents a hard deadline: if the case is not resolved — either through Appeals settlement or issuance of a Statutory Notice of Deficiency — prior to December 31, 2024, the IRS will lose its ability to assess additional tax for TY 2017 and TY 2018.

Tax Years 2019 and 2020 remain within their original statutory assessment periods, which do not expire until 2023 and 2024, respectively, under the three-year general rule of IRC § 6501(a) (or later, if the six-year statute of IRC § 6501(e) applies due to the magnitude of the proposed adjustments). In either event, the original expiration dates for TY 2019 and TY 2020 provide sufficient time for the anticipated Appeals resolution in Q1 2024.

C&H is closely monitoring the statute dates and will advise PPC of any need for further extensions as the Appeals process progresses. In particular, if the Appeals process extends beyond Q1 2024 and the December 31, 2024 extended deadline for TY 2017 and TY 2018 comes under pressure, C&H will assess whether to grant a further extension or allow the statute to expire for those years.

VII. IDR Process — Final Status

The Information Document Request ("IDR") process has been fully completed. Over the course of the examination, the IRS issued a total of 47 IDRs, all of which were responded to by C&H on behalf of PPC. The final IDR — IDR No. 47 — was issued by the IRS in September 2023, and C&H filed its response on September 29, 2023. The IDR period concluded with the filing of that final response, and no further IDRs are outstanding.

C&H has maintained a master IDR tracker throughout the examination, cataloguing each IDR by number, date of issuance, subject matter, response deadline, date of response, and status. The master tracker reflects that all 47 IDRs have been fully satisfied and that no outstanding items remain. In addition, C&H has maintained a master document production index identifying all documents produced to the IRS over the course of the examination, organized by Bates number, date of production, and IDR reference. The master document production index encompasses thousands of pages of documents produced across multiple productions.

C&H has also maintained a privilege log listing all documents withheld from production under claims of attorney-client privilege and/or the work-product doctrine. The privilege log has been updated on a rolling basis throughout the examination and reflects all withheld documents through the close of the IDR process. No privilege challenges were asserted by the IRS examination team with respect to any entries on the privilege log.

VIII. Financial Summary — Fees and Budget

A. Calderwood & Harkness LLP Fees

Total C&H professional fees billed through December 31, 2023, are approximately $4.9 million. This reflects professional time expended by the engagement team from the commencement of the engagement through the end of Q4 2023, including the preparation of all IDR responses, the analysis and response to the NOPA, the preparation and filing of the Formal Protest, and the development of the Appeals strategy.

The 2023 billing rates reflect annual adjustments from the 2022 rate schedule, consistent with the firm's standard annual rate adjustment process. The 2024 rate schedule became effective on January 1, 2024, and will apply to all professional time expended from that date forward. Updated rate information has been provided to PPC under separate cover.

The engagement remains within the estimated fee range of $4.5 million to $7.0 million communicated to PPC in the engagement letter dated June 2, 2022. Based on the current posture of the matter and the anticipated scope of work required for the Appeals process, Sylvia Hartwell has reviewed the budget projections and estimates that total C&H professional fees through the resolution of the Appeals process will be in the range of $5.5 million to $6.0 million. This projection assumes that the Appeals conference is held in late February 2024, that settlement negotiations proceed during Q1 2024, and that the matter is resolved through Appeals without the need for Tax Court litigation. Should the case proceed to the Tax Court, the estimated fee range would need to be revised significantly upward.

B. Whitmore Valuation Group LLC Fees

WVG professional fees billed through December 31, 2023, total approximately $2.0 million. Remaining WVG work includes the preparation of the rebuttal memorandum addressing Dr. Washburne's analyses and support for the Appeals conference, including potential testimony by Dr. Vasquez. C&H estimates that the total WVG engagement cost upon conclusion of the matter will be approximately $2.15 million.

C. Thornbury & Keogh Fees

T&K professional fees billed through December 31, 2023, total approximately €280,000. Remaining T&K work relates to the assessment of Irish tax implications of any settlement and potential MAP coordination. C&H anticipates that total T&K fees will be approximately €312,500 upon conclusion of the matter.

D. Summary of Professional Fees to Date

The following table summarizes combined professional fees billed through December 31, 2023:

The original estimated C&H fee range of $4.5 million to $7.0 million was established at the outset of the engagement based on a range of assumptions regarding the complexity and duration of the IRS examination. The engagement is tracking within the upper portion of this range, which is consistent with the scope and intensity of the examination, including the issuance of 47 IDRs, the IRS's engagement of an economist and Chief Counsel attorneys, and the significant dollar magnitude of the proposed adjustments.

IX. Key Products and Financial Context

For reference, the following is a summary of the key PPC pharmaceutical products relevant to the IRS examination and their financial performance. These products constitute the principal revenue-generating assets at the center of the CSA and legacy IP license arrangements under challenge by the IRS:

Veritaxol (oncology therapeutic): FY 2020 global net sales of $3.12 billion, of which non-Americas net sales were $1.34 billion. Veritaxol is PPC's flagship product and the single largest contributor to the intangible value at issue in this examination.

Imvara (immunology therapeutic): FY 2020 global net sales of $1.87 billion, of which non-Americas net sales were $0.79 billion. Imvara has experienced strong growth in PBI's European and Asia-Pacific markets during the examination period.

Cerulon (rare disease therapeutic): FY 2020 global net sales of $0.62 billion, of which non-Americas net sales were $0.28 billion. As a rare disease product, Cerulon commands premium pricing but serves a smaller patient population.

PPC's consolidated FY 2020 total revenue was $6.82 billion, with pre-tax income of $1.47 billion. PBI reported FY 2020 revenue of €2.14 billion and pre-tax income of €1.06 billion. These financial figures underscore both the materiality of the intercompany transactions at issue and the significance of PBI as a substantive operating entity within the PPC corporate group.

X. Key Upcoming Dates and Action Items

The following table sets forth the key dates and action items anticipated for Q1 2024:

C&H will provide a supplemental update to PPC following the assignment of the Appeals Officer and the scheduling of the Appeals conference.

XI. Conclusion and Recommendations

The filing of the Formal Protest on December 22, 2023, represents the culmination of the examination phase of this engagement and the commencement of the Appeals phase. The Protest positions PPC's defense comprehensively and forcefully on all three of the IRS's proposed adjustment categories — the CSA cost-sharing ratio adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge — as well as on the penalty protection issue.

Based on our thorough analysis of the factual record, the applicable legal authorities, the strengths and weaknesses of the IRS's positions, and the hazards of litigation that the IRS would face in the United States Tax Court, C&H makes the following recommendations:

1. Pursue Aggressive Settlement at Appeals. PPC should pursue aggressive settlement negotiations at the Appeals level, targeting a resolution in the range of 10–15% of the proposed $380.4 million adjustment (approximately $38.0 million to $57.1 million), with a hard ceiling of 20% of the proposed adjustment (approximately $76.1 million). This target range reflects C&H's assessment of the probability-weighted outcomes of Tax Court litigation and represents a range within which both parties can achieve a reasonable resolution of the dispute.

2. Maintain Strong Advocacy on All Three Issues. PPC should maintain its position that the IRS's proposed adjustments are without merit on all three issues. The strength of PPC's positions — particularly on the arm's-length royalty rate and PBI's economic substance — provides significant leverage in settlement negotiations and should not be conceded prematurely.

3. Leverage Penalty Protection. PPC's contemporaneous transfer pricing documentation, prepared by Crestfield & Associates, provides a strong foundation for penalty abatement. The elimination of the proposed $15.98 million penalty should be a primary objective in any settlement negotiation.

4. Prepare for Contingencies. While C&H is confident in PPC's ability to achieve a favorable resolution at Appeals, PPC should be prepared for the possibility that settlement negotiations do not produce an acceptable outcome. In that event, PPC's options would include proceeding to Tax Court litigation, pursuing MAP relief under the U.S.-Ireland Income Tax Treaty, or a combination of both.

C&H has strong confidence in PPC's arm's-length positions, in the economic substance of PBI's operations, and in the quality and sufficiency of the contemporaneous documentation supporting penalty abatement. We believe PPC is well-positioned for the Appeals phase and anticipate a resolution that reflects the strength of PPC's positions.

Leonard Cross and Sylvia Hartwell are available to discuss this report and to coordinate Appeals preparation at PPC's convenience. We suggest scheduling a call or meeting in the week of January 15, 2024, to review the Appeals strategy and settlement parameters in advance of the anticipated assignment of the Appeals Officer.

XII. Distribution and Confidentiality Notice

This report is marked Privileged and Confidential — Attorney-Client Communication / Attorney Work Product and is protected by the attorney-client privilege, the work-product doctrine, and all other applicable privileges and protections.

Distribution of this report is limited to the addressees — Marcus Whitfield, VP Global Tax; Deborah Staines, General Counsel; and Rajesh Iyer, Chief Financial Officer — and such additional Penterra Pharmaceuticals Corp. personnel as may be designated by the addressees on a need-to-know basis. This report is not to be shared with, or disclosed to, any person or entity outside of Penterra Pharmaceuticals Corp. without the prior written consent of Calderwood & Harkness LLP.

The legal analyses, strategic assessments, settlement recommendations, and other work product contained in this report reflect the professional judgment of Calderwood & Harkness LLP as of the date hereof and are provided for the sole use and benefit of Penterra Pharmaceuticals Corp. in connection with the matters described herein.

Calderwood & Harkness LLP Matter No. 1018-00009

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross Responsible Partner

By: ________

Sylvia Hartwell Billing Partner

Date: January 5, 2024

C&H Matter No. 1018-00009	IRS Exam Team ID: LB&I-NE-TP-2022-00641	PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT	This document is not to be reproduced or distributed without the prior written consent of Calderwood & Harkness LLP.
Tax Year	PPC Reported Share	IRS Proposed Share	Adjustment (pp)	R&D Cost Base	Proposed Adjustment
2017	38.2%	48.2%	+10.0	$487.3M	$48.73M
2018	39.6%	50.6%	+11.0	$523.8M	$57.61M
2019	41.1%	52.3%	+11.2	$561.2M	$62.85M
2020	42.7%	53.7%	+11.0	$598.4M	$65.82M
Total	$235.01M
Tax Year	PBI Net Sales Subject to Royalty	Rate Adjustment	Proposed Adjustment
2017	$814.6M	6.5%	$52.95M
2018	$762.3M	6.5%	$49.55M
2019	$691.8M	6.5%	$44.97M
2020	$624.1M	6.5%	$40.57M
Total	$188.04M
Firm	Fees Through Q4 2023	Estimated Total
Calderwood & Harkness LLP	~$4.9M	$5.5M–$6.0M
Whitmore Valuation Group LLC	~$2.0M	~$2.15M
Thornbury & Keogh	~€280,000 (~$310K)	~€312,500 (~$345K)
Combined Total	~$7.2M	~$7.8M–$8.5M
Target Date	Action Item	Responsible Party
January 2024	Assignment of IRS Appeals Officer (expected)	IRS Appeals
January 10, 2024	Letter filed requesting scheduling of Appeals conference and proposing dates	Leonard Cross
January 2024	WVG rebuttal memorandum of Dr. Washburne analysis (in progress)	Dr. Vasquez / Dr. Chakrabarti
February 2024	Preparation of Appeals conference presentation (Northgate Services Inc.), document binder, and talking points	C&H engagement team
February 2024	Witness preparation sessions for Marcus Whitfield and Dr. Helena Vasquez	Cross / Hartwell / Simmons
Late February 2024 (target)	Appeals conference	Cross, Hartwell, Simmons, Whitfield, Staines, Dr. Vasquez

Q1 2024	Settlement negotiation and potential execution of IRS Form 906 Closing Agreement	Cross / IRS Appeals Officer
December 31, 2024	Expiration of extended statute of limitations for TY 2017 and TY 2018 (hard deadline — monitor)	C&H / PPC Tax Department

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
January 5, 2024
MEMORANDUM
FROM: Leonard Cross, Responsible Partner, and Sylvia Hartwell, Billing Partner, Calderwood & Harkness LLP
TO: Marcus Whitfield, Vice President — Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp.
RE: Quarterly Status Report — Q4 2023 (October 1 – December 31, 2023) Matter No. 1018-00009: IRS Transfer Pricing Examination Defense Penterra Pharmaceuticals Corp. (EIN: 22-3741856) Tax Years 2017–2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641
Right-click to update Table of Contents
I. Executive Summary
The fourth quarter of 2023 (October 1 – December 31, 2023) was the most consequential quarter of this engagement since its inception. During this period, three critical milestones were reached: (1) the Internal Revenue Service issued a Notice of Proposed Adjustment ("NOPA") proposing net adjustments of $380.4 million across Tax Years 2017 through 2020; (2) the IRS issued a 30-Day Letter formally advising Penterra Pharmaceuticals Corp. ("PPC") of its right to protest the proposed adjustments and request consideration by the IRS Office of Appeals; and (3) Calderwood & Harkness LLP ("C&H") prepared and filed, on behalf of PPC, a comprehensive Formal Protest contesting the entirety of the proposed adjustments and initiating the transition of this matter to IRS Appeals.
The NOPA, issued on October 12, 2023, sets forth the IRS examination team's position across three principal adjustment categories. First, the IRS proposes adjustments to PPC's cost-sharing arrangement ("CSA") cost-sharing ratios, totaling $235.01 million for the four-year period, contending that PPC's share of intangible development costs should have been significantly higher than reported. Second, the IRS proposes adjustments to the royalty rate applied to legacy intellectual property licensed from PPC to its Irish subsidiary, Penterra Biosciences Ireland Ltd. ("PBI"), totaling $188.04 million, asserting that the arm's-length royalty rate should be 11.0% of net sales rather than the 4.5% rate applied by PPC. Third, the IRS has allowed a correlative offset of negative $42.65 million to avoid double-counting between the CSA and royalty adjustments, resulting in a net proposed adjustment of $380.40 million. In addition, the IRS has proposed a substantial valuation misstatement penalty under IRC § 6662(e) of approximately $15.98 million, calculated at 20% of the underpayment of tax attributable to the proposed § 482 allocation (i.e., $380.4 million × 21% × 20%).
The 30-Day Letter was issued on November 8, 2023, providing PPC with the right to file a formal administrative protest and request a conference with IRS Appeals. By agreement with the IRS, C&H secured an extension of the protest deadline from December 8, 2023 to December 22, 2023. The Formal Protest was filed on December 22, 2023, well within the extended deadline. The Protest comprehensively addresses each of the IRS's proposed adjustments and sets forth PPC's factual record and legal arguments in defense of its transfer pricing positions, its CSA structure, and the economic substance of PBI's operations. The Protest also advances a robust penalty protection argument grounded in PPC's contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP.
Following the filing of the Formal Protest, the case is expected to be assigned to an IRS Appeals Officer in January 2024. C&H has already filed a letter with IRS Appeals, dated January 10, 2024, requesting the scheduling of an Appeals conference and proposing dates in late February 2024.
It is C&H's assessment, based on our comprehensive review of the factual record, the applicable legal authorities, and the strengths and weaknesses of the IRS's positions, that PPC holds strong factual and legal positions on all three of the IRS's challenges — the CSA cost-sharing ratio adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge. We are confident that PPC can achieve a substantial reduction of the proposed adjustments at the Appeals level. Our preliminary hazards-of-litigation analysis supports a target settlement in the range of 10–15% of the proposed $380.4 million adjustment, which would result in a total adjusted amount of approximately $38.0 million to $57.1 million, with a corresponding tax liability of approximately $8.0 million to $12.0 million at the applicable corporate rates.
The sections that follow provide a detailed discussion of each of these developments.
II. Examination Status and Procedural Posture
A. Notice of Proposed Adjustment (NOPA) — Issued October 12, 2023
On October 12, 2023, the IRS Large Business & International Division ("LB&I") examination team issued the NOPA for all four tax years under examination (2017, 2018, 2019, and 2020). The NOPA was issued under the signatures of Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy, who have led the IRS examination since its formal commencement in 2022. The NOPA reflects the combined work product of the examination team, which has been supplemented throughout the examination by attorneys from the IRS Office of Chief Counsel — specifically, Attorney-Advisor Franklin Rosario and Senior Counsel Donna Hirabayashi — as well as IRS Economist Dr. Alan Washburne, who prepared the economic analyses underlying the IRS's proposed adjustments.
The NOPA proposes aggregate net adjustments of $380.40 million across the four tax years, organized into three principal adjustment categories, as summarized below.
1. CSA Cost-Sharing Ratio Adjustments ($235.01 Million Total)
The IRS contends that PPC understated its share of intangible development costs ("Coss") under the CSA between PPC and PBI. The CSA, which became effective on July 1, 2012, allocates coss between PPC and PBI based on each party's share of reasonably anticipated benefits ("RAB") from the intangible property developed under the arrangement. The IRS asserts that PPC's cost-sharing percentages, as reported on its returns, materially understate PPC's share of RAB and should be increased as follows:
The IRS's proposed cost-sharing percentages are derived from Dr. Washburne's analysis of the RAB projections underlying the CSA, which the IRS contends overstate the future benefits attributable to PBI's participation and understate the contribution of PPC's U.S.-based research and development activities to the value of the developed intangibles. C&H's analysis of the weaknesses in the IRS's RAB methodology is discussed in Section II.B below.
2. Legacy IP Royalty Rate Adjustments ($188.04 Million Total)
Independently of the CSA adjustments, the IRS proposes to increase the royalty rate applicable to the license of legacy intellectual property (i.e., pre-CSA intangible property) from PPC to PBI. PPC licensed certain legacy pharmaceutical intangible property to PBI at a royalty rate of 4.5% of net sales, a rate that PPC has consistently maintained is within the arm's-length range based on the comparable uncontrolled transaction ("CUT") method analysis prepared by Whitmore Valuation Group LLC ("WVG"). The IRS proposes to increase this royalty rate from 4.5% to 11.0% of net sales, an increase of 6.5 percentage points. The resulting adjustments by year are as follows:
The IRS bases its proposed 11.0% royalty rate on a set of purportedly comparable uncontrolled license agreements that Dr. Washburne identified through searches of publicly available licensing databases. As discussed in Section II.B, C&H has identified significant deficiencies in the IRS's CUT comparables, which we believe are readily distinguishable from the PPC-PBI license and do not support the proposed rate.
3. Correlative Offset (-$42.65 Million)
The IRS examination team has recognized that the simultaneous assertion of both the CSA cost-sharing adjustments and the legacy IP royalty rate adjustments creates a potential for double-counting of certain income items. To address this overlap, the NOPA includes a correlative offset of negative $42.65 million, reducing the aggregate proposed adjustment from $423.05 million ($235.01M + $188.04M) to a net proposed adjustment of $380.40 million.
4. Economic Substance Challenge
In addition to the quantitative adjustments described above, the NOPA asserts that PBI lacked sufficient economic substance to support PPC's transfer pricing positions. Specifically, the IRS contends that the key development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions with respect to PPC's pharmaceutical intangible property remained in the United States throughout the examination period, and that PBI served as little more than a conduit entity lacking genuine decision-making authority over the exploitation of the licensed and cost-shared intangibles. The IRS's economic substance challenge, while not generating an independent numerical adjustment, serves as a foundational predicate for the IRS's assertion that the arm's-length compensation attributable to PBI should be significantly lower than PPC has reported.
5. Proposed Penalty
The NOPA proposes the assertion of a substantial valuation misstatement penalty under IRC § 6662(e). The penalty is calculated at 20% of the underpayment of tax attributable to the proposed § 482 allocation. At a corporate tax rate of 21% (applicable to TY 2018–2020), the proposed penalty is approximately $15.98 million ($380.4M × 21% × 20%). We note that the IRS reserved, but did not assert, the IRC § 6662(h) gross valuation misstatement penalty, which would impose a 40% penalty rate. The non-assertion of the § 6662(h) penalty may reflect the IRS's own uncertainty regarding the magnitude of its proposed adjustments, a factor we intend to leverage in Appeals proceedings.
B. C&H Analysis of the NOPA
Upon receipt of the NOPA, C&H undertook an immediate and thorough analysis of the IRS's proposed adjustments. A detailed analysis memorandum was prepared by Garrett Simmons, Senior Associate, and Leila Nazari, Senior Associate, and was finalized on October 20, 2023. The memorandum was circulated to the full C&H engagement team and provided to PPC's in-house tax team on October 23, 2023.
The analysis identified several critical weaknesses in the IRS's positions across all three adjustment categories:
Royalty Rate — CUT Comparables. The IRS's proposed 11.0% royalty rate is derived from a set of comparable uncontrolled license agreements that are materially distinguishable from the PPC-PBI legacy IP license. In particular, several of the IRS's purported comparables involve early-stage pharmaceutical compounds with significantly different risk profiles, market exclusivity characteristics, and therapeutic areas. By contrast, WVG's analysis, which was prepared contemporaneously and updated for the examination, identified 14 comparable uncontrolled pharmaceutical license agreements that are closely analogous to the PPC-PBI arrangement. WVG's CUT analysis yields an interquartile range ("IQR") of 3.1% to 6.8%, with a median of 4.4%. PPC's 4.5% royalty rate falls squarely within this arm's-length range and is nearly identical to the median of WVG's comparable set.
CSA Cost-Sharing Percentages — RAB Methodology. The IRS's proposed cost-sharing percentages are based on Dr. Washburne's analysis of the RAB projections underlying the CSA. C&H's review has identified flawed assumptions in Dr. Washburne's RAB projections, which systematically overstate the value of U.S.-sourced activities and understate PBI's contributions to the development and commercialization of cost-shared intangibles. Specifically, Dr. Washburne's revenue projections for PBI's territory fail to account for the significantly different regulatory timelines, pricing environments, and market access dynamics applicable to PBI's 68 country markets outside the Americas. The IRS's proposed adjustments of 10.0 to 11.2 percentage points per year are not supported by the contemporaneous RAB analysis or by any recognized arm's-length methodology.
PCT Valuation — Discount Rate. The IRS's PCT valuation of $852 million is based on a discounted cash flow ("DCF") analysis using a weighted average cost of capital ("WACC") of 7.2%. C&H, in coordination with WVG, has determined that this discount rate materially understates the risk inherent in the cost-shared intangibles at the time the CSA was entered into. WVG's DCF analysis, which employs a WACC of 9.8% — reflecting a more appropriate risk-adjusted discount rate for early- to mid-stage pharmaceutical intangible development — supports a PCT payment range of $278 million to $361 million. PPC's actual PCT payment of $312 million falls within this range. The difference between the IRS's 7.2% WACC and WVG's 9.8% WACC is the single most significant driver of the divergence between the parties' PCT valuations.
PBI Economic Substance. The IRS's contention that PBI lacked sufficient economic substance is contradicted by extensive documentary evidence that C&H compiled and presented to the examination team over the course of the IDR process. At year-end 2020, PBI employed 185 personnel in Dublin, Ireland. PBI's board of directors convened 42 meetings in Dublin over the 2017–2020 period, during which substantive strategic, commercial, and operational decisions were made. PBI incurred cumulative regulatory expenditures of approximately €47.2 million across the four tax years, reflecting its direct engagement with the European Medicines Agency, the UK Medicines and Healthcare Products Regulatory Agency, and numerous national regulatory authorities. PBI maintained independent pricing authority across its 68 country markets, operated out of approximately 18,000 square feet of office space at Sandyford Business Park in Dublin, maintained independent banking relationships with Glenmore Bank Ireland plc, and was led by its Managing Director, Aidan Naughton, who exercised day-to-day operational authority. This evidence, which was presented to the examination team through IDR responses and supporting documentation, demonstrates that PBI performed meaningful DEMPE functions and was a bona fide operating entity, not a conduit.
C. 30-Day Letter — Issued November 8, 2023
On November 8, 2023, the IRS examination team issued a formal 30-Day Letter communicating PPC's right to file a Protest with the IRS and to request consideration of the proposed adjustments by the IRS Office of Appeals. The 30-Day Letter accompanied a copy of the NOPA and a copy of IRS Publication 5, Your Appeal Rights and How to Prepare a Protest, and specified a 30-day deadline from the date of issuance — i.e., originally December 8, 2023 — for the filing of any protest.
Upon receipt of the 30-Day Letter, C&H prepared an analysis memorandum, authored by Leila Nazari and dated November 12, 2023, assessing PPC's procedural options. The memorandum evaluated two principal alternatives: (1) filing a Formal Protest and pursuing resolution through IRS Appeals, or (2) declining to protest at the administrative level and proceeding directly to litigation in the United States Tax Court upon issuance of a Statutory Notice of Deficiency (90-Day Letter). The memorandum concluded, and C&H recommended, that PPC file a Formal Protest and pursue resolution at the Appeals level. This recommendation was based on several factors, including the strength of PPC's substantive positions, the historically favorable resolution rates for transfer pricing disputes at IRS Appeals, the significantly lower cost and time burden of an Appeals resolution relative to Tax Court litigation, and the opportunity to present PPC's economic analyses and factual evidence directly to an Appeals Officer with settlement authority in a non-adversarial setting.
This recommendation was communicated to Marcus Whitfield and Deborah Staines during a conference call on November 14, 2023, and was approved by PPC on the same date.
On November 15, 2023, Cross filed a letter with the IRS examination team requesting an extension of the Protest deadline from December 8, 2023 to December 22, 2023, citing the complexity of the proposed adjustments and the need for adequate time to prepare a comprehensive protest. The extension request was granted by the IRS.
D. Initial Response to NOPA
On October 25, 2023, Cross transmitted a letter to Supervisory Revenue Agent Meskill and Lead Revenue Agent Dunleavy formally acknowledging PPC's receipt of the NOPA, reserving all of PPC's rights with respect to the proposed adjustments, and advising the IRS that PPC intended to file a Formal Protest. The letter also served as an initial preservation of PPC's positions and set the stage for the subsequent extension request and Protest filing.
III. Formal Protest — Filed December 22, 2023
A. Protest Preparation Process
The preparation of the Formal Protest was the principal focus of C&H's engagement team during the months of November and December 2023. Given the complexity of the issues, the magnitude of the proposed adjustments, and the importance of establishing a comprehensive administrative record for Appeals, the Protest underwent a rigorous multi-stage drafting and review process.
Draft Version 1 was prepared by Garrett Simmons and Leila Nazari and circulated internally within C&H on December 5, 2023. This initial draft set forth the complete factual narrative and legal arguments and was subjected to review by the full C&H engagement team.
Draft Version 2 was prepared incorporating comments from Leonard Cross and Sylvia Hartwell, including revisions to the legal argument sections, refinements to the presentation of PBI's economic substance evidence, and adjustments to the penalty protection argument. Draft Version 2 was circulated on December 12, 2023, together with a redline showing all revisions from Version 1 to Version 2.
Draft Version 3 (near-final) was prepared on December 16, 2023, and transmitted to Marcus Whitfield and Deborah Staines for client review. A redline from Version 2 to Version 3 was provided concurrently to facilitate efficient client review.
Client comments were received from Whitfield on December 19, 2023. Whitfield approved the filing of the Protest with minor revisions, principally relating to the factual description of PBI's commercial operations and the characterization of certain intercompany transactions. These revisions were incorporated by the C&H team on December 20 and 21, 2023.
The final Formal Protest was filed with the IRS on December 22, 2023, within the extended deadline.
B. Protest Content Summary
The Formal Protest was filed on behalf of Penterra Pharmaceuticals Corp. and contests the entirety of the $380.40 million in proposed adjustments for Tax Years 2017 through 2020 as set forth in the NOPA. The Protest is a substantial document, running approximately 85 pages exclusive of exhibits, and is organized into the following principal sections:
Statement of Facts. The Protest opens with a comprehensive statement of facts establishing the relevant corporate structure, the CSA, and PBI's operations. The statement describes PPC's corporate structure, including the chain from Penterra Pharmaceuticals Corp. (the U.S. parent) through Penterra Holdings Ltd. ("PHL"), a disregarded entity, to Penterra Biosciences Ireland Ltd. ("PBI"), the Irish operating subsidiary, and to Penterra Manufacturing Ireland Ltd. ("PMI"), the Irish contract manufacturing entity. The statement describes in detail the CSA, which became effective on July 1, 2012, pursuant to which PPC and PBI agreed to share the costs and risks of developing pharmaceutical intangible property in exchange for the rights to exploit such property in their respective territories. The statement describes the platform contribution transaction ("PCT") payment of $312 million made by PBI to PPC at the inception of the CSA, representing compensation for PBI's use of pre-existing intangible property as a platform for further development. The statement also describes the legacy IP license agreement under which PPC licenses certain pre-CSA intangible property to PBI at a royalty rate of 4.5% of net sales. Finally, the statement sets forth detailed evidence of PBI's substantive operations in Ireland, including its personnel, facilities, regulatory activities, commercial operations, and governance.
Legal Arguments. The legal argument section of the Protest presents PPC's defense of its transfer pricing positions under the following provisions:
(a) IRC § 482 — The Protest argues that PPC's intercompany transactions, including the CSA cost-sharing ratios, the legacy IP royalty rate, and the PCT payment, are consistent with arm's-length standards and do not warrant adjustment under § 482.
(b) Treas. Reg. § 1.482-4 (Arm's-Length Royalty Rates) — The Protest defends the 4.5% royalty rate as arm's-length, supported by WVG's CUT analysis of 14 comparable uncontrolled pharmaceutical license agreements yielding an IQR of 3.1% to 6.8% and a median of 4.4%.
(c) Treas. Reg. § 1.482-7 (Qualified Cost-Sharing Arrangements) — The Protest defends PPC's cost-sharing ratios (38.2% to 42.7% for TY 2017–2020) as consistent with the RAB methodology prescribed by the regulations, and demonstrates that the IRS's proposed ratios are based on flawed RAB projections.
(d) Treas. Reg. § 1.482-1(d) (Best Method Rule) — The Protest argues that the CUT method is the best method for determining the arm's-length royalty rate and that the IRS's selection of comparables fails to satisfy the comparability requirements under the best method rule.
Defense of CSA Cost-Sharing Ratios. The Protest provides a year-by-year defense of PPC's reported cost-sharing percentages of 38.2%, 39.6%, 41.1%, and 42.7% for TY 2017 through 2020, respectively. The defense is grounded in PPC's contemporaneous RAB analysis, which accounts for the distinct market characteristics, regulatory timelines, and pricing dynamics applicable to PBI's non-Americas territory. The Protest demonstrates that the IRS's proposed increases of 10.0 to 11.2 percentage points per year are unsupported by the contemporaneous economic evidence and reflect a fundamental misallocation of RAB between the parties.
Defense of 4.5% Arm's-Length Royalty Rate. The Protest presents WVG's CUT analysis in detail, including descriptions of the 14 comparable uncontrolled pharmaceutical license agreements, a comparability analysis demonstrating the reliability of the comparables, and a statistical presentation of the IQR (3.1%–6.8%) and median (4.4%). The Protest argues that PPC's 4.5% royalty rate is squarely within the arm's-length range and is strongly supported by the most reliable comparable data available.
Defense of PCT Valuation. The Protest defends PBI's $312 million PCT payment as arm's-length, citing WVG's DCF analysis using a 9.8% WACC, which produces a valuation range of $278 million to $361 million. The Protest demonstrates that the IRS's proposed PCT valuation of $852 million is based on a materially understated discount rate (7.2% WACC) that fails to appropriately reflect the risk profile of early- to mid-stage pharmaceutical intangible development at the time the CSA was entered into.
Rebuttal of IRS Economic Substance Challenge. The Protest presents a comprehensive rebuttal of the IRS's assertion that PBI lacked economic substance. The rebuttal is supported by detailed evidence of PBI's DEMPE functions, including its workforce of 185 employees as of year-end 2020, its 42 board meetings held in Dublin over the examination period, its cumulative regulatory expenditures of approximately €47.2 million, its independent pricing authority across 68 country markets, its 18,000-square-foot Dublin office facility at Sandyford Business Park, its independent banking relationships with Glenmore Bank Ireland plc, and the leadership of its Managing Director, Aidan Naughton.
Penalty Protection Argument. The Protest advances a defense against the proposed IRC § 6662(e) substantial valuation misstatement penalty under the reasonable cause and good faith exception of IRC § 6662(e)(3)(B). The penalty protection argument is grounded in PPC's contemporaneous transfer pricing documentation, which was prepared by Crestfield & Associates LLP (Susan Lam, Transfer Pricing Partner) for each of the four tax years under examination. The documentation satisfies the requirements of IRC § 6662(e)(3)(B) and Treas. Reg. § 1.6662-6 and demonstrates that PPC's transfer pricing positions were based on a thorough analysis of the relevant facts and applicable legal authorities, prepared by qualified professionals, and maintained contemporaneously with the filing of each return. The Protest also sets forth the factors supporting a reasonable-cause defense, including the qualifications and independence of PPC's advisors, the thoroughness of the economic analyses performed, and PPC's good faith reliance on the advice of its professional advisors.
C. Protest Exhibits
The Formal Protest was accompanied by five exhibits, which are summarized below:
Exhibit A: PPC Corporate Structure Chart. A graphic organizational chart depicting PPC's relevant corporate structure, including the ownership chain from Penterra Pharmaceuticals Corp. (U.S. parent) through Penterra Holdings Ltd. (disregarded entity) to Penterra Biosciences Ireland Ltd. (Irish operating subsidiary) and Penterra Manufacturing Ireland Ltd. (Irish contract manufacturer).
Exhibit B: Summary of Cost-Sharing Arrangement. A summary of the material terms of the CSA between PPC and PBI, including the effective date (July 1, 2012), the scope of intangible development activities covered, the PCT payment of $312 million, and the cost-sharing percentages for each year from inception through TY 2020, with particular focus on the TY 2017–2020 examination period.
Exhibit C: Summary of Economic Analyses. A compilation of the economic analyses prepared by Whitmore Valuation Group LLC in support of PPC's transfer pricing positions, including the CUT analysis (14 comparables, IQR 3.1%–6.8%, median 4.4%), the comparable profits method / transactional net margin method ("CPM/TNMM") analysis, and the DCF analysis (9.8% WACC, PCT valuation range $278M–$361M).
Exhibit D: Evidence of PBI Economic Substance. A comprehensive compilation of evidence supporting PBI's economic substance, including organizational charts, employee headcount data (185 employees as of year-end 2020), a schedule of 42 board meetings held in Dublin during the examination period, a summary of €47.2 million in cumulative regulatory expenditures, documentation of PBI's 18,000-square-foot office at Sandyford Business Park, evidence of independent pricing across 68 country markets, banking documentation from Glenmore Bank Ireland plc, and the curriculum vitae and responsibilities of Managing Director Aidan Naughton.
Exhibit E: Penalty Protection Documentation. A summary of PPC's contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP for TY 2017 through 2020, together with a discussion of the reasonable-cause factors supporting penalty abatement.
IV. IRS Appeals Transition
A. Case Referral to Appeals
The filing of the Formal Protest on December 22, 2023, triggers the formal referral of PPC's case from the LB&I examination team to the IRS Office of Appeals. Under established IRS procedures, the examination team will prepare an administrative case file — including the NOPA, the Protest, supporting workpapers, and the Revenue Agent's Report — and transmit it to the IRS Appeals Office for assignment to an Appeals Officer. Based on the complexity and dollar magnitude of this case, C&H anticipates that it will be assigned to an Appeals Officer from the IRS Appeals Office in Manhattan, which handles large-case transfer pricing disputes in the Northeast region.
C&H anticipates that the case will be assigned to an Appeals Officer in January 2024. On January 10, 2024, Cross filed a letter with the IRS Office of Appeals requesting the scheduling of the initial Appeals conference and proposing available dates in late February 2024. The letter also identified the anticipated participants on behalf of PPC, including Cross, Hartwell, Simmons, Whitfield, Staines, and Dr. Helena Vasquez of WVG.
B. Appeals Strategy Development
In anticipation of the transition to Appeals, C&H has commenced the development of a comprehensive Appeals strategy. The following documents have been prepared or are in progress:
Appeals Strategy Memorandum. An Appeals strategy memorandum was prepared by Cross and Hartwell, dated December 1, 2023, and provided to PPC's in-house team. The memorandum outlines C&H's recommended approach to the Appeals process, including the following:
(a) Settlement Posture and Hazards-of-Litigation Analysis. The memorandum sets forth C&H's assessment of the strengths and weaknesses of both PPC's and the IRS's positions, framed in terms of the "hazards of litigation" — i.e., the risk to each party of an adverse outcome if the case were to proceed to the United States Tax Court.
(b) Recommended Negotiating Positions. The memorandum identifies recommended opening, target, and walk-away positions for settlement negotiations.
(c) Conference Preparation Plan. The memorandum outlines the steps required to prepare for the Appeals conference, including the preparation of a conference presentation, a document binder, and talking points, as well as witness preparation for key PPC and WVG personnel.
Hazards-of-Litigation Analysis. A detailed hazards-of-litigation analysis was prepared by Cross, dated December 5, 2023, and is subject to attorney-client privilege and work-product protection. The analysis assigns probability-weighted ranges to potential Tax Court outcomes on each of the three IRS positions — the CSA cost-sharing adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge — and models the expected value of each position under various scenarios. The analysis concludes that the IRS's positions carry significant litigation risk and that a Tax Court would, more likely than not, sustain PPC's positions on the royalty rate and economic substance issues and sustain only a modest portion of the CSA adjustment.
Settlement Authority Memorandum. A settlement authority memorandum was prepared by Cross and transmitted to Whitfield and Staines on December 10, 2023. The memorandum recommends the following settlement parameters:
•  Target Resolution: 10–15% of the proposed $380.4 million adjustment, or approximately $38.0 million to $57.1 million.
•  Hard Ceiling: 20% of the proposed adjustment, or approximately $76.1 million.
•  Illustrative Calculation: At the midpoint of the target range (12.5% of $380.4 million), the total adjustment would be approximately $47.6 million, resulting in an estimated federal income tax liability of approximately $10.0 million at the 21% corporate rate (applicable to TY 2018–2020).
The settlement authority memorandum has been discussed with Whitfield and Staines, and PPC has authorized C&H to negotiate within the parameters outlined above, subject to PPC's final approval of any settlement terms prior to execution.
Coordination with Whitmore Valuation Group. On January 5, 2024, Cross formally requested that Dr. Helena Vasquez and Dr. Rohan Chakrabarti at Whitmore Valuation Group prepare a rebuttal memorandum addressing the specific economic analyses and assumptions underlying IRS Economist Dr. Washburne's work. The rebuttal memorandum is expected to focus on Dr. Washburne's CUT selection criteria and the comparability of the IRS's purported comparable license agreements, Dr. Washburne's discount rate assumptions (the 7.2% WACC versus WVG's 9.8% WACC and the basis for the divergence), and Dr. Washburne's projected revenue growth rates for PBI's territory, which C&H believes are materially overstated. The rebuttal memorandum is anticipated to be completed in late January or early February 2024 for use in the Appeals conference.
C. Anticipated Next Steps for Q1 2024
Based on the current procedural posture, C&H anticipates the following key activities during the first quarter of 2024:
1.  Assignment of Appeals Officer. The IRS Appeals Office is expected to assign an Appeals Officer to the case in January 2024. Upon assignment, C&H will promptly establish contact with the assigned officer and coordinate scheduling.
2.  Appeals Conference. C&H has proposed dates for the Appeals conference in late February 2024 and anticipates that the conference will be scheduled for this timeframe. The conference is expected to be held in person at the IRS Appeals Office in Manhattan, though videoconference participation may be accommodated for certain participants.
3.  Conference Preparation. C&H will prepare a comprehensive Appeals conference presentation (in Northgate Services Inc. format), a document binder containing all relevant exhibits, workpapers, and economic analyses, and detailed talking points for each presenter. These materials will be provided to PPC's in-house team for review and comment prior to the conference.
4.  Witness Preparation. C&H will conduct witness preparation sessions for Marcus Whitfield, who is anticipated to address PPC's intercompany pricing decisions and PBI's operational history, and Dr. Helena Vasquez, who is anticipated to present WVG's economic analyses and to rebut Dr. Washburne's positions.
5.  Supplemental Submissions. Depending on the outcome of the initial conference and any requests from the Appeals Officer, C&H may prepare supplemental written submissions addressing specific issues raised during the conference.
6.  Settlement Negotiation. If the Appeals conference progresses productively, C&H anticipates entering settlement negotiations with the Appeals Officer, with the goal of reaching an agreed resolution within the settlement parameters authorized by PPC. If a settlement is reached, the parties would execute an IRS Form 906 (Closing Agreement on Final Determination Covering Specific Matters) or an equivalent agreement memorializing the terms of the resolution.
V. Coordination with Third Parties
A. Whitmore Valuation Group LLC
Dr. Helena Vasquez and Dr. Rohan Chakrabarti of Whitmore Valuation Group LLC ("WVG") have served as PPC's economic experts throughout this engagement. WVG was retained under a Kovel arrangement pursuant to a Kovel letter executed on June 20, 2022 (reference number 1018-00009-KV), which provides that WVG's work is performed at the direction of C&H and is protected by the attorney-client privilege and the work-product doctrine.
WVG's work product has been central to PPC's defense on all three of the IRS's proposed adjustment categories. WVG prepared the CUT analysis supporting the 4.5% arm's-length royalty rate, the DCF analysis supporting the $312 million PCT payment, and the RAB analysis supporting PPC's cost-sharing percentages. WVG has also provided invaluable support throughout the IDR process, including the preparation of responses to the IRS's economic information requests and the review and analysis of Dr. Washburne's work product as disclosed through the examination process.
As noted above, on January 5, 2024, Cross requested that Dr. Vasquez and Dr. Chakrabarti prepare a rebuttal memorandum of Dr. Washburne's analysis for use in the Appeals proceedings. The rebuttal will specifically address Dr. Washburne's CUT selection criteria and the comparability deficiencies in the IRS's purported comparable license agreements, Dr. Washburne's discount rate assumptions (7.2% WACC versus WVG's 9.8% WACC) and the methodological basis for the divergence, and Dr. Washburne's projected revenue growth rates for PBI's territory markets.
WVG's professional fees billed through December 31, 2023, are running at a total approaching $2.1 million, calculated at a blended hourly rate of approximately $650 per hour. Remaining WVG work in connection with this engagement is expected to include the completion of the rebuttal memorandum and support for the Appeals conference, including potential testimony by Dr. Vasquez.
B. Crestfield & Associates LLP
Crestfield & Associates LLP ("Crestfield") serves as PPC's transfer pricing documentation provider and has prepared contemporaneous transfer pricing documentation for PPC for each of the four tax years under examination. The documentation was prepared under the direction of Susan Lam, Transfer Pricing Partner at Crestfield. As described in Section III.B, this contemporaneous documentation is a critical element of PPC's penalty protection argument under IRC § 6662(e)(3)(B).
During Q4 2023, Crestfield provided an updated FIN 48 / ASC 740-10 support letter to Martin Ogilvy (PPC's Director of Tax Reporting) on November 20, 2023. The support letter provides revised legal conclusions regarding the technical merits of PPC's transfer pricing positions following the issuance of the NOPA, for use by PPC in connection with its year-end 2023 financial statement uncertain tax position reserve analysis. Based on PPC's assessment, supported by the Crestfield analysis and C&H's legal conclusions, PPC has established a pre-settlement FIN 48 reserve for its transfer pricing positions of $62.4 million.
C&H continues to coordinate with Crestfield on an ongoing basis regarding return data, contemporaneous documentation updates, and the integration of Crestfield's documentation into the Protest and Appeals submissions.
C. Thornbury & Keogh (Irish Tax Advisors)
Thornbury & Keogh ("T&K"), an Irish tax advisory firm based in Dublin, has been engaged to advise on dual-jurisdiction aspects of PPC's defense. Ciarán Thornbury, the firm's managing partner, has served as the primary advisor. T&K's role has focused on the Irish tax implications of the IRS's proposed adjustments and any potential settlement, with particular attention to the following issues:
(a) The impact of any agreed adjustment on PBI's eligibility for, and the quantum of benefits under, Ireland's Knowledge Development box ("KDB") regime, which provides an effective corporate tax rate of 6.25% on qualifying income derived from qualifying intellectual property.
(b) The interaction of any adjustment with PBI's Irish standard trading income, which is subject to the 12.5% Irish corporate tax rate.
(c) The potential availability of relief under the Mutual Agreement Procedure ("MAP") provisions of the U.S.-Ireland Income Tax Treaty (discussed further in Section VI.C below).
T&K's professional fees billed through December 31, 2023, are approximately €280,000.
VI. Collateral Matters
A. SEC Disclosure Considerations
In November 2023, Garrett Simmons prepared an analysis memorandum assessing PPC's disclosure obligations under the federal securities laws in connection with the IRS's proposed $380.4 million adjustment. The memorandum evaluated PPC's obligations under Item 303 of Regulation S-K (Management's Discussion and Analysis), ASC 450 (Contingencies), and ASC 740-10 (Accounting for Uncertainty in Income Taxes) as they relate to the disclosure of the IRS examination and the proposed adjustments in PPC's Form 10-K for the fiscal year ending December 31, 2023, and any interim Form 10-Q filings.
The memorandum noted that PPC's institutional shareholder base includes significant sophisticated investors, including Ridgeview Capital Management LP (an 8.3% institutional shareholder managed by Douglas Everett), who actively monitor FIN 48 / ASC 740-10 disclosures and uncertain tax position reserves. The memorandum recommended that PPC ensure that its disclosure language appropriately reflects the existence of the IRS examination, the proposed adjustments, and PPC's position that it has meritorious defenses, while avoiding disclosure of privileged settlement positions or legal strategy.
Guidance based on this analysis was provided to Deborah Staines, General Counsel, via email dated November 25, 2023. C&H remains available to review draft disclosure language for PPC's year-end filings.
B. Hargrove National Bank Credit Facility Covenants
In November 2023, Leila Nazari prepared an analysis memorandum reviewing the potential impact of the IRS's proposed adjustments on PPC's obligations under its $1.5 billion revolving credit facility with Hargrove National Bank, N.A. (Christine Bellucci, SVP, Relationship Manager). The memorandum focused on two provisions of the credit agreement that could potentially be implicated by the IRS examination:
(a) Tax Indemnity Covenants. The credit agreement contains representations and covenants relating to PPC's tax compliance and the absence of material tax liabilities not reflected in PPC's financial statements. The memorandum analyzed whether the NOPA constitutes a breach of any such representation or covenant.
(b) Material Tax Event Covenants. The credit agreement defines "Material Tax Event" and includes notification and potential default provisions triggered by the occurrence of a Material Tax Event. The memorandum analyzed whether the NOPA constitutes a Material Tax Event as defined in the credit agreement.
The memorandum concluded that the issuance of the NOPA does not constitute a "Material Tax Event" as defined in the credit agreement, principally because the NOPA is a proposed adjustment that has not been agreed to by PPC and is not a final assessment or determination. Accordingly, the NOPA does not trigger a default or mandatory prepayment obligation under the credit facility. However, the memorandum recommended that PPC continue to monitor the status of the IRS examination and be prepared to provide notice to Hargrove National Bank in the event that a final assessment is issued, a closing agreement is executed, or a Tax Court petition is filed, any of which could potentially constitute a Material Tax Event depending on the amounts involved.
C. TCJA Considerations
The Tax Cuts and Jobs Act of 2017 ("TCJA") has significant implications for this engagement, given that the examination period spans both the pre-TCJA and post-TCJA environments. Tax Year 2017 is subject to the 35% corporate tax rate in effect prior to the enactment of the TCJA, while Tax Years 2018 through 2020 are subject to the 21% corporate tax rate enacted by the TCJA. This rate differential affects the calculation of tax deficiencies and penalties associated with the proposed adjustments and must be considered in any settlement negotiation.
In addition, the TCJA introduced the global intangible low-taxed income ("GILTI") provisions under IRC § 951A and the base erosion and anti-abuse tax ("BEAT") provisions under IRC § 59A, both of which interact with the proposed § 482 adjustments for TY 2018–2020. The interaction of GILTI and BEAT with the proposed adjustments was previously analyzed in a memorandum prepared by Leila Nazari in October 2022, which assessed the secondary effects of the proposed adjustments on PPC's GILTI inclusion and BEAT liability. That analysis remains current and has been incorporated into C&H's overall assessment of PPC's exposure.
Finally, Cross prepared an analysis in December 2023 evaluating the potential availability of relief under the competent authority / Mutual Agreement Procedure ("MAP") provisions of the U.S.-Ireland Income Tax Treaty (Article 25). Under the MAP, if a U.S. transfer pricing adjustment results in double taxation of the same income — i.e., taxation by the United States on income that has already been taxed by Ireland in the hands of PBI — PPC may request that the U.S. and Irish competent authorities negotiate a correlative adjustment to eliminate the double taxation. Cross's analysis concluded that MAP relief may be available and may be a valuable tool if PPC is unable to achieve a satisfactory resolution at the Appeals level. However, MAP proceedings are typically lengthy and uncertain, and C&H recommends pursuing them only as a fallback if Appeals negotiations do not result in a satisfactory outcome.
D. Statute of Limitations
The statute of limitations for assessment of additional tax is a critical consideration for the timing of any resolution. The current status of the statute for each tax year is as follows:
PPC and the IRS have executed Form 872 (Consent to Extend the Time to Assess Tax) for Tax Year 2017 and Tax Year 2018, extending the assessment statute of limitations through December 31, 2024. This date represents a hard deadline: if the case is not resolved — either through Appeals settlement or issuance of a Statutory Notice of Deficiency — prior to December 31, 2024, the IRS will lose its ability to assess additional tax for TY 2017 and TY 2018.
Tax Years 2019 and 2020 remain within their original statutory assessment periods, which do not expire until 2023 and 2024, respectively, under the three-year general rule of IRC § 6501(a) (or later, if the six-year statute of IRC § 6501(e) applies due to the magnitude of the proposed adjustments). In either event, the original expiration dates for TY 2019 and TY 2020 provide sufficient time for the anticipated Appeals resolution in Q1 2024.
C&H is closely monitoring the statute dates and will advise PPC of any need for further extensions as the Appeals process progresses. In particular, if the Appeals process extends beyond Q1 2024 and the December 31, 2024 extended deadline for TY 2017 and TY 2018 comes under pressure, C&H will assess whether to grant a further extension or allow the statute to expire for those years.
VII. IDR Process — Final Status
The Information Document Request ("IDR") process has been fully completed. Over the course of the examination, the IRS issued a total of 47 IDRs, all of which were responded to by C&H on behalf of PPC. The final IDR — IDR No. 47 — was issued by the IRS in September 2023, and C&H filed its response on September 29, 2023. The IDR period concluded with the filing of that final response, and no further IDRs are outstanding.
C&H has maintained a master IDR tracker throughout the examination, cataloguing each IDR by number, date of issuance, subject matter, response deadline, date of response, and status. The master tracker reflects that all 47 IDRs have been fully satisfied and that no outstanding items remain. In addition, C&H has maintained a master document production index identifying all documents produced to the IRS over the course of the examination, organized by Bates number, date of production, and IDR reference. The master document production index encompasses thousands of pages of documents produced across multiple productions.
C&H has also maintained a privilege log listing all documents withheld from production under claims of attorney-client privilege and/or the work-product doctrine. The privilege log has been updated on a rolling basis throughout the examination and reflects all withheld documents through the close of the IDR process. No privilege challenges were asserted by the IRS examination team with respect to any entries on the privilege log.
VIII. Financial Summary — Fees and Budget
A. Calderwood & Harkness LLP Fees
Total C&H professional fees billed through December 31, 2023, are approximately $4.9 million. This reflects professional time expended by the engagement team from the commencement of the engagement through the end of Q4 2023, including the preparation of all IDR responses, the analysis and response to the NOPA, the preparation and filing of the Formal Protest, and the development of the Appeals strategy.
The 2023 billing rates reflect annual adjustments from the 2022 rate schedule, consistent with the firm's standard annual rate adjustment process. The 2024 rate schedule became effective on January 1, 2024, and will apply to all professional time expended from that date forward. Updated rate information has been provided to PPC under separate cover.
The engagement remains within the estimated fee range of $4.5 million to $7.0 million communicated to PPC in the engagement letter dated June 2, 2022. Based on the current posture of the matter and the anticipated scope of work required for the Appeals process, Sylvia Hartwell has reviewed the budget projections and estimates that total C&H professional fees through the resolution of the Appeals process will be in the range of $5.5 million to $6.0 million. This projection assumes that the Appeals conference is held in late February 2024, that settlement negotiations proceed during Q1 2024, and that the matter is resolved through Appeals without the need for Tax Court litigation. Should the case proceed to the Tax Court, the estimated fee range would need to be revised significantly upward.
B. Whitmore Valuation Group LLC Fees
WVG professional fees billed through December 31, 2023, total approximately $2.0 million. Remaining WVG work includes the preparation of the rebuttal memorandum addressing Dr. Washburne's analyses and support for the Appeals conference, including potential testimony by Dr. Vasquez. C&H estimates that the total WVG engagement cost upon conclusion of the matter will be approximately $2.15 million.
C. Thornbury & Keogh Fees
T&K professional fees billed through December 31, 2023, total approximately €280,000. Remaining T&K work relates to the assessment of Irish tax implications of any settlement and potential MAP coordination. C&H anticipates that total T&K fees will be approximately €312,500 upon conclusion of the matter.
D. Summary of Professional Fees to Date
The following table summarizes combined professional fees billed through December 31, 2023:
The original estimated C&H fee range of $4.5 million to $7.0 million was established at the outset of the engagement based on a range of assumptions regarding the complexity and duration of the IRS examination. The engagement is tracking within the upper portion of this range, which is consistent with the scope and intensity of the examination, including the issuance of 47 IDRs, the IRS's engagement of an economist and Chief Counsel attorneys, and the significant dollar magnitude of the proposed adjustments.
IX. Key Products and Financial Context
For reference, the following is a summary of the key PPC pharmaceutical products relevant to the IRS examination and their financial performance. These products constitute the principal revenue-generating assets at the center of the CSA and legacy IP license arrangements under challenge by the IRS:
Veritaxol (oncology therapeutic): FY 2020 global net sales of $3.12 billion, of which non-Americas net sales were $1.34 billion. Veritaxol is PPC's flagship product and the single largest contributor to the intangible value at issue in this examination.
Imvara (immunology therapeutic): FY 2020 global net sales of $1.87 billion, of which non-Americas net sales were $0.79 billion. Imvara has experienced strong growth in PBI's European and Asia-Pacific markets during the examination period.
Cerulon (rare disease therapeutic): FY 2020 global net sales of $0.62 billion, of which non-Americas net sales were $0.28 billion. As a rare disease product, Cerulon commands premium pricing but serves a smaller patient population.
PPC's consolidated FY 2020 total revenue was $6.82 billion, with pre-tax income of $1.47 billion. PBI reported FY 2020 revenue of €2.14 billion and pre-tax income of €1.06 billion. These financial figures underscore both the materiality of the intercompany transactions at issue and the significance of PBI as a substantive operating entity within the PPC corporate group.
X. Key Upcoming Dates and Action Items
The following table sets forth the key dates and action items anticipated for Q1 2024:
C&H will provide a supplemental update to PPC following the assignment of the Appeals Officer and the scheduling of the Appeals conference.
XI. Conclusion and Recommendations
The filing of the Formal Protest on December 22, 2023, represents the culmination of the examination phase of this engagement and the commencement of the Appeals phase. The Protest positions PPC's defense comprehensively and forcefully on all three of the IRS's proposed adjustment categories — the CSA cost-sharing ratio adjustments, the legacy IP royalty rate adjustments, and the economic substance challenge — as well as on the penalty protection issue.
Based on our thorough analysis of the factual record, the applicable legal authorities, the strengths and weaknesses of the IRS's positions, and the hazards of litigation that the IRS would face in the United States Tax Court, C&H makes the following recommendations:
1.  Pursue Aggressive Settlement at Appeals. PPC should pursue aggressive settlement negotiations at the Appeals level, targeting a resolution in the range of 10–15% of the proposed $380.4 million adjustment (approximately $38.0 million to $57.1 million), with a hard ceiling of 20% of the proposed adjustment (approximately $76.1 million). This target range reflects C&H's assessment of the probability-weighted outcomes of Tax Court litigation and represents a range within which both parties can achieve a reasonable resolution of the dispute.
2.  Maintain Strong Advocacy on All Three Issues. PPC should maintain its position that the IRS's proposed adjustments are without merit on all three issues. The strength of PPC's positions — particularly on the arm's-length royalty rate and PBI's economic substance — provides significant leverage in settlement negotiations and should not be conceded prematurely.
3.  Leverage Penalty Protection. PPC's contemporaneous transfer pricing documentation, prepared by Crestfield & Associates, provides a strong foundation for penalty abatement. The elimination of the proposed $15.98 million penalty should be a primary objective in any settlement negotiation.
4.  Prepare for Contingencies. While C&H is confident in PPC's ability to achieve a favorable resolution at Appeals, PPC should be prepared for the possibility that settlement negotiations do not produce an acceptable outcome. In that event, PPC's options would include proceeding to Tax Court litigation, pursuing MAP relief under the U.S.-Ireland Income Tax Treaty, or a combination of both.
C&H has strong confidence in PPC's arm's-length positions, in the economic substance of PBI's operations, and in the quality and sufficiency of the contemporaneous documentation supporting penalty abatement. We believe PPC is well-positioned for the Appeals phase and anticipate a resolution that reflects the strength of PPC's positions.
Leonard Cross and Sylvia Hartwell are available to discuss this report and to coordinate Appeals preparation at PPC's convenience. We suggest scheduling a call or meeting in the week of January 15, 2024, to review the Appeals strategy and settlement parameters in advance of the anticipated assignment of the Appeals Officer.
XII. Distribution and Confidentiality Notice
This report is marked Privileged and Confidential — Attorney-Client Communication / Attorney Work Product and is protected by the attorney-client privilege, the work-product doctrine, and all other applicable privileges and protections.
Distribution of this report is limited to the addressees — Marcus Whitfield, VP Global Tax; Deborah Staines, General Counsel; and Rajesh Iyer, Chief Financial Officer — and such additional Penterra Pharmaceuticals Corp. personnel as may be designated by the addressees on a need-to-know basis. This report is not to be shared with, or disclosed to, any person or entity outside of Penterra Pharmaceuticals Corp. without the prior written consent of Calderwood & Harkness LLP.
The legal analyses, strategic assessments, settlement recommendations, and other work product contained in this report reflect the professional judgment of Calderwood & Harkness LLP as of the date hereof and are provided for the sole use and benefit of Penterra Pharmaceuticals Corp. in connection with the matters described herein.
Calderwood & Harkness LLP Matter No. 1018-00009
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Responsible Partner
By: ________
Sylvia Hartwell Billing Partner
Date: January 5, 2024
C&H Matter No. 1018-00009 | IRS Exam Team ID: LB&I-NE-TP-2022-00641 | PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT | This document is not to be reproduced or distributed without the prior written consent of Calderwood & Harkness LLP.
Tax Year | PPC Reported Share | IRS Proposed Share | Adjustment (pp) | R&D Cost Base | Proposed Adjustment
2017 | 38.2% | 48.2% | +10.0 | $487.3M | $48.73M
2018 | 39.6% | 50.6% | +11.0 | $523.8M | $57.61M
2019 | 41.1% | 52.3% | +11.2 | $561.2M | $62.85M
2020 | 42.7% | 53.7% | +11.0 | $598.4M | $65.82M
Total | $235.01M
Tax Year | PBI Net Sales Subject to Royalty | Rate Adjustment | Proposed Adjustment
2017 | $814.6M | 6.5% | $52.95M
2018 | $762.3M | 6.5% | $49.55M
2019 | $691.8M | 6.5% | $44.97M
2020 | $624.1M | 6.5% | $40.57M
Total | $188.04M
Firm | Fees Through Q4 2023 | Estimated Total
Calderwood & Harkness LLP | ~$4.9M | $5.5M–$6.0M
Whitmore Valuation Group LLC | ~$2.0M | ~$2.15M
Thornbury & Keogh | ~€280,000 (~$310K) | ~€312,500 (~$345K)
Combined Total | ~$7.2M | ~$7.8M–$8.5M
Target Date | Action Item | Responsible Party
January 2024 | Assignment of IRS Appeals Officer (expected) | IRS Appeals
January 10, 2024 | Letter filed requesting scheduling of Appeals conference and proposing dates | Leonard Cross
January 2024 | WVG rebuttal memorandum of Dr. Washburne analysis (in progress) | Dr. Vasquez / Dr. Chakrabarti
February 2024 | Preparation of Appeals conference presentation (Northgate Services Inc.), document binder, and talking points | C&H engagement team
February 2024 | Witness preparation sessions for Marcus Whitfield and Dr. Helena Vasquez | Cross / Hartwell / Simmons
Late February 2024 (target) | Appeals conference | Cross, Hartwell, Simmons, Whitfield, Staines, Dr. Vasquez
Q1 2024 | Settlement negotiation and potential execution of IRS Form 906 Closing Agreement | Cross / IRS Appeals Officer
December 31, 2024 | Expiration of extended statute of limitations for TY 2017 and TY 2018 (hard deadline — monitor) | C&H / PPC Tax Department

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

CALDERWOOD & HARKNESS LLP

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