Marcus,
Thank you for the call this afternoon and for forwarding the IRS initial contact letter. I have reviewed Letter 2205-A, dated May 16, 2022, and wanted to provide you with my preliminary assessment and recommended next steps while the matter is fresh.
**Summary of the Letter**
The letter originates from the IRS Large Business & International Division, Northeast Transfer Pricing Practice (Exam Team ID: LB&I-NE-TP-2022-00641). The Team Manager is Gerald Meskill, and the Lead Revenue Agent is Patricia Dunleavy. The examination covers Penterra Pharmaceuticals Corp. (EIN 22-3741856) federal income tax returns (Forms 1120) for tax years 2017 through 2020. The assignment to LB&I's dedicated Transfer Pricing Practice — rather than a general LB&I team — makes clear that the IRS intends to scrutinize PPC's intercompany pricing arrangements as the primary focus of this examination.
**Likely IRS Focus Areas**
Based on the team assignment and the years at issue, I expect the examination will concentrate on PPC's cost-sharing arrangement with Penterra Biopharma International DAC, including the platform contribution transaction valuation and ongoing cost-sharing ratios. The legacy IP royalty arrangement between PPC and PBI — the 4.5% royalty rate on non-Americas net sales of pre-2012 compounds — will almost certainly also be under review. I would additionally anticipate scrutiny of PBI's economic substance as IP owner and CSA participant; the IRS has been increasingly aggressive in pharmaceutical structures on DEMPE-related arguments. Because PPC was not in the Compliance Assurance Process for these years, this will proceed as a standard post-filing examination.
**Exposure Context**
The examination years span both the pre-TCJA period (2017, at a 35% corporate rate) and post-TCJA (2018–2020, at 21%), which may influence the IRS's approach to proposed adjustments, particularly for the earlier year. Given the scale of intercompany flows — including cost-sharing payments and royalties on products such as Veritaxol, Imvara, and Cerulon — potential exposure could be significant if the IRS challenges the arm's-length nature of PPC's transfer pricing methodology. It is too early to quantify specific exposure, but this type of examination warrants serious attention and dedicated outside counsel resources from the outset.
**Engagement of Outside Counsel**
I strongly recommend that PPC formally engage experienced transfer pricing controversy counsel to manage this examination from inception. The IDR process will begin quickly once the IRS schedules an opening conference, and the manner in which PPC responds to initial Information Document Requests can shape the entire trajectory of the exam. Calderwood & Harkness has deep experience representing pharmaceutical and biotech companies in IRS transfer pricing examinations, and I would be prepared to assemble a team that includes Sylvia Hartwell (cc'd), who leads our international tax controversy practice, along with experienced associates. I am happy to prepare a formal engagement letter and proposed scope of representation for your and Deborah's review.
**Immediate Practical Steps**
Regardless of whether formal engagement is finalized immediately, I would urge the following:
1. **Do not respond** to the IRS letter or contact Revenue Agent Dunleavy or Team Manager Meskill until counsel is engaged and a Form 2848 (Power of Attorney) has been filed. 2. **Issue a document preservation notice** to all relevant personnel at PPC, PBI, Penterra Holdings Luxembourg S.à r.l., and Penterra Manufacturing Ireland Ltd. covering all documents related to the CSA, PCT, legacy IP license agreement, intercompany pricing, and PBI operations for TY 2017–2020. 3. **Assemble PPC's contemporaneous transfer pricing documentation** for the years at issue — I understand these were prepared by Crestfield & Associates — so we can conduct an initial review of the existing defensive position. 4. **Alert Rajesh Iyer (CFO)** if you have not already. The examination could have implications for PPC's FIN 48 (ASC 740-10) reserves, SEC disclosure obligations, and potentially for covenants under PPC's credit facility.
**Proposed Next Steps**
I would like to schedule a call early next week — the week of May 23 — with you and Deborah to discuss the examination in more detail, review the proposed engagement scope, and agree on a timeline. If PPC decides to engage C&H, I would target circulating a draft engagement letter by approximately May 27. Once formally engaged, we would also recommend retaining an independent economic consulting firm under a Kovel arrangement — retained at the direction of counsel to preserve attorney-client privilege — to support the economic and benchmarking analyses that will be central to PPC's defense.
Marcus, this is a significant examination, but I want to be clear that PPC's strong contemporaneous documentation and PBI's operational substance position the company well. That said, LB&I Transfer Pricing Practice teams are sophisticated and thorough, and early, well-coordinated engagement with experienced counsel will make a meaningful difference in how this proceeds.
Please let me know your availability next week, and don't hesitate to call if any questions come up in the interim.
Best regards,
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 T: (215) 764-3200 lcross@calderwoodharkness.com