Marcus,
I am writing to confirm that we received yesterday, November 8, 2023, the IRS 30-Day Letter for the examination of Penterra Pharmaceuticals Corp. (EIN 22-3741856) for tax years 2017, 2018, 2019, and 2020. The letter was issued by the LB&I examination team (Exam Team ID LB&I-NE-TP-2022-00641) and accompanies and formalizes the Notice of Proposed Adjustment (NOPA) issued October 12, 2023. As you will recall from our October 15 email and the NOPA analysis memorandum we circulated shortly thereafter, the NOPA proposes net adjustments of $380.4 million across all four years, consisting of CSA cost-sharing adjustments of $235.01 million and royalty rate adjustments of $188.04 million, less a $42.65 million correlative offset. The IRS has also proposed an IRC § 6662(e) substantial valuation misstatement penalty of approximately $15.98 million, representing 20% of the tax attributable to the proposed § 482 allocation.
I want to walk you through what this letter means procedurally, our recommended course of action, the applicable deadlines, and the immediate steps we need to take together.
**1. What the 30-Day Letter Means**
The 30-Day Letter formally provides PPC with the right to contest the proposed adjustments before the IRS Office of Appeals. PPC has 30 days from the date of the letter — making the deadline **December 8, 2023** — to file a formal written Protest under Revenue Procedure 2015-41 requesting consideration by Appeals.
PPC's procedural options at this juncture are as follows:
- **(a) Agree to the proposed adjustments.** We do not recommend this course of action. - **(b) Take no action and await a statutory Notice of Deficiency (90-Day Letter).** Under this path, PPC would need to file a petition in the U.S. Tax Court to contest the adjustments — a more costly, time-consuming, and public process. - **(c) File a formal Protest and pursue resolution at Appeals.** This is our recommended path, as discussed below.
**2. Recommended Course of Action — File a Formal Protest**
We strongly recommend that PPC file a formal Protest to take this case to IRS Appeals. The Appeals process offers significant structural advantages over both acquiescing and proceeding directly to Tax Court. Most importantly, Appeals Officers are authorized to consider the "hazards of litigation" in reaching settlements, unlike the examination team, which is bound to assert the full proposed adjustment. This means Appeals has the flexibility to settle at a fraction of the proposed deficiency where the IRS's litigation position carries meaningful risk.
We believe PPC has strong positions on all issues. Based on the economic analyses prepared by our team and by Whitmore Valuation Group:
- The **CUT analysis** supports PPC's 4.5% legacy IP royalty rate, which falls within the interquartile range of 3.1% to 6.8% derived from 14 comparable pharmaceutical license agreements, with a median of 4.4%. The IRS's proposed rate is not well-supported by the comparable data. - The **CPM/TNMM analysis** validates PBI's operating margins against a set of 22 comparable companies, demonstrating that PBI's results are consistent with arm's-length returns. - The **DCF/income-method analysis** establishes the $312 million PCT payment within the arm's-length range of $278 million to $361 million, undermining the IRS's proposed revaluation.
On the economic substance front, the functional analysis demonstrating PBI's operational reality — 185 employees, 42 board meetings held in Dublin during 2017–2020, €47.2 million in cumulative regulatory expenditures, and independent pricing decisions across 68 country markets — provides a strong factual foundation to rebut the IRS's DEMPE/economic substance challenge.
With respect to the penalty, PPC's contemporaneous transfer pricing documentation, prepared by Crestfield & Associates for each tax year, provides a robust basis for the penalty protection defense under IRC § 6662(e)(3)(B). We expect to achieve full penalty abatement at Appeals.
Tax Court litigation remains available if Appeals does not yield an acceptable resolution. However, the cost, duration, and public nature of Tax Court proceedings weigh strongly in favor of seeking resolution at Appeals first.
**3. Extension Request**
Given the complexity of the issues at stake — the Protest must comprehensively address the CSA cost-sharing ratio adjustments, the royalty rate dispute, the PCT valuation, PBI's economic substance, and penalty protection across four tax years — 30 days is not sufficient to prepare the kind of thorough, well-supported Protest that will best serve PPC's interests at Appeals.
We plan to send a letter to Supervisory Revenue Agent Gerald Meskill requesting an extension of the Protest filing deadline from December 8, 2023 to **December 22, 2023**. Extensions of this nature are routinely granted, particularly in large transfer pricing cases of this scope and complexity. I would like to submit this request promptly and ask for PPC's authorization to do so.
**4. Protest Preparation — Scope and Process**
The Protest will be a detailed written submission setting forth PPC's statement of facts, legal arguments under IRC § 482 and Treasury Regulations §§ 1.482-4 and 1.482-7, and a thorough presentation of the economic analyses supporting PPC's positions. We will attach key exhibits, including the corporate structure chart, the CSA summary, a summary of Whitmore's economic analyses, PBI substance evidence, and the penalty protection documentation.
Our team will begin drafting immediately. Garrett Simmons and Kaveh Nazari will prepare the initial draft. Sylvia Hartwell and I will review and refine the submission, and we will circulate a near-final version to you and Deborah for client review before filing.
We will also coordinate with Dr. Helena Vasquez at Whitmore Valuation Group to ensure the economic analyses are properly summarized and fully supported in the Protest submission.
**5. Related Considerations**
I want to flag two additional matters that we are analyzing separately:
- **SEC Disclosure and FIN 48 Reserve.** We are analyzing the implications of the proposed $380.4 million adjustment for PPC's upcoming year-end 10-K disclosure and FIN 48 (ASC 740-10) reserve. PPC's pre-settlement FIN 48 reserve of $62.4 million may need to be reassessed in light of the formalized proposed adjustment. - **Credit Facility Covenants.** We are reviewing whether the proposed adjustment triggers any material-tax-event reporting obligations under the $1.5 billion revolving credit agreement with Hargrove National Bank.
We will provide a more detailed analysis on both of these points separately to Deborah and Priya Iyer.
**6. Immediate Next Steps**
To keep this moving efficiently, I would ask the following:
1. **Call to discuss strategy.** I would like to schedule a call with you and Deborah at your earliest convenience — ideally tomorrow (Friday) or Monday — to discuss the extension request and our overall Protest strategy. 2. **Authorization to file the extension request.** Please confirm that we have PPC's authorization to submit the extension request letter to SRA Meskill. 3. **Updated timeline.** Following our call, we will circulate an updated timeline and Protest preparation schedule to the full team. 4. **Settlement authority.** Once the Protest is filed, we will need to have a discussion regarding PPC management's settlement authority for the Appeals process. We will prepare a settlement authority memorandum and hazards-of-litigation analysis for management's consideration at the appropriate time.
**7. Closing**
Marcus, I want to assure you that we believe PPC's transfer pricing positions are well-supported by the economic evidence and the applicable legal standards. Appeals presents the best path to a favorable resolution, and we are confident that PPC can achieve a result at a fraction of the proposed $380.4 million adjustment. We will move quickly and keep you informed at every step.
Please do not hesitate to reach out with any questions in the meantime. I am available by phone or email.
Best regards,
**Leonard Cross** Partner Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7200 Email: lcross@calderwoodharkness.com
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