Tax Court in Brief | Genecure, LLC v. Commissioner | Capital Expenses, QTDP Recapture Tax, Fraud-Related Penalty Requirements

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The Tax Court in Brief – May 23rd – May 27th, 2022

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Tax Litigation:  The Week of May 23rd, 2022, through May 27th, 2022

Genecure, LLC v. Comm’r, T.C. Memo 2022-52 | May 23, 2022 | Jones, J. | Dkt. No. 14916-15

Short Summary: This is a TEFRA partnership-level case. Genecure is a biotech firm and is organized as a member-managed LLC. It is treated as a partnership for federal income tax purposes. See Treas. Reg. § 301.7701-3(b)(1). Frank Tung was Genecure’s tax matters partner. The opinion addresses a number of splintered issues that arose from Genecure’s business transactions in tax years 2009-2012, including taxation of settlement proceeds received in contract dispute, deductibility of item-by-item categories of business expenses, recapture tax for an Affordable Care Act-Qualified Therapeutic Discovery Project (QTDP) grant received by Genecure, characterization of amounts received from an LLC owned by Frank Tung’s wife (i.e., is it a loan, or not a loan), and possible capital contributions from the LLC owned by Frank Tung’s wife. The IRS examined Genecure’s tax returns for years 2009 through 2012. The examining agent prepared a Form 11661, Fraud Development Recommendation-Examination, and Frank Tung was given summary report transmittal Letter 1807 to attend a closing conference, which conference never occurred. Ultimately, the IRS issued Frank Tung, in his capacity as tax matters partner, a separate Notices of Final Partnership Administrative Adjustment (FPAA) for each of the years in issue, as well as a section 6663 civil fraud penalty for underpayment of tax for each year. In the Tax Court proceeding, Frank Tung sought to admit emails, letters, and other documentation from Genecure’s day-to-day business, most of which the Tax Court refused to admit or consider.

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Insights: Frank Tung, in a pro se capacity and as tax matters partner for Genecure, sought to admit an array of documentary evidence during the Tax Court proceeding. Due to evidentiary standards and Frank Tung’s failure to provide available exceptions to the rules, his proffered evidence was not admitted. From a substantive tax perspective, Genecure failed to document and substantiate most of the claimed business expenses it sought to deduct in the returns in issue. And, Genecure was negligent in failing to report taxable income such as amounts received in settlement from a business contract dispute. Genecure also claimed deductions and other tax benefits for rent, loans and capital contribution, none of which were properly substantiated. This case is another reminder of the due care the taxpayer must take in documenting all aspects of the business that are relevant for taxation, deductions, and fraud-related assessments or defense purposes.

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