Marcus,
Thank you — and please extend our thanks to Deborah as well — for executing the engagement letter yesterday. We are pleased and grateful for the confidence you and the Penterra team have placed in Calderwood & Harkness, and we are committed to providing the vigorous and well-coordinated defense that this examination warrants.
With the engagement letter now fully executed, C&H is formally engaged to represent Penterra Pharmaceuticals Corp. ("PPC") in connection with the IRS Large Business & International Division examination of PPC's transfer pricing for tax years 2017 through 2020 (Exam Team LB&I-NE-TP-2022-00641). As you know, this examination was initiated by the IRS's initial contact letter (Letter 2205-A) dated May 16, 2022. Our internal matter number is **1018-00009** — I would appreciate it if you could reference this number on all future correspondence related to the engagement.
I want to move quickly on a number of fronts. Below I have set out our engagement team, the immediate action items with target dates and assigned responsibilities, and a proposed schedule for a kickoff call. This is a longer email than I would ordinarily send, but I think it is important that we establish clear lanes and a shared roadmap from the outset.
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**1. ENGAGEMENT TEAM**
Our core team and their respective roles are as follows:
- **Leonard Cross** (Partner, Philadelphia — 1735 Market Street, Suite 3100) — Responsible Partner. I will oversee overall strategy, manage the relationship with the IRS examination team, and handle any communications with IRS Appeals. All IRS communications will flow through me.
- **Sylvia Hartwell** (Partner, New York — 600 Lexington Avenue) — Billing Partner. Sylvia will oversee client management and billing. She is your point of contact for any billing or engagement-letter questions.
- **Garrett Simmons** (Associate, Philadelphia) — Lead Associate. Garrett will manage the day-to-day work on IDR responses, coordinate with your economic advisors, and handle IRS scheduling and correspondence under my supervision. He will be your primary day-to-day contact for document requests and scheduling matters.
- **Leila Nazari** (Associate, Philadelphia) — Working Associate. Leila will handle legal research, document production oversight, and serve as our primary liaison for Irish-side coordination (discussed further below).
For strategy calls and anything involving direct IRS communications, please come to me. For everything else on a day-to-day basis — document requests, scheduling, logistics — Garrett is your person.
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**2. IMMEDIATE NEXT STEPS — ACTION ITEMS**
**A. IRS Form 2848 — Power of Attorney**
We are preparing IRS Form 2848 to authorize all four C&H attorneys (Cross, Hartwell, Simmons, and Nazari) to represent PPC (EIN: 22-3741856) before the IRS for tax years 2017, 2018, 2019, and 2020. I will send the completed form to you for signature early next week, with a target filing date of **June 8, 2022**.
Until Form 2848 has been filed with and processed by the IRS, I would ask that PPC direct any incoming IRS inquiries to me and **refrain from providing any substantive responses** to the examination team. This is important — we want to ensure that all communications are coordinated and consistent from the start.
**B. Document Preservation**
We are preparing a formal document preservation notice to be distributed to PPC, Penterra Biopharma Ireland Ltd. ("PBI"), Penterra Holdings Luxembourg S.à r.l. ("PHL"), and Penterra Manufacturing Ireland Ltd. ("PMI"), directing the preservation of all documents — electronic and physical — relevant to the IRS examination. Our target distribution date is **June 6, 2022**.
Marcus, I need your help here. Please identify the appropriate contacts at each entity who should receive the preservation notice:
- **PBI** — I would suggest Aidan Naughton, Managing Director. Please confirm. - **PHL** (Luxembourg) — Please identify the appropriate contact. - **PMI** (Cork) — Please identify the appropriate contact.
It is critical that the preservation notice cover all entities in the corporate chain: PPC → PHL (disregarded entity) → PBI → PMI. We cannot afford any gaps.
**C. Initial Document Collection**
I would ask that you begin assembling the following categories of documents for our review at the earliest opportunity:
1. **Cost-Sharing Arrangement:** The CSA agreement effective July 1, 2012, together with all amendments, the PCT valuation report, and all supporting workpapers for the $312 million platform contribution transaction payment.
2. **Legacy IP License Agreement:** The intercompany license agreement for pre-2012 compounds (4.5% royalty rate) between PPC and PBI.
3. **Transfer Pricing Documentation:** Contemporaneous transfer pricing documentation for TY 2017–2020, as prepared by Crestfield & Associates (Susan Lam's team).
4. **Federal Tax Returns:** Forms 1120 for TY 2017–2020 and Forms 5471 for PBI and PHL for the same years.
5. **PBI Corporate Records:** Board minutes, organizational charts, headcount data, office lease agreements, and key governance documents.
6. **Intercompany Manufacturing Agreement:** The PBI-PMI contract manufacturing agreement (cost + 8%).
7. **Product Revenue Data:** Revenue breakdowns by territory (Americas vs. non-Americas) for Veritaxol, Imvara, and Cerulon for each year under examination.
8. **R&D Cost Pool Data:** Breakdown of qualified R&D costs for each year ($487.3M in 2017 through $598.4M in 2020) and cost-sharing ratio calculations (38.2%–42.7% PBI share).
Garrett will follow up with you and Deborah separately to discuss logistics for the document collection, including secure transfer protocols. We recognize this is a significant lift and will work with you to prioritize.
**D. Coordination with Crestfield & Associates**
We will need to coordinate closely with Crestfield & Associates — specifically Martin Ogilvy (engagement partner) and Susan Lam (transfer pricing partner) — to obtain the original TP documentation, return workpapers, and develop a thorough understanding of the methodologies they employed. Garrett Simmons will serve as our point of contact for all Crestfield coordination.
Could you either make an introduction or authorize us to contact Susan Lam directly? To be clear, Crestfield will not appear as counsel of record in this examination; C&H will handle all communications with the IRS. Our coordination with Crestfield is for the purpose of understanding and, as necessary, supplementing the existing economic analyses.
**E. Retention of Economic Expert — Whitmore Valuation Group**
I strongly recommend that we retain Whitmore Valuation Group LLC ("WVG") to perform independent economic analyses under a Kovel arrangement, which will preserve attorney-client privilege and work-product protection over their analyses and work product. The lead on their side would be Dr. Helena Vasquez, Managing Director. C&H has worked extensively with WVG on pharmaceutical transfer pricing matters, and they are ideally suited for the CUT, CPM/TNMM, and DCF analyses that this examination will require.
We will prepare the Kovel engagement letter (our reference: 1018-00009-KV) for your execution. WVG's blended rate is $650/hour. Our target date for execution of the Kovel letter is **June 20, 2022**, which will allow us to get WVG up to speed before the examination is fully underway.
Marcus, please let me know whether you are authorized to proceed with the WVG retention, or if this requires additional internal approval on your end.
**F. Irish Tax Advisor Coordination — Thornbury & Keogh**
Given the dual-jurisdiction nature of this examination — with the IRS fundamentally challenging the PPC-PBI structure — we will need to coordinate with PBI's Irish tax advisors, Thornbury & Keogh. I understand the lead partner on the T&K side is Ciarán Thornbury in Dublin. Leila Nazari will serve as our primary liaison with T&K.
Could you or Aidan Naughton provide an introduction and authorize C&H to communicate with T&K regarding the U.S. examination? The key areas of Irish coordination will include:
- PBI's Knowledge Development box claims (6.25% rate); - Irish Revenue filings and any parallel audit activity; - PBI substance documentation (personnel, decision-making, DEMPE functions); and - Potential competent authority / mutual agreement procedure considerations under the U.S.-Ireland Income Tax Treaty.
Early coordination on the Irish side is important. If the IRS proposes adjustments that effectively reallocate income to the United States, we will want to be positioned to pursue treaty-based relief if necessary.
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**3. OPENING CONFERENCE WITH THE IRS**
We anticipate that the IRS will schedule an opening conference in the near term — likely late June. Once Form 2848 is filed, I will send a letter to Supervisory Revenue Agent Gerald Meskill confirming the opening conference date and identifying C&H as PPC's authorized representatives.
I would recommend that you plan to attend the opening conference along with the C&H team. As VP, Global Tax, your presence will signal PPC's seriousness and cooperative posture, and it will give you a firsthand view of the examination team's approach. Lead Revenue Agent Patricia Dunleavy will likely manage day-to-day IDR issuance going forward, so it will be useful for you and Garrett to establish that relationship early.
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**4. PRIVILEGE PROTOCOLS**
We will circulate a privilege protocol memorandum in the coming days establishing procedures for maintaining attorney-client privilege and work-product protection throughout the examination. In the meantime, I want to flag two ground rules:
- All substantive communications regarding the examination should flow through or be copied to C&H. This includes any internal PPC discussions regarding the transfer pricing positions at issue. - Any economic analysis performed by Whitmore Valuation Group under the Kovel arrangement will be protected as attorney work product directed by counsel. It is essential that WVG's engagement be structured through C&H, not directly with PPC, to preserve this protection.
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**5. BUDGET AND BILLING**
As set forth in the engagement letter, our fee estimate for the examination through Appeals resolution is $4.5 million to $7.0 million, depending on examination scope, duration, and the complexity of any economic analyses required. Our 2022 billing rates are as follows:
- Cross: $1,475/hr - Hartwell: $1,350/hr - Simmons: $885/hr - Nazari: $695/hr
We will provide quarterly matter status reports and billing summaries so that you have full visibility into the progression of costs. Sylvia Hartwell will oversee billing and is available to address any questions on that front.
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**6. PROPOSED KICKOFF CALL**
I would like to schedule a kickoff call with you, Deborah, and the full C&H team for early next week — ideally **Tuesday, June 7** or **Wednesday, June 8**. On that call, I would like to:
- Walk through the items outlined above in more detail; - Discuss the IRS's likely examination focus areas based on the initial contact letter and current LB&I campaigns; - Align on document collection priorities and a realistic timeline; and - Address any questions or concerns from the PPC side.
Could you let me know your availability for either of those days? We are flexible on timing.
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**7. CLOSING THOUGHTS**
The team is fully mobilized and ready to move quickly. I want you to know that while we take this examination very seriously — as we should — I am confident in PPC's positions. PPC maintained contemporaneous transfer pricing documentation, the CSA was supported by a robust PCT valuation, and the methodologies employed by Crestfield appear well-supported on initial review. That said, thorough preparation will be critical, particularly with respect to PBI's substance and the economic underpinnings of the cost-sharing ratios. The IRS has been increasingly aggressive in this area, and we need to be ready for a searching examination.
One final note: I understand that PPC was not in the IRS Compliance Assurance Process (CAP) for the years under examination, so standard examination procedures will apply. This is neither unusual nor concerning — it simply means we will follow the conventional IDR and 30-day letter timeline.
I look forward to speaking with you next week. Please do not hesitate to reach out in the meantime if anything arises.
Best regards,
Leonard
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**Leonard Cross** Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7200 Mobile: (215) 510-3388 Email: lcross@calderwoodharkness.com
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