Susan,
Thank you for the materials Crestfield has provided to date in connection with the ongoing IRS examination of Penterra Pharmaceuticals Corp. (EIN 22-3741856), TY 2017–2020 (IRS Exam Team LB&I-NE-TP-2022-00641). Your team's responsiveness has been very helpful as we work through this process.
As you'll recall, in our initial data request sent on July 10, 2022, we asked for copies of the contemporaneous transfer pricing documentation, supporting workpapers, and relevant return data. Crestfield promptly provided the contemporaneous TP documentation, which we produced to the IRS in response to IDR No. 4 on August 1, 2022. In addition, the IDR No. 6 response dated August 18, 2022 included top-level cost-sharing data and a summary of the R&D cost pool allocation methodology.
However, we now need more granular breakdowns of the qualified R&D cost pool underlying the cost-sharing arrangement between PPC and Penterra Biopharma International DAC ("PBI"). I've outlined our specific requests below.
**1. Detailed R&D Cost Pool Breakdowns by Tax Year**
We are requesting detailed breakdowns of the total qualified R&D costs for each of the four examination years:
- TY 2017: $487.3 million - TY 2018: $523.8 million - TY 2019: $561.2 million - TY 2020: $598.4 million
For each year, we need the following detail:
- **By cost category:** Personnel/labor costs, materials and supplies, contract research organization ("CRO") fees, clinical trial costs, depreciation on R&D equipment, overhead allocations, and stock-based compensation (if any included in the pool). - **By therapeutic area or product line:** To the extent available, breakdowns by therapeutic area or product line — specifically Veritaxol, Imvara, Cerulon, and any other pipeline compounds. - **Geographic allocation:** Identification of which costs were incurred in the U.S. versus outside the U.S. - **IDA qualification:** Identification of costs that qualify as intangible development activity ("IDA") costs under Treas. Reg. § 1.482-7. - **Adjustments and exclusions:** Any adjustments or exclusions made in arriving at the qualified cost pool, including costs excluded from the CSA cost pool and the basis for each exclusion.
**2. PBI Cost-Sharing Percentages — Supporting Workpapers**
We also need the underlying workpapers and projections used to derive PBI's cost-sharing percentages for each year:
- TY 2017: 38.2% (PBI share = $186.15M) - TY 2018: 39.6% (PBI share = $207.42M) - TY 2019: 41.1% (PBI share = $230.65M) - TY 2020: 42.7% (PBI share = $255.52M)
Specifically, we are requesting:
- The reasonably anticipated benefits ("RAB") projections (whether revenue-based or based on another metric) used in each year to determine the Americas versus non-Americas split. - Any contemporaneous documentation of how those projections were developed, including the revenue forecasting methodology and any board or management approvals of the underlying projections.
**3. Why We Need This Now**
As you are likely aware, Lead Revenue Agent Patricia Dunleavy and her team have been focused on the cost-sharing methodology, and we anticipate additional IDRs specifically targeting the composition and allocation of the R&D cost pool. Based on the pace of IDR issuance since the examination commenced in June 2022, we expect as many as 47 IDRs over the course of the examination. Having clean, detailed cost pool data in hand will allow us to respond more efficiently and to build a more defensible record as we move forward.
In addition, we are coordinating closely with Whitmore Valuation Group LLC — specifically Dr. Helena Vasquez and Dr. Rohan Chakrabarti — the economic consultants we have retained under a Kovel arrangement (reference 1018-00009-KV). Whitmore needs this data to complete their CPM/TNMM analysis and to refine the cost-sharing ratio analysis. The Kovel arrangement ensures that data shared with Whitmore's economists for purposes of rendering legal advice to PPC through Calderwood & Harkness remains privileged.
**4. Format and Delivery**
We would appreciate receiving the data in Excel workbook format with supporting schedules, consistent with the format Crestfield used in the original transfer pricing documentation. To the extent available, we would also ask for a reconciliation of the R&D cost pool to PPC's consolidated R&D credit computations on Form 6765 for TY 2017–2020, particularly where the Section 41 credit cost pool overlaps with the CSA cost pool.
We would like to receive these materials **by no later than November 1, 2022**, to allow sufficient time for Whitmore's analysis and for preparation of upcoming IDR responses.
**5. Privilege Reminder**
As a reminder, materials provided to Calderwood & Harkness in connection with this engagement are subject to the attorney-client privilege and the attorney work-product doctrine. We ask that all communications relating to examination matters be routed through C&H rather than directly to the IRS examination team.
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Susan, if it would be helpful, I'm happy to schedule a call to walk through the specific data points we're looking for. I know this is a detailed request, and I want to make sure we're not creating unnecessary work on your end if there's a more efficient way to pull this together.
Marcus Whitfield, VP of Global Tax at PPC, is aware of this request and has authorized Crestfield's cooperation.
Thank you again for Crestfield's continued support on this matter. Please don't hesitate to reach out with any questions.
Best regards,
Garrett Simmons Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7233 Email: gsimmons@calderwoodharkness.com
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