WEBVTT NOTE This file was generated by Descript 00:00:08.209 --> 00:00:11.840 Speaker: Welcome to Real Estate is Taxing, where we talk about all things real estate 00:00:11.870 --> 00:00:16.869 tax and break down complex concepts into understandable, entertaining tax topics. 00:00:17.440 --> 00:00:21.259 My name is Natalie Kalady, I'm your host, and I am so excited 00:00:21.259 --> 00:00:22.670 that you've decided to join me. 00:00:23.748 --> 00:00:27.288 Microphone (Shure MV7): A $3 million New York city condo furnished with 00:00:27.318 --> 00:00:30.318 $300,000 of high-end furnishings. 00:00:30.828 --> 00:00:34.398 A hundred thousand dollar SUV and an extra marital affair. 00:00:35.058 --> 00:00:37.068 Are we talking about a lifetime movie? 00:00:37.548 --> 00:00:43.548 It could be, but it's not, we are talking about a very recent tax court case. 00:00:43.818 --> 00:00:44.778 TC memo. 00:00:44.868 --> 00:00:50.238 2024 dash 76 about Gregory and Laura shackle. 00:00:50.738 --> 00:00:51.218 Gregory. 00:00:51.218 --> 00:00:58.478 And Laura had been married since 1985 and in 2000 Gregory started an escort. 00:00:58.898 --> 00:01:01.778 He was the sole owner of this business. 00:01:02.078 --> 00:01:03.038 S E I. 00:01:03.728 --> 00:01:09.428 And he mostly provided engineering and design services related to real 00:01:09.428 --> 00:01:11.318 estate and construction projects. 00:01:11.798 --> 00:01:17.318 He consulted and designed various systems, including plumbing, electrical, sprinkler 00:01:17.318 --> 00:01:23.108 systems, and the overwhelming majority of his work was in commercial real estate. 00:01:23.138 --> 00:01:26.798 Over 75% was commercial. 00:01:27.758 --> 00:01:31.418 Now they were based in Omaha, Nebraska. 00:01:31.988 --> 00:01:38.468 And at that time, they did have offices in California and in New York city. 00:01:38.968 --> 00:01:41.878 The wife in this case, Laura. 00:01:42.538 --> 00:01:46.288 Had very little involvement with Gregory's business. 00:01:46.828 --> 00:01:51.118 She had a degree in human nutrition and service management. 00:01:51.178 --> 00:01:55.348 And she worked as a nutritionist prior to helping out with the business, 00:01:55.498 --> 00:01:58.048 but only in a very minimal capacity. 00:01:58.548 --> 00:02:03.468 She took an intro to accounting class and did very limited 00:02:03.468 --> 00:02:06.198 amounts of bookkeeping for SEI. 00:02:06.618 --> 00:02:11.778 Mostly, she was just signing checks and looking at receivables and payables. 00:02:12.268 --> 00:02:17.338 In addition to Laura handling this limited amount of accounting for SEI, 00:02:17.788 --> 00:02:22.288 they did have an outside accountant as well as an in-house accountant who 00:02:22.288 --> 00:02:25.408 worked exclusively for Greg's S-corp. 00:02:25.978 --> 00:02:29.788 So the wife's involvement was pretty minimal when it came to the business. 00:02:30.658 --> 00:02:31.978 Even past that. 00:02:32.548 --> 00:02:35.878 The years we are going to be talking about Laura wasn't even 00:02:35.878 --> 00:02:37.738 doing accounting for those years. 00:02:38.128 --> 00:02:41.518 She was working as a wellness coordinator for the business. 00:02:41.518 --> 00:02:45.028 In the early two thousands, Greg decides he wants to get 00:02:45.028 --> 00:02:46.618 further into the New York market. 00:02:47.308 --> 00:02:48.958 Around 2004. 00:02:49.048 --> 00:02:51.238 He starts taking multiple trips there. 00:02:51.568 --> 00:02:58.018 And is trying to build out a network and a customer base in New York city. 00:02:58.828 --> 00:03:00.208 In these early years. 00:03:00.628 --> 00:03:05.308 Gregory starts off by sharing office space with an architecture firm 00:03:05.308 --> 00:03:07.168 that is also based in New York. 00:03:07.558 --> 00:03:11.578 So that he has somewhere to operate out of when he is in the city and 00:03:11.578 --> 00:03:13.378 working on building this clientele. 00:03:14.158 --> 00:03:18.508 During 2005, however, that architecture firm decides they do 00:03:18.508 --> 00:03:20.368 not want to continue sharing space. 00:03:20.878 --> 00:03:25.498 And now Gregory needs to find a new New York location. 00:03:25.798 --> 00:03:29.668 To operate sci out of when he is there on his trips. 00:03:30.168 --> 00:03:31.308 For a couple of years. 00:03:31.668 --> 00:03:32.598 He's transient. 00:03:32.628 --> 00:03:34.698 There is no new office space. 00:03:35.268 --> 00:03:39.738 And whenever Gregory visits, New York city, he was based out of hotels. 00:03:40.218 --> 00:03:45.318 And was spending a fair amount of time there, even with this being the case. 00:03:46.068 --> 00:03:49.638 So for 2005 and 2006. 00:03:50.148 --> 00:03:54.798 See, I only had a couple small projects that were in New York. 00:03:55.458 --> 00:03:58.938 But Gregory was spending at least a third of his time. 00:03:58.938 --> 00:03:59.388 There. 00:03:59.888 --> 00:04:02.288 In December of 2006. 00:04:02.708 --> 00:04:06.188 Gregory decides that it is time to buy a property. 00:04:06.578 --> 00:04:10.628 In New York city so that he has somewhere to operate out of while he's 00:04:10.658 --> 00:04:15.728 there building this client base and impressing New York real estate moguls. 00:04:16.238 --> 00:04:20.138 Obviously this can't be your run of the mill office. 00:04:20.318 --> 00:04:24.728 Gregory needs something that shows he is also a savant and real estate. 00:04:25.148 --> 00:04:26.588 And to be trusted. 00:04:27.758 --> 00:04:36.218 He goes out and in 2006, he purchases a penthouse in New York for 3.2, $5 million. 00:04:37.088 --> 00:04:40.238 Only Gregory is listed as the owner of this condo. 00:04:40.808 --> 00:04:44.708 Laura did come and tore it with him once before purchase, but she 00:04:44.708 --> 00:04:46.118 really has nothing to do with it. 00:04:46.148 --> 00:04:50.288 It is literally a condo that is there for Greg's travel to New York. 00:04:50.768 --> 00:04:52.058 And where he can. 00:04:52.388 --> 00:04:55.028 Bring investors and potential clients. 00:04:55.418 --> 00:04:58.628 When he is staying in New York and building that client base. 00:04:59.128 --> 00:05:04.108 This condo was almost 3000 square feet and had an outdoor 00:05:04.108 --> 00:05:06.028 terrace with views of Manhattan. 00:05:06.418 --> 00:05:08.608 Incredibly high-end building. 00:05:09.178 --> 00:05:13.258 Whether or not this met the criteria of being ordinary and 00:05:13.258 --> 00:05:15.508 necessary is still to be determined. 00:05:16.008 --> 00:05:18.858 Now when Gregory purchased this condo. 00:05:19.128 --> 00:05:22.728 He did so with a primary occupancy loan. 00:05:23.238 --> 00:05:27.918 He attested to the fact that he would not be renting out this property and it 00:05:27.918 --> 00:05:30.708 was going to be used as his second home. 00:05:31.208 --> 00:05:33.428 That was the terms of his loan. 00:05:34.148 --> 00:05:35.018 However. 00:05:35.708 --> 00:05:38.018 The very beginning of 2007. 00:05:38.048 --> 00:05:41.468 So just a few weeks after purchasing this condo. 00:05:42.398 --> 00:05:44.678 Gregory signs, a lease agreement. 00:05:45.008 --> 00:05:47.918 Between SEI his S corporation. 00:05:48.308 --> 00:05:49.388 And himself. 00:05:49.868 --> 00:05:53.948 For the company to rent his personal condo from him. 00:05:54.448 --> 00:05:55.168 No. 00:05:55.888 --> 00:05:58.708 This is something that is allowed. 00:05:59.668 --> 00:06:05.038 If someone wants to rent real estate, they own to a company that they are 00:06:05.038 --> 00:06:06.898 operating out of that real estate. 00:06:07.408 --> 00:06:11.008 This can absolutely be a valid transaction. 00:06:11.508 --> 00:06:12.828 The amount of rent. 00:06:13.458 --> 00:06:16.878 The expenses, the way the contract is structured. 00:06:17.388 --> 00:06:23.208 Needs to be from a standpoint of what would be reasonable and ordinary if 00:06:23.208 --> 00:06:25.128 they were renting any other space. 00:06:26.058 --> 00:06:29.478 However, that's not how Gregory went about this. 00:06:30.108 --> 00:06:35.688 He did not advise, nor did his wife advise with any kind of a real 00:06:35.688 --> 00:06:40.848 estate expert to determine what fair market rent would be for this condo. 00:06:41.418 --> 00:06:45.438 To establish what a reasonable amount would be for SEI to pay 00:06:45.438 --> 00:06:49.608 him personally, for the use of this condo in his personal name. 00:06:50.268 --> 00:06:51.108 Instead. 00:06:51.618 --> 00:06:52.938 For multiple years. 00:06:53.478 --> 00:06:58.698 SEI signs, Elise with Gregory to pay him $20,000 per month. 00:06:59.088 --> 00:07:02.598 For use of his personally owned condo. 00:07:03.318 --> 00:07:08.838 This amount was literally just calculated as the amount it would take to cover 00:07:08.838 --> 00:07:11.418 Gregory's costs of owning the condo. 00:07:11.958 --> 00:07:13.398 So there was no. 00:07:13.908 --> 00:07:18.828 Consideration or no analysis of what a reasonable rent amount would be. 00:07:19.428 --> 00:07:24.408 Gregory was just moving money from his business to himself personally 00:07:24.738 --> 00:07:29.388 labeled as rent so that he was not out of pocket, any amount personally, 00:07:29.688 --> 00:07:32.208 for his ownership of this condo. 00:07:33.058 --> 00:07:40.228 Now in retrospect, this $28,000 a month was overstated and was. 00:07:40.708 --> 00:07:44.878 An abnormally high amount for rent for any of the years in question. 00:07:45.818 --> 00:07:49.118 at the onset of the petitioner, looking at their tax returns. 00:07:49.628 --> 00:07:53.768 They went through and established fair market rents for the years in question, 00:07:54.248 --> 00:08:01.388 and for 2011 fair market rent would have been $22,500 would have been 21, 5 for 20 00:08:01.388 --> 00:08:06.368 12, 20 3000 for 2013 and 25,000 for 2014. 00:08:06.938 --> 00:08:11.018 So Gregory was paying several thousand dollars. 00:08:11.288 --> 00:08:14.018 Above fair market value rent for this condo. 00:08:14.528 --> 00:08:20.138 Every single month during all of these years, but more importantly, he was paying 00:08:20.138 --> 00:08:25.418 based on an amount to literally shift what would be personal costs to business. 00:08:25.928 --> 00:08:30.848 Not from a reasonable basis of what fair market rents would 00:08:30.848 --> 00:08:33.938 be for the use of his condo. 00:08:34.438 --> 00:08:40.888 After Greg buys this condo, he obviously has to furnish it and updated in a way 00:08:40.918 --> 00:08:45.838 to match the quality of the high-end condo, the quality of the type of 00:08:45.838 --> 00:08:47.878 clients he's trying to gain a New York. 00:08:48.268 --> 00:08:51.778 So he then spends over the next several years. 00:08:52.228 --> 00:08:57.868 $326,000 furnishing and updating this condo. 00:08:58.588 --> 00:09:02.698 After paying for all of these things, he depreciates them as business 00:09:02.698 --> 00:09:04.678 use assets because they're in. 00:09:05.068 --> 00:09:06.538 This business, use condo. 00:09:06.628 --> 00:09:11.728 All of these furnishings and updates are listed on the books for SEI. 00:09:12.418 --> 00:09:18.328 And these included things such as a baby grand piano, various artwork 00:09:18.358 --> 00:09:24.448 that is not just wall art and luxury sheets, linens rugs, et cetera. 00:09:25.228 --> 00:09:31.018 So very much pushing the level of what would be acceptable for ordinary and 00:09:31.018 --> 00:09:34.018 necessary furnishings for a condo. 00:09:34.468 --> 00:09:38.458 That is intended to be used for only business cues. 00:09:38.958 --> 00:09:45.198 It's also important to note that at no point during these years, Was the 00:09:45.198 --> 00:09:48.528 condo only used for business purposes? 00:09:49.098 --> 00:09:54.558 I think that's pretty clear when we determined that Gregory only had a couple 00:09:54.558 --> 00:09:58.878 of small projects in New York, but was spending a third of his time there. 00:09:59.688 --> 00:10:03.948 So in addition to all of that extra time, Gregory was just spending in 00:10:03.948 --> 00:10:08.478 New York city and his new high-end luxuriously furnished condo. 00:10:09.018 --> 00:10:13.728 They also spent Thanksgiving weekend there with the whole family every year. 00:10:13.998 --> 00:10:19.308 Why wouldn't you Thanksgiving in New York is stunning, but that's not business use. 00:10:20.028 --> 00:10:25.098 There was also a time during 2013 when their daughter lived in the 00:10:25.098 --> 00:10:29.838 condo full time and was using both the property, the furnishings, everything 00:10:29.838 --> 00:10:31.458 that was put in there as business use. 00:10:31.878 --> 00:10:35.748 Because she was attending NYU during 2013. 00:10:36.248 --> 00:10:40.988 During all of these years in question from 2011 on. 00:10:41.828 --> 00:10:42.668 Neither. 00:10:42.998 --> 00:10:46.928 The taxpayer nor their accountant. 00:10:47.438 --> 00:10:52.478 Was keeping track of these business use versus personal use days. 00:10:53.048 --> 00:10:55.928 They just weren't reporting any kind of a split. 00:10:56.318 --> 00:11:00.428 They weren't allocating between the two uses as required. 00:11:00.878 --> 00:11:07.028 They were just reporting the $28,000 rent expense for business use of this condo. 00:11:07.868 --> 00:11:13.358 The flip side to this is if a business is renting your real 00:11:13.358 --> 00:11:15.008 estate from you personally. 00:11:15.638 --> 00:11:19.958 You then need to report the rents from this business use, 00:11:19.958 --> 00:11:21.938 you are receiving rental income. 00:11:22.808 --> 00:11:27.488 This is because with the Augusta rule, you have 14 days or less where you do not 00:11:27.488 --> 00:11:29.708 have to report any income or expenses. 00:11:30.098 --> 00:11:34.568 But once you are above that 14 day, mark, it is all reportable. 00:11:34.928 --> 00:11:38.858 And now the taxpayer would need to be reporting the income from 00:11:38.858 --> 00:11:40.718 rents received from his business. 00:11:41.318 --> 00:11:45.878 To also be able to claim the expense for rent paid by the business. 00:11:46.838 --> 00:11:49.928 There's no mention if that was done. 00:11:50.378 --> 00:11:52.598 But that's not what the court is looking at here. 00:11:53.528 --> 00:11:58.568 So during none of those years, was that difference of business 00:11:58.568 --> 00:12:00.398 and personal use tracked. 00:12:00.788 --> 00:12:02.798 Let alone was it reported? 00:12:03.298 --> 00:12:07.348 In addition to having the luxury condo with the luxury furnishings 00:12:07.348 --> 00:12:08.848 to get the high end clientele. 00:12:09.598 --> 00:12:13.648 Obviously Gregory needs to arrive to client meetings in style. 00:12:14.398 --> 00:12:17.038 At the very end of 2011. 00:12:17.488 --> 00:12:23.278 Gregory goes out and purchases a brand new 2012 range Rover for just 00:12:23.278 --> 00:12:25.588 shy of a hundred thousand dollars. 00:12:26.088 --> 00:12:28.908 Unlike the business and personal use of the condo, which had 00:12:28.908 --> 00:12:30.108 not been tracked at all. 00:12:30.528 --> 00:12:35.508 The taxpayer did put together a log of his business and personal 00:12:35.508 --> 00:12:37.188 miles for the range Rover. 00:12:37.578 --> 00:12:40.398 And said that he did this during 2012. 00:12:41.178 --> 00:12:42.888 This was said to have been done. 00:12:43.398 --> 00:12:50.058 To help facilitate the preparation of the 2011 taxes to be able to 00:12:50.058 --> 00:12:52.548 show his amount of business mileage. 00:12:53.178 --> 00:12:58.518 However, Gregory also noted that the information that he put onto this log. 00:12:59.028 --> 00:13:01.188 Was based on his memory. 00:13:01.458 --> 00:13:04.878 And when he knew he was in New York and dates and things like that. 00:13:05.268 --> 00:13:10.548 This wasn't an ongoing log kept day to day as the vehicle was driven. 00:13:11.028 --> 00:13:12.798 But it's better than nothing. 00:13:12.828 --> 00:13:15.078 Gregory did have a log. 00:13:15.918 --> 00:13:16.788 However. 00:13:17.598 --> 00:13:22.788 In spite of Gregory's testimony saying that this log was created during 2012. 00:13:23.328 --> 00:13:26.148 To help with the preparation of the 2011 taxes. 00:13:27.168 --> 00:13:29.718 Gregory's accountants said they did not have any mileage 00:13:29.718 --> 00:13:31.878 log for their 2011 tax return. 00:13:33.178 --> 00:13:38.338 See, I actually didn't report any use of the vehicle on its 2011 tax return. 00:13:38.908 --> 00:13:40.348 Instead what it reported. 00:13:40.738 --> 00:13:46.348 Was just special depreciation in the amount of 94,000 3 34, the 00:13:46.348 --> 00:13:47.878 purchase price of the range Rover. 00:13:48.598 --> 00:13:53.188 So there was no correct reporting of the vehicle and its business 00:13:53.188 --> 00:13:55.198 usage on the S-corp return. 00:13:55.888 --> 00:13:59.828 All there was the reporting of depreciation on an asset, but 00:13:59.828 --> 00:14:01.898 no actual vehicle reporting. 00:14:02.728 --> 00:14:04.528 Past all of this drama. 00:14:04.558 --> 00:14:08.068 We've now gotten to the point where Gregory has the condo. 00:14:08.068 --> 00:14:09.178 It's nicely furnished. 00:14:09.208 --> 00:14:10.738 The daughter's used it some years. 00:14:10.738 --> 00:14:12.298 The family has used it some years. 00:14:12.658 --> 00:14:15.208 There's no reporting the differences there. 00:14:15.658 --> 00:14:17.938 Gregory buys the high end SUV. 00:14:17.968 --> 00:14:20.638 We write off the entire SUV. 00:14:21.058 --> 00:14:24.448 Even though there's no proof or substantiation reported. 00:14:25.138 --> 00:14:26.788 Then we get to 2010. 00:14:27.778 --> 00:14:32.398 In 2010 Gregory meets someone while he's in New York. 00:14:33.268 --> 00:14:38.188 He began meeting with this person regularly from 2010 through 2013. 00:14:38.878 --> 00:14:42.838 And during this time to the taxpayer's favor tax wise. 00:14:43.348 --> 00:14:47.698 He was not actually using that New York condo for personal use. 00:14:48.208 --> 00:14:53.758 This is because he didn't want his wife to find out about his mistress in New York. 00:14:54.338 --> 00:14:59.168 So there was a large portion of time here from 2010 through 2013. 00:14:59.618 --> 00:15:00.278 We're Gregory. 00:15:00.308 --> 00:15:04.568 Actually, wasn't using the condo for personal use much at all. 00:15:04.898 --> 00:15:05.618 Instead. 00:15:05.888 --> 00:15:10.718 He was using hotels because he didn't want the connection between 00:15:10.748 --> 00:15:13.028 his new mistress and the condo. 00:15:13.528 --> 00:15:18.298 In addition to that when the courts were reviewing the financials for SEI. 00:15:18.928 --> 00:15:22.918 It found that between 2013 and 2017. 00:15:23.398 --> 00:15:29.248 The taxpayer had made just shy of $3 million in payments. 00:15:29.728 --> 00:15:32.008 To a secret credit card. 00:15:32.428 --> 00:15:36.208 In addition to taking out over a half million dollars in cash. 00:15:36.568 --> 00:15:43.738 That directly went to the affair partner, to his mistress and to funding all of 00:15:43.738 --> 00:15:47.008 the fun activities of their affair. 00:15:47.908 --> 00:15:52.468 So whole lot of questionable things, both tax wise. 00:15:52.918 --> 00:15:53.908 And morally. 00:15:54.328 --> 00:15:57.868 But something we've seen more than once in tax court. 00:15:59.078 --> 00:16:03.548 If the person testifying has proven to not be credible or that they're 00:16:03.548 --> 00:16:08.648 breaking either laws or that they're known to fabricate truths 00:16:08.678 --> 00:16:10.448 or things like this, historically. 00:16:10.898 --> 00:16:14.948 The tax court has a hard time relying on their testimony related to this matter. 00:16:15.428 --> 00:16:19.508 If they would lie to their employer partner, et cetera, why wouldn't 00:16:19.508 --> 00:16:21.638 they lie regarding their taxes? 00:16:22.138 --> 00:16:24.898 Because of this extra marital affair. 00:16:25.378 --> 00:16:29.788 A unique situation came up, additionally, in relation to this case. 00:16:30.298 --> 00:16:35.758 Which was Laura, the wife applying for innocent spouse relief on the 00:16:35.758 --> 00:16:40.168 amounts owed the penalties, et cetera, based on being kept in the dark. 00:16:40.738 --> 00:16:46.888 Obviously, if Gregory was operating in a way to hide a multi-million dollar affair. 00:16:47.248 --> 00:16:52.018 There was no reason for the IRS or the courts to believe 00:16:52.018 --> 00:16:53.788 that Laura was in the no. 00:16:54.238 --> 00:16:59.698 On all of the incorrect use of this piece of New York, real estate of 00:16:59.698 --> 00:17:03.298 all of the inappropriate business expenses claimed, et cetera. 00:17:03.898 --> 00:17:07.468 As we learned early on, she had very little involvement in the business, 00:17:07.468 --> 00:17:09.478 which was only in Gregory's name. 00:17:09.868 --> 00:17:13.198 So very little reason to believe Laura was in the no. 00:17:13.618 --> 00:17:14.488 Combined. 00:17:14.818 --> 00:17:17.128 With this affair that he was hiding from her. 00:17:17.578 --> 00:17:21.388 There was an application there for innocent spouse relief. 00:17:21.888 --> 00:17:26.418 At the end of all of this, you guys might be wondering, well, across these 00:17:26.418 --> 00:17:28.848 years, how much did they end up bowing? 00:17:28.878 --> 00:17:35.538 When the IRS came back and opened up their returns for 2012 through 2014. 00:17:35.868 --> 00:17:40.098 What were the amounts that it was determined that Gregory and Laura owed 00:17:40.428 --> 00:17:42.378 and what kind of penalties did they have? 00:17:42.888 --> 00:17:44.748 It was a pretty substantial amount. 00:17:45.248 --> 00:17:48.518 For 20 12, 13 and 14. 00:17:49.148 --> 00:17:56.228 It was determined that they had deficiencies of $244,965. 00:17:56.678 --> 00:18:01.928 A hundred thousand $550 and $98,002. 00:18:02.858 --> 00:18:03.878 Additionally. 00:18:04.418 --> 00:18:09.668 They incurred an accuracy related penalty under section 6, 6, 6, 2. 00:18:10.268 --> 00:18:14.528 Which has to do with intentionally disregarding and reporting 00:18:14.528 --> 00:18:16.688 something knowingly incorrect. 00:18:17.678 --> 00:18:20.588 For 2012, this penalty amount. 00:18:20.888 --> 00:18:24.398 Was $44,993. 00:18:24.758 --> 00:18:31.718 It was just over 20,000 for 2013 and just under 20,000 for 2014. 00:18:32.708 --> 00:18:35.108 Microphone (Shure MV7)-1: With all of these considerations. 00:18:35.618 --> 00:18:39.098 Gregory really did almost everything. 00:18:39.638 --> 00:18:45.278 In the worst way possible when it came to these large, very questionable right. 00:18:45.278 --> 00:18:45.758 Offs. 00:18:46.448 --> 00:18:48.728 He rented this condo. 00:18:48.758 --> 00:18:54.038 That was a three plus million dollar condo with over $300,000 of furnishings in it. 00:18:54.428 --> 00:18:58.448 To his company based only on the amount it would take to cover the 00:18:58.448 --> 00:19:02.138 expense of ownership, no actual analysis of fair market rent. 00:19:03.038 --> 00:19:07.388 In addition to that, there seems to be no substantial proof. 00:19:07.928 --> 00:19:13.598 That the use of the condo related to the business much at all, while Gregory was 00:19:13.598 --> 00:19:18.548 trying to establish a New York clientele and build the business there, there 00:19:18.548 --> 00:19:20.858 was only ever a few small projects. 00:19:21.218 --> 00:19:25.418 Nothing that would justify the spending of millions of dollars. 00:19:25.688 --> 00:19:29.888 To establish further business activity in New York. 00:19:30.428 --> 00:19:32.618 The juice wasn't worth the squeeze here. 00:19:32.948 --> 00:19:38.858 However, there was a pretty driving personal motive for having this condo. 00:19:39.518 --> 00:19:43.988 In those earlier years, we had personal use for the family at vacation. 00:19:44.318 --> 00:19:47.498 We had some summertime vacation use use for it. 00:19:47.498 --> 00:19:51.398 Every Thanksgiving, the daughter even lived in the condo for a while. 00:19:51.908 --> 00:19:58.958 So when looking at this side by side of, if this piece of property had more of a 00:19:58.988 --> 00:20:04.868 personal benefit or a business benefit, it very heavily leans to the personal side. 00:20:05.498 --> 00:20:11.228 Additionally after 2010, Gregory had a pretty large personal benefit to 00:20:11.228 --> 00:20:13.388 spending additional time in New York. 00:20:13.838 --> 00:20:19.118 Which was the start of this ongoing affair that we know went on through at least 00:20:19.148 --> 00:20:22.358 2017 based on the records from this case. 00:20:22.868 --> 00:20:27.668 So obviously if Gregory has a mistress New York, he has a very personal motive 00:20:27.668 --> 00:20:29.558 for spending more time in New York. 00:20:30.398 --> 00:20:34.058 Even though during those years he didn't use the condo as much 00:20:34.088 --> 00:20:38.078 because he didn't want his wife to see the mistress at the property. 00:20:38.798 --> 00:20:42.548 There was still excessive trips to New York and time spent 00:20:42.548 --> 00:20:46.988 there and literally millions of dollars spent as a result of it. 00:20:47.768 --> 00:20:48.788 Now, Laura. 00:20:49.058 --> 00:20:52.178 The wife who did apply for innocent spouse. 00:20:52.778 --> 00:20:59.258 Gregory tried to argue that she absolutely knew about the business use 00:20:59.288 --> 00:21:04.238 or lack thereof related to the condo and the range Rover and everything else. 00:21:04.898 --> 00:21:07.028 However, the courts looked at all of this. 00:21:07.478 --> 00:21:10.628 And said Laura had no ownership in the business. 00:21:11.198 --> 00:21:15.218 She had a tiny sliver of participation in the business. 00:21:15.758 --> 00:21:19.988 She only received a very small benefit from the New York condo. 00:21:20.018 --> 00:21:22.388 Her personal advantage was pretty minimal. 00:21:23.078 --> 00:21:26.348 And even though it was stated that Laura did have. 00:21:26.948 --> 00:21:31.418 A large interest, a large control in the finances of their household. 00:21:31.818 --> 00:21:33.378 There was no link. 00:21:33.888 --> 00:21:37.788 Between her having that same amount of involvement or to show any kind 00:21:37.788 --> 00:21:43.548 of similar level of control and the finances of SEI of Gregory's company. 00:21:44.048 --> 00:21:45.698 All of that combined. 00:21:46.238 --> 00:21:49.928 With the fact that multiple years that were brought up under audit. 00:21:50.528 --> 00:21:54.158 We're when Gregory was having an extra marital affair. 00:21:54.638 --> 00:21:59.648 Led the courts to land on the fact that obviously he was hiding things from Laura. 00:21:59.648 --> 00:22:04.043 If Laura had a good understanding of everything that was going on in New 00:22:04.043 --> 00:22:09.428 York in relation to this condo, what the business activity there really was. 00:22:09.788 --> 00:22:12.968 The range Rover all of the time Gregory spent there. 00:22:13.568 --> 00:22:17.948 If she had a clue to it being much less business use than it was, 00:22:18.428 --> 00:22:19.898 then there's also a good chance. 00:22:19.898 --> 00:22:22.148 She would have discovered this affair. 00:22:22.568 --> 00:22:27.278 She had no reason to think Gregory was not in New York for business purposes. 00:22:27.638 --> 00:22:28.988 And that's what she believed. 00:22:29.468 --> 00:22:31.268 And the tax court agreed with her. 00:22:31.628 --> 00:22:37.328 So ultimately she was issued innocent spouse relief when it came to this case. 00:22:37.868 --> 00:22:39.938 like I said, this case. 00:22:40.418 --> 00:22:42.398 Could be made into a lifetime movie. 00:22:42.578 --> 00:22:44.078 I can picture it in my head. 00:22:44.078 --> 00:22:46.148 I can see the whole thing play out. 00:22:46.578 --> 00:22:52.038 In my head, I have a picture of the mistress and she's one of those New 00:22:52.038 --> 00:22:56.058 York women who wears those shear robes with fluffy fur around the 00:22:56.058 --> 00:23:00.228 arms and the very bottom and wears like high-heeled house slippers. 00:23:00.708 --> 00:23:03.948 But that's probably not the case, but that's who I would cast. 00:23:04.098 --> 00:23:06.228 If this were made into a lifetime movie. 00:23:07.098 --> 00:23:07.908 In the end. 00:23:08.568 --> 00:23:09.978 If a court case reads. 00:23:10.368 --> 00:23:11.208 Like a movie. 00:23:11.718 --> 00:23:19.068 I think the key takeaways should be that these extravagant, these high-end, these 00:23:19.068 --> 00:23:21.918 really pushing what's allowable, right. 00:23:21.918 --> 00:23:22.398 Offs. 00:23:23.118 --> 00:23:25.008 Should be questioned. 00:23:25.968 --> 00:23:31.728 Every time you see an influencer online who is telling you, you can convert. 00:23:31.968 --> 00:23:35.748 Most of your day-to-day costs, you can convert your luxurious, 00:23:35.748 --> 00:23:37.908 personal life into a write-off. 00:23:38.598 --> 00:23:41.628 Question it, because this is the outcome. 00:23:42.108 --> 00:23:46.218 Gregory and his S-corp is the exact example. 00:23:47.058 --> 00:23:53.448 Of someone who is trying to abuse, what is allowable within the tax code for business 00:23:53.448 --> 00:23:58.578 write-offs and how did all unravel and how does life unravel as part of it? 00:23:59.238 --> 00:24:03.738 So the next time you see an influencer saying that they are writing off 00:24:03.768 --> 00:24:09.588 their costs to stay in a $12,000 a night hotel as ordinary and necessary. 00:24:10.128 --> 00:24:14.418 Just know that if they're under audit, there's going to be a really uphill 00:24:14.418 --> 00:24:17.238 battle to prove why that was needed. 00:24:17.838 --> 00:24:23.898 There's always a scale of what is reasonable and if the cost of 00:24:23.898 --> 00:24:26.328 something is standard for the industry. 00:24:26.748 --> 00:24:29.658 If it results in an increase in revenue. 00:24:29.658 --> 00:24:31.008 And can you prove that. 00:24:31.578 --> 00:24:36.828 And most importantly, making sure you are substantiating all of these expenses. 00:24:37.188 --> 00:24:38.598 For what they are. 00:24:39.498 --> 00:24:45.438 How Gregory kept good, accurate logs during those years of business use 00:24:45.438 --> 00:24:47.538 in the condo versus personal use. 00:24:47.988 --> 00:24:50.568 Some of that expense may have still been allowed. 00:24:51.078 --> 00:24:54.588 As we learned, there were several years where a lot of his personal 00:24:54.588 --> 00:24:59.418 use in New York was spent staying at hotels instead because of the affair. 00:24:59.898 --> 00:25:02.808 If that was the case, then there's a good argument that during 00:25:02.808 --> 00:25:06.738 those years he might've had only business use for that condo with 00:25:06.738 --> 00:25:09.198 less than 14 days of personal use. 00:25:09.678 --> 00:25:12.798 But Gregory didn't even make an attempt to track all of this. 00:25:13.128 --> 00:25:17.748 And from the start, he just claimed all of the costs as business cost. 00:25:18.248 --> 00:25:19.238 A step farther. 00:25:19.598 --> 00:25:20.798 Gregory's accountant. 00:25:21.398 --> 00:25:23.138 Gregory tried to throw under the bus. 00:25:23.768 --> 00:25:27.128 They tried to say, well, my tax preparer filed this every year. 00:25:27.128 --> 00:25:28.928 They knew I didn't have logs. 00:25:28.928 --> 00:25:31.628 They let me do it anyway, et cetera, et cetera. 00:25:32.128 --> 00:25:36.988 Gregory's tax professional came back and said, yup, we did know. 00:25:37.108 --> 00:25:41.878 And there are multiple communications and lots of proof that we told him 00:25:42.208 --> 00:25:46.108 that he needed to maintain logs, that if this was ever looked at, it would 00:25:46.108 --> 00:25:50.158 be disallowed that he was informed of the requirements and what he should 00:25:50.158 --> 00:25:52.468 be doing to justify these write-offs. 00:25:52.948 --> 00:25:54.898 And the taxpayer failed to comply. 00:25:55.738 --> 00:26:00.838 So shifting the blame to the fact that you used a tax professional also doesn't 00:26:00.838 --> 00:26:06.178 work and has been disallowed in many cases because ultimately as a taxpayer, 00:26:06.178 --> 00:26:08.038 you are responsible for your return. 00:26:08.518 --> 00:26:12.088 And especially if you've been told what you need to be doing. 00:26:13.258 --> 00:26:17.128 And you are just choosing to not keep those records to follow those 00:26:17.128 --> 00:26:19.948 steps, then it's absolutely on you. 00:26:20.448 --> 00:26:22.728 This was an incredibly interesting case. 00:26:23.088 --> 00:26:26.658 Again, if you want to dive into this yourself, this is 00:26:26.658 --> 00:26:30.348 tax court memo, 2024 dash 76. 00:26:30.798 --> 00:26:35.968 And this is Gregory and Laura Tackle the commissioner And that 00:26:35.968 --> 00:26:39.568 last name is S C H N a C K E L. 00:26:39.628 --> 00:26:43.468 I'm not sure if I'm saying that correctly, but I did take my best. 00:26:43.618 --> 00:26:49.348 Try at it as a personal holder of a hard to pronounce last name. 00:26:49.558 --> 00:26:53.428 I do make a best attempt when it comes to unique names. 00:26:54.088 --> 00:26:58.528 And I will end today's episode with just a final note that I think 00:26:58.528 --> 00:27:00.058 a lot of people are wondering. 00:27:00.568 --> 00:27:05.938 Which is the fact that throughout this case, I referred to Gregory and his wife. 00:27:06.508 --> 00:27:13.798 However, as of 2017, Laura did file for divorce and they are no longer married. 00:27:14.128 --> 00:27:17.848 So once this was all unraveled, she did peace out of there. 00:27:18.448 --> 00:27:19.798 I don't know the outcome. 00:27:19.918 --> 00:27:22.618 I just hope she got the condo seems fair. 00:27:22.948 --> 00:27:24.688 But I guess we'll never know. 00:27:24.718 --> 00:27:27.118 We'll have to write our own ending for the lifetime movie. 00:27:28.198 --> 00:27:31.738 So as always, I hope you guys found this episode. 00:27:31.738 --> 00:27:37.408 Interesting hope you found a little bit of insight in this court case about a very. 00:27:37.438 --> 00:27:38.938 A popular topic. 00:27:39.628 --> 00:27:43.918 And if you think someone else would enjoy this, please share this episode with them. 00:27:44.158 --> 00:27:45.658 Please subscribe, share. 00:27:45.658 --> 00:27:50.338 And like, and as always, I will talk to you guys next week.