In episode 16 of How Tax Works, Matt Foreman talks about how to lower your taxes and why your accountant probably shouldn’t let you deduct your Bugatti, as well as answering a question from Ken Falcon, Managing Partner at Falcon Rappaport & Berkman LLP regarding whether property acquired via adverse possession is taxable.  This episode is for anyone who has asked or has been asked a quick tax question.

Please also see Matt Foreman’s upcoming webinars! Details below:

• Deducting Digital Asset Losses: Worthless Assets, Rev Proc 2024-28 Basis Safe Harbor, Theft and Casualty Losses
  January 15th, 2025 @ 1:00pm – 2:50pm EST
• Domicile and Tax Residency Considerations for Business Owners

  January 22^nd, 2025 @ 2:00pm – 3:00pm EST

Listen to the episode here:

  

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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

Whether you’re a seasoned entrepreneur, accountant, lawyer, or financial advisor, “How Tax Works” offers a wealth of knowledge to empower you in making sound business decisions. Tune in and embark on a journey to unravel the complexities of tax law, one episode at a time.

This podcast may be considered attorney advertising. This podcast is not presented for purposes of legal advice or for providing a legal opinion. Before any of the presenting attorneys can provide legal advice to any person or entity, and before an attorney-client relationship is formed, that attorney must have a signed fee agreement with a client setting forth the firm’s scope of representation and the fees that will be charged.

Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

Matthew Foreman [00:00:00]:
Welcome to the 16th episode of How Tax Works. I’m Matt Forman. In this episode, I’ll discuss common and hopefully interesting questions that people ask me when they find out that I am in fact a tax lawyer. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please, please, please, please, please hire. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business choices that we all make.

Matthew Foreman [00:00:44]:
But before, before I get started right, a few administrative things, as I always do. New episodes every two weeks. We’re going back to the two week schedule. It’s just trying to avoid the holidays. Happy New Year. Of course, the next episode is going to talk about qualified small business stock section 1202 of the Internal Revenue Code. It’s probably going to be a two parter and as I, I alluded to on the last episode, it is, it is going to be pretty detailed, pretty intense. There is a small chance I push this into three or it might just be two little bit longer ones.

Matthew Foreman [00:01:13]:
This is an incredibly simple and short code section. It doesn’t really have regulations, but man, is there a lot. There is a lot of detail. There’s a lot of stuff to talk about. So definitely one you’re going to want to, you know, get out your popcorn, really focus on, definitely take notes. People absolutely do that during a podcast, right? So if you have any questions, comments or constructive criticism, email me my FRB email address. As I said in the last one, have two webinars coming up January 15, 1 to 2:50 Eastern Stratford webinar on Deducting Losses in Digital Assets with Mark Demichel co presenting with him. He’s a partner at Citroen Cooperman and there’s a link on the FRB page for this episode also Wednesday, January 22 this one’s 2 to 3pm Eastern.

Matthew Foreman [00:01:58]:
I live in New York, so I keep everything Eastern. If you’re not sure what time it is, feel free to email me. I’ll. I’ll help you out there. This one’s American Law Institute, Continuing Legal education. There’s also CPE is my understanding. I don’t think there’s CE for EAs. We’ll also post a link on the main webpage on FRB so that you can sign up for it if you would like.

Matthew Foreman [00:02:17]:
If not, that’s, that’s cool too. But it’s a great way to start off the Year. What could be better than starting your continuing ed? Hopefully learn something. Okay, so on to common and interesting questions that people ask me when they find out what I do for a living. Every profession gets questions, right? And they get questions for what they do, right? You know, my father was a dentist, and he would go to things and people would ask him questions about their tea. So I’d be at a family wedding and someone would be standing there talking to my dad with, like, their mouth wide open, right? And the visual of it is, is, Is. Is humorous, of course, but that’s what happens. You know, people find out what you do and they’re like, it’s not that they’re necessarily trying to get free advice.

Matthew Foreman [00:02:58]:
Maybe they are. I don’t know. But, you know, they’re. They’re doing it. And, And I used to tell people that I, I was. That I’m a nuclear physicist. My wife told me, don’t do it. That’s weird.

Matthew Foreman [00:03:09]:
But I used to do it to avoid questions, because no one really has questions for nuclear physicists other than like, is the Iron man suit possible? The answer is no, but, you know, that’s it. So I, I go to things and people ask me questions about tax. Because they have questions, right? They have all kinds of questions. So, you know, one question, just to kind of give you an idea of it, and some of them are general, and this one’s pretty specific. But I was talking to another attorney, not a tax attorney, not in the area really at all. And what he asked me is, hey, Matt, is adverse possession taxable? And if so, when? And I thought to myself, I’m fairly certain I said out loud, oh, that’s a really interesting question. Right? And it’s an interesting question for one specific reason that I think is pretty important because I’m a tax lawyer who’s fascinated by tax law and how it interacts. So I think that that’s really important.

Matthew Foreman [00:04:00]:
So what is adverse possession? I think that’s the first question most people would ask in this situation, which is a valid question, right? And I’m going to use New York law. Every law, more or less follows the same thing. Any lawyer who’s listening to this will be like, well, that’s not correct. Well, the answer is, okay, fine, I’m being close enough. It doesn’t have to be perfect, right? And so the question is, what is adverse possession? Right? A person or entity occupies real property of another with or without the knowledge of the other’s superior ownership rights and in a manner that would give the owner A cause of action for ejectment. Okay, so an example of this that’s not. Is when you’re doing all those things, but the owner says, yeah, you can just hang out there, don’t worry about it. They actually don’t have a cause of action for ejectment.

Matthew Foreman [00:04:48]:
So because they’ve allowed you to do it, that doesn’t start the clock for adverse possession. And the clock’s really important. Anyone who went to law school would tell you adverse possession is seven years, unless you’re a real property attorney. For example, in New York, it’s 10 years, it’s not seven. And I think that that’s really important. And you need one of, you know, and these are the things that people talk about that you need. The phrase is open and notorious, right? And what that means is that you’re not hiding it, you’re just kind of doing it. You don’t have to make it like obvious, but open and notorious.

Matthew Foreman [00:05:19]:
I’m doing it, you know, and you need one of, you know, you need one of the open, notorious or others under certain circumstances. I’m not going to go into the certain circumstances. They are really niche, really niche. So just think of open and notorious. And. And when does this happen? This is where the open inventories comes in, the most common one that I think happens. And maybe I’m wrong here, but I want you to imagine a suburban house and there is a, you know, the line between property, which isn’t perfectly done, but, you know, everyone knows about where it is. And there’s a line of bushes right in there.

Matthew Foreman [00:05:50]:
Right. The middle is the line, although the bushes kind of wiggle. So we’ll figure it out later. And what happens is one of the two owners puts a fence on the other side of the bushes. That can be adverse possession because what they’re doing is a person or entity. So the person. Person’s a loose term in this regard, occupies the real property of another with or without the knowledge of the other superior ownership rights. So you don’t.

Matthew Foreman [00:06:18]:
Doesn’t matter if you know that the other someone else owns it. You could be doing it accidentally and in a manner that would give the owner a cause of action for ejectment. Which means you could go to court and say, take that fence and tear it out. Right? So that’s a common one. Other ones, you know, buildings have a common wall and there’s a space between them, or there’s an air shaft and one party puts something in there or they use it, or they build over it, or literally, you Know, just, I mean, this does happen. People just build buildings on someone else’s property. It’s common for people who live in rural areas. You don’t really know where the line is.

Matthew Foreman [00:06:52]:
Or people just kind of have squatters rights and they just kind of build a house in someone else’s large plot of land, right? That’s what happens. So those are examples of it. You know, the question goes back to that I was asked, right, is adverse possession taxable? And if so, when? Right? And the answer is, yes, absolutely. Income, right? Section 61, glenshaw glass. Anyone who’s a tax professional will tell you that it’s definitely income, right? Income from whatever Source derives. Section 61. It includes gains, derives from dealings in property. 61.

Matthew Foreman [00:07:24]:
83. It is an undeniable accession to wealth, clearly realized when the taxpayer has complete dominion. Right. And control. That’s Glenshaw Glass. But this is really important, right? That’s where you delve into the second question. When, when is it income? Right? And it’s income when the taxer has complete dominion and control. That’s Glenshaw Glass just said it.

Matthew Foreman [00:07:45]:
So this is where it’s really important. You go back to the New York one, right? It requires you to actually get a court order, New York State, that says that you have adverse possession. It’s not just enough to, you know, be there for 10 years. You know, you have to go to court to get title for it. So when you do it, when you get the court order and you now own title, that is the moment it is taxable, right? And people ask me, well, how is it valued? And the answer is, well, I don’t, I don’t know. What you would have to do is go to someone who does valuations and say, okay, what was my real property worth before $100? What is it worth now? $102. That $2 taxable income ordinary or capital? Probably ordinary. I don’t see how that would be a capital game by, you know, adversely possessing it.

Matthew Foreman [00:08:29]:
But it’d be an argument you could make, but it’s definitely an interesting one. So, you know, this question was asked to me more than a year ago, so. So my answer is, yes, it is taxable and the answer is when you get the court order. So I think that that’s a really, really, really interesting one that comes into it. On that note, we’re going to take a quick break and we’ll come back in a moment. So I, you know, welcome back. I get all kinds of questions like this, right? At weddings, birthday parties, yada Yada, yada. I’ve been asked about a lot of stuff, most of which I won’t talk about.

Matthew Foreman [00:09:04]:
Right. Qsbs, that’s gonna be my next one. I, I thought that instead of giving nine seconds on it or three minutes, it’s worth, it’s worth at least a full episode. F reorgs. My boss said that we’re gonna do an F reorg. So I’m gonna check what does that, okay, talk about that. That’s probably gonna be after I think mid February then. You know, people ask me questions about like cross border Mergers and why Section 367 exists.

Matthew Foreman [00:09:26]:
And I got to tell you something, if you were asking a random person that you just met at a social event that kind of question, then I don’t know what to do with you because that’s, that’s wild, right? That’s wild. So I’m going to go with questions that I think I can answer, you know, on the fly. I get the question right. What can I do to lower my taxes? And that’s kind of again, interesting question to ask someone you just met. And, and my uncle asked me this. God, it was probably 2014. It was, it was around when I was, I think I was in my LLM programs. Cause you were late 14, early 15.

Matthew Foreman [00:09:55]:
He did not like my answer, which was earn less money. Which is true. If you earn less money, generally speaking, you’ll pay, you, you will pay less in taxes. But you know, I, I, there’s a couple kind of high points I always hit 5, 6 that I think are really important. I think people don’t pay attention to. Right. You know, do you really need a million dollars of salary? Could you go to 950,000. Right.

Matthew Foreman [00:10:15]:
Which will lower your taxes. Defer them. Deferral has real value and then you’re not paying taxes on it for a while. Right. So retirement accounts, IRA, 401k, you know, SEP, IRA, blah blah blah, blah. Obviously Roth, Roths don’t defer taxes. Could be better long term. But it’s something to do, prevent the income, you know, realization recognition.

Matthew Foreman [00:10:33]:
Right. Section 121 which is the exclusion for principal residents. Section 1031, you know, the exchanging real property or starting in 2026 maybe again other, other business property. Right. So it’s not just, you know, the vacation house. It, it’s a piece of business property. Real property or investment real property. Maybe it’ll expand back to more.

Matthew Foreman [00:10:55]:
We’ll see how that, how that one goes. One of my favorite ones to prevent the income realization is if you take your IRA or 401k and you roll it into a company that you are still an employee and, and you own 5%, I think it’s 5% or less. Don’t quote me on that. Definitely less than 5%, but I think it’s 5% or less. Then you don’t have to take an RMD. So I will tell you that I tell people who are retired, hey, you should go be a greeter at Walmart, then take your IRA and put it into the most boring bond fund that exists that they have. And I bet you, I bet you Walmart has some really boring stuff in their 401k and people are like, matt, that is the dumbest thing ever. And I will tell you that there are two benefits, okay? Two, one, you are not taking RMDs, which if you don’t need, don’t have the income, deal with it later.

Matthew Foreman [00:11:47]:
Two, look, I think studies have shown, and I don’t think there’s anyone who’s going to disagree with me in this, that being active and interacting with people is great for cognition. So if you can physically do it, you know, back feet problems, et cetera, I appreciate that’s an issue. Get out there, go talk to people. Just say, hey, how you doing? You want a flyer, right? Go do it. And I think that’s the kind of thing that you can do. Some people have, you know, a lot of them self invested IRAs. You don’t even have to have someone else, you know, put the money in yourself. Some people have jobs where they don’t have that retirement account put to put it in.

Matthew Foreman [00:12:17]:
Six, six grand, 6,500, maybe seven grand by now. It goes up every year, right. That you can deduct, you know, tax focused investments. Right. You know, T bills, municipal bonds, munis are earning what, four and a half percent these days to get that, you know, if you live in New York City like I do, that’s like a, you have to get like eight and a half, nine percent. And that’s boring. That’s, that’s mailbox money. You’re getting that every, you know, you’re getting that.

Matthew Foreman [00:12:39]:
You’re getting your money. You’re, you’re not paying any tax on it. And that’s great. And the selection, right. Episode one of my podcast is about should I be a C Corp? Should be an S corp. Doing that properly, you know, structuring into getting PTATs, pass through taxes, USPS other pass through stuff, things like that. You know, some people like, oh, you know, I’m A C corp and I pay myself all wages. I’m might not be right.

Matthew Foreman [00:13:04]:
Given your business, let’s talk about it. Right? Real estate professional or having a spouse who’s a real estate professional. Right. Buy real estate, use the depreciation. Episode 13 the context works especially for you. 14. We’ll talk about some stuff too, but really. 13.

Matthew Foreman [00:13:17]:
The passive activity loss limitations. Credit and loss limitations can be really helpful, but the key is, and this is what I tell people all, all, all, all, all the time, don’t chase tax savings. The focus should always be roi. Focus on your margins, focus on your return. You know, the best way to view it. And this is how I always think about it. I know I’m a tax lawyer, but best way to view it is that the taxes are an expense and you should maximize your net roi. They’re no more than rent, just the amount you have to pay.

Matthew Foreman [00:13:47]:
People get much angry about them. But do you really get angry when you pay rent? Maybe you do, maybe you should, I don’t know. And that. That’s it. Then the next one I think is really interesting is, you know, I get, look, I live in New York, so I’m going to say this. I’m sure people live in other high tax states deal with this. Like, you know, I think I’ll move to Florida or Puerto Rico, but like, how do I do that without moving? And I’m always like, well, you really, you can’t, right? You have to actually move. And they’re like, well, you know, my business is still here, so I’m gonna be here 178 days.

Matthew Foreman [00:14:15]:
I’m like, well, how many days are you gonna be in Florida? They’re like, yeah, like 1:15, 1:20. But you know, I travel a bunch for work and I go on vacation. I’m like, well then you’re really still in New York. My wife will move down there. Well, my kids still live here, so I’ll probably keep my apartment in the city or keep my house in Ronkonkoma or whatever. You know, that’s that bad fact didn’t change your domicile. You always say for this one you have to move. And people really don’t like that statement.

Matthew Foreman [00:14:40]:
They’re like, well, I don’t want to pay taxes, but I want to derive and benefit from the state. And I’m like, you know, what are we doing here? You know, again, you’re letting the tax tail wag. The dog beware earns the highest return. You know, taxes are an expense. I’m just not Sympathetic to that. But you see that sometimes and you know, they’re like, wow, you know, my buddy did it and he’s saving all kinds of taxes. Like. Yeah.

Matthew Foreman [00:15:02]:
And if he gets audited, he’s going to lose and he’s going to pay interest and penalties or she’s going to lose, pay interest and penalties. So that, that’s, you know, how big is your audit tolerance? Are you willing to lose or can you pay the taxes? Can you pay the interest? Penalties years later, right? So that’s problematic. Right. And plus, you know, a lot of people, look, if you own a business that only operates here and you’re not here, it’s New York source income anyway, so you’re going to pay New York state taxes, you’re just gonna feel like you moved. I guess, you know, the weather may be better except for the four months a year that, you know, Florida’s uninhabitable. Right? Too hot, et cetera. I’m biased. It is what it is.

Matthew Foreman [00:15:35]:
I know it’s cold here right now, so who knows? And my final one, you know the idea with, and this is the same one, it’s an audit. Cause you know, my friend, you know, he, where we do the same thing and we work next to each other and da, da, da. And he deducts his, he deducts his, his, his suv, but my accountant says I can’t do it. So I, I want to do it. Do you know someone, you know, an accountant who’s more, who’s more creative? And I’m like, well, this isn’t really, this isn’t really creativity. This is just a willingness to let people do the incorrect thing, right? That’s not supported by the law. So again, you know, I’m getting into this, right, and, and, and having a little bit of fun, making fun of people, which, which it is what it is. But look, the answer should be no, right? For most businesses, you know, you see these people who are like, you know, they’re a dentist and I need a, I need an all wheel drive car for my dental practice.

Matthew Foreman [00:16:26]:
I’m like, oh, do you do surgery? They’re like, no, I do braces. You know, I’m a, I’m a, you know, this or that. I’m not a prosthodontist or an oral surgeon. You know, I’m a child pediatric dentist. I’m like, oh, maybe, but probably not. You know, you really don’t need it. You don’t definitely don’t need to deduct the entire thing. You know, again, I’m a stranger they just met and they’re asking for tax advice.

Matthew Foreman [00:16:44]:
So, you know, people ask me, you know, I don’t know if I’m the. I assume I’m not the only one who gets this question. But, you know, what should the IRS do? How should the IRS go? Compliance. And there’s a lot of ways that the IRS could, very simply and very straightforward, do it. And I would make it very public what they’re doing. And I would say, look, we’re going to use NAICS codes, which are on every, every tax return that’s a business, so you can deduct your expenses. And I would say, look, here’s the deal. We’re going to send everyone letter that’s a business that really doesn’t need to have a car.

Matthew Foreman [00:17:12]:
If it has a car, which you basically have to disclose and you’re depreciating it, we’re going to tell you that the answer is no and you have to prove it, right? And you say, oh, this is small dollar amounts. Small dollar amounts. And I don’t think it is. I think this number is big, bigger than people think. And I think the value of having people not doing going forward is material, right? People say, oh, well, then I won’t buy the car. And I’m like, oh, okay, I guess you’re still going to need a car, you know, and the tax revenue is different, right? And I think it’s. I. This is one of the things that fascinates me.

Matthew Foreman [00:17:41]:
You know, you do deals and you see a business owner and they have four cars in the company that they’re a SaaS business. What do they need a car for? So, you know, people are coming to ask me, like, you know, what tax stuff can I do? What can I do? And they’re, you know, poking me in the chest, or they’re like, hey, what’s going on? Or you’re a tax lawyer. And I’m like, well, you know, I really do m. And a tax, you know, transactional structuring. But I can talk about this. And the answer is sometimes the best tax advisor, a lot of times the best tax advisor is actually the person who tells you no, who views their job as not just advising you and letting you do things, but making. So if there is an audit, you’re going to be successful. You know, I, I know one professional.

Matthew Foreman [00:18:21]:
I’m not going to go into who it is or how I know them, who really is probably still working because their advisor let them deduct everything and they got audited. And that audit went extremely poorly and they owed well into six figures. You know, Mag was making say three, $400,000 a year, good salary. And also they owe $300,000 in tax, in back taxes. Right. With interest and penalties. So I want you to think about that number, right? How, how do you pay that off? Five years, you know, you’re making a real cut, 60 grand a year plus, plus interest, you know, 60, 75 grand a year. You’re cutting a quarter of their, of their net tax that, you know, of their gross income out.

Matthew Foreman [00:18:59]:
Right? That’s pre tax. That’s not great. So, you know, sometimes it’s best to not take the best one. So people ask me, you know, again, how, how do I pay less in tax? Play at the margins, play at the edges. And that’s really important. You know, take defensible positions and don’t deal with it. Interest, penalties, interest. Not that high, right? Seven and a half, maybe 8%.

Matthew Foreman [00:19:17]:
I’m not totally sure, but I think that’s really important. Okay, so, you know, that was the 16th episode, a little shorter, but the next two, you know, if I’m doing it right, right, this 17th episode, and by 18th they’re going to be unqualified small business stock under section 1202 of the Internal Revenue Code. Going to be really, really, really detailed. So I think that’s going to be an important one. Good, good way, you know, lighter one to start off the year. But in two weeks we’re going heavy. And now for the best song of all time.