CALDERWOOD & HARKNESS LLP 1735 Market Street, Suite 3100
November 15, 2023
Via Certified Mail (Return Receipt Requested) and Electronic Delivery (IRS Secure Messaging)
Supervisory Revenue Agent Gerald Meskill Team Manager Internal Revenue Service Large Business & International Division
Re: Penterra Pharmaceuticals Corp. EIN: 22-3741856 Exam Team ID: LB&I-NE-TP-2022-00641 Tax Years Under Examination: 2017, 2018, 2019, 2020 Re: Request for Extension of Time to File Protest C&H Matter No.: 1018-00009
Dear Mr. Meskill:
I am a partner in the Tax Department of Calderwood & Harkness LLP and am writing on behalf of our client, Penterra Pharmaceuticals Corp. ("PPC"), a corporation organized and existing under the laws of the State of Delaware, with its principal place of business located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. Calderwood & Harkness LLP ("C&H") serves as the authorized representative of PPC pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Internal Revenue Service on June 8, 2022. The Form 2848 designates the following attorneys as authorized representatives with respect to all matters pertaining to the above-referenced examination: Leonard Cross (CAF No. 4178-90261R), Sylvia Hartwell (CAF No. 3962-81437R), Garrett Simmons (CAF No. 5023-64189R), and Leila Nazari (CAF No. 5187-33742R). This matter is maintained within our firm under C&H Matter Number 1018-00009.
The purpose of this letter is to respectfully request an extension of time to file a formal Protest in response to the 30-Day Letter issued by the Internal Revenue Service on November 8, 2023, with respect to PPC's federal income tax liabilities for tax years 2017, 2018, 2019, and 2020. As discussed more fully below, PPC requests that the deadline to file its Protest be extended by fourteen (14) calendar days, from December 8, 2023 to December 22, 2023, in light of the extraordinary complexity and volume of the issues presented and the logistical challenges associated with coordinating the preparation of a comprehensive Protest across multiple parties and jurisdictions.
I. Procedural Background
The Internal Revenue Service initiated its examination of PPC on May 16, 2022, through the issuance of an initial contact letter (Letter 2205-A) addressed to PPC's VP of Global Tax, Marcus Whitfield. The examination encompasses PPC's federal income tax returns (Forms 1120) filed for tax years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020.
Throughout the course of the examination, the IRS examination team issued a total of forty-seven (47) Information Document Requests ("IDRs") between June 2022 and September 2023. PPC responded fully and in a timely manner to each of these IDRs, cooperating at all stages with the examination team in the production of documents, data, and factual materials responsive to the Service's inquiries. At no point during the examination did the IRS issue any delinquency notices or enforcement actions relating to the IDR process, and PPC's responsiveness and good-faith cooperation throughout the examination are a matter of record.
On October 12, 2023, the IRS issued a Notice of Proposed Adjustment ("NOPA") covering all four tax years under examination. The NOPA proposes net adjustments totaling approximately $380,400,000 in the aggregate, comprising the following principal categories:
• Cost-sharing arrangement adjustments of approximately $235,010,000, reflecting the IRS's proposal to increase PPC's Irish subsidiary Penterra Biopharma International DAC's ("PBI") cost-sharing percentages by approximately eight (8) to twelve (12) percentage points across the 2017 through 2020 tax years, thereby reallocating a greater share of intangible development costs to PBI and correspondingly increasing PPC's taxable income;
• Royalty rate adjustments of approximately $188,040,000, reflecting the IRS's proposal to increase the intercompany royalty rate applicable to legacy intellectual property from 4.5% to 11.0% of net sales, asserting that the arm's-length royalty rate for the licensed intangibles is substantially higher than the rate established in PPC's intercompany licensing agreements; and
• A correlative offset of approximately ($42,650,000), reflecting the reduction in proposed adjustments attributable to certain intercompany transactions that are directionally favorable to PPC when the above adjustments are taken into account.
In addition to the foregoing proposed income adjustments, the NOPA also proposed the imposition of a substantial valuation misstatement penalty under Section 6662(e) of the Internal Revenue Code of 1986, as amended (the "Code"), in the approximate amount of $15,977,000.
Thereafter, on November 8, 2023, the IRS issued the 30-Day Letter (Letter 950), formally advising PPC of the proposed adjustments set forth in the NOPA and providing PPC with a period of thirty (30) days in which to file a formal written Protest to request consideration of the disputed adjustments by the IRS Office of Appeals. Under the terms of the 30-Day Letter, PPC's deadline to file its Protest falls on or about December 8, 2023.
II. Request for Extension of Time
PPC respectfully requests that the deadline to file its formal Protest be extended by fourteen (14) calendar days, from December 8, 2023 to December 22, 2023. PPC submits that good cause exists for this extension, as set forth in detail below.
III. Grounds for Extension — Complexity and Good Cause
A. Extraordinary Complexity of the Proposed Adjustments
The proposed adjustments set forth in the NOPA are of extraordinary complexity, both in their legal and economic dimensions. The NOPA encompasses four separate tax years (2017 through 2020) and involves aggregate proposed adjustments of approximately $380.4 million across multiple distinct transfer pricing issues.
The proposed adjustments implicate highly complex transfer pricing matters that lie at the intersection of domestic and international tax law, economics, and industry-specific regulatory considerations. Specifically, the Protest must address the following substantive issues, among others:
(1) Valuation of the Platform Contribution Transaction. The IRS has challenged the valuation of the platform contribution transaction ("PCT") entered into between PPC and PBI in connection with the qualified cost-sharing arrangement ("CSA") governed by Treasury Regulation § 1.482-7. The Protest must present detailed legal arguments regarding the appropriate methods for valuing the PCT, the economic assumptions underlying the discounted cash flow ("DCF") analysis employed by PPC's economic advisors, and the factual predicates supporting PBI's anticipated benefits from the cost-shared intangibles.
(2) Arm's-Length Character of Intercompany Royalty Rates. The IRS has proposed to increase the intercompany royalty rate on legacy intellectual property from 4.5% to 11.0% of net sales, asserting that the arm's-length royalty rate is materially higher than the rate established by PPC. The Protest must address the proper application of the comparable uncontrolled transaction ("CUT") method and the comparable profits method ("CPM") under Treasury Regulation § 1.482-4, and must present PPC's comparable license agreement analysis in support of the 4.5% rate.
(3) Economic Substance of PBI. The IRS has raised questions regarding the economic substance of PBI, PPC's Irish subsidiary organized as a designated activity company under Irish law. The Protest must marshal substantial factual evidence demonstrating PBI's functions, assets, and risks across sixty-eight (68) country markets in which PBI conducts or oversees commercial operations, including evidence of PBI's headcount, operational decision-making authority, regulatory expenditures, and assumption of marketplace risk.
The preparation of a thorough and well-supported Protest thus requires the coordination of detailed legal arguments under Section 482 of the Code and the extensive body of Treasury Regulations promulgated thereunder, the integration of economic analyses prepared by Whitmore Valuation Group LLC ("WVG"), which has been retained as PPC's economic consultant under attorney direction for purposes of this matter, and the marshaling of substantial factual evidence from PPC's business records and the records of PBI. The complexity of these interlocking issues is such that additional time is necessary to ensure that the Protest presents PPC's positions in a comprehensive and coherent manner that will facilitate efficient consideration by the Office of Appeals.
B. Volume of the Examination Record
The examination record underlying the proposed adjustments is vast. Over the course of the seventeen-month examination, PPC responded to all forty-seven (47) IDRs, producing thousands of pages of documents, data, and explanatory materials. The documents produced include, without limitation, the following:
• The qualified cost-sharing arrangement agreement between PPC and PBI (effective July 1, 2012), together with all amendments thereto;
• Legacy intellectual property license agreements between PPC and PBI and related intercompany agreements;
• Audited financial statements of PBI for each of the years 2012 through 2020;
• Minutes and materials from forty-two (42) board meetings of PBI conducted during the 2017 through 2020 tax years;
• Personnel data, including headcount, compensation, and functional responsibility information, for one hundred eighty-five (185) employees of PBI;
• Regulatory expenditure records reflecting aggregate expenditures of approximately €47.2 million incurred by PBI in connection with product registration, post-market surveillance, and pharmacovigilance obligations across multiple jurisdictions; and
• Product-level revenue data for PPC's three principal commercial products — Veritaxol, Imvara, and Cerulon — disaggregated by country, distribution channel, and customer segment.
The Protest must address and incorporate the results of economic analyses that draw upon this extensive factual record. These analyses include a CUT analysis of fourteen (14) comparable pharmaceutical license agreements identified through a rigorous comparability screening process, a CPM/TNMM analysis utilizing a set of twenty-two (22) comparable companies selected through functional and financial screening, and an income method / DCF valuation of the PCT. Each of these economic analyses involves multiple layers of data, assumptions, and sensitivity analyses that must be carefully presented and explained in the Protest to ensure that the Office of Appeals has a clear and complete understanding of PPC's positions.
C. Multiple Tax Years and Distinct Issues Across Years
The Protest must address distinct legal and factual arguments applicable to each of the four tax years under examination. The positions taken by PPC and the adjustments proposed by the IRS differ across the tax years in material respects, including:
• Cost-sharing percentages: PPC's reported cost-sharing percentages for PBI ranged from 38.2% (2017) to 42.7% (2020), reflecting PBI's growing share of anticipated benefits from the cost-shared intangibles over the relevant period. The IRS has proposed to increase these percentages to a range of 48.2% (2017) to 53.7% (2020), representing increases of eight to twelve percentage points in each year. The Protest must address the year-specific factual bases for PPC's reported percentages and the methodological errors in the IRS's proposed revisions.
• Legacy IP net sales: The legacy intellectual property net sales figures upon which the royalty adjustment is based declined from approximately $814.6 million in 2017 to approximately $624.1 million in 2020, reflecting the natural lifecycle decline of PPC's legacy product portfolio. The Protest must address the implications of these declining sales figures for the royalty rate analysis.
• Applicable corporate tax rates: The four-year examination period spans the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), with the consequence that the proposed adjustments for tax year 2017 are subject to the pre-TCJA corporate tax rate of 35%, while the proposed adjustments for tax years 2018 through 2020 are subject to the post-TCJA corporate tax rate of 21%. The interaction of these different rates with the proposed adjustments requires careful analysis in the Protest, particularly with respect to the computation of penalties and interest.
In addition, the Protest must address the proposed substantial valuation misstatement penalty under Section 6662(e) of the Code and must present PPC's defenses thereto, including PPC's reasonable cause defense under Section 6664(c) and its contemporaneous transfer pricing documentation defense under Section 6662(e)(3)(B). These penalty defenses require independent factual and legal development.
D. Need for Coordination with Multiple Parties
The preparation of a comprehensive Protest in this matter requires the coordination of efforts across multiple parties and, in certain instances, across multiple jurisdictions and time zones. Specifically, the Protest requires coordination with the following individuals and firms:
• PPC personnel, including Marcus Whitfield (VP, Global Tax), Deborah Staines (General Counsel), and Rajesh Iyer (Chief Financial Officer), whose review, input, and approval of factual representations in the Protest are essential;
• Whitmore Valuation Group LLC ("WVG"), PPC's economic consultants, and specifically Dr. Helena Vasquez, Managing Director of WVG, who is responsible for the preparation and finalization of the economic analyses that will be submitted as exhibits to the Protest;
• Crestfield & Associates LLP, PPC's independent accounting firm and the original preparers of PPC's contemporaneous transfer pricing documentation, and specifically Martin Ogilvy (Engagement Partner) and Susan Lam (Transfer Pricing Partner), whose input is necessary to address the examination team's criticisms of the transfer pricing documentation and to support PPC's contemporaneous documentation defense to the proposed penalty; and
• Thornbury & Keogh, PBI's Irish tax advisors, and specifically Ciarán Thornbury (Lead Partner), whose input is necessary to address dual-jurisdiction aspects of the proposed adjustments, including the economic substance of PBI under Irish law, the interaction of the proposed U.S. adjustments with PBI's Irish tax positions, and the availability of correlative relief under the U.S.–Ireland income tax treaty.
The scheduling of necessary consultations and review cycles among these parties is further complicated by the approaching holiday season, which constrains the availability of key personnel at PPC, WVG, Crestfield & Associates, and Thornbury & Keogh during the final weeks of the current deadline period.
IV. Assurance of Good Faith and Diligence
PPC wishes to assure the Service that this request for a modest extension is made in good faith and is not sought for purposes of delay. PPC has cooperated fully and diligently throughout the examination, responding to all forty-seven (47) IDRs within the timeframes agreed upon with the examination team. At no point during the examination has PPC failed to meet a deadline or requested an extension of time to respond to an IDR.
PPC has already commenced the preparation of its Protest in earnest. C&H attorneys have been actively engaged in drafting the legal arguments that will be presented in the Protest, and WVG is in the process of finalizing the economic analyses that will support PPC's positions. PPC's internal tax and legal teams are concurrently assembling the supporting exhibits and factual materials that will accompany the Protest.
The requested fourteen-day extension is sought solely to ensure that the Protest is comprehensive, well-supported, and presented in a manner that will facilitate the efficient consideration of PPC's positions by the IRS Office of Appeals. A thorough Protest will serve the interests of both PPC and the Service by enabling the Office of Appeals to fully evaluate the disputed issues and, it is hoped, to reach a fair and well-informed resolution of this matter without the need for protracted litigation.
PPC is not seeking delay and remains fully committed to a timely resolution of all issues arising from the examination.
V. Proposed Extended Deadline
In light of the foregoing, PPC respectfully requests that the deadline to file its formal Protest be extended from December 8, 2023 to December 22, 2023. PPC commits to filing its Protest on or before December 22, 2023, and anticipates no further requests for extension of time.
VI. Contact Information
Should you have any questions regarding this request, or should you wish to discuss this matter further, please do not hesitate to contact the undersigned directly:
Leonard Cross, Esq. Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7244
Email: lcross@calderwoodharkness.com
In addition, a copy of this letter is being provided to Lead Revenue Agent Patricia Dunleavy and to IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, each of whom has been involved in the examination.
We thank you sincerely for your consideration of this request and for the courteous and professional manner in which the examination has been conducted by you and your team throughout this process. We look forward to your favorable response and to continuing to work cooperatively with the Service toward a timely and fair resolution of the matters under examination.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 864-7244
Email: lcross@calderwoodharkness.com
cc:
Lead Revenue Agent Patricia Dunleavy, IRS Large Business & International Division Attorney-Advisor Franklin Rosario, IRS Office of Chief Counsel Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Sylvia Hartwell, Partner, Calderwood & Harkness LLP
Enclosure(s): None. (Form 2848, Power of Attorney and Declaration of Representative, previously filed on June 8, 2022, is available upon request.)