PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the individuals identified herein and should not be disclosed to any third party without prior written authorization from Calderwood & Harkness LLP.
MEMORANDUM
TO: Leonard Cross, Responsible Partner Sylvia Hartwell, Billing Partner Garrett Simmons, Lead Associate
FROM: Leila Nazari, Working Associate
DATE: November 15, 2023
RE: IRS Appeals Procedures Under Rev. Proc. 2015-41 — Application to Penterra Pharmaceuticals Corp. IRS Transfer Pricing Examination (TY 2017–2020)
MATTER NO.: 1018-00009
CLIENT: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
IRS EXAM TEAM ID: LB&I-NE-TP-2022-00641
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I. Purpose and Scope of Memorandum
This memorandum summarizes the procedural framework governing IRS Appeals conferences under Revenue Procedure 2015-41, 2015-35 I.R.B. 263 ("Rev. Proc. 2015-41"), as applicable to Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") pending transfer pricing examination for tax years 2017, 2018, 2019, and 2020 (collectively, the "Tax Years at Issue"). The memorandum is prepared at the request of the engagement team and is intended to serve as the primary procedural roadmap for PPC's administrative appeal.
The IRS Large Business & International Division ("LB&I"), Northeast Transfer Pricing Group, issued a Notice of Proposed Adjustment ("NOPA") on October 12, 2023, proposing net adjustments of approximately $380.4 million across all four Tax Years at Issue under Internal Revenue Code ("IRC") § 482. The proposed adjustments relate to intercompany transactions between PPC and its Irish subsidiary, Penterra Biologics Ireland, Ltd. ("PBI"), encompassing cost-sharing agreement ("CSA") cost-sharing ratios, legacy intellectual property ("IP") royalty rates, and a platform contribution transaction ("PCT") valuation, as well as an asserted accuracy-related penalty under IRC § 6662(e) of approximately $15.98 million.
On November 8, 2023, the IRS issued a Preliminary Notice of Deficiency, commonly known as the "30-Day Letter," providing PPC with the right to file a formal written Protest and request an Appeals conference with the IRS Independent Office of Appeals ("Appeals"). Calderwood & Harkness LLP ("C&H" or the "Firm") submitted a request for an extension of the deadline to file the Protest on November 15, 2023, directed to Supervisory Revenue Agent Gerald Meskill. The extension was granted, establishing December 22, 2023 as the revised Protest filing deadline.
This memorandum is intended to guide the team's preparation of the formal Protest and the subsequent Appeals process, ensuring full compliance with all procedural requirements under Rev. Proc. 2015-41, IRS Publication 5 (Your Appeal Rights and How to Prepare a Protest If You Don't Agree), and the Internal Revenue Manual ("IRM"). Specifically, this memorandum addresses: (1) the procedural framework of Rev. Proc. 2015-41; (2) the formal requirements for the written Protest; (3) the mechanics of the Appeals conference; (4) possible outcomes and settlement dynamics; (5) statute of limitations management; and (6) strategic considerations specific to PPC's transfer pricing dispute. All references to the "Code" or "IRC" are to the Internal Revenue Code of 1986, as amended, and all references to "Treasury Regulations" or "Treas. Reg." are to the applicable regulations promulgated thereunder.
II. Overview of Rev. Proc. 2015-41
A. Background and Purpose
Revenue Procedure 2015-41 was issued by the IRS on August 17, 2015, and became effective on September 2, 2015. It replaced and consolidated several prior guidance documents governing the administrative appeals process, including portions of Rev. Proc. 87-24, Rev. Proc. 2000-43, and Rev. Proc. 2006-44, among others. The consolidation effort was part of the IRS's broader initiative to modernize and streamline the administrative dispute resolution framework, providing taxpayers with clearer and more unified procedural guidance.
Rev. Proc. 2015-41 establishes the comprehensive framework for resolving federal tax controversies at the administrative level—that is, within the IRS's own organizational structure—before the matter proceeds to litigation in the United States Tax Court, the United States District Courts, or the United States Court of Federal Claims. The revenue procedure reflects a longstanding IRS policy that the Independent Office of Appeals provides an independent, impartial review of disputes, functioning separately from the Examination Division (including LB&I) that conducted the original audit.
The stated mission of the IRS Independent Office of Appeals, as codified in both Rev. Proc. 2015-41 and the Taxpayer First Act of 2019 (P.L. 116-25), is to resolve tax controversies on a basis that is fair and impartial to both the government and the taxpayer, without the necessity of litigation, while considering the hazards of litigation that would exist if the case were litigated. This hazards-of-litigation framework is a critical feature of the Appeals process and distinguishes it from the Examination function, which advocates for the government's position. The practical significance of this distinction for PPC cannot be overstated: while the LB&I examination team has taken aggressive positions regarding PPC's transfer pricing arrangements, the Appeals Officer is charged with objectively evaluating the strengths and weaknesses of both parties' positions, including the realistic probability of the IRS prevailing on each issue if the case were tried before the Tax Court.
Rev. Proc. 2015-41 also addresses the scope of Appeals' settlement authority, the procedures for requesting an Appeals conference, the ex parte communication restrictions that protect the independence of Appeals, and the various administrative mechanisms available for resolving disputes, including closing agreements, concessions, and partial settlements. Importantly, Rev. Proc. 2015-41 does not address Alternative Dispute Resolution ("ADR") mechanisms such as Fast Track Settlement, Mediation, or Arbitration, which are governed by separate revenue procedures and IRM provisions. While those ADR mechanisms may be considered as a backstop strategy for PPC, they are beyond the scope of this memorandum.
B. Applicability. Rev. Proc. 2015-41 applies broadly to all cases—docketed and non-docketed—that fall within the jurisdiction of the IRS Independent Office of Appeals. The revenue procedure covers the full range of administrative tax controversy matters, including income tax, employment tax, excise tax, and estate and gift tax disputes. For purposes of PPC's case, the following aspects of applicability are particularly relevant.
First, Rev. Proc. 2015-41 is specifically applicable to cases originating from the Large Business & International Division, which is the IRS division responsible for examining taxpayers with assets exceeding $10 million. PPC, as a publicly traded multinational pharmaceutical corporation, squarely falls within LB&I's jurisdiction, and its transfer pricing examination was conducted by the LB&I Northeast Transfer Pricing Group under Exam Team ID LB&I-NE-TP-2022-00641.
Second, the revenue procedure governs both unagreed issues arising from completed or partially completed examinations and penalty considerations. In PPC's case, the proposed adjustments encompass both substantive transfer pricing reallocations under IRC § 482 and the assertion of an IRC § 6662(e) substantial valuation misstatement penalty. Both categories of issues are properly within the scope of an Appeals conference under Rev. Proc. 2015-41.
Third, it is important to note that PPC was not a participant in the IRS Compliance Assurance Process ("CAP") for any of the Tax Years at Issue (TY 2017–2020). The CAP program, which is available to certain large corporate taxpayers, involves a pre-filing review process with separate procedural protocols for dispute resolution. Because PPC was not in CAP, the standard Appeals procedures set forth in Rev. Proc. 2015-41 apply without modification. Had PPC been a CAP participant, certain expedited or modified procedures under IRM 4.51.8 might have been available, but those provisions are inapplicable here.
Finally, it should be noted that while Rev. Proc. 2015-41 provides the overarching procedural framework, the IRM—particularly IRM Part 8 (Appeals)—contains extensive operational guidance that supplements the revenue procedure. The Appeals Officer assigned to PPC's case will rely on both Rev. Proc. 2015-41 and the applicable IRM provisions in managing the case. C&H should be familiar with the relevant IRM sections, particularly IRM 8.2 (Conference and Settlement Practices), IRM 8.4 (Appeals Case Memorandum), and IRM 8.7 (Closing Agreements).
III. Right to Appeal and Procedural Prerequisites
A. Issuance of the 30-Day Letter
Upon completion of the examination, if the taxpayer does not agree with the proposed adjustments set forth in the NOPA, the IRS examination team issues a Preliminary Notice of Deficiency, commonly referred to as the "30-Day Letter." The 30-Day Letter serves as the formal mechanism by which the IRS communicates the results of the examination and notifies the taxpayer of its right to seek administrative review by the Independent Office of Appeals. The letter is also sometimes referred to as a "letter of proposed changes" or a "preliminary notice of deficiency," though the terminology varies by IRS division and context. Regardless of nomenclature, the 30-Day Letter's legal significance lies in its initiation of the administrative appeals clock.
In PPC's case, the IRS examination team—led by Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy, with economic support from IRS economist Dr. Alicia Washburne and international examiner Carlos Rosario—issued the 30-Day Letter on November 8, 2023. This letter followed the issuance of the NOPA on October 12, 2023, which set forth in detail the proposed adjustments totaling $380.4 million across TY 2017 through TY 2020. The 30-Day Letter was addressed to PPC at its principal office at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550, with copies transmitted to C&H as PPC's authorized representative under the Form 2848 Power of Attorney then on file.
The 30-Day Letter provides the taxpayer 30 days from the date of issuance to file a written Protest requesting consideration by Appeals. This 30-day period is not a jurisdictional deadline in the same sense as the 90-day period triggered by a Statutory Notice of Deficiency; rather, it is an administrative deadline that may be extended by agreement between the taxpayer and the examination team, as discussed below. Nevertheless, failure to file a timely Protest (or obtain an extension) results in the forfeiture of the taxpayer's right to an Appeals conference at the non-docketed stage, and the IRS will proceed to issue a Statutory Notice of Deficiency.
B. Election of Remedies
Upon receipt of the 30-Day Letter, the taxpayer is presented with several courses of action. Each option carries distinct procedural, economic, and strategic implications, and the appropriate choice depends on the specific facts and circumstances of the case. The available options are as follows:
1. Accept the proposed adjustments. The taxpayer may agree to the IRS's proposed adjustments by executing an agreement form (typically IRS Form 870 or Form 870-AD). This option is not recommended for PPC given the magnitude of the proposed adjustment—$380.4 million in aggregate income reallocations plus a $15.98 million penalty—and the significant factual and legal bases supporting PPC's original transfer pricing positions. Acceptance of the adjustment would result in substantial additional tax liability, interest, and penalties, with corresponding financial statement implications that are disproportionate to the merits of the IRS's position.
2. File a formal written Protest and request an Appeals conference. The taxpayer may submit a formal written Protest to the IRS examination team, setting forth in detail the factual and legal bases for disagreement with each proposed adjustment, and requesting that the case be referred to the Independent Office of Appeals for an impartial review. This is the recommended course of action for PPC. The Appeals process historically yields favorable outcomes in transfer pricing cases, as the hazards-of-litigation standard encourages resolution at amounts significantly below the full proposed adjustment. Moreover, the Appeals process preserves all of PPC's subsequent rights, including the right to petition the Tax Court if no settlement is reached.
3. Take no action. If the taxpayer does not respond to the 30-Day Letter within the allotted time (including any extensions), the IRS will issue a Statutory Notice of Deficiency, also known as the "90-Day Letter." The Statutory Notice of Deficiency is a jurisdictional prerequisite to a petition in the United States Tax Court under IRC § 6213(a). The taxpayer then has 90 days (150 days if the notice is addressed to a person outside the United States) from the date of the notice to file a Tax Court petition. If no petition is filed within that period, the deficiency becomes final and the IRS may proceed to assess and collect the tax. While the Tax Court route remains available to PPC as a backstop, proceeding directly to Tax Court litigation without first exhausting the administrative Appeals process is generally inadvisable. Tax Court litigation is expensive, time-consuming, and uncertain, and the Firm's recommended approach is to seek resolution at the Appeals level in the first instance.
4. Pay the asserted deficiency and file a claim for refund. The taxpayer may pay the full amount of the asserted deficiency (including interest and penalties) and then file a claim for refund on IRS Form 1120-X (or comparable form). If the claim is denied or not acted upon within six months, the taxpayer may pursue refund litigation in the United States District Court or the United States Court of Federal Claims. This option provides a jury trial right (in District Court only) and may offer strategic advantages in certain types of cases. However, for PPC, this option is impractical given the magnitude of the proposed deficiency. Requiring PPC to pay approximately $380.4 million in additional income (with resulting tax liability, including interest, potentially exceeding $100 million depending on effective tax rates) as a prerequisite to litigation would impose unacceptable cash flow and financial statement consequences.
For PPC, Calderwood & Harkness recommends Option 2: filing a formal written Protest and requesting an Appeals conference. This course of action preserves all of PPC's administrative and judicial rights while providing the most cost-effective and procedurally efficient path to a favorable resolution. As discussed further in Section IX below, PPC has strong factual and legal positions on each of the disputed issues, and the Appeals process—with its hazards-of-litigation framework—is well suited to achieving a settlement at a fraction of the proposed adjustment.
C. Extension of Time to File Protest
The IRS may grant extensions to the 30-day Protest filing deadline upon written request demonstrating good cause. Extensions are typically granted by the Supervisory Revenue Agent overseeing the examination, and the IRS is generally accommodating in granting reasonable requests, particularly in complex cases involving voluminous records, multiple issues, or the need for economic analysis.
In PPC's case, the original Protest filing deadline would have been December 8, 2023 (30 days from the November 8, 2023 30-Day Letter). Given the complexity of the transfer pricing issues involved—including the need to finalize Whitmore Valuation Group's economic analyses, coordinate with PPC management on factual statements, and prepare a comprehensive Protest document addressing four tax years and multiple interrelated issues—Calderwood & Harkness submitted a written extension request on November 15, 2023, directed to Supervisory Revenue Agent Gerald Meskill.
The extension request cited the following grounds for good cause: (1) the complexity of the IRC § 482 issues, involving both CSA cost-sharing ratios and legacy IP royalty rates across four tax years; (2) the need to coordinate with PPC's economic expert, Whitmore Valuation Group LLC, to finalize updated benchmarking analyses responsive to the IRS's proposed adjustments; (3) the necessity of obtaining PPC management's review and approval of the factual statements to be included in the Protest under the penalties-of-perjury declaration; and (4) the intervening Thanksgiving holiday.
The extension was granted by SRA Meskill, establishing December 22, 2023 as the extended Protest filing deadline. C&H received written confirmation of the extension on November 17, 2023. The team should treat this deadline as firm and non-negotiable, absent extraordinary circumstances requiring a further extension request.
IV. Requirements for the Formal Written Protest
A. Mandatory Content Elements
Under Rev. Proc. 2015-41 and IRS Publication 5, the formal written Protest must contain a number of specified elements. The failure to include any required element may result in the examination team returning the Protest as incomplete or, in some circumstances, the forfeiture of the taxpayer's right to an Appeals conference. Accordingly, C&H must ensure that PPC's Protest is meticulously prepared and includes each of the following components:
1. Taxpayer Identification. The Protest must include the taxpayer's full legal name, current address, Employer Identification Number ("EIN"), and the tax years or periods at issue. For PPC, this information is as follows:
Penterra Pharmaceuticals Corp. 2200 Independence Boulevard Princeton Junction, NJ 08550 EIN: 22-3741856 Tax Years: 2017, 2018, 2019, 2020
2. Statement of Intent to Appeal. The Protest must include a clear, unambiguous statement that the taxpayer wishes to appeal the IRS's findings to the Independent Office of Appeals. The statement should be placed prominently at the beginning of the Protest and should explicitly reference the 30-Day Letter by date.
3. Copy of or Reference to the 30-Day Letter and NOPA. The Protest should attach, or clearly reference by date and document number, the 30-Day Letter (dated November 8, 2023) and the NOPA (dated October 12, 2023) showing the proposed adjustments. C&H should attach complete copies of both documents as exhibits to the Protest.
4. Tax Years Involved. The Protest must specifically identify each tax year at issue: TY 2017, TY 2018, TY 2019, and TY 2020.
5. List of Proposed Adjustments With Which the Taxpayer Disagrees. The Protest must include a schedule or listing of each proposed adjustment that the taxpayer contests, organized by issue and tax year. For PPC, the contested adjustments include:
• CSA cost-sharing ratio adjustments: $235.01 million (aggregated across all four Tax Years at Issue)
• Legacy IP royalty rate adjustments: $188.04 million (aggregated across all four Tax Years at Issue)
• Less: Correlative offset recognized by the IRS: ($42.65 million)
• Proposed IRC § 6662(e) substantial valuation misstatement penalty: $15.98 million
• Net total proposed adjustments: $380.4 million (plus $15.98 million penalty)
The Protest should include a detailed schedule breaking down these adjustments by tax year, cross-referenced to the corresponding items in the NOPA.
6. Statement of Facts. The Protest must contain a detailed factual statement supporting the taxpayer's position on each disputed issue. This statement is critical because it establishes the evidentiary foundation upon which PPC's legal and economic arguments rest. The factual statement should cover, at a minimum: PPC's corporate structure and the relationship between PPC and PBI; the history and business rationale for the Irish IP structure; the terms of the CSA between PPC and PBI; the legacy IP license agreement and the basis for the 4.5% royalty rate; PBI's operational substance, including employee headcount, facilities, regulatory activities, board governance, and independent decision-making authority; the transfer pricing methodologies employed by PPC and PBI; and the contemporaneous documentation maintained under IRC § 6662(e)(3)(B). The factual statement must be declared true under penalties of perjury (see item 9 below).
7. Statement of Law. The Protest must include a discussion of the applicable legal authorities supporting the taxpayer's position on each disputed issue. For PPC, the principal legal authorities include:
• IRC § 482 and the arm's-length standard
• Treas. Reg. § 1.482-1(d) (arm's-length range and comparability factors)
• Treas. Reg. § 1.482-4 (methods for determining taxable income in connection with transfers of intangible property)
• Treas. Reg. § 1.482-7 (cost sharing arrangements)
• Treas. Reg. § 1.482-7(g) (platform contribution transactions)
• IRC § 6662(e) and (h) (accuracy-related penalties on underpayments attributable to substantial or gross valuation misstatements)
• IRC § 6662(e)(3)(B) (reasonable cause exception based on contemporaneous transfer pricing documentation)
• Relevant case law, including Harborview Corporation, Inc. v. Commissioner, 154 T.C. 101 (2020); Hollowell & Co. v. Commissioner, T.C. Memo. 2017-25; Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019); and other authorities as applicable.
8. Statement of Arguments. The Protest must contain the taxpayer's reasoned arguments connecting the factual record to the applicable legal authorities and demonstrating why the proposed adjustments are incorrect. The arguments should be organized by issue—CSA cost-sharing ratios, legacy IP royalty rate, PCT valuation, and penalty—and should address both the substantive merits and the IRS's burden of proof under IRC § 482.
9. Penalties of Perjury Statement. The Protest must include a signed declaration, under penalties of perjury, that the facts presented in the Protest are true, correct, and complete. This declaration must be signed by the taxpayer—in PPC's case, by an authorized corporate officer—or by an authorized representative acting pursuant to a valid Power of Attorney. C&H recommends that the penalties-of-perjury statement be signed by Marcus Whitfield, Vice President of Global Tax, on behalf of Penterra Pharmaceuticals Corp. Mr. Whitfield has direct knowledge of PPC's transfer pricing practices and has served as the principal client contact throughout the examination. Alternatively, the statement could be signed by Deborah Staines, General Counsel, if corporate governance considerations so require.
B. Power of Attorney
IRS Form 2848, Power of Attorney and Declaration of Representative, must be on file with the IRS to authorize C&H attorneys to represent PPC before the IRS, including before the Independent Office of Appeals. Calderwood & Harkness filed Form 2848 on June 8, 2022, authorizing the following C&H attorneys to represent PPC for TY 2017 through TY 2020:
• Leonard Cross, Partner (CAF No. assigned)
• Sylvia Hartwell, Partner (CAF No. assigned)
• Garrett Simmons, Associate (CAF No. assigned)
• Leila Nazari, Associate (CAF No. assigned)
The Form 2848 currently on file authorizes representation before the IRS Examination Division. C&H should verify that the form also specifically authorizes representation before the IRS Independent Office of Appeals. If the existing Form 2848 does not expressly cover Appeals representation, a supplemental or revised Form 2848 should be executed and filed before the Protest is submitted. As a best practice, C&H should attach a copy of the current Form 2848 (and any updates) to the Protest itself, so that the Appeals Officer has immediate confirmation of C&H's authority to act on PPC's behalf.
C. Dollar Threshold for Formal Protest
Rev. Proc. 2015-41 and IRS Publication 5 distinguish between two types of taxpayer submissions based on the dollar amount of the proposed adjustments. A formal written Protest—containing all of the elements described in Section IV.A above—is required when the total amount of proposed adjustments (including penalties) exceeds $25,000 for any single tax year. For cases involving proposed adjustments of $25,000 or less for all tax years, a simplified "Small Case Request" using IRS Form 12203 may be submitted in lieu of a formal Protest.
PPC's proposed adjustments—totaling approximately $380.4 million in aggregate, with individual tax year adjustments ranging from approximately $73 million to over $100 million—far exceed the $25,000 threshold by multiple orders of magnitude. Accordingly, a full formal written Protest containing all mandatory elements is required. There is no question that PPC's case necessitates the preparation of a comprehensive, detailed Protest document, which C&H anticipates will be a substantial submission accompanied by multiple exhibits.
D. Submission Procedures
The formal written Protest is filed with the IRS Examination team that issued the 30-Day Letter—that is, the Protest is submitted to Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy at the LB&I Northeast Transfer Pricing Group. The Protest should be transmitted by certified mail, return receipt requested, or by an IRS-approved private delivery service, to ensure proof of timely filing. C&H should also retain a complete copy of the Protest and all exhibits for the engagement file and transmit a copy to PPC.
Upon receipt, the examination team reviews the Protest for completeness and determines whether all required elements are present. If the Protest is deemed incomplete, the examination team may return it to the taxpayer with a request for supplementation, which could delay the referral to Appeals. Assuming the Protest is accepted as complete, the examination team then prepares the case file for transfer to the Office of Appeals, as described in Section V below.
The filing deadline for PPC's Protest, as extended by agreement with SRA Meskill, is December 22, 2023. Given that this date falls on a Friday, C&H should aim to finalize and transmit the Protest no later than December 20, 2023, to allow for any unforeseen logistical issues.
V. Transfer to Appeals and Case Assignment
A. Case Referral Process
After the examination team receives and accepts PPC's formal Protest, it is responsible for preparing a complete case file for transfer to the Independent Office of Appeals. The case file preparation process is governed by IRM 8.1.1 and related provisions, and typically involves the following steps:
First, the examination team assembles the administrative file, which includes all documents generated or obtained during the examination. For PPC, this file is expected to be voluminous, reflecting the scope and duration of the examination. The administrative file will include the formal Protest submitted by C&H; the NOPA dated October 12, 2023; the 30-Day Letter dated November 8, 2023; all Information Document Requests ("IDRs") issued during the examination and PPC's responses thereto (a total of 47 IDRs were issued over the course of the examination); PPC's contemporaneous transfer pricing documentation for TY 2017 through TY 2020 prepared by Crestfield & Associates LLP; the IRS examination team's workpapers, including the economic analyses prepared by IRS economist Dr. Alicia Washburne; and any correspondence between C&H and the examination team during the audit.
Second, the examination team may prepare a written rebuttal to the taxpayer's Protest. This rebuttal, sometimes referred to as the "examiner's response" or "case memorandum," addresses the taxpayer's factual and legal arguments and sets forth the examination team's rationale for sustaining the proposed adjustments. The rebuttal is included in the case file forwarded to Appeals. C&H should request a copy of any such rebuttal, as it will provide insight into the specific arguments the examination team intends to emphasize before the Appeals Officer. Under current IRS practice, taxpayers are generally entitled to receive a copy of the examiner's rebuttal, although there may be some delay.
Third, once the case file is complete, the examination team forwards it to the Office of Appeals through the IRS's internal case management system. The referral triggers the formal commencement of the Appeals process and initiates the assignment of an Appeals Officer.
B. Assignment of Appeals Officer
Upon receipt of the case file, the Appeals function assigns the case to a specific Appeals Officer based on several factors, including subject matter expertise, geographic considerations, current caseload, and the complexity and dollar magnitude of the issues involved. For transfer pricing cases of PPC's magnitude—involving IRC § 482 adjustments in excess of $380 million across four tax years, implicating cost-sharing arrangements, intangible property valuation, and international operational substance—the assigned Appeals Officer will typically be a senior officer with specialized knowledge of international tax issues, transfer pricing methodologies, and the economic analysis frameworks applicable to arm's-length determinations.
Based on information received from the IRS, the case has been assigned to Appeals Officer Noreen Castañeda, with an anticipated effective assignment date in January 2024. C&H should research Appeals Officer Castañeda's background and prior published decisions or settlement patterns, to the extent publicly available, in order to tailor the presentation strategy for the Appeals conference. Informal inquiries with other practitioners who have worked with AO Castañeda may also yield useful intelligence regarding her approach to transfer pricing cases, her familiarity with particular economic methodologies, and her general settlement posture.
C. Independence of Appeals
A cornerstone of the administrative appeals process, reaffirmed by Rev. Proc. 2015-41 and further codified by the Taxpayer First Act of 2019 (IRC § 7803(e)), is the organizational and operational independence of the Independent Office of Appeals from the Examination function. Appeals Officers are not advocates for the government's position; rather, they serve as neutral evaluators who assess the merits of both the IRS's and the taxpayer's positions under the hazards-of-litigation standard.
A key procedural safeguard of this independence is the prohibition on ex parte communications. Rev. Proc. 2015-41, Section 5, and IRM 8.1.1.3.4, provide that Appeals Officers are prohibited from having substantive ex parte communications with the Examination team (or with IRS Chief Counsel attorneys in non-docketed cases) regarding the merits of the taxpayer's case without the taxpayer or the taxpayer's authorized representative being present or given the opportunity to participate. This restriction applies to communications about the strengths and weaknesses of the taxpayer's positions, the facts underlying the disputed issues, and the development of new legal theories or factual arguments not raised during the examination.
There are limited exceptions to the ex parte restriction. For example, purely administrative or ministerial communications—such as scheduling, case file logistics, or procedural questions—are permissible. Additionally, if the Appeals Officer determines that a communication with the Examination team is necessary for case resolution, the taxpayer must be given the opportunity to be present or to participate in the communication.
C&H should proactively monitor for any potential ex parte violations throughout the Appeals process. If there is any indication that the Appeals Officer has engaged in substantive ex parte communications with the examination team—for example, if the Appeals Officer appears to have access to factual information or legal arguments not contained in the administrative file or the Protest—C&H should raise an immediate objection. Any such objection should be documented in writing and directed to the Appeals Team Manager, with a copy to the taxpayer's file. Persistent or material ex parte violations may warrant escalation to the IRS Taxpayer Advocate Service or, in extreme cases, may provide grounds for challenging the outcome of the Appeals process in subsequent litigation.
VI. The Appeals Conference
A. Scheduling the Conference
After the case is assigned to Appeals Officer Castañeda, she will contact C&H to schedule the Appeals conference. In practice, there can be a delay of several weeks between case assignment and the initial scheduling contact, particularly given the complexity and volume of PPC's case file. To minimize delay, C&H should proactively submit a written request to Appeals Officer Castañeda shortly after confirmation of case assignment, requesting scheduling of the conference and proposing specific dates. The team should propose dates in late February 2024, which allows sufficient time for C&H to prepare comprehensive conference materials while ensuring that the Appeals process can be completed well within the December 31, 2024 statute of limitations expiration dates for TY 2017 and TY 2018.
The scheduling letter should be sent via certified mail and by email (if the Appeals Officer's email address is available), and should include: (1) a reference to the case number and taxpayer identification; (2) a brief description of the issues and the anticipated length of the conference (C&H should request a minimum of two full days for a case of this complexity); (3) proposed dates in late February 2024, with alternate dates in early March 2024; (4) a preference for an in-person conference at the IRS Appeals Office in Manhattan, New York; and (5) a list of anticipated participants from PPC's side.
B. Conference Format and Logistics
Appeals conferences are informal administrative proceedings. They are not adversarial hearings, and they are not governed by the Federal Rules of Evidence, the Federal Rules of Civil Procedure, or other formal procedural rules applicable to judicial proceedings. The Appeals Officer has broad discretion to conduct the conference in whatever manner he or she deems most productive, including determining the order of presentation, the amount of time allocated to each issue, and the types of materials that may be submitted.
Conferences may be conducted in person, by telephone, or by video conference. For complex transfer pricing cases involving the magnitude of adjustments at issue in PPC's examination, an in-person conference is strongly recommended. In-person conferences provide several advantages: they allow for more effective presentation of complex economic analyses; they facilitate real-time interaction between the Appeals Officer, counsel, and the client's subject matter experts; and they create an environment more conducive to candid settlement discussions. The IRS Appeals Office in Manhattan, New York, is the expected venue, given that the examination was conducted by the LB&I Northeast Transfer Pricing Group and C&H's offices are located in New York.
Appeals conferences are typically not transcribed or recorded by either party. However, the taxpayer's representatives may take contemporaneous notes, and C&H should designate a team member (Garrett Simmons or Leila Nazari) to serve as the primary note-taker during the conference. These notes will be important for documenting the Appeals Officer's questions, reactions, and areas of focus, which in turn will inform C&H's post-conference supplemental submissions and settlement strategy.
C. Participants. The participants in the Appeals conference should be carefully selected to ensure that PPC's team projects both legal expertise and factual credibility. The anticipated participants are as follows:
Taxpayer's side:
• Attorneys: Leonard Cross (Responsible Partner, lead presenter), Sylvia Hartwell (Billing Partner, co-presenter on penalty issues), Garrett Simmons (Lead Associate, supporting role and note-taker), and Leila Nazari (Working Associate, document management and supporting role). All four attorneys are authorized representatives under the Form 2848 currently on file.
• Client representatives: Marcus Whitfield, Vice President of Global Tax, Penterra Pharmaceuticals Corp. (primary client witness on transfer pricing practices and corporate governance); Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. (available for legal and governance questions as needed).
• Expert consultant: Dr. Helena Vasquez, Managing Director, Whitmore Valuation Group LLC, retained by C&H under a Kovel arrangement (reference 1018-00009-KV) to provide expert economic analysis and testimony in support of PPC's transfer pricing positions. Dr. Vasquez served as the lead economist on Whitmore's engagement and is prepared to present and defend the economic analyses submitted with the Protest.
IRS side:
• Appeals Officer: Noreen Castañeda, assigned Appeals Officer. The Appeals Officer may also have an Appeals technical advisor present, particularly for specialized transfer pricing issues.
• Examination team: Under Rev. Proc. 2015-41 and IRM 8.6.1.6.2, the Examination team members (SRA Gerald Meskill, LRA Patricia Dunleavy, IRS economist Dr. Alicia Washburne, and international examiner Carlos Rosario) do not attend the Appeals conference unless the Appeals Officer specifically requests their presence. Even if the Appeals Officer determines that Examination team participation is necessary, the taxpayer has the absolute right to be present during any such communications. C&H should object to any ex parte involvement of the examination team and ensure that if any joint meeting occurs, PPC's full team is present and able to participate.
D. Presentation of the Taxpayer's Case
The Appeals conference is the taxpayer's primary opportunity to present its case directly to the decision-maker. The quality and comprehensiveness of the presentation can significantly influence the Appeals Officer's hazards-of-litigation assessment and, ultimately, the settlement outcome. For PPC, C&H should prepare the following materials:
Comprehensive Appeals Conference Presentation. C&H should prepare a professional Northgate Services Inc. presentation (or equivalent visual aid) covering the following topics in a logical sequence: (i) case overview, including the procedural history, the IRS's proposed adjustments, and PPC's position; (ii) factual background, including PPC's corporate structure, the history and business rationale for the Irish IP structure, and PBI's operational activities; (iii) PPC's transfer pricing positions, including the arm's-length basis for the CSA cost-sharing ratios, the legacy IP royalty rate, and the PCT valuation; (iv) Whitmore Valuation Group's economic analyses, including the CUT, CPM/TNMM, and DCF analyses supporting PPC's positions; (v) PBI substance evidence demonstrating that PBI performs genuine DEMPE functions and has economic substance independent of PPC; and (vi) PPC's proposed resolution framework for settlement discussions.
Detailed Talking Points by Issue. In addition to the presentation slides, C&H should prepare detailed talking points organized by the four principal issues in dispute:
(1) CSA cost-sharing ratios — PPC's position that the reasonably anticipated benefit ("RAB") shares used in the CSA between PPC and PBI are consistent with the arm's-length standard and supported by contemporaneous documentation;
(2) Legacy IP royalty rate — PPC's position that the 4.5% royalty rate under the legacy IP license agreement falls within the arm's-length range as demonstrated by 14 comparable uncontrolled transactions;
(3) Economic substance / DEMPE functions — evidence of PBI's substantive operations, including personnel, facilities, regulatory activities, governance, and independent decision-making authority; and
(4) IRC § 6662(e) penalty — PPC's reasonable cause defense based on contemporaneous transfer pricing documentation meeting the requirements of IRC § 6662(e)(3)(B), and the absence of any negligent or intentional disregard of rules or regulations.
Document Binder. C&H should prepare a comprehensive document binder for submission to Appeals Officer Castañeda (with copies for all conference participants), containing: the Protest and all exhibits; Whitmore Valuation Group's economic analysis reports and supporting data; PBI substance evidence (organizational charts, board minutes, employee rosters, facilities documentation, regulatory filings, and financial statements); and legal authorities cited in the Protest.
Specific economic analysis materials to be included in the binder encompass:
• CUT analysis: 14 comparable pharmaceutical license agreements identified by Whitmore, with an interquartile range ("IQR") of 3.1%–6.8% and a median of 4.4%. PPC's 4.5% royalty rate falls within the IQR and is proximate to the median, supporting PPC's position that the rate is arm's-length.
• CPM/TNMM analysis: 22 comparable companies identified by Whitmore as the basis for a comparable profits method / transactional net margin method analysis supporting PBI's reported profitability levels.
• PCT DCF valuation: A discounted cash flow analysis valuing the platform contribution transaction at a range of $278 million to $361 million at a weighted average cost of capital ("WACC") of 9.8%. PPC's $312 million PCT payment falls within this arm's-length range, compared to the IRS's assertion that the PCT should be valued at $852 million using a 7.2% WACC.
Witness Preparation. Marcus Whitfield, as PPC's principal factual witness, should be thoroughly prepared to address questions from the Appeals Officer regarding PPC's transfer pricing practices, the business rationale for the Irish IP structure, PBI's operational activities, and the corporate governance framework. Dr. Helena Vasquez should be prepared to present and defend Whitmore's economic analyses, including the selection of comparable transactions, the application of statistical methods, and the sensitivity analyses underlying the DCF valuation. C&H should conduct at least one full-day preparation session with each witness prior to the conference.
E. Hazards-of-Litigation Standard
The hazards-of-litigation standard is the defining analytical framework of the Appeals process. Unlike the Examination function, which is charged with advocating for the government's position, Appeals evaluates each issue based on the probable outcome if the case were to be litigated in the United States Tax Court (or, where applicable, in a federal district court or the Court of Federal Claims). The Appeals Officer considers the strengths and weaknesses of both the IRS's and the taxpayer's positions, including evidentiary and legal uncertainties, the quality of the factual record, and applicable precedent.
Under this standard, the Appeals Officer does not simply determine whether the IRS's proposed adjustment is "correct" in some absolute sense. Rather, the Appeals Officer assesses the percentage likelihood that the IRS would prevail on each issue if the case were tried, and uses that assessment to determine an appropriate settlement amount. For example, if the Appeals Officer determines that the IRS has a 30% chance of prevailing on a particular issue, the settlement for that issue might be set at approximately 30% of the proposed adjustment (though the actual settlement calculus is more nuanced and may involve qualitative factors as well).
For PPC, the key hazards-of-litigation considerations are as follows:
CSA Cost-Sharing Ratios. PPC's reasonably anticipated benefit methodology is supported by contemporaneous documentation prepared by Crestfield & Associates LLP (Martin Ogilvy, engagement partner; Susan Lam, transfer pricing partner) and is corroborated by the independent economic analyses performed by Whitmore Valuation Group. The IRS's proposed increases of 8–12 percentage points in the cost-sharing ratios lack comparable empirical support and rely on assumptions that are inconsistent with the economic realities of PBI's operations. The IRS bears the burden of demonstrating that PPC's cost-sharing ratios are not arm's-length, and PPC's well-documented positions create significant litigation risk for the government.
Legacy IP Royalty Rate. PPC's 4.5% royalty rate falls squarely within the interquartile range (3.1%–6.8%) of the 14 comparable uncontrolled transactions identified by Whitmore, and is within one-tenth of a percentage point of the median (4.4%). The IRS's proposed 11.0% royalty rate is outside the comparable ranges identified by Whitmore and is not supported by a reliable CUT analysis. Under Harborview Corporation, Inc. v. Commissioner, 154 T.C. 101 (2020), the Tax Court has demonstrated a willingness to reject IRS proposed adjustments that are not supported by reliable comparable transactions, even where the taxpayer's own methodology is subject to some criticism.
Economic Substance and DEMPE Functions. PBI's operational profile—185 employees (grown from 52 in 2012), 42 board meetings conducted in Dublin during the examination years, €47.2 million in aggregate regulatory expenditures, approximately 18,000 square feet of office space at Sandyford Business Park, and independent pricing decisions across 68 country markets—demonstrates substantial economic substance and genuine performance of development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions. While the IRS may argue that PBI's headcount is disproportionately low relative to its pre-tax income, the transfer pricing analysis under IRC § 482 does not require proportionality between headcount and profitability. Rather, the regulations require that compensation for intangible property and services be consistent with arm's-length principles, which PPC's documentation demonstrates.
IRC § 6662(e) Penalty. PPC maintains contemporaneous transfer pricing documentation that satisfies the requirements of IRC § 6662(e)(3)(B), providing a strong reasonable cause and good faith defense against the proposed $15.98 million substantial valuation misstatement penalty. The documentation was prepared by Crestfield & Associates in the ordinary course of PPC's tax compliance process, covers all Tax Years at Issue, and includes detailed functional analyses, economic analyses, and descriptions of the controlled transactions. Under the regulations, a taxpayer that maintains qualifying contemporaneous documentation is presumed to have had reasonable cause for its transfer pricing positions.
C&H should present a comprehensive hazards-of-litigation analysis to Appeals Officer Castañeda, emphasizing these factors and demonstrating that the IRS faces substantial litigation risk on each of the disputed issues.
F. Settlement Negotiations
The Independent Office of Appeals has broad authority to settle cases based on the hazards of litigation, without seeking concurrence from the Examination Division or the Office of Chief Counsel, provided the settlement amount falls within Appeals' delegated authority. For IRC § 482 transfer pricing cases, Appeals' settlement authority is generally sufficient to resolve cases of PPC's magnitude, although cases involving adjustments above certain dollar thresholds may require review by the Appeals Area Director or other senior officials.
In transfer pricing cases, Appeals may propose a settlement that reflects a weighted assessment of the litigation hazards on each issue. Settlements may take various forms, including a percentage concession of the proposed adjustment, a compromise on the transfer pricing methodology or comparable set, or a reallocation of income that splits the difference between the IRS's and the taxpayer's positions. The Appeals Officer may also consider non-monetary terms, such as the taxpayer's agreement to prospectively adopt a particular transfer pricing methodology or to seek an Advance Pricing Agreement ("APA") for future years.
Settlement Authority. C&H should obtain clear settlement authority from PPC management prior to the Appeals conference. Based on the strength of PPC's positions and the hazards-of-litigation analysis, the Firm's recommended settlement posture is as follows:
• Target settlement range: 10–15% of the proposed $380.4 million adjustment, representing approximately $38 million to $57 million in aggregate income adjustments across all four Tax Years at Issue.
• Hard ceiling: 20% of the proposed adjustment, or approximately $76 million.
• Penalty: Full abatement of the proposed $15.98 million IRC § 6662(e) penalty, given PPC's strong reasonable cause defense.
These settlement parameters should be discussed with Marcus Whitfield and Deborah Staines and formally approved by PPC's Board of Directors or its authorized Tax Committee prior to the conference. Settlement discussions during the Appeals conference are confidential and are conducted without prejudice to either party's position in any subsequent litigation. This means that statements made during settlement negotiations, including concessions or offers of compromise, generally cannot be used against either party if the case ultimately proceeds to Tax Court.
G. Supplemental Submissions
Under Rev. Proc. 2015-41 and IRM 8.6.1.6, the taxpayer may submit additional written materials and evidence to the Appeals Officer after the conference. Supplemental submissions are common in complex cases and may be prompted by questions raised by the Appeals Officer during the conference, the Appeals Officer's request for additional comparable license agreements or benchmarking data, or the taxpayer's desire to respond to arguments raised by the IRS in the examination team's rebuttal or during the conference itself.
Any supplemental submissions should be made promptly—ideally within 30 days of the conference, unless the Appeals Officer specifies a different deadline. If the Appeals Officer shares supplemental materials with the examination team (which may occur if the examination team is consulted on specific factual or technical questions), the taxpayer must be given notice and an opportunity to respond.
C&H should anticipate that Appeals Officer Castañeda may request additional comparable license agreements, updated benchmarking data, or supplemental analyses addressing specific economic assumptions (such as the WACC used in the PCT DCF valuation). The team should coordinate with Whitmore Valuation Group to ensure that any such requests can be fulfilled on a timely basis.
VII. Possible Outcomes of the Appeals Process
A. Full Agreement / Settlement
If the Appeals Officer and PPC (through C&H) reach agreement on all disputed issues, the resolution is memorialized in a formal closing agreement. The standard instrument for this purpose is IRS Form 906, Closing Agreement on Final Determination Covering Specific Matters, which is authorized under IRC § 7121. Form 906 is the appropriate vehicle when the agreement covers specific tax issues (such as transfer pricing adjustments and penalty treatment) for specific tax years, rather than a comprehensive determination of total tax liability.
The executed Form 906 is binding on both PPC and the IRS with respect to the resolved issues and the Tax Years at Issue. Once signed by both parties, the Closing Agreement is final and conclusive, and neither party may reopen the resolved issues absent a showing of fraud, malfeasance, or misrepresentation of material fact. This finality is a significant advantage of the Appeals settlement process, as it provides PPC with certainty regarding its federal income tax liability for the covered years.
For PPC, if a favorable settlement is reached within the target range of 10–20% of the proposed $380.4 million adjustment (i.e., approximately $38 million to $76 million), the Form 906 would specify: (i) the adjusted income amounts by tax year (TY 2017, TY 2018, TY 2019, TY 2020); (ii) the specific transfer pricing adjustments agreed upon for each issue (CSA cost-sharing ratios, legacy IP royalty rate, PCT valuation); (iii) the agreed penalty treatment (which PPC will seek to be full abatement); and (iv) any additional terms, such as interest computation methodology or correlative adjustments.
B. Partial Agreement
In some cases, the Appeals Officer and the taxpayer may reach agreement on some but not all of the disputed issues. In a partial agreement scenario, the agreed issues are resolved—typically through a Form 870-AD (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment) or a partial Form 906—and the unagreed issues proceed through the normal channels, which may include the issuance of a Statutory Notice of Deficiency and subsequent Tax Court litigation.
For PPC, a partial agreement is a suboptimal outcome but may be preferable to a complete impasse. If, for example, the Appeals Officer is willing to settle the CSA cost-sharing ratio and royalty rate issues on favorable terms but insists on a higher PCT valuation adjustment, PPC may need to weigh the costs and risks of litigating the PCT issue against the benefits of resolving the other issues administratively. C&H should aim for full resolution on all issues to avoid the expense, uncertainty, and burden of Tax Court proceedings. However, the team should develop contingency plans for partial agreement scenarios and discuss these possibilities with PPC management in advance of the conference.
C. No Agreement
If the Appeals Officer and PPC cannot reach agreement on any of the disputed issues, the administrative Appeals process concludes without resolution and the IRS proceeds to issue a Statutory Notice of Deficiency (the "90-Day Letter") under IRC § 6212. The Statutory Notice of Deficiency is the jurisdictional prerequisite for a petition in the United States Tax Court under IRC § 6213(a).
Upon receipt of the 90-Day Letter, PPC has 90 days from the date of the notice (or 150 days if the notice is addressed to a person outside the United States) to file a petition with the Tax Court. If no petition is filed within that period, the deficiency becomes final, and the IRS may proceed to assess and collect the tax, plus interest and penalties, without further judicial review. In the event of a no-agreement outcome, C&H should immediately commence preparation of a Tax Court petition and associated litigation strategy. The matter would transition from an administrative dispute resolution engagement to a full litigation matter, with corresponding staffing, budgetary, and strategic implications.
D. Closing Agreement (Form 906) Procedures
Upon reaching agreement on all or some of the disputed issues, the Appeals Officer prepares or reviews a draft Form 906 reflecting the settlement terms. In practice, it is common for the taxpayer's counsel to prepare an initial draft of the Form 906 and submit it to the Appeals Officer for review and comment. C&H should prepare a draft Form 906 reflecting the proposed settlement terms—including the adjusted income amounts, tax year allocations, penalty treatment, and any additional provisions—and submit it to Appeals Officer Castañeda as part of the settlement negotiations.
The Form 906 must be signed by an authorized officer of PPC. For corporate taxpayers, the signatory must be an officer who has the authority to bind the corporation. C&H recommends that Marcus Whitfield, Vice President of Global Tax, serve as the signatory, provided that he has the requisite corporate authority under PPC's bylaws and corporate governance framework. Alternatively, Deborah Staines (General Counsel) or another officer authorized by the Board of Directors may sign the Form 906. On the IRS side, the Form 906 must be signed by an authorized IRS official, typically the Area Director of Appeals or a designated delegate.
Once executed by both parties, the Closing Agreement becomes binding and conclusive for the tax years and issues covered, subject to the narrow exceptions for fraud, malfeasance, or misrepresentation described above.
VIII. Timing Considerations and Statute of Limitations
A. Statute of Limitations Management
Careful management of the statute of limitations on assessment is critical throughout the Appeals process. Under IRC § 6501(a), the IRS generally has three years from the date a return is filed to assess additional tax. If the taxpayer filed the return before the due date (including extensions), the three-year period begins on the due date. The statute of limitations must remain open throughout the administrative Appeals process; if the statute expires before the IRS has issued either a closing agreement or a Statutory Notice of Deficiency, the IRS loses its authority to assess additional tax for the affected years.
For PPC's Tax Years at Issue, the statute of limitations analysis is as follows:
TY 2017: PPC's consolidated Form 1120 for TY 2017 was filed on or about October 15, 2018, pursuant to a valid extension of time to file. The three-year statute of limitations under IRC § 6501(a) would ordinarily have expired on October 15, 2021. However, C&H executed IRS Form 872 (Consent to Extend the Time to Assess Tax) on behalf of PPC, extending the assessment period through December 31, 2024.
TY 2018: PPC's consolidated Form 1120 for TY 2018 was filed on or about October 15, 2019. The three-year statute would ordinarily have expired on October 15, 2022. C&H executed Form 872 extending the assessment period through December 31, 2024.
TY 2019: PPC's consolidated Form 1120 for TY 2019 was filed on or about October 15, 2020. The three-year statute would ordinarily expire on October 15, 2023. C&H has executed a Form 872 extending the assessment period; the current extension date should be verified but is believed to extend at least through 2025.
TY 2020: PPC's consolidated Form 1120 for TY 2020 was filed on or about October 15, 2021. The three-year statute would ordinarily expire on October 15, 2024. The statute may still be open without the need for a Form 872 consent, depending on the exact filing date, but C&H should verify the status and consider executing a Form 872 as a precautionary measure.
It is critical that the Appeals process be completed—or further Form 872 consents executed—before the statute expiration dates. The December 31, 2024 expiration for TY 2017 and TY 2018 is the most immediate concern. If the Appeals process is not concluded by that date, C&H must seek additional Form 872 consents extending the statute for those years. The decision to grant or deny a consent extension is ultimately within the IRS's discretion, but taxpayers who are actively engaged in the Appeals process and making good-faith efforts toward resolution are generally accommodated. Conversely, allowing the statute to expire on any tax year would permanently preclude the IRS from assessing additional tax for that year—an outcome that would benefit PPC but that the IRS will actively seek to prevent.
Additionally, it should be noted that IRC § 6501(e) provides a six-year statute of limitations for returns that contain a "substantial omission of income"—generally defined as an omission of gross income in excess of 25% of the gross income reported on the return. In theory, the IRS could invoke this extended statute if it contends that PPC's transfer pricing adjustments result in a substantial omission of income. However, the IRS has not invoked IRC § 6501(e) in PPC's case, and the Form 872 consents presently govern the applicable assessment periods.
B. Expected Timeline
Based on current information and the typic