GeneCure, LLC v. Comm’r: A Case in Biotechnology
Genecure, LLC v. Comm’r, T.C. Memo 2022-52 | May 23, 2022 | Jones, J. | Dkt. No. 14916-15.
GeneCure, LLC is a biotechnology company focused on developing gene therapy based technologies to treat genetic and acquired human diseases. The company developed a patented lentiviral delivery platform which they use to further develop novel human vaccines. The company claimed R&D tax credits for this research and were met with adjustments made by the IRS for the 2009-2012 taxable years.
The opinion set out to address numerous issues 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.
Key Points of Law:
This is a TEFRA partnership-level case with GeneCure organized as a member-managed LLC. As such, it is treated as a partnership for federal income tax purposes (Treas. Reg. § 301.7701-3(b)(1)).
The IRS first examined the tax returns for 2009-2012, providing a Form 11661, Fraud Development Recommendation-Examination. They then 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.
Frank Tung gathered and attempted to admit evidence and documentation including emails and letters from GeneCure’s day-to-day business. Most of this documentation the Tax Court refused to admit or consider. This was due to the irrelevance of the evidence. Tax Court evidentiary rulings are determined under the Federal Rules of Evidence (7453; Rule 143(a)).
The Court’s Decision And Learnings:
Frank Tung, acting as tax matters partner for GeneCure, failed to provide acceptable evidence following evidentiary standards. He also failed to provide available exceptions to the rules and therefore the evidence was not submitted.
GeneCure failed to document and substantiate most of the claimed business expenses it sought to deduct. They further failed to report taxable income including the amounts received in a settlement from a business contract dispute. Deductions and other tax benefits were claimed but could not be substantiated. They further could not prove that a $200,000 payment from Frank Tung’s wife was a loan for rent.
Because of these failures, the Tax Court ruled in favor of the IRS on all tax issues. They found Frank Tung’s testimony to be self-serving, evasive, conflicted, and improbable. The court’s conclusions were as follows:
- That Genecure had unreported income of $6,000; $21,578; and $7,000 in taxable years 2009-11, respectively;
- That Mr. Tung largely failed to establish Genecure’s entitlement to deductions for various business expenses reported for each of the taxable years at issue;
- That Genecure is subject to a $230, 979 recapture tax with respect to its taxable year 2010 for excess amounts received as a QTDP grant;
- That Mr. Tung failed to substantiate a $200,000 loan to Genecure from Mrs. Tung in taxable year 2009;
- That Mr. Tung failed to substantiate a $100,000 capital contribution to Genecure from Mrs. Tung in taxable year 2011.
As for the fraud-related penalties, the IRS Civil Penalty Approval Form and its Form 11661 did not satisfy the written supervisory approval requirements for purposes of assessing section 6663 civil fraud penalties; therefore, such penalties were inapplicable against Genecure at the partnership level.
This court case serves as an example of the absolute importance of documentation and substantiation. There are stringent evidentiary requirements which must be considered and having a paper trail to back up any claim is crucial to the vitality of said claim.
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