Marcus,
I hope this message finds you well. Below is our monthly status update on the IRS Large Business & International examination (Exam Team ID LB&I-NE-TP-2022-00641) for Penterra Pharmaceuticals Corporation ("PPC"), tax years 2017–2020.
As you know, the examination was opened on May 16, 2022, and Calderwood & Harkness was engaged on June 2. We are now approximately two and a half months into active defense. Our Form 2848 (Power of Attorney), filed June 8 and covering myself, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, has been confirmed accepted by the IRS. The opening conference was held June 28 with Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy.
**IDR Response Progress**
As of today, the IRS has issued approximately 12 Information Document Requests. Below is a summary of where we stand on responses to the first eight IDRs:
- **IDR No. 1** (Corporate Structure / Org Charts) — *Responded July 8, 2022.* We provided the PPC global organizational charts, including the ownership chain: PPC → Penterra Holdings Luxembourg S.à r.l. ("PHL," disregarded entity for U.S. tax purposes) → Penterra Biosciences Ireland Ltd. ("PBI," Ireland) → Penterra Manufacturing Ireland Ltd. ("PMI," contract manufacturer, Ireland).
- **IDR No. 2** (CSA Agreement and Amendments) — *Responded July 15, 2022.* We produced the cost-sharing arrangement effective July 1, 2012, together with all subsequent amendments.
- **IDR No. 3** (Legacy IP License Agreement) — *Responded July 22, 2022.* We produced the intercompany license covering legacy compounds at the 4.5% royalty rate.
- **IDR No. 4** (Transfer Pricing Documentation, TY 2017–2020) — *Responded August 1, 2022.* We produced the contemporaneous transfer pricing documentation prepared by Crestfield & Associates (Susan Lam's team) for all four examination years.
- **IDR No. 5** (PCT Valuation and Workpapers) — *Responded August 10, 2022.* We produced the original platform contribution transaction valuation report and supporting workpapers for the $312 million PCT payment.
- **IDR No. 6** (R&D Cost Pool and Allocation Methodology) — *Response in progress; target submission August 18, 2022.* This IDR covers the composition of qualified R&D costs ($487.3M in 2017, $523.8M in 2018, $561.2M in 2019, $598.4M in 2020) and the methodology for determining PBI's cost-sharing percentages (38.2%, 39.6%, 41.1%, and 42.7% for the respective years). We are finalizing the supporting schedules now.
- **IDR No. 7** (PBI Financial Statements and Irish Tax Returns) — *Due August 25, 2022.* Leila Nazari is coordinating with Ciarán Thornbury at Thornbury & Keogh in Dublin to gather PBI's Irish statutory financial statements and Revenue filings (PBI Irish Tax Reference 3218764T). We expect to have these in hand well in advance of the deadline.
- **IDR No. 8** (PBI Personnel and Headcount Data) — *Due September 5, 2022.* We are compiling headcount data reflecting PBI's growth from 52 employees in 2012 to 185 in 2020, along with organizational charts and role descriptions for key personnel, including Managing Director Aidan Naughton.
All responses are being routed through Calderwood & Harkness to Revenue Agent Dunleavy, referencing PPC EIN 22-3741856.
**Coordination with Crestfield & Associates**
Garrett Simmons has been in regular contact with Susan Lam (Transfer Pricing Partner) at Crestfield to obtain the underlying workpapers and data supporting Crestfield's original contemporaneous documentation. Garrett sent a comprehensive data request to Susan on July 10, and we have received initial responses; follow-up on the detailed R&D cost pool breakdowns is ongoing. We are also coordinating with Martin Ogilvy (Engagement Partner, Audit) as needed for return-level data from PPC's Forms 1120 for TY 2017–2020.
As a reminder, we are maintaining clear lines between Crestfield's role as auditor and return preparer and our role as counsel of record. Privilege protocols are being observed in accordance with the privilege protocol memorandum we circulated on June 10. Please let us know if you need another copy of that memo.
**Coordination with Whitmore Valuation Group**
Our Kovel engagement letter with Whitmore Valuation Group was executed on June 20 (Reference 1018-00009-KV), and Dr. Helena Vasquez (lead economist) and her team are now actively engaged. Whitmore is beginning work on three principal deliverables:
1. A comparable uncontrolled transaction (CUT) analysis for the legacy IP royalty rate; 2. A comparable profits method / transactional net margin method (CPM/TNMM) analysis of PBI's operating margins; and 3. An income-method / Discounted cash flow revaluation of the PCT.
Initial data packages have been transmitted to Whitmore under the Kovel arrangement, and all communications are being routed through Calderwood & Harkness to preserve privilege.
**Coordination with Thornbury & Keogh (Dublin)**
Leila Nazari has been coordinating with Ciarán Thornbury at T&K on Irish-side documentation, including PBI's Irish Revenue filings and Knowledge Development box claims (6.25% effective rate on qualifying IP income). T&K is also assembling PBI substance documentation — lease agreements for the approximately 18,000 sq ft office at Sandyford Business Park, PBI board governance documents, and banking records from Glenmore Bank Ireland plc.
This coordination is critical for our economic substance defense. As we discussed at the outset, demonstrating PBI's genuine development, enhancement, maintenance, protection, and exploitation (DEMPE) functions in Ireland will be central to our position.
**IRS Exam Team Observations**
Based on the opening conference and the IDR focus areas to date, the exam team appears to be concentrating on four principal issues:
1. The adequacy of the PCT payment; 2. The cost-sharing ratios and the reasonably anticipated benefits methodology; 3. The legacy IP royalty rate; and 4. PBI's economic substance.
We have confirmed that an IRS economist, Dr. Alan Washburne from the IRS Transfer Pricing Practice, is assigned to the case and will be conducting his own independent economic analysis. IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario is also assigned. None of this is unexpected, but it does confirm that the Service is taking a thorough approach.
**Upcoming Deadlines and Action Items**
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We also anticipate additional IDRs in the near term covering product revenue data by territory, PBI board minutes, and the intercompany manufacturing agreement between PBI and PMI (the cost-plus-8% markup arrangement).
On our side, Garrett and Leila are preparing a comprehensive functional analysis of PBI, which we expect to complete in draft by October 2022.
**Action Item for PPC:** It would be helpful if you could designate internal points of contact who can provide us with product-level revenue data for Veritaxol, Imvara, and Cerulon, broken down between Americas and non-Americas territories. The sooner we can establish those contacts, the more efficiently we can respond to the anticipated revenue-related IDRs.
**Budget Status**
Fees are currently tracking within the projected range established in our June 2022 budget estimate ($4.5M–$7.0M through Appeals resolution). We will provide a detailed billing summary at the end of Q3 2022, consistent with the terms of our engagement letter.
**Next Steps**
I am happy to schedule a call this week or next to discuss any questions or concerns. Our next monthly status update will follow in mid-September.
In the meantime, please do not hesitate to reach out to me, Sylvia, or Garrett with any questions. We also have available for your reference the master IDR Tracker, the privilege protocol memorandum (June 10, 2022), and the June 2022 budget estimate — just let us know if you would like us to send updated copies.
Best regards,
Leonard Cross Partner Calderwood & Harkness LLP 1700 Pennsylvania Avenue NW, Suite 800 Washington, DC 20006 (202) 555-4180 lcross@calderwoodharkness.com
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