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Hey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to "Real Estate is Taxing" – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we're breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate
tax and break down complex concepts into
understandable, entertaining tax topics.
My name is Natalie Kalady, I'm
your host, and I am so excited
that you've decided to join me.
Microphone (Shure MV7): A $3 million
New York city condo furnished with
$300,000 of high-end furnishings.
A hundred thousand dollar SUV
and an extra marital affair.
Are we talking about a lifetime movie?
It could be, but it's not, we are talking
about a very recent tax court case.
TC memo.
2024 dash 76 about
Gregory and Laura shackle.
Gregory.
And Laura had been married since 1985
and in 2000 Gregory started an escort.
He was the sole owner of this business.
S E I.
And he mostly provided engineering
and design services related to real
estate and construction projects.
He consulted and designed various systems,
including plumbing, electrical, sprinkler
systems, and the overwhelming majority of
his work was in commercial real estate.
Over 75% was commercial.
Now they were based in Omaha, Nebraska.
And at that time, they did have offices
in California and in New York city.
The wife in this case, Laura.
Had very little involvement
with Gregory's business.
She had a degree in human
nutrition and service management.
And she worked as a nutritionist prior
to helping out with the business,
but only in a very minimal capacity.
She took an intro to accounting
class and did very limited
amounts of bookkeeping for SEI.
Mostly, she was just signing checks and
looking at receivables and payables.
In addition to Laura handling this
limited amount of accounting for SEI,
they did have an outside accountant
as well as an in-house accountant who
worked exclusively for Greg's S-corp.
So the wife's involvement was pretty
minimal when it came to the business.
Even past that.
The years we are going to be
talking about Laura wasn't even
doing accounting for those years.
She was working as a wellness
coordinator for the business.
In the early two thousands,
Greg decides he wants to get
further into the New York market.
Around 2004.
He starts taking multiple trips there.
And is trying to build out a network
and a customer base in New York city.
In these early years.
Gregory starts off by sharing office
space with an architecture firm
that is also based in New York.
So that he has somewhere to operate
out of when he is in the city and
working on building this clientele.
During 2005, however, that
architecture firm decides they do
not want to continue sharing space.
And now Gregory needs to
find a new New York location.
To operate sci out of when
he is there on his trips.
For a couple of years.
He's transient.
There is no new office space.
And whenever Gregory visits, New York
city, he was based out of hotels.
And was spending a fair amount of time
there, even with this being the case.
So for 2005 and 2006.
See, I only had a couple small
projects that were in New York.
But Gregory was spending at
least a third of his time.
There.
In December of 2006.
Gregory decides that it
is time to buy a property.
In New York city so that he has
somewhere to operate out of while he's
there building this client base and
impressing New York real estate moguls.
Obviously this can't be
your run of the mill office.
Gregory needs something that shows
he is also a savant and real estate.
And to be trusted.
He goes out and in 2006, he purchases a
penthouse in New York for 3.2, $5 million.
Only Gregory is listed as
the owner of this condo.
Laura did come and tore it with
him once before purchase, but she
really has nothing to do with it.
It is literally a condo that is
there for Greg's travel to New York.
And where he can.
Bring investors and potential clients.
When he is staying in New York
and building that client base.
This condo was almost 3000
square feet and had an outdoor
terrace with views of Manhattan.
Incredibly high-end building.
Whether or not this met the
criteria of being ordinary and
necessary is still to be determined.
Now when Gregory purchased this condo.
He did so with a primary occupancy loan.
He attested to the fact that he would
not be renting out this property and it
was going to be used as his second home.
That was the terms of his loan.
However.
The very beginning of 2007.
So just a few weeks after
purchasing this condo.
Gregory signs, a lease agreement.
Between SEI his S corporation.
And himself.
For the company to rent his
personal condo from him.
No.
This is something that is allowed.
If someone wants to rent real estate,
they own to a company that they are
operating out of that real estate.
This can absolutely be
a valid transaction.
The amount of rent.
The expenses, the way the
contract is structured.
Needs to be from a standpoint of what
would be reasonable and ordinary if
they were renting any other space.
However, that's not how
Gregory went about this.
He did not advise, nor did his
wife advise with any kind of a real
estate expert to determine what fair
market rent would be for this condo.
To establish what a reasonable
amount would be for SEI to pay
him personally, for the use of
this condo in his personal name.
Instead.
For multiple years.
SEI signs, Elise with Gregory
to pay him $20,000 per month.
For use of his personally owned condo.
This amount was literally just calculated
as the amount it would take to cover
Gregory's costs of owning the condo.
So there was no.
Consideration or no analysis of what
a reasonable rent amount would be.
Gregory was just moving money from
his business to himself personally
labeled as rent so that he was not
out of pocket, any amount personally,
for his ownership of this condo.
Now in retrospect, this $28,000
a month was overstated and was.
An abnormally high amount for rent
for any of the years in question.
at the onset of the petitioner,
looking at their tax returns.
They went through and established fair
market rents for the years in question,
and for 2011 fair market rent would have
been $22,500 would have been 21, 5 for 20
12, 20 3000 for 2013 and 25,000 for 2014.
So Gregory was paying
several thousand dollars.
Above fair market value
rent for this condo.
Every single month during all of these
years, but more importantly, he was paying
based on an amount to literally shift
what would be personal costs to business.
Not from a reasonable basis of
what fair market rents would
be for the use of his condo.
After Greg buys this condo, he obviously
has to furnish it and updated in a way
to match the quality of the high-end
condo, the quality of the type of
clients he's trying to gain a New York.
So he then spends over
the next several years.
$326,000 furnishing and
updating this condo.
After paying for all of these things,
he depreciates them as business
use assets because they're in.
This business, use condo.
All of these furnishings and updates
are listed on the books for SEI.
And these included things such as
a baby grand piano, various artwork
that is not just wall art and luxury
sheets, linens rugs, et cetera.
So very much pushing the level of what
would be acceptable for ordinary and
necessary furnishings for a condo.
That is intended to be used
for only business cues.
It's also important to note that at
no point during these years, Was the
condo only used for business purposes?
I think that's pretty clear when we
determined that Gregory only had a couple
of small projects in New York, but was
spending a third of his time there.
So in addition to all of that extra
time, Gregory was just spending in
New York city and his new high-end
luxuriously furnished condo.
They also spent Thanksgiving weekend
there with the whole family every year.
Why wouldn't you Thanksgiving in New York
is stunning, but that's not business use.
There was also a time during 2013
when their daughter lived in the
condo full time and was using both the
property, the furnishings, everything
that was put in there as business use.
Because she was attending NYU during 2013.
During all of these years
in question from 2011 on.
Neither.
The taxpayer nor their accountant.
Was keeping track of these business
use versus personal use days.
They just weren't reporting
any kind of a split.
They weren't allocating between
the two uses as required.
They were just reporting the $28,000 rent
expense for business use of this condo.
The flip side to this is if a
business is renting your real
estate from you personally.
You then need to report the
rents from this business use,
you are receiving rental income.
This is because with the Augusta rule,
you have 14 days or less where you do not
have to report any income or expenses.
But once you are above that 14
day, mark, it is all reportable.
And now the taxpayer would need
to be reporting the income from
rents received from his business.
To also be able to claim the expense
for rent paid by the business.
There's no mention if that was done.
But that's not what the
court is looking at here.
So during none of those years,
was that difference of business
and personal use tracked.
Let alone was it reported?
In addition to having the luxury
condo with the luxury furnishings
to get the high end clientele.
Obviously Gregory needs to arrive
to client meetings in style.
At the very end of 2011.
Gregory goes out and purchases a
brand new 2012 range Rover for just
shy of a hundred thousand dollars.
Unlike the business and personal
use of the condo, which had
not been tracked at all.
The taxpayer did put together a
log of his business and personal
miles for the range Rover.
And said that he did this during 2012.
This was said to have been done.
To help facilitate the preparation
of the 2011 taxes to be able to
show his amount of business mileage.
However, Gregory also noted that the
information that he put onto this log.
Was based on his memory.
And when he knew he was in New York
and dates and things like that.
This wasn't an ongoing log kept day
to day as the vehicle was driven.
But it's better than nothing.
Gregory did have a log.
However.
In spite of Gregory's testimony saying
that this log was created during 2012.
To help with the preparation
of the 2011 taxes.
Gregory's accountants said
they did not have any mileage
log for their 2011 tax return.
See, I actually didn't report any use
of the vehicle on its 2011 tax return.
Instead what it reported.
Was just special depreciation in
the amount of 94,000 3 34, the
purchase price of the range Rover.
So there was no correct reporting
of the vehicle and its business
usage on the S-corp return.
All there was the reporting of
depreciation on an asset, but
no actual vehicle reporting.
Past all of this drama.
We've now gotten to the point
where Gregory has the condo.
It's nicely furnished.
The daughter's used it some years.
The family has used it some years.
There's no reporting
the differences there.
Gregory buys the high end SUV.
We write off the entire SUV.
Even though there's no proof
or substantiation reported.
Then we get to 2010.
In 2010 Gregory meets someone
while he's in New York.
He began meeting with this person
regularly from 2010 through 2013.
And during this time to the
taxpayer's favor tax wise.
He was not actually using that
New York condo for personal use.
This is because he didn't want his wife to
find out about his mistress in New York.
So there was a large portion of
time here from 2010 through 2013.
We're Gregory.
Actually, wasn't using the condo
for personal use much at all.
Instead.
He was using hotels because he
didn't want the connection between
his new mistress and the condo.
In addition to that when the courts
were reviewing the financials for SEI.
It found that between 2013 and 2017.
The taxpayer had made just
shy of $3 million in payments.
To a secret credit card.
In addition to taking out over
a half million dollars in cash.
That directly went to the affair partner,
to his mistress and to funding all of
the fun activities of their affair.
So whole lot of questionable
things, both tax wise.
And morally.
But something we've seen
more than once in tax court.
If the person testifying has proven
to not be credible or that they're
breaking either laws or that
they're known to fabricate truths
or things like this, historically.
The tax court has a hard time relying on
their testimony related to this matter.
If they would lie to their employer
partner, et cetera, why wouldn't
they lie regarding their taxes?
Because of this extra marital affair.
A unique situation came up,
additionally, in relation to this case.
Which was Laura, the wife applying
for innocent spouse relief on the
amounts owed the penalties, et cetera,
based on being kept in the dark.
Obviously, if Gregory was operating in a
way to hide a multi-million dollar affair.
There was no reason for the
IRS or the courts to believe
that Laura was in the no.
On all of the incorrect use of this
piece of New York, real estate of
all of the inappropriate business
expenses claimed, et cetera.
As we learned early on, she had very
little involvement in the business,
which was only in Gregory's name.
So very little reason to
believe Laura was in the no.
Combined.
With this affair that
he was hiding from her.
There was an application there
for innocent spouse relief.
At the end of all of this, you guys
might be wondering, well, across these
years, how much did they end up bowing?
When the IRS came back and opened up
their returns for 2012 through 2014.
What were the amounts that it was
determined that Gregory and Laura owed
and what kind of penalties did they have?
It was a pretty substantial amount.
For 20 12, 13 and 14.
It was determined that they
had deficiencies of $244,965.
A hundred thousand $550 and $98,002.
Additionally.
They incurred an accuracy related
penalty under section 6, 6, 6, 2.
Which has to do with intentionally
disregarding and reporting
something knowingly incorrect.
For 2012, this penalty amount.
Was $44,993.
It was just over 20,000 for 2013
and just under 20,000 for 2014.
Microphone (Shure MV7)-1: With
all of these considerations.
Gregory really did almost everything.
In the worst way possible when it came
to these large, very questionable right.
Offs.
He rented this condo.
That was a three plus million dollar condo
with over $300,000 of furnishings in it.
To his company based only on the
amount it would take to cover the
expense of ownership, no actual
analysis of fair market rent.
In addition to that, there seems
to be no substantial proof.
That the use of the condo related to the
business much at all, while Gregory was
trying to establish a New York clientele
and build the business there, there
was only ever a few small projects.
Nothing that would justify the
spending of millions of dollars.
To establish further business
activity in New York.
The juice wasn't worth the squeeze here.
However, there was a pretty driving
personal motive for having this condo.
In those earlier years, we had personal
use for the family at vacation.
We had some summertime
vacation use use for it.
Every Thanksgiving, the daughter
even lived in the condo for a while.
So when looking at this side by side of,
if this piece of property had more of a
personal benefit or a business benefit, it
very heavily leans to the personal side.
Additionally after 2010, Gregory had
a pretty large personal benefit to
spending additional time in New York.
Which was the start of this ongoing affair
that we know went on through at least
2017 based on the records from this case.
So obviously if Gregory has a mistress
New York, he has a very personal motive
for spending more time in New York.
Even though during those years
he didn't use the condo as much
because he didn't want his wife to
see the mistress at the property.
There was still excessive trips
to New York and time spent
there and literally millions of
dollars spent as a result of it.
Now, Laura.
The wife who did apply
for innocent spouse.
Gregory tried to argue that she
absolutely knew about the business use
or lack thereof related to the condo
and the range Rover and everything else.
However, the courts looked at all of this.
And said Laura had no
ownership in the business.
She had a tiny sliver of
participation in the business.
She only received a very small
benefit from the New York condo.
Her personal advantage was pretty minimal.
And even though it was
stated that Laura did have.
A large interest, a large control
in the finances of their household.
There was no link.
Between her having that same amount
of involvement or to show any kind
of similar level of control and the
finances of SEI of Gregory's company.
All of that combined.
With the fact that multiple years
that were brought up under audit.
We're when Gregory was having
an extra marital affair.
Led the courts to land on the fact that
obviously he was hiding things from Laura.
If Laura had a good understanding of
everything that was going on in New
York in relation to this condo, what
the business activity there really was.
The range Rover all of the
time Gregory spent there.
If she had a clue to it being much
less business use than it was,
then there's also a good chance.
She would have discovered this affair.
She had no reason to think Gregory was
not in New York for business purposes.
And that's what she believed.
And the tax court agreed with her.
So ultimately she was issued innocent
spouse relief when it came to this case.
like I said, this case.
Could be made into a lifetime movie.
I can picture it in my head.
I can see the whole thing play out.
In my head, I have a picture of the
mistress and she's one of those New
York women who wears those shear
robes with fluffy fur around the
arms and the very bottom and wears
like high-heeled house slippers.
But that's probably not the case,
but that's who I would cast.
If this were made into a lifetime movie.
In the end.
If a court case reads.
Like a movie.
I think the key takeaways should be that
these extravagant, these high-end, these
really pushing what's allowable, right.
Offs.
Should be questioned.
Every time you see an influencer online
who is telling you, you can convert.
Most of your day-to-day costs,
you can convert your luxurious,
personal life into a write-off.
Question it, because this is the outcome.
Gregory and his S-corp
is the exact example.
Of someone who is trying to abuse, what is
allowable within the tax code for business
write-offs and how did all unravel and
how does life unravel as part of it?
So the next time you see an influencer
saying that they are writing off
their costs to stay in a $12,000 a
night hotel as ordinary and necessary.
Just know that if they're under audit,
there's going to be a really uphill
battle to prove why that was needed.
There's always a scale of what
is reasonable and if the cost of
something is standard for the industry.
If it results in an increase in revenue.
And can you prove that.
And most importantly, making sure you
are substantiating all of these expenses.
For what they are.
How Gregory kept good, accurate logs
during those years of business use
in the condo versus personal use.
Some of that expense may
have still been allowed.
As we learned, there were several
years where a lot of his personal
use in New York was spent staying at
hotels instead because of the affair.
If that was the case, then there's
a good argument that during
those years he might've had only
business use for that condo with
less than 14 days of personal use.
But Gregory didn't even make an
attempt to track all of this.
And from the start, he just claimed
all of the costs as business cost.
A step farther.
Gregory's accountant.
Gregory tried to throw under the bus.
They tried to say, well, my tax
preparer filed this every year.
They knew I didn't have logs.
They let me do it anyway,
et cetera, et cetera.
Gregory's tax professional came
back and said, yup, we did know.
And there are multiple communications
and lots of proof that we told him
that he needed to maintain logs, that
if this was ever looked at, it would
be disallowed that he was informed of
the requirements and what he should
be doing to justify these write-offs.
And the taxpayer failed to comply.
So shifting the blame to the fact that
you used a tax professional also doesn't
work and has been disallowed in many
cases because ultimately as a taxpayer,
you are responsible for your return.
And especially if you've been
told what you need to be doing.
And you are just choosing to not
keep those records to follow those
steps, then it's absolutely on you.
This was an incredibly interesting case.
Again, if you want to dive
into this yourself, this is
tax court memo, 2024 dash 76.
And this is Gregory and Laura
Tackle the commissioner And that
last name is S C H N a C K E L.
I'm not sure if I'm saying that
correctly, but I did take my best.
Try at it as a personal holder
of a hard to pronounce last name.
I do make a best attempt when
it comes to unique names.
And I will end today's episode
with just a final note that I think
a lot of people are wondering.
Which is the fact that throughout this
case, I referred to Gregory and his wife.
However, as of 2017, Laura did file for
divorce and they are no longer married.
So once this was all unraveled,
she did peace out of there.
I don't know the outcome.
I just hope she got the condo seems fair.
But I guess we'll never know.
We'll have to write our own
ending for the lifetime movie.
So as always, I hope you
guys found this episode.
Interesting hope you found a little bit of
insight in this court case about a very.
A popular topic.
And if you think someone else would enjoy
this, please share this episode with them.
Please subscribe, share.
And like, and as always, I will
talk to you guys next week.