PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
INTERNAL MEMORANDUM — NOT FOR DISTRIBUTION OUTSIDE THE FIRM WITHOUT PARTNER APPROVAL
Date: June 10, 2022
From: Leonard Cross, Partner, Tax Department
To: Sylvia Hartwell, Partner, Tax Department Garrett Simmons, Associate, Tax Department Leila Nazari, Associate, Tax Department
Re: Privilege Protocols — IRS Transfer Pricing Examination of Penterra Pharmaceuticals Corp. (TY 2017–2020)
Matter No.: 1018-00009
IRS Exam Team ID: LB&I-NE-TP-2022-00641
I. PURPOSE AND SCOPE OF THIS MEMORANDUM
This memorandum establishes binding protocols for all members of the Calderwood & Harkness LLP ("C&H") engagement team working on the defense of Penterra Pharmaceuticals Corp. ("PPC"), Employer Identification Number 22-3741856, in connection with the IRS Large Business & International Division ("LB&I") examination opened on May 16, 2022, covering tax years 2017, 2018, 2019, and 2020 (collectively, the "Examination"). The protocols set forth herein are mandatory and apply from the date of this memorandum through the conclusion of the engagement, including any extension of the matter into IRS Appeals, competent authority proceedings, or Tax Court litigation.
The Examination centers on transfer pricing issues under Section 482 of the Internal Revenue Code ("IRC § 482") and the regulations promulgated thereunder, specifically the intercompany royalty rates and cost-sharing arrangement ("CSA") payments between PPC's U.S. operations and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"), Irish Tax Reference Number 3218764T. The IRS has signaled a focus on whether the royalty rates charged by PPC to PBI for the license of non-Americas intellectual property rights, and the platform contribution transaction ("PCT") payments made in connection with PBI's entry into the CSA effective January 1, 2016, comply with the arm's-length standard. In addition, the IRS has indicated an interest in PBI's economic substance and the allocation of Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions between the U.S. and Irish entities.
Given the magnitude of anticipated exposure — our initial assessment suggests potential proposed adjustments in the hundreds of millions of dollars, with corresponding penalty exposure under IRC § 6662(e) and (h) — the multi-jurisdictional nature of the matter (involving the United States, Ireland, and Luxembourg), the involvement of multiple outside advisors (including economic consultants, Irish tax advisors, and independent auditors), and the near certainty that documents generated during the course of the engagement will be subject to scrutiny at examination, Appeals, and potentially in Tax Court litigation, rigorous privilege discipline is essential from the outset.
This memorandum governs all communications, work product, document creation, document handling, and interactions with third parties throughout the engagement. The protocols are designed to maximize the protections afforded by the attorney-client privilege, the attorney work-product doctrine, and, where applicable, the Kovel doctrine, while ensuring that the engagement team operates efficiently and in full coordination with the client, its affiliates, and retained advisors.
All team members — including attorneys, paralegals, and support staff assigned to Matter No. 1018-00009 — must read this memorandum in its entirety and acknowledge their understanding of, and agreement to comply with, these protocols. Acknowledgment procedures are set forth in Section XIII below. Questions regarding the application or interpretation of these protocols should be directed to Leonard Cross (Philadelphia office, 1735 Market Street, Suite 3100, Philadelphia, PA 19103) or Sylvia Hartwell (New York office, 600 Lexington Avenue, New York, NY 10022).
II. ENGAGEMENT STRUCTURE AND KEY PERSONNEL
A. Client Identification
The client in this engagement is Penterra Pharmaceuticals Corp., a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is publicly traded on the Nasdaq Stock Market under the ticker symbol "PPCA." PPC is a global specialty pharmaceutical company engaged in the research, development, manufacture, and commercialization of branded pharmaceutical products in the therapeutic areas of oncology, immunology, and rare diseases.
The engagement was formalized pursuant to an engagement letter executed on June 2, 2022 (the "Engagement Letter"), which sets forth the scope of C&H's representation, fee arrangements, and the mutual obligations of C&H and PPC. The Engagement Letter confirms that C&H is retained to represent PPC in connection with the Examination, including any proceedings before IRS Appeals, competent authority proceedings under applicable income tax treaties, and, if necessary, litigation in the United States Tax Court.
PPC's primary contacts for this engagement are as follows:
• Marcus Whitfield, Vice President of Global Tax — Mr. Whitfield serves as the principal day-to-day contact between PPC and C&H. He is responsible for coordinating PPC's internal document collection efforts, managing the flow of factual information to C&H, and liaising with PPC's finance and operations teams. Mr. Whitfield's office is located at PPC's headquarters in Princeton Junction, and he can be reached at mwhitfield@penterra.com and (609) 555-4200 (direct).
• Deborah Staines, General Counsel — Ms. Staines provides oversight of the engagement from PPC's legal department and serves as the primary contact for privilege-related questions on the client side. Ms. Staines has responsibility for ensuring that PPC personnel adhere to applicable privilege protocols and for approving any waivers or disclosures of privileged information. She can be reached at dstaines@penterra.com and (609) 555-4100 (direct).
• Rajesh Iyer, Chief Financial Officer — Mr. Iyer is involved in the engagement in connection with financial and disclosure matters, including PPC's FIN 48 (ASC 740-10) uncertain tax position reserves, SEC reporting obligations, and any financial covenants implicated by the Examination. He can be reached at riyer@penterra.com and (609) 555-4050 (direct).
The attorney-client relationship exists solely between Calderwood & Harkness LLP and PPC. No attorney-client relationship exists with PBI, Penterra Holdings Luxembourg S.à r.l. ("PHL," Luxembourg Registre de Commerce et des Sociétés No. B 168452), Penterra Manufacturing Ireland Ltd. ("PMI," Irish Companies Registration Office No. 512347), or any other subsidiary, affiliate, or related entity of PPC unless such entity is separately engaged in writing and a separate engagement letter is executed. This distinction is critical: while C&H may receive documents from, and coordinate with, PPC affiliates in connection with the defense, the privilege protections discussed in this memorandum apply to communications between C&H and PPC, not to communications between C&H and PPC's affiliates (except to the extent that affiliate employees are acting as agents of PPC for purposes of the privileged communication, a determination that must be made on a case-by-case basis by Cross or Hartwell).
B. C&H Engagement Team
The following C&H attorneys are assigned to this engagement:
• Leonard Cross — Responsible Partner. Mr. Cross is licensed to practice law in New York, New Jersey, and the District of Columbia. His office is in C&H's Philadelphia location, 1735 Market Street, Suite 3100, Philadelphia, PA 19103. As Responsible Partner, Mr. Cross has overall supervisory authority over the engagement, including final approval of all communications with the IRS, all strategy decisions, and all privilege determinations.
• Sylvia Hartwell — Billing Partner. Ms. Hartwell is licensed to practice law in New York and the District of Columbia. Her office is in C&H's New York location, 600 Lexington Avenue, New York, NY 10022. Ms. Hartwell serves as the billing partner for the engagement and assists with substantive legal work, particularly on matters relating to international tax treaty implications and competent authority procedures.
• Garrett Simmons — Lead Associate. Mr. Simmons is licensed to practice law in New York. His office is in C&H's Philadelphia location. Mr. Simmons serves as the primary day-to-day working attorney on the engagement, responsible for drafting IDR response letters, coordinating document production, interfacing with PPC's tax department, and managing communications with Crestfield & Associates LLP regarding factual data requests.
• Leila Nazari — Working Associate. Ms. Nazari is licensed to practice law in New York and New Jersey. Her office is in C&H's Philadelphia location. Ms. Nazari serves as the primary C&H contact for coordination with Thornbury & Keogh in Dublin on Irish tax matters and assists Mr. Simmons with document review, legal research, and preparation of memoranda and analyses.
All four attorneys are listed on IRS Form 2848 (Power of Attorney and Declaration of Representative) filed with the IRS on June 8, 2022, authorizing representation of PPC before the IRS for tax years 2017 through 2020, inclusive. Copies of the executed Form 2848 have been provided to PPC's contacts and are maintained in the matter file.
Paralegals and support staff assigned to the matter must be briefed on these protocols before beginning any work on the matter. The briefing will be conducted by Simmons or Nazari and should cover, at a minimum, the communication protocols, document labeling requirements, and document handling procedures described herein. Paralegals and support staff who work on the matter are bound by the same confidentiality and privilege obligations as the attorneys on the team by virtue of their roles as agents of C&H.
C. Third-Party Advisors
Three categories of third-party advisors are involved in the engagement. Each occupies a distinct position with respect to privilege protections, and the team must understand and observe the differences carefully.
1. Whitmore Valuation Group LLC (Kovel Engagement)
Whitmore Valuation Group LLC ("WVG") is an economic consulting firm with offices at 200 Ashbury Asset Advisors, Suite 700, Boston, Massachusetts 02109. WVG has been retained by C&H — not by PPC directly — under a Kovel arrangement to perform independent economic analyses, benchmarking studies, and expert reports supporting PPC's transfer pricing positions. The retention of WVG by C&H, rather than by PPC, is a deliberate structural choice intended to bring WVG's work within the scope of the attorney-client privilege as extended by the Kovel doctrine. The terms, implications, and protocols governing the Kovel arrangement are discussed in detail in Section IV below.
WVG's lead personnel on this engagement are Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director. The Kovel engagement letter, reference number 1018-00009-KV, was executed on June 20, 2022.
2. Crestfield & Associates LLP (Independent Auditor / Tax Return Preparer)
Crestfield & Associates LLP ("Crestfield") is a national accounting firm with offices at 1200 Avenue of the Americas, New York, New York 10036. Crestfield serves as PPC's independent auditor and prepared PPC's consolidated federal income tax returns (Forms 1120) and contemporaneous transfer pricing documentation reports for tax years 2017 through 2020. The engagement partner for Crestfield's audit of PPC is Martin Ogilvy, CPA, and the transfer pricing partner is Susan Lam, CPA.
Critically, Crestfield is NOT retained by C&H and is NOT covered by a Kovel arrangement. Crestfield's engagement is directly with PPC. Communications between C&H attorneys and Crestfield personnel are NOT protected by attorney-client privilege or Kovel privilege. This has significant implications for how the engagement team interacts with Crestfield, as discussed in detail in Section V below.
3. Thornbury & Keogh (Irish Tax Advisors)
Thornbury & Keogh ("T&K") is an Irish tax advisory firm located at 22 Fitzwilliam Square, Dublin 2, D02 YH68, Ireland. T&K serves as the tax advisor to PBI and PMI, retained directly by PBI. The lead partner at T&K is Ciarán Thornbury.
T&K is not retained by C&H or by PPC (the U.S. parent). T&K's engagement is with the Irish entities. Irish legal privilege — referred to as "legal professional privilege" — attaches differently than U.S. attorney-client privilege, and the scope of privilege for communications with T&K depends on factors specific to Irish law, including the professional qualifications of T&K personnel. The protocols governing coordination with T&K are discussed in detail in Section VI below.
III. ATTORNEY-CLIENT PRIVILEGE — GENERAL PROTOCOLS
A. Foundational Principles
The attorney-client privilege is the oldest recognized privilege for confidential communications in Anglo-American jurisprudence. In the context of this engagement, the privilege protects confidential communications between PPC (the client) and C&H (its attorneys) made for the purpose of obtaining or providing legal advice in connection with the IRS examination defense. The privilege applies regardless of the form of the communication — oral, written, or electronic.
The following elements must be present for the privilege to attach:
(i) A communication;
(ii) Between a client (PPC) and an attorney (C&H);
(iii) Made in confidence;
(iv) For the purpose of seeking or providing legal advice.
Several fundamental principles must be borne in mind:
The privilege belongs to the client. Only PPC can waive the attorney-client privilege. C&H attorneys may not waive the privilege on PPC's behalf without PPC's express authorization. Conversely, C&H has a duty to take reasonable steps to prevent inadvertent waiver.
The privilege does not protect underlying facts. The privilege protects only the communication of facts for the purpose of seeking or providing legal advice. It does not protect the underlying facts themselves. Thus, if PPC transmits factual data to C&H for the purpose of obtaining legal advice regarding its transfer pricing positions, the communication is privileged, but the IRS may independently obtain the same facts through other means (e.g., IDRs directed to PPC, third-party summonses, or document subpoenas). This distinction is of particular importance in the IRS examination context, where the IRS has broad authority under IRC § 7602 to examine books, records, and witnesses.
The privilege can be waived. Waiver can be express (i.e., the client authorizes disclosure) or implied (i.e., the client places the privileged communication at issue, such as by relying on an advice-of-counsel defense). Waiver can also occur inadvertently if privileged materials are disclosed to third parties without appropriate safeguards. The team must be vigilant in preventing inadvertent waiver.
The privilege must be asserted. The privilege is not self-executing. If the IRS or any other party challenges a claim of privilege, PPC (through C&H) must assert the privilege and, if necessary, support the assertion with a privilege log and, in some cases, in camera review by the court. Failure to assert the privilege in a timely manner may result in waiver.
B. Communication Protocols
The following protocols govern all communications in connection with the engagement:
1. Email Communications. All emails relating to the matter must include the following legend in the subject line and at the top of the email body:
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
In addition, the matter number 1018-00009 must be included in the subject line for all correspondence related to the engagement. For example, a subject line should read: "1018-00009 — PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — [description of topic]." The inclusion of the privilege legend does not, standing alone, create privilege where none would otherwise exist, but it serves as evidence of the parties' intent that the communication be treated as confidential and privileged, and it puts recipients on notice of the claim.
2. Recipient Controls. Email distribution must be limited to those individuals who have a need to know and who fall within the privilege circle. On the PPC side, the privilege circle for this engagement includes the following individuals:
• Marcus Whitfield, VP of Global Tax
• Deborah Staines, General Counsel
• Rajesh Iyer, CFO
Team members must not copy or forward C&H communications to other PPC employees (including members of PPC's tax department, finance team, operations team, or executives) without first confirming with Cross or Hartwell that the proposed recipient falls within the privilege circle. The analysis of whether a particular PPC employee falls within the privilege circle depends on whether that employee's involvement is necessary for PPC to obtain or act upon the legal advice being rendered. This is a fact-specific determination that must be made by Cross or Hartwell.
Catherine Falk (CEO of PPC) and Aidan Naughton (Managing Director, PBI) may be included in specific communications where their input or approval is necessary, but only upon approval by Cross. Their inclusion should be documented in the matter file.
3. Written Memoranda and Analyses. All C&H memoranda, legal analyses, strategy documents, and other written materials relating to the engagement must bear the following header on each page:
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
Each document must also include the matter number 1018-00009. Documents should be stored in C&H's secure document management system under the designated matter folder and should not be maintained on personal devices, local drives, or unsecured shared drives.
4. Oral Communications. For telephone conferences and in-person meetings with PPC personnel, the C&H attorney leading the communication should confirm at the outset that (a) the communication is for the purpose of obtaining or providing legal advice, (b) only privilege-circle participants are present or on the call, and (c) the communication is intended to be confidential. If any non-privileged individuals are present (e.g., a PPC operations employee providing factual information), the C&H attorney should note that the factual portions of the discussion may not be privileged and should separately memorialize any legal advice or strategy discussions in a privileged memorandum.
Notes of all substantive telephone conferences and meetings should be taken by the C&H attorney and labeled with the heading "Attorney-Client Privileged Notes." Notes should be stored in the secure matter folder in C&H's document management system. Notes should capture the substance of the discussion, including any legal advice rendered, but should avoid recording the mental impressions and strategic assessments of C&H attorneys in the same document as factual call notes (see Section IX.B below regarding the separation of factual meeting notes from opinion work product).
5. Inadvertent Disclosure. Any inadvertent disclosure of privileged material to non-privileged parties — whether through misdirected email, accidental production in an IDR response, or any other means — must be reported immediately to Cross. Time is of the essence in asserting protections against inadvertent waiver. Upon notification, C&H will invoke protections under Federal Rule of Evidence 502(b), which provides that inadvertent disclosure does not operate as a waiver if (i) the disclosure was inadvertent, (ii) the holder of the privilege took reasonable steps to prevent disclosure, and (iii) the holder promptly took reasonable steps to rectify the error, including notifying the receiving party and requesting return or destruction of the materials. C&H will also invoke any applicable court rules or IRS Internal Revenue Manual provisions addressing clawback of inadvertently produced privileged documents.
C. Common Privilege Pitfalls in IRS Examination Context
The IRS examination context presents several recurring pitfalls that the team should be aware of and guard against:
Business communications versus privileged communications. Communications that merely inform C&H of factual developments in PPC's business operations are not automatically privileged simply because they are directed to an attorney. To be privileged, the communication must be made for the purpose of seeking or providing legal advice. For example, a factual update from Whitfield about PPC's financial results for a given quarter, standing alone, is a business communication and is not privileged. However, if Whitfield provides the same factual information in the context of asking C&H to assess whether the information affects PPC's transfer pricing defense, the communication is more likely to be privileged. The team should instruct PPC contacts to frame communications as requests for legal advice or counsel's opinion wherever appropriate and to include language such as "I am requesting your legal advice on the following" or "Please advise us regarding the legal implications of..." in their communications.
Pre-existing business documents. Pre-existing business documents gathered by PPC for production to the IRS in response to IDRs do not become privileged merely by being transmitted to C&H. A PPC board presentation from 2018 discussing transfer pricing strategy is a business document that is discoverable by the IRS regardless of whether it was subsequently sent to C&H. However, the act of selecting, assembling, and organizing pre-existing documents for defense purposes may, in certain circumstances, be protected under the work-product doctrine as reflecting counsel's mental processes and litigation strategy. The team should be mindful of this distinction when managing document production.
Dual-purpose documents. Documents prepared for both business and legal purposes present a recurring challenge. Under the "primary purpose" test applied by many courts, a document prepared for dual purposes is privileged only if the primary purpose of the communication was to seek or obtain legal advice. If the primary purpose was a business purpose (e.g., financial reporting, management decision-making), the document may not be privileged even if it was copied to or discussed with counsel. To ensure that documents intended to be privileged are in fact protected, the team should ensure that any such document is prepared at the direction of counsel and is created primarily for a legal purpose. Where a document serves both business and legal purposes, consideration should be given to preparing separate versions — one for business purposes and one for legal purposes — to avoid tainting the privileged version with business-purpose content.
IV. KOVEL ARRANGEMENT — WHITMORE VALUATION LLC
A. Background and Legal Basis
The Kovel doctrine derives from the decision of the United States Court of Appeals for the Second Circuit in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). In Kovel, the court held that the attorney-client privilege may extend to communications between an attorney's client and a non-attorney expert retained by the attorney, where the expert's services are necessary to enable the attorney to render informed legal advice to the client. The court drew an analogy to the use of interpreters and translators, reasoning that an attorney who needs the assistance of an accountant or other expert to understand the client's situation should not be forced to forfeit the privilege simply because a third party is interposed in the communication chain.
The Kovel privilege is not without limits. Courts have consistently held that the privilege extends to the expert's communications only when (i) the expert is retained by the attorney (not by the client directly), (ii) the expert's services are necessary to facilitate the attorney's provision of legal advice, and (iii) the expert is functioning as a translator or interpreter of complex information rather than performing independent business services. The privilege does not extend to an expert who is retained by the client for business purposes, even if the attorney directs the expert's work, nor does it extend to an expert who is performing services that the client would have obtained regardless of litigation (such as routine financial auditing or tax return preparation).
WVG has been retained by C&H — not directly by PPC — to perform independent economic analyses, benchmarking studies, and expert reports supporting PPC's transfer pricing positions, at the direction of counsel, for the purpose of enabling C&H to render informed legal advice to PPC regarding the IRS examination. This structure is essential to preserving the Kovel privilege. If WVG were retained directly by PPC, WVG's work would not be protected by the Kovel doctrine (although it might, in some circumstances, be protected under the work-product doctrine if prepared in anticipation of litigation).
B. Kovel Letter Terms
The Kovel engagement letter was executed on June 20, 2022, and bears the reference number 1018-00009-KV. The letter was executed by Leonard Cross on behalf of C&H and by Dr. Helena Vasquez on behalf of WVG. A copy is maintained in the matter file.
Dr. Helena Vasquez is the designated lead economist for the engagement; Dr. Rohan Chakrabarti is the supporting economist. Additional WVG personnel may be assigned to the engagement with C&H's prior approval, and any such personnel will be bound by the terms of the Kovel letter.
The blended billing rate for WVG's services under the Kovel engagement is $650 per hour. WVG's invoices are submitted to C&H and are forwarded to PPC for payment, consistent with the Engagement Letter's provisions regarding third-party costs. This billing arrangement does not alter the fact that WVG is retained by C&H, not by PPC.
The key terms of the Kovel engagement letter include the following:
(i) WVG agrees to maintain the confidentiality of all materials, data, and information received from C&H, PPC, or any other source in connection with the engagement. WVG will not disclose any such materials to any party other than C&H without C&H's prior written consent.
(ii) WVG will not disclose any communications, analyses, work product, draft or final reports, or other deliverables prepared in connection with the engagement to any party other than C&H without C&H's prior written consent.
(iii) WVG's deliverables are rendered to C&H for use in providing legal advice to PPC. WVG acknowledges that its work is being performed at the direction of C&H attorneys and for the purpose of facilitating C&H's provision of legal advice.
(iv) WVG will label all work product — including drafts, memoranda, analyses, spreadsheets, models, reports, and presentations — with the following legend: "PREPARED AT THE DIRECTION OF COUNSEL — PRIVILEGED AND CONFIDENTIAL."
(v) WVG will not communicate with the IRS, IRS agents, IRS economists, IRS counsel, or any third party regarding the subject matter of the engagement without C&H's prior written consent and, where applicable, the participation of an C&H attorney.
(vi) WVG will retain all documents and materials relating to the engagement in accordance with C&H's document retention instructions and will not destroy any materials without C&H's prior written consent.
C. Protocols for Communications with WVG
The following protocols govern all communications with WVG:
1. Attorney involvement in all substantive communications. All substantive communications with WVG personnel regarding the engagement must be initiated by, or conducted through, an C&H attorney (Cross, Hartwell, Simmons, or Nazari). PPC personnel — including Whitfield, Staines, and Iyer — should not communicate directly with WVG regarding the substance of the transfer pricing issues, C&H's legal strategy, or the IRS examination without an C&H attorney present on the communication (whether by email, telephone, or in person). This requirement is essential to maintaining the Kovel privilege: if PPC communicates directly with WVG without the intermediation of C&H attorneys, the communications may fall outside the scope of the Kovel privilege.
2. Factual data transmissions. There will be occasions when PPC personnel need to provide factual data to WVG for use in its economic analyses — for example, financial records, revenue data, cost pool breakdowns, intercompany agreements, comparable licensing arrangements, and similar materials. For logistical efficiency, it may be appropriate for PPC to transmit such data directly to WVG rather than routing it through C&H. If data is transmitted directly from PPC to WVG, the cover email or transmittal letter must reference that the materials are being provided at the direction of Calderwood & Harkness LLP in connection with C&H's provision of legal advice to PPC and must include the privilege legend ("PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — PREPARED AT THE DIRECTION OF COUNSEL"). An C&H attorney should be copied on the transmittal. These steps help preserve the Kovel privilege framework by documenting that the transmission is made in furtherance of the attorney-client relationship.
3. WVG deliverables. WVG's deliverables in connection with this engagement are expected to include the following:
(a) Functional analysis — a detailed analysis of the functions performed, assets employed, and risks assumed by PPC and PBI in connection with their respective roles in the development, manufacture, and commercialization of PPC's pharmaceutical products.
(b) Comparable Uncontrolled Transaction ("CUT") analysis — an analysis of arm's-length royalty rates based on a set of 14 comparable pharmaceutical license agreements identified by WVG. Preliminary results indicate an interquartile range of 3.1% to 6.8%, with a median of 4.4%.
(c) Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") analysis — an analysis of the arm's-length range of profitability for PBI's activities based on a set of 22 comparable companies. This analysis will serve as a supplementary best-method analysis.
(d) PCT valuation analysis — a valuation of the pre-existing intangible property contributed by PPC to the CSA, using the income method (Discounted cash flow), with a weighted average cost of capital ("WACC") of 9.8% and a preliminary valuation range of $278 million to $361 million.
(e) Rebuttal of IRS economist's analysis — a critique and rebuttal of the economic analysis prepared by the IRS's economist, Dr. Alan Washburne, once his analysis is received.
All of these deliverables are prepared at the direction of C&H counsel and constitute privileged work product under the Kovel doctrine and the work-product doctrine. However, if any WVG report or analysis is submitted to the IRS — for example, as an exhibit to the formal Protest or in response to an IDR — privilege may be waived as to the specific document disclosed. Subject-matter waiver may also extend to related documents addressing the same subject matter, depending on the circumstances. The team must consult with Cross before making any decision to produce or reference any WVG work product to the IRS. Each proposed disclosure will be evaluated to determine the scope of potential waiver and whether the benefits of disclosure outweigh the risks.
4. Draft WVG reports. Draft WVG reports circulated to the C&H team for review and comment are attorney work product. The iterative process of drafting, revising, and refining WVG's reports — including C&H's comments, suggestions, and edits — reflects the mental impressions and strategic judgments of C&H attorneys and constitutes opinion work product entitled to heightened protection. Draft reports should never be shared with the IRS. If a final version of a WVG report is ultimately produced to the IRS, only the clean, final version should be transmitted. The final version should not contain markup, tracked changes, or comments reflecting attorney mental impressions, strategy, or legal conclusions. All drafts and comment versions should be retained in C&H's secure document management system as part of the privileged work-product file.
D. Distinguishing Kovel-Protected Work from Non-Privileged Expert Work
The distinction between Kovel-protected work and non-privileged expert work is critical and must be managed carefully throughout the engagement:
WVG's analyses prepared at the direction of C&H for legal advice purposes are privileged under the Kovel doctrine. This privilege attaches because WVG is retained by C&H, is performing its work at the direction of C&H attorneys, and its work is necessary to enable C&H to render informed legal advice to PPC on complex transfer pricing issues.
However, if at any point WVG is designated as a testifying expert — for example, if the matter proceeds to Tax Court litigation and C&H determines that Dr. Vasquez or Dr. Chakrabarti should provide expert testimony — the scope of work-product protections may be substantially narrowed. Under Federal Rule of Civil Procedure 26(a)(2), a testifying expert must disclose a written report containing, among other things, a complete statement of all opinions and the basis and reasons for each, the facts and data considered, and all exhibits to be used in support of the opinions. The Tax Court has similar disclosure requirements. The designation of WVG as a testifying expert could result in the disclosure of materials that are currently protected, including draft reports and communications with C&H attorneys reflecting the development of WVG's opinions.
For now, WVG is retained solely under the Kovel framework and is not a designated testifying expert. No decision regarding expert designation should be made without the express approval of Cross, and any such decision should be deferred until the engagement team has a clearer picture of the litigation posture and the scope of disclosure that expert designation would entail.
V. COMMUNICATIONS WITH CRESTFIELD & ASSOCIATES LLP
A. Nature of Relationship
Crestfield & Associates LLP ("Crestfield") is PPC's independent auditor and prepared PPC's consolidated federal income tax returns (Forms 1120) and contemporaneous transfer pricing documentation reports for tax years 2017 through 2020. The audit engagement partner is Martin Ogilvy, CPA, and the transfer pricing partner is Susan Lam, CPA. Crestfield's relationship with PPC predates the engagement of C&H and encompasses a broad range of accounting, audit, and tax compliance services.
Crestfield originally prepared PPC's contemporaneous transfer pricing documentation under IRC § 6662(e) and Treas. Reg. § 1.6662-6. This documentation, which sets forth PPC's selection and application of the best transfer pricing method for each controlled transaction, is not privileged and will be produced to the IRS in the ordinary course of the Examination. The documentation forms part of the baseline factual record against which the IRS will evaluate PPC's transfer pricing positions.
Crestfield is NOT retained by C&H and is NOT party to a Kovel arrangement. This is a fundamental distinction from WVG. Crestfield's engagement is with PPC directly, and Crestfield's services — auditing, tax return preparation, and transfer pricing documentation — are performed for business purposes, not for the purpose of facilitating C&H's provision of legal advice. As a result, communications between C&H and Crestfield are NOT protected by attorney-client privilege or Kovel privilege.
B. Handling Protocols
Given the absence of privilege protection for communications with Crestfield, the following protocols must be observed:
1. Treat all communications as potentially discoverable. All communications with Crestfield — whether by email, telephone, letter, or in person — should be treated as potentially discoverable by the IRS. The IRS has the authority under IRC § 7602 to issue summonses to PPC's accountants and to compel the production of accountant workpapers. The IRS may also request, through IDRs or informal channels, copies of communications between PPC (or its counsel) and Crestfield. C&H attorneys must not share C&H's legal strategies, mental impressions, hazards-of-litigation analyses, settlement posture, or any other privileged analyses with Crestfield personnel. Any email or communication with Crestfield should be drafted with the assumption that it may be produced to the IRS.
2. Frame requests as factual data requests. Requests to Crestfield for information — such as return data, audit workpapers, research and development cost pool breakdowns, transfer pricing benchmarking data, or comparable company data — should be framed as factual data requests, not as requests for legal advice or analysis. The team should not ask Crestfield to provide opinions on the defensibility of PPC's positions, the strength of potential IRS arguments, or the probability of adverse outcomes. Such analyses, if needed, should be performed internally by C&H or by WVG under the Kovel arrangement. For reference, the R&D cost pool data for the examination period reflects total qualified R&D costs ranging from approximately $487.3 million in tax year 2017 to approximately $598.4 million in tax year 2020, with annual figures for each intervening year. These data points will be essential to both WVG's benchmarking analyses and C&H's defense of the CSA cost-sharing allocations.
3. FIN 48 / ASC 740-10 opinion letters. C&H may be asked to provide legal opinions to Crestfield for specific limited purposes, most notably to support PPC's FIN 48 (ASC 740-10) uncertain tax position reserves relating to the transfer pricing issues under examination. PPC currently maintains uncertain tax position reserves of approximately $62.4 million in connection with the transfer pricing positions at issue. Crestfield, as PPC's independent auditor, requires support for the technical merits of PPC's tax positions and the measurement of the reserve amounts. C&H may provide opinion letters addressing the likelihood of sustaining PPC's positions on a "more likely than not" basis, as required under ASC 740-10.
Such opinion letters should be clearly labeled as addressed to PPC and provided to Crestfield solely for PPC's financial reporting purposes. The opinion letter itself is privileged as between C&H and PPC. However, providing the letter to Crestfield may create waiver risks, particularly if the IRS asserts that PPC's disclosure of the letter to its auditor constitutes a waiver of privilege as to the letter's contents. The case law on this point is unsettled, with some courts finding waiver and others finding that disclosure to an auditor for the limited purpose of financial statement preparation does not constitute waiver. Each instance in which an opinion letter is to be shared with Crestfield must be approved by Cross, who will evaluate the waiver risks and, where appropriate, implement protective measures such as a limited-purpose confidentiality agreement with Crestfield.
4. Primary point of contact. Simmons is the primary C&H point of contact for routine data requests to Susan Lam at Crestfield. All requests to Crestfield should be documented in the matter file, and responses from Crestfield should be reviewed for any content that might inadvertently reveal C&H legal strategy before being filed.
VI. DUAL-JURISDICTION PRIVILEGE — THORNBURY & KEOGH COORDINATION
A. Nature of Relationship
Thornbury & Keogh ("T&K") is an Irish tax advisory firm retained directly by PBI (and PMI) as Irish tax advisors. T&K is not retained by C&H or by PPC. The lead partner at T&K, Ciarán Thornbury, has extensive experience advising multinational pharmaceutical companies on Irish corporation tax matters, including the Knowledge Development box ("KDB") regime, Irish transfer pricing rules (as amended by the Finance Act 2019), and Irish Revenue audits.
The nature of T&K's engagement raises important privilege considerations in both the U.S. and Irish jurisdictions:
Irish legal privilege (legal professional privilege). Under Irish law, legal professional privilege encompasses two categories: legal advice privilege (protecting confidential communications between a client and a solicitor for the purpose of obtaining legal advice) and litigation privilege (protecting confidential communications made for the dominant purpose of pending or contemplated litigation). Legal advice privilege in Ireland extends to communications with solicitors, but its application to communications with non-solicitor professionals — including chartered tax advisors ("CTAs") — is more limited. Whether T&K's communications with PBI are protected by legal professional privilege under Irish law depends, in significant part, on whether T&K personnel hold solicitor qualifications. The team should confirm with T&K the professional qualifications of the T&K personnel working on PBI's matters. If T&K personnel are CTAs rather than solicitors, certain communications may not be protected under Irish legal advice privilege, although litigation privilege may apply to communications made for the dominant purpose of contemplated litigation.
U.S. privilege considerations. Under U.S. law, the attorney-client privilege generally does not extend to communications with foreign tax advisors who are not attorneys admitted to practice law, although some courts have recognized a functional equivalency doctrine that extends the privilege to communications with foreign legal professionals whose role is substantially equivalent to that of a U.S. attorney. The applicability of this doctrine depends on the specific facts and on the court applying the law. As a general matter, C&H should not assume that communications between C&H and T&K are privileged under U.S. law.
B. Coordination Protocols
Effective coordination with T&K is essential to the defense, particularly with respect to PBI's economic substance, PBI's Irish Revenue filings, and the potential for competent authority relief under the U.S.-Ireland Income Tax Treaty. The following protocols govern the coordination:
1. Primary C&H contact. Leila Nazari is the primary C&H contact for coordination with T&K on Irish tax aspects of the defense. Nazari will serve as the liaison between the C&H team and T&K for all matters relating to PBI's and PMI's Irish operations, including PBI's Irish Revenue filings, Knowledge Development box claims (which provide an effective tax rate of 6.25% on qualifying intellectual property income), PBI economic substance documentation, and any Irish Revenue audit activity.
2. Common-interest or joint-defense framework. Communications between C&H and T&K concerning legal strategy should be routed through a common-interest or joint-defense framework where possible. A common-interest agreement would provide a basis for sharing certain privileged communications between the parties without waiver, on the theory that C&H (representing PPC) and T&K (representing PBI and PMI) share a common legal interest in the defense of the transfer pricing positions at issue. Cross and Nazari will evaluate whether a common-interest agreement is advisable and, if so, will negotiate and execute an appropriate agreement with T&K. Until a common-interest agreement is in place, the team should exercise caution in sharing legal strategy with T&K.
3. Restrictions on sharing C&H strategy. Team members must not share C&H's U.S. legal strategy memoranda, hazards-of-litigation analyses, settlement posture assessments, or other privileged work product with T&K unless specifically approved by Cross. The approval will take into account the specific content to be shared, the common-interest framework (if any), and the risk that disclosure may result in waiver of privilege under U.S. or Irish law.
4. Factual information sharing. Factual information about PBI's operations — including personnel, facilities, regulatory activities, and governance — may be shared freely with T&K, as underlying facts are not privileged. Relevant facts that may be shared include, without limitation:
• PBI's headcount: 185 employees as of December 31, 2020, including Managing Director Aidan Naughton.
• PBI's office presence: approximately 18,000 square feet at Sandyford Business Park, Dublin D18 K7T4.
• PBI's cumulative regulatory expenditures: €47.2 million for the period 2017 through 2020.
• PBI's board meetings: 42 board meetings held in Dublin during the period 2017 through 2020.
• PBI's independent pricing across 68 country markets outside the Americas.
These facts are relevant to establishing PBI's economic substance and DEMPE functions, and sharing them with T&K is appropriate for purposes of coordinating the defense.
5. Competent authority and mutual agreement procedure. T&K may be asked to provide analysis of potential competent authority relief under Article 25 (Mutual Agreement Procedure) of the U.S.-Ireland Income Tax Treaty, including the procedures for initiating a competent authority request with the Irish Revenue Commissioners and the coordination required between the U.S. and Irish competent authorities. Any such requests should be documented and coordinated through Nazari, with copies provided to Cross. C&H will separately advise PPC on the U.S. side of the competent authority process, including the filing of a request with the U.S. Competent Authority (currently within the IRS Treaty Assistance and Interpretation Team).
6. Billing. T&K's Irish advisory fees — approximately €312,500 for the engagement period to date — are billed directly to PBI/PPC, not through C&H. C&H does not control T&K's billing or engagement terms. T&K's fees are not included in C&H's invoices to PPC.
VII. ATTORNEY WORK-PRODUCT DOCTRINE
A. Scope of Protection
The work-product doctrine, first recognized by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), and codified in Federal Rule of Civil Procedure 26(b)(3), protects documents and tangible things prepared in anticipation of litigation or for trial by or for a party or its representative (including its attorney, consultant, surety, indemnitor, insurer, or agent). The doctrine is broader than the attorney-client privilege in that it protects materials prepared by non-attorneys (such as consultants or paralegals) as well as attorneys, but it is narrower in that it applies only to materials prepared "in anticipation of litigation," not to all confidential communications made for the purpose of obtaining legal advice.
In the IRS examination context, the application of the work-product doctrine turns on when the "anticipation of litigation" threshold is met. Courts have generally held that work-product protection does not attach during the routine examination phase of an IRS audit, when the IRS is merely gathering information. However, once there is a reasonable anticipation of litigation — i.e., a realistic prospect that the matter may proceed beyond examination and Appeals to litigation in the Tax Court — the doctrine applies. The determination is fact-specific and depends on factors such as the nature and severity of the issues, the positions taken by the IRS, and the likelihood that the parties will be unable to resolve the dispute administratively.
Given the magnitude of the present Examination — covering four tax years, involving potential proposed adjustments in the hundreds of millions of dollars, and addressing fundamental questions about PPC's transfer pricing methodology for its most significant intercompany transactions — it is our assessment that the matter presents a realistic prospect of litigation from the outset. Accordingly, we should treat the matter as one in anticipation of litigation from the commencement of C&H's engagement and apply work-product protections to all eligible documents and materials created by the engagement team.
B. Categories of Protected Work Product
The work-product doctrine recognizes two categories of protection, with different standards for overcoming each:
1. Fact work product. Fact work product includes document compilations, summaries of factual data prepared for litigation or defense purposes, IDR response strategy documents, document production indices, and other materials that reflect the assembling and organizing of factual information for defense purposes. Fact work product is subject to a qualified privilege: an opposing party may obtain discovery of fact work product upon a showing of substantial need and an inability to obtain the substantial equivalent of the materials by other means without undue hardship. In the IRS examination context, the IRS may overcome the qualified privilege for fact work product in certain circumstances, particularly where the factual information compiled by counsel is not otherwise available to the IRS.
2. Opinion work product (heightened protection). Opinion work product includes legal memoranda, strategy assessments, hazards-of-litigation analyses, mental impressions, conclusions, opinions, and legal theories of C&H attorneys. Opinion work product receives near-absolute protection under the work-product doctrine. Courts have consistently held that opinion work product is virtually undiscoverable, and the IRS cannot overcome this protection even upon a showing of substantial need. Opinion work product should never be disclosed to the IRS under any circumstances.
3. Economic analyses by WVG. WVG's economic analyses prepared at the direction of C&H counsel in anticipation of litigation are protected as work product. The analyses reflect the collaborative process between C&H attorneys and WVG economists in developing PPC's defense, and they are prepared for the purpose of enabling C&H to render informed legal advice. WVG's work product is additionally protected under the Kovel doctrine, as discussed in Section IV above.
C. Protection Protocols
1. Labeling. All work-product documents must be labeled with the following legend:
ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION
Where a document also qualifies as an attorney-client privileged communication, it should bear both the work-product legend and the attorney-client privilege legend.
2. Storage and access controls. Draft documents — including draft Protests, draft IDR response letters, internal strategy memoranda, hazards-of-litigation analyses, and all other work-product materials — must be maintained in C&H's secure document management system under the matter number 1018-00009. Access to the matter folder should be restricted to members of the C&H engagement team. Drafts should not be circulated outside the C&H team and the PPC privilege circle (Whitfield, Staines, and Iyer).
3. No disclosure of drafts to the IRS. Under no circumstances should draft documents be shared with the IRS. Only final versions of documents intended for IRS production — such as final IDR response letters and final Protests — should be transmitted to the IRS. The production of a draft document to the IRS would not only waive work-product protection for the draft itself but could also provide the IRS with insight into C&H's strategic thinking, editorial process, and mental impressions.
VIII. DOCUMENT HANDLING FOR IRS INFORMATION DOCUMENT REQUESTS (IDRs)
A. General Framework
The IRS examination team — led by Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy — will issue Information Document Requests ("IDRs") throughout the examination period. Based on the scope of the Examination (transfer pricing methodology for the CSA, royalty, and PCT across four tax years, 2017 through 2020), we anticipate a significant volume of IDRs, potentially numbering in the dozens. The IDRs will request production of a wide range of documents and information, including intercompany agreements, contemporaneous transfer pricing documentation, financial statements, board minutes, organizational charts, employee records, economic analyses, comparable company data, and communications relating to PPC's transfer pricing methodology and CSA.
All IDR responses will be prepared by or reviewed by the C&H team before production to the IRS. PPC personnel should not respond to IDRs directly without C&H's involvement. This protocol is essential to ensure that (i) no privileged or work-product materials are inadvertently produced, (ii) PPC's responses are complete, accurate, and consistent, and (iii) the scope and timing of document productions are managed strategically.
B. Document Review Process
The document review process for IDR responses will proceed as follows:
1. Collection. PPC will collect responsive documents from its internal systems, files, and personnel and forward them to C&H. Marcus Whitfield serves as the primary coordinator for PPC's internal document collection efforts, and he may designate other PPC personnel to assist with collection on specific topics. Documents should be transmitted to C&H via secure file transfer (the firm's secure portal) or, for physical documents, via courier or hand delivery. Documents should not be transmitted via unencrypted email.
2. First-level privilege review. Simmons and Nazari will conduct a first-level review of all documents collected by PPC before production to the IRS. The first-level review will identify documents that are (a) potentially privileged (attorney-client privilege, work-product doctrine, or both), (b) potentially subject to Kovel protection, (c) outside the scope of the IDR request, or (d) raise other strategic concerns. Documents flagged during the first-level review will be escalated to the second-level review.
3. Second-level review. Cross or Hartwell will conduct a second-level review of documents that implicate significant privilege or strategic concerns. This includes documents involving communications with C&H or other outside counsel, documents reflecting legal advice or strategy, documents containing mental impressions or opinion work product, and documents that may be especially sensitive from a factual perspective (e.g., documents reflecting PPC's internal assessments of its transfer pricing positions or documents relating to the negotiation and execution of the intercompany agreements).
4. Privilege log. A privilege log will be maintained for all documents withheld from production on privilege grounds (attorney-client privilege, work-product doctrine, or both). The privilege log will include the following information for each withheld document:
• Document description (type of document, e.g., email, memorandum, spreadsheet)
• Date of the document
• Author(s)
• Recipient(s) and, where applicable, persons copied
• Privilege basis (attorney-client privilege, work-product doctrine, or both)
• A brief, non-waiving description of the document sufficient to enable the IRS to assess the privilege claim without revealing the privileged content
The privilege log will be updated on a rolling basis as additional IDR responses are prepared and produced. Simmons is responsible for maintaining the privilege log and ensuring its accuracy and completeness.
C. Bates Numbering and Production Tracking
All documents produced to the IRS in response to IDRs will be Bates-stamped with a "PPC-IRS-" prefix and sequential numbering (e.g., PPC-IRS-000001, PPC-IRS-000002, etc.). The Bates-numbering scheme will be applied consistently across all productions to ensure a comprehensive and traceable production record.
A master document production index will be maintained, cross-referencing the following information for each production:
• IDR number
• Bates range (beginning and ending Bates numbers)
• Document description
• Production date
• Any notes or qualifications regarding the production (e.g., redactions, partial productions, documents produced subject to a privilege reservation)
The master production index will serve as the definitive record of all documents produced to the IRS during the Examination and will be essential for tracking the scope of productions, avoiding duplicative productions, and managing privilege issues. Simmons is responsible for maintaining the master production index.
D. Inadvertent Production of Privileged Materials
If privileged material is inadvertently produced to the IRS in an IDR response, the following steps must be taken immediately:
(i) Notify Cross immediately upon discovery of the inadvertent production. Time is of the essence.
(ii) Cross will prepare and transmit a written communication to the IRS examination team invoking clawback protections under Federal Rule of Evidence 502(b) and requesting the immediate return or destruction of the inadvertently produced document(s). The communication will identify the document(s) by Bates number and describe the privilege basis.
(iii) Document the inadvertent production in the matter file, including the circumstances of the production, the date of discovery, the remedial steps taken, and the IRS's response.
(iv) Review the production process to identify the cause of the inadvertent production and implement corrective measures to prevent recurrence.
Under FRE 502(b), an inadvertent disclosure does not operate as a waiver of privilege if the holder of the privilege took reasonable steps to prevent disclosure and promptly took reasonable steps to rectify the error. The protocols set forth in this memorandum — including the multi-level privilege review process, the privilege log, and the document labeling requirements — are designed, in part, to establish that C&H and PPC take reasonable steps to prevent inadvertent disclosure.
IX. COMMUNICATIONS WITH THE IRS
A. General Protocol
All substantive communications with the IRS — whether with Revenue Agents Gerald Meskill and Patricia Dunleavy, IRS Economist Dr. Alan Washburne, IRS Chief Counsel attorneys Franklin Rosario and Donna Hirabayashi, or any Appeals Officer assigned to the matter in the future — must be conducted by or with an C&H attorney present. This protocol applies to all forms of communication, including in-person meetings, telephone conferences, video conferences, email correspondence, and written submissions.
PPC personnel — including Whitfield, Staines, Iyer, and any other PPC employees — should not communicate directly with the IRS regarding the subject matter of the Examination without C&H's participation. This requirement has been confirmed with PPC via the Engagement Letter, and the filing of Form 2848 designates C&H as PPC's authorized representative before the IRS for tax years 2017 through 2020. Direct communications between PPC personnel and the IRS, without C&H's involvement, present significant risks: PPC personnel may inadvertently disclose privileged information, make factual admissions that are inconsistent with PPC's defense strategy, or agree to positions or concessions without the benefit of legal counsel's advice.
C&H will prepare all written correspondence to the IRS, including IDR response cover letters, meeting confirmation letters, extension requests (Form 872 or Form 872-A), and the formal Protest if the matter proceeds to IRS Appeals. All such correspondence will be reviewed and approved by Cross before transmission.
B. Meeting/Conference Notes
C&H will prepare notes for all meetings, telephone calls, and conferences with the IRS. These notes serve two important functions: they create a contemporaneous record of the IRS's positions, questions, and representations, and they document the factual content of the interactions for use in preparing the defense.
Factual meeting notes should be labeled "ATTORNEY WORK PRODUCT — PRIVILEGED AND CONFIDENTIAL" and should capture the factual content of the discussion, including the topics addressed, the questions asked by the IRS, the responses provided by PPC and C&H, any documents discussed or exchanged, and any commit