1018-00009 · Client 1018 · Correspondence/IRS

letter-to-irs-appeals-conference-request-20240110.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP

Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103

Telephone: (215) 564-8200 Facsimile: (215) 564-8201

600 Lexington Avenue New York, New York 10022

Telephone: (212) 848-4000 Facsimile: (212) 848-4001

www.calderwoodharkness.com

January 10, 2024

Via U.S. Mail and Facsimile (212) 298-2040

Appeals Officer Noreen Castañeda Internal Revenue Service Office of Appeals 290 Broadway, 30th Floor New York, New York 10007

Re: Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years: 2017, 2018, 2019, 2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter Number: 1018-00009 Request for Appeals Conference — IRC § 482 Transfer Pricing Adjustments

Dear Appeals Officer Castañeda:

This firm, Calderwood & Harkness LLP, represents Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), 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. Our representation of PPC is authorized by IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Internal Revenue Service on June 8, 2022, covering Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, all of the Tax Department of Calderwood & Harkness LLP. A copy of the executed Form 2848 is enclosed with this letter for your convenience.

The purpose of this letter is to respectfully request the scheduling of an Appeals conference pursuant to Revenue Procedure 2015-41 to consider PPC's Formal Protest, which was filed on December 22, 2023, with the IRS Large Business & International Division. The Formal Protest contests proposed adjustments totaling $380,400,000 (net) for the tax years 2017 through 2020, as set forth in the Notice of Proposed Adjustment ("NOPA") issued by the examination team on October 12, 2023, and the 30-Day Letter dated November 8, 2023. The proposed adjustments relate exclusively to transfer pricing determinations under Internal Revenue Code § 482 and the associated substantial valuation misstatement penalty under IRC § 6662(e). PPC contests all proposed adjustments and the penalty in their entirety, as detailed in the Formal Protest, and respectfully seeks the opportunity to present its positions to the Office of Appeals.

I. Background Summary

A. Examination History

The IRS Large Business & International Division ("LB&I") opened an examination of PPC's federal income tax returns for tax years 2017, 2018, 2019, and 2020 on May 16, 2022, via Letter 2205-A, Notification of Examination. The examination was conducted by Supervisory Revenue Agent Gerald Meskill, who served as Team Manager, and Lead Revenue Agent Patricia Dunleavy, who served as the principal examiner responsible for the day-to-day conduct of the audit. The examination team was further supported by IRS Economist Dr. Alan Washburne, who provided economic analysis and reviewed PPC's transfer pricing documentation and methodologies, and IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, under the supervision of Senior Counsel Donna Hirabayashi, who provided legal guidance to the examination team on matters of transfer pricing law and regulation.

The examination was assigned the internal identifier LB&I-NE-TP-2022-00641 and was focused principally on the transfer pricing aspects of PPC's intercompany transactions with its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). Over the course of the examination, which spanned approximately sixteen months from its inception through the issuance of the NOPA, the examination team issued a total of forty-seven (47) Information Document Requests ("IDRs") between June 2022 and September 2023. PPC responded to all IDRs in full, providing extensive documentation including contemporaneous transfer pricing studies, intercompany agreements, financial statements, board minutes, corporate governance records, employee headcount and functional analyses, and supporting economic data. PPC cooperated fully with the examination throughout its duration and made its personnel available for interviews and conferences as requested by the examination team.

B. Issues Under Appeal

The NOPA issued on October 12, 2023, proposes adjustments under IRC § 482 challenging the transfer pricing methodology employed by PPC in connection with its qualified cost-sharing arrangement ("CSA") and its legacy intangible property royalty arrangement with PBI. PBI is a designated activity company organized under the laws of Ireland, with its principal offices in Dublin, and serves as the primary entity responsible for the commercialization, distribution, and regulatory management of PPC's pharmaceutical products outside of the Americas region.

The NOPA raises three principal issues, each of which is contested in PPC's Formal Protest:

1. CSA Cost-Sharing Ratio Adjustments. The NOPA proposes an increase of PBI's cost-sharing percentage by approximately eight (8) to twelve (12) percentage points across each of the tax years 2017 through 2020. The examination team contends that PBI's reasonably anticipated benefits ("RAB") from the intangible development activities conducted under the CSA were understated, and that PBI should have borne a greater share of the intangible development costs ("Coss") incurred during the relevant period. The proposed additional cost-sharing payments attributable to this adjustment total $235,010,000 across the four tax years under examination.

2. Legacy Intangible Property Royalty Rate Adjustments. The NOPA proposes an increase in the royalty rate applicable to PBI's use of legacy intangible property — that is, intangible property developed or acquired by PPC prior to the inception of the CSA — from the contractual rate of 4.5% of non-Americas net sales to 11.0% of non-Americas net sales. The examination team challenges PPC's application of the comparable uncontrolled transaction ("CUT") method and contends that the arm's-length royalty rate should be significantly higher than the rate established in the intercompany license agreement. The proposed additional royalties attributable to this adjustment total $188,040,000 across the four tax years.

3. Economic Substance Challenge. The NOPA challenges the economic substance of PBI's role as an intangible property owner and CSA participant. The examination team contends that PBI lacked sufficient decision-making authority, control, and functional capacity to be treated as a bona fide participant in the CSA and as the beneficial owner of the licensed legacy intangible property for purposes of IRC § 482 and the regulations thereunder.

After application of a correlative offset of $42,650,000 to account for the interrelationship between the cost-sharing adjustment and the royalty rate adjustment, the aggregate net proposed adjustment is $380,400,000 across tax years 2017 through 2020.

In addition to the foregoing adjustments, the IRS has proposed an accuracy-related penalty under IRC § 6662(e) for a substantial valuation misstatement in connection with transfer pricing, in an approximate amount of $15,977,000. PPC's Formal Protest contests the applicability of this penalty and asserts that PPC is entitled to penalty protection under IRC § 6662(e)(3)(B) on the basis of its contemporaneous transfer pricing documentation, the reasonableness of its transfer pricing methodology, and the existence of reasonable cause and good faith.

PPC's Formal Protest, filed on December 22, 2023, contests all proposed adjustments and the penalty in their entirety, as set forth in greater detail in the Protest and the five exhibits attached thereto.

II. Request for Appeals Conference

PPC respectfully requests that the Office of Appeals schedule an in-person conference at the earliest available date to consider the issues raised in the Formal Protest. Given the complexity and magnitude of the transfer pricing issues under appeal, PPC believes that an in-person conference will provide the most effective and efficient forum for presentation and discussion of the relevant facts, applicable law, and economic analyses.

PPC proposes that the conference be held during the week of February 26, 2024, with specific availability on Monday, February 26, Tuesday, February 27, or Wednesday, February 28, 2024. In the event that these dates are not available to the Office of Appeals, PPC offers the week of March 4, 2024, as an alternative period. PPC's preferred location for the conference is the IRS Appeals Office in Manhattan, New York, given the proximity of that office to our New York headquarters and the convenience for the anticipated participants. PPC estimates that the conference will require one full day given the complexity of the transfer pricing issues, the number of distinct legal and economic questions to be addressed, and the anticipated need for the Appeals Officer to direct questions to PPC's economic expert.

PPC is, of course, flexible with respect to scheduling and location and will endeavor to accommodate any alternative dates or arrangements proposed by the Appeals Officer.

III. Proposed Attendees

PPC proposes the following attendees for the Appeals conference:

1. Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP — Mr. Cross serves as the Responsible Partner for the PPC engagement and will serve as lead presenter at the conference. Mr. Cross will address the legal issues raised in the Protest, including the application of the arm's-length standard under IRC § 482 and the applicable Treasury Regulations, the economic substance of PBI's operations, and the penalty protection analysis.

2. Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP — Ms. Hartwell serves as the Billing Partner for the PPC engagement and will be available to address questions concerning the procedural history of the examination and the overall framework of PPC's transfer pricing positions.

3. Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP — Mr. Simmons is the Lead Associate on the engagement and will assist with the presentation of the factual record and the supporting documentation.

4. Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. — Mr. Whitfield is the senior tax officer of PPC and will be available to address questions concerning PPC's intercompany transactions, the business rationale for PPC's transfer pricing policies, and PBI's operations and organizational structure.

5. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. — Ms. Staines will be available to address questions concerning the corporate governance and legal structure of PPC and its subsidiaries, including PBI, and the intercompany agreements that govern the CSA and the legacy IP license.

6. Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC — Dr. Vasquez is the independent economic expert retained by PPC under a Kovel arrangement (Kovel Letter Reference 1018-00009-KV, executed June 20, 2022, pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)). Dr. Vasquez is prepared to present and respond to questions concerning the economic analyses supporting PPC's transfer pricing positions, including the comparable uncontrolled transaction ("CUT") analysis supporting the 4.5% legacy IP royalty rate, the comparable profits method / transactional net margin method ("CPM/TNMM") analysis used to corroborate the arm's-length results of the intercompany transactions, and the platform contribution transaction ("PCT") valuation (income method / Discounted cash flow approach) supporting the $312 million PCT payment made at the inception of the CSA.

PPC believes that the presence of the foregoing attendees will enable a comprehensive and productive discussion of the issues under appeal and will facilitate the Appeals Officer's consideration of the factual, legal, and economic bases for PPC's positions.

IV. Summary of Issues to Be Addressed at the Conference

PPC requests confirmation that the Appeals conference will address all issues raised in the Formal Protest. Specifically, PPC anticipates that the conference will address the following principal issues:

1. Cost-Sharing Percentages. The arm's-length nature of PBI's cost-sharing percentages (ranging from 38.2% to 42.7% for tax years 2017 through 2020) under Treasury Regulation § 1.482-7, as determined on the basis of PBI's reasonably anticipated benefits from the intangible development activities conducted under the CSA. PPC will present evidence demonstrating that PBI's cost-sharing percentages were calculated in accordance with the RAB methodology prescribed by the applicable regulations and that the percentages accurately reflect PBI's proportionate share of the anticipated benefits from the cost-shared intangibles.

2. Legacy IP Royalty Rate. The arm's-length nature of the 4.5% legacy intangible property royalty rate under Treasury Regulation § 1.482-4, as supported by PPC's application of the CUT method. PPC's CUT analysis identified fourteen (14) comparable uncontrolled pharmaceutical license agreements, yielding an interquartile range of 3.1% to 6.8%, with a median of 4.4%. The contractual royalty rate of 4.5% falls within the interquartile range and is closely aligned with the median of the comparable set, thereby satisfying the arm's-length standard.

3. Economic Substance and DEMPE Functions of PBI. PBI's economic substance as an intangible property owner and CSA participant, supported by evidence of PBI's development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions. During the tax years 2017 through 2020, PBI maintained an average of 185 employees, held 42 board meetings in Dublin, incurred cumulative regulatory expenditures of approximately €47.2 million in connection with obtaining and maintaining marketing authorizations and product registrations, and exercised independent pricing authority across 68 country markets. PPC will present comprehensive evidence that PBI performed substantial and meaningful functions, assumed significant risks, and utilized valuable assets in connection with the intangible property at issue.

4. PCT Payment Valuation. The validity of the $312 million platform contribution transaction payment made by PBI at the inception of the CSA. PPC's income method / Discounted cash flow ("DCF") analysis, conducted at a weighted average cost of capital ("WACC") of 9.8%, determined that the arm's-length range for the PCT payment was $278 million to $361 million. The actual PCT payment of $312 million falls within this range and is therefore consistent with the arm's-length standard under Treasury Regulation § 1.482-7(g).

5. Penalty Protection. PPC's entitlement to penalty protection under IRC § 6662(e)(3)(B). PPC maintained contemporaneous transfer pricing documentation for each of the tax years under examination, prepared by qualified transfer pricing professionals, and PPC's transfer pricing positions were supported by reasonable economic analyses and a reasonable application of the applicable transfer pricing methods. PPC will present evidence of reasonable cause and good faith in adopting its transfer pricing positions, thereby satisfying the requirements for penalty protection under the statute and regulations.

V. Supplemental Materials

PPC may wish to submit supplemental written materials in advance of or at the Appeals conference to assist the Appeals Officer in her review of the issues under appeal. Such materials may include additional economic analyses, updated comparability data, or legal memoranda addressing specific issues raised during the course of the Appeals process. PPC respectfully requests that Appeals Officer Castañeda provide guidance on any preferred timeline or procedures for the submission of pre-conference materials or supplemental evidence, so that PPC may ensure timely compliance with any such requirements.

For the record, PPC's Formal Protest, together with its five exhibits, was transmitted to the IRS Large Business & International Division on December 22, 2023, and PPC understands that the Protest and exhibits have been forwarded to the Office of Appeals as part of the case file. The five exhibits are as follows:

• Exhibit A — Corporate structure chart depicting the organizational relationship between PPC, PBI, and related entities.

• Exhibit B — Summary of the qualified cost-sharing arrangement, including the CSA agreement, amendments, and annual cost-sharing calculations for tax years 2017 through 2020.

• Exhibit C — Summary of economic analyses, including the CUT analysis, CPM/TNMM analysis, and PCT valuation (income method / DCF approach).

• Exhibit D — Evidence of PBI's economic substance, including employee headcount data, board meeting records, regulatory expenditure summaries, and pricing authority documentation.

• Exhibit E — Penalty protection documentation, including contemporaneous transfer pricing reports and supporting materials.

PPC will make additional copies of these exhibits available at the conference if requested.

VI. Administrative Matters

PPC respectfully requests that Appeals Officer Castañeda confirm her mailing address and facsimile number for purposes of future correspondence in connection with this matter. PPC also requests confirmation of the case assignment and any docket or case number assigned by the Office of Appeals upon receipt of the Protest and the case file from the examination division.

PPC understands that the case was assigned to Appeals Officer Castañeda in January 2024 following referral from the LB&I examination division, and PPC looks forward to working cooperatively with the Appeals Officer toward a prompt and equitable resolution of the issues under appeal.

PPC further notes that IRS Forms 872, Consent to Extend the Time to Assess Tax, have been executed extending the statute of limitations for assessment with respect to tax year 2017 and tax year 2018 through December 31, 2024. Statute management remains a priority for PPC, and PPC will cooperate in executing any further extensions of the statute of limitations that may be necessary to facilitate the completion of the Appeals process. PPC respectfully requests that the Appeals Officer advise as early as practicable if additional Forms 872 or Forms 872-A will be required for any of the tax years under appeal.

VII. Closing

PPC is committed to achieving a prompt and efficient resolution of the disputed issues at the Appeals level and believes that a well-organized in-person conference will serve the interests of both PPC and the Service. PPC reiterates its willingness to cooperate fully with the Office of Appeals and to provide any additional information, documentation, or analyses that may be requested by the Appeals Officer in connection with her review of the case.

Should the Appeals Officer wish to discuss scheduling, procedural matters, or any other aspect of this request, PPC's counsel would welcome the opportunity to do so by telephone at the Appeals Officer's convenience. The undersigned may be reached directly at the contact information set forth below.

We thank you for your attention to this matter and look forward to your response.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 564-8237

Email: lcross@calderwoodharkness.com

cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP

Enclosure: Copy of IRS Form 2848, Power of Attorney and Declaration of Representative (filed June 8, 2022)

CALDERWOOD & HARKNESS LLP
Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103
Telephone: (215) 564-8200 Facsimile: (215) 564-8201
600 Lexington Avenue New York, New York 10022
Telephone: (212) 848-4000 Facsimile: (212) 848-4001
www.calderwoodharkness.com
January 10, 2024
Via U.S. Mail and Facsimile (212) 298-2040
Appeals Officer Noreen Castañeda Internal Revenue Service Office of Appeals 290 Broadway, 30th Floor New York, New York 10007
Re: Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years: 2017, 2018, 2019, 2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter Number: 1018-00009 Request for Appeals Conference — IRC § 482 Transfer Pricing Adjustments
Dear Appeals Officer Castañeda:
This firm, Calderwood & Harkness LLP, represents Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), 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. Our representation of PPC is authorized by IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Internal Revenue Service on June 8, 2022, covering Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, all of the Tax Department of Calderwood & Harkness LLP. A copy of the executed Form 2848 is enclosed with this letter for your convenience.
The purpose of this letter is to respectfully request the scheduling of an Appeals conference pursuant to Revenue Procedure 2015-41 to consider PPC's Formal Protest, which was filed on December 22, 2023, with the IRS Large Business & International Division. The Formal Protest contests proposed adjustments totaling $380,400,000 (net) for the tax years 2017 through 2020, as set forth in the Notice of Proposed Adjustment ("NOPA") issued by the examination team on October 12, 2023, and the 30-Day Letter dated November 8, 2023. The proposed adjustments relate exclusively to transfer pricing determinations under Internal Revenue Code § 482 and the associated substantial valuation misstatement penalty under IRC § 6662(e). PPC contests all proposed adjustments and the penalty in their entirety, as detailed in the Formal Protest, and respectfully seeks the opportunity to present its positions to the Office of Appeals.
I. Background Summary
A. Examination History
The IRS Large Business & International Division ("LB&I") opened an examination of PPC's federal income tax returns for tax years 2017, 2018, 2019, and 2020 on May 16, 2022, via Letter 2205-A, Notification of Examination. The examination was conducted by Supervisory Revenue Agent Gerald Meskill, who served as Team Manager, and Lead Revenue Agent Patricia Dunleavy, who served as the principal examiner responsible for the day-to-day conduct of the audit. The examination team was further supported by IRS Economist Dr. Alan Washburne, who provided economic analysis and reviewed PPC's transfer pricing documentation and methodologies, and IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, under the supervision of Senior Counsel Donna Hirabayashi, who provided legal guidance to the examination team on matters of transfer pricing law and regulation.
The examination was assigned the internal identifier LB&I-NE-TP-2022-00641 and was focused principally on the transfer pricing aspects of PPC's intercompany transactions with its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). Over the course of the examination, which spanned approximately sixteen months from its inception through the issuance of the NOPA, the examination team issued a total of forty-seven (47) Information Document Requests ("IDRs") between June 2022 and September 2023. PPC responded to all IDRs in full, providing extensive documentation including contemporaneous transfer pricing studies, intercompany agreements, financial statements, board minutes, corporate governance records, employee headcount and functional analyses, and supporting economic data. PPC cooperated fully with the examination throughout its duration and made its personnel available for interviews and conferences as requested by the examination team.
B. Issues Under Appeal
The NOPA issued on October 12, 2023, proposes adjustments under IRC § 482 challenging the transfer pricing methodology employed by PPC in connection with its qualified cost-sharing arrangement ("CSA") and its legacy intangible property royalty arrangement with PBI. PBI is a designated activity company organized under the laws of Ireland, with its principal offices in Dublin, and serves as the primary entity responsible for the commercialization, distribution, and regulatory management of PPC's pharmaceutical products outside of the Americas region.
The NOPA raises three principal issues, each of which is contested in PPC's Formal Protest:
1. CSA Cost-Sharing Ratio Adjustments. The NOPA proposes an increase of PBI's cost-sharing percentage by approximately eight (8) to twelve (12) percentage points across each of the tax years 2017 through 2020. The examination team contends that PBI's reasonably anticipated benefits ("RAB") from the intangible development activities conducted under the CSA were understated, and that PBI should have borne a greater share of the intangible development costs ("Coss") incurred during the relevant period. The proposed additional cost-sharing payments attributable to this adjustment total $235,010,000 across the four tax years under examination.
2. Legacy Intangible Property Royalty Rate Adjustments. The NOPA proposes an increase in the royalty rate applicable to PBI's use of legacy intangible property — that is, intangible property developed or acquired by PPC prior to the inception of the CSA — from the contractual rate of 4.5% of non-Americas net sales to 11.0% of non-Americas net sales. The examination team challenges PPC's application of the comparable uncontrolled transaction ("CUT") method and contends that the arm's-length royalty rate should be significantly higher than the rate established in the intercompany license agreement. The proposed additional royalties attributable to this adjustment total $188,040,000 across the four tax years.
3. Economic Substance Challenge. The NOPA challenges the economic substance of PBI's role as an intangible property owner and CSA participant. The examination team contends that PBI lacked sufficient decision-making authority, control, and functional capacity to be treated as a bona fide participant in the CSA and as the beneficial owner of the licensed legacy intangible property for purposes of IRC § 482 and the regulations thereunder.
After application of a correlative offset of $42,650,000 to account for the interrelationship between the cost-sharing adjustment and the royalty rate adjustment, the aggregate net proposed adjustment is $380,400,000 across tax years 2017 through 2020.
In addition to the foregoing adjustments, the IRS has proposed an accuracy-related penalty under IRC § 6662(e) for a substantial valuation misstatement in connection with transfer pricing, in an approximate amount of $15,977,000. PPC's Formal Protest contests the applicability of this penalty and asserts that PPC is entitled to penalty protection under IRC § 6662(e)(3)(B) on the basis of its contemporaneous transfer pricing documentation, the reasonableness of its transfer pricing methodology, and the existence of reasonable cause and good faith.
PPC's Formal Protest, filed on December 22, 2023, contests all proposed adjustments and the penalty in their entirety, as set forth in greater detail in the Protest and the five exhibits attached thereto.
II. Request for Appeals Conference
PPC respectfully requests that the Office of Appeals schedule an in-person conference at the earliest available date to consider the issues raised in the Formal Protest. Given the complexity and magnitude of the transfer pricing issues under appeal, PPC believes that an in-person conference will provide the most effective and efficient forum for presentation and discussion of the relevant facts, applicable law, and economic analyses.
PPC proposes that the conference be held during the week of February 26, 2024, with specific availability on Monday, February 26, Tuesday, February 27, or Wednesday, February 28, 2024. In the event that these dates are not available to the Office of Appeals, PPC offers the week of March 4, 2024, as an alternative period. PPC's preferred location for the conference is the IRS Appeals Office in Manhattan, New York, given the proximity of that office to our New York headquarters and the convenience for the anticipated participants. PPC estimates that the conference will require one full day given the complexity of the transfer pricing issues, the number of distinct legal and economic questions to be addressed, and the anticipated need for the Appeals Officer to direct questions to PPC's economic expert.
PPC is, of course, flexible with respect to scheduling and location and will endeavor to accommodate any alternative dates or arrangements proposed by the Appeals Officer.
III. Proposed Attendees
PPC proposes the following attendees for the Appeals conference:
1. Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP — Mr. Cross serves as the Responsible Partner for the PPC engagement and will serve as lead presenter at the conference. Mr. Cross will address the legal issues raised in the Protest, including the application of the arm's-length standard under IRC § 482 and the applicable Treasury Regulations, the economic substance of PBI's operations, and the penalty protection analysis.
2. Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP — Ms. Hartwell serves as the Billing Partner for the PPC engagement and will be available to address questions concerning the procedural history of the examination and the overall framework of PPC's transfer pricing positions.
3. Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP — Mr. Simmons is the Lead Associate on the engagement and will assist with the presentation of the factual record and the supporting documentation.
4. Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. — Mr. Whitfield is the senior tax officer of PPC and will be available to address questions concerning PPC's intercompany transactions, the business rationale for PPC's transfer pricing policies, and PBI's operations and organizational structure.
5. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. — Ms. Staines will be available to address questions concerning the corporate governance and legal structure of PPC and its subsidiaries, including PBI, and the intercompany agreements that govern the CSA and the legacy IP license.
6. Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC — Dr. Vasquez is the independent economic expert retained by PPC under a Kovel arrangement (Kovel Letter Reference 1018-00009-KV, executed June 20, 2022, pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)). Dr. Vasquez is prepared to present and respond to questions concerning the economic analyses supporting PPC's transfer pricing positions, including the comparable uncontrolled transaction ("CUT") analysis supporting the 4.5% legacy IP royalty rate, the comparable profits method / transactional net margin method ("CPM/TNMM") analysis used to corroborate the arm's-length results of the intercompany transactions, and the platform contribution transaction ("PCT") valuation (income method / Discounted cash flow approach) supporting the $312 million PCT payment made at the inception of the CSA.
PPC believes that the presence of the foregoing attendees will enable a comprehensive and productive discussion of the issues under appeal and will facilitate the Appeals Officer's consideration of the factual, legal, and economic bases for PPC's positions.
IV. Summary of Issues to Be Addressed at the Conference
PPC requests confirmation that the Appeals conference will address all issues raised in the Formal Protest. Specifically, PPC anticipates that the conference will address the following principal issues:
1. Cost-Sharing Percentages. The arm's-length nature of PBI's cost-sharing percentages (ranging from 38.2% to 42.7% for tax years 2017 through 2020) under Treasury Regulation § 1.482-7, as determined on the basis of PBI's reasonably anticipated benefits from the intangible development activities conducted under the CSA. PPC will present evidence demonstrating that PBI's cost-sharing percentages were calculated in accordance with the RAB methodology prescribed by the applicable regulations and that the percentages accurately reflect PBI's proportionate share of the anticipated benefits from the cost-shared intangibles.
2. Legacy IP Royalty Rate. The arm's-length nature of the 4.5% legacy intangible property royalty rate under Treasury Regulation § 1.482-4, as supported by PPC's application of the CUT method. PPC's CUT analysis identified fourteen (14) comparable uncontrolled pharmaceutical license agreements, yielding an interquartile range of 3.1% to 6.8%, with a median of 4.4%. The contractual royalty rate of 4.5% falls within the interquartile range and is closely aligned with the median of the comparable set, thereby satisfying the arm's-length standard.
3. Economic Substance and DEMPE Functions of PBI. PBI's economic substance as an intangible property owner and CSA participant, supported by evidence of PBI's development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions. During the tax years 2017 through 2020, PBI maintained an average of 185 employees, held 42 board meetings in Dublin, incurred cumulative regulatory expenditures of approximately €47.2 million in connection with obtaining and maintaining marketing authorizations and product registrations, and exercised independent pricing authority across 68 country markets. PPC will present comprehensive evidence that PBI performed substantial and meaningful functions, assumed significant risks, and utilized valuable assets in connection with the intangible property at issue.
4. PCT Payment Valuation. The validity of the $312 million platform contribution transaction payment made by PBI at the inception of the CSA. PPC's income method / Discounted cash flow ("DCF") analysis, conducted at a weighted average cost of capital ("WACC") of 9.8%, determined that the arm's-length range for the PCT payment was $278 million to $361 million. The actual PCT payment of $312 million falls within this range and is therefore consistent with the arm's-length standard under Treasury Regulation § 1.482-7(g).
5. Penalty Protection. PPC's entitlement to penalty protection under IRC § 6662(e)(3)(B). PPC maintained contemporaneous transfer pricing documentation for each of the tax years under examination, prepared by qualified transfer pricing professionals, and PPC's transfer pricing positions were supported by reasonable economic analyses and a reasonable application of the applicable transfer pricing methods. PPC will present evidence of reasonable cause and good faith in adopting its transfer pricing positions, thereby satisfying the requirements for penalty protection under the statute and regulations.
V. Supplemental Materials
PPC may wish to submit supplemental written materials in advance of or at the Appeals conference to assist the Appeals Officer in her review of the issues under appeal. Such materials may include additional economic analyses, updated comparability data, or legal memoranda addressing specific issues raised during the course of the Appeals process. PPC respectfully requests that Appeals Officer Castañeda provide guidance on any preferred timeline or procedures for the submission of pre-conference materials or supplemental evidence, so that PPC may ensure timely compliance with any such requirements.
For the record, PPC's Formal Protest, together with its five exhibits, was transmitted to the IRS Large Business & International Division on December 22, 2023, and PPC understands that the Protest and exhibits have been forwarded to the Office of Appeals as part of the case file. The five exhibits are as follows:
• Exhibit A — Corporate structure chart depicting the organizational relationship between PPC, PBI, and related entities.
• Exhibit B — Summary of the qualified cost-sharing arrangement, including the CSA agreement, amendments, and annual cost-sharing calculations for tax years 2017 through 2020.
• Exhibit C — Summary of economic analyses, including the CUT analysis, CPM/TNMM analysis, and PCT valuation (income method / DCF approach).
• Exhibit D — Evidence of PBI's economic substance, including employee headcount data, board meeting records, regulatory expenditure summaries, and pricing authority documentation.
• Exhibit E — Penalty protection documentation, including contemporaneous transfer pricing reports and supporting materials.
PPC will make additional copies of these exhibits available at the conference if requested.
VI. Administrative Matters
PPC respectfully requests that Appeals Officer Castañeda confirm her mailing address and facsimile number for purposes of future correspondence in connection with this matter. PPC also requests confirmation of the case assignment and any docket or case number assigned by the Office of Appeals upon receipt of the Protest and the case file from the examination division.
PPC understands that the case was assigned to Appeals Officer Castañeda in January 2024 following referral from the LB&I examination division, and PPC looks forward to working cooperatively with the Appeals Officer toward a prompt and equitable resolution of the issues under appeal.
PPC further notes that IRS Forms 872, Consent to Extend the Time to Assess Tax, have been executed extending the statute of limitations for assessment with respect to tax year 2017 and tax year 2018 through December 31, 2024. Statute management remains a priority for PPC, and PPC will cooperate in executing any further extensions of the statute of limitations that may be necessary to facilitate the completion of the Appeals process. PPC respectfully requests that the Appeals Officer advise as early as practicable if additional Forms 872 or Forms 872-A will be required for any of the tax years under appeal.
VII. Closing
PPC is committed to achieving a prompt and efficient resolution of the disputed issues at the Appeals level and believes that a well-organized in-person conference will serve the interests of both PPC and the Service. PPC reiterates its willingness to cooperate fully with the Office of Appeals and to provide any additional information, documentation, or analyses that may be requested by the Appeals Officer in connection with her review of the case.
Should the Appeals Officer wish to discuss scheduling, procedural matters, or any other aspect of this request, PPC's counsel would welcome the opportunity to do so by telephone at the Appeals Officer's convenience. The undersigned may be reached directly at the contact information set forth below.
We thank you for your attention to this matter and look forward to your response.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 564-8237
Email: lcross@calderwoodharkness.com
cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP
Enclosure: Copy of IRS Form 2848, Power of Attorney and Declaration of Representative (filed June 8, 2022)

CALDERWOOD & HARKNESS LLP

CALDERWOOD & HARKNESS LLP

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