Sen. Ron Johnson’s $10 million post-election windfall from his former company not only raises eyebrows among election lawyers, but the lump-sum payout also could raise serious red flags for the IRS, according to legal experts and accountants.
The Wisconsin Republican, a Tea Party favorite who defeated Sen. Russ Feingold (D-WI) last year, received a $10 million payment in deferred compensation from his former plastics company, Pacur, weeks after his $9 million self-financed 2010 campaign for Senate came to an end.
Election lawyers and reporters have raised questions about the similar amounts and whether the company, not Johnson, was underwriting his campaign. The apparent lack of a written deferred compensation agreement signed and dated before the election is problematic, experts tell TPM.
The Supreme Court’s Citizens United ruling opened up the floodgates for companies to spend unlimited funds on independent campaign expenditures benefiting candidates, but corporations still cannot give directly from their treasuries to federal candidates’ campaigns.
Aside from election law violations, Johnson’s $10 million payday also may violate the Internal Revenue Code’s requirements that any deferred compensation agreement must be in writing - even if it’s between the top executive and the company he owns.
In January 2005, the IRS imposed new rules requiring any compensation deferment agreement to be formalized in a written document and imposing a severe 20 percent penalty on any agreements that do not comply with the new rules.
The new IRS rules were enacted, in part, in response to the Enron scandal when executives were attempting to speed up the payments under their deferred compensation plans in order to access the money before the company went belly up, and also, because there had been a history of perceived tax-timing abuses associated with compensation deferments.
The timing of a written agreement is also key, said Jeff Martin, manager of the national tax office of Grant Thorton, a major accounting firm.
“It would have to exist at the time that the compensation was deferred,” Martin told TPM.
And it would certainly be in Johnson’s interest to have a written agreement to guard against an IRS audit.
“A prudent lawyer structuring this transaction would want to confirm the contours of the package at the time it was committed,” said Scott Oswald, the managing principal of the Employment Law Group, “otherwise, the IRS could tax it differently than the parties determined at the time.”
“Deferred compensation needs to be structured in such a way that there isn’t even an inference of impropriety because of the executive’s duty of loyalty to the company,” Oswald added.
Johnson told the Milwaukee Journal-Sentinel, which first reported on the $10 million payment, that it was “an agreed-upon amount” that was determined at the end of his tenure with the company.
Agreed upon with whom?
“That would be me,” he said.
Johnson has subsequently declined to produce a written document or any proof that the deferred compensation was agreed to before the campaign when he stopped taking a salary from Pacur.
Asked by TPM before a Senate vote on Tuesday to clarify whether he worked out the agreement before or after his 2010 campaign, Johnson did not give a direct answer.
“It’s a private company,” he said. “We fully complied, fully disclosed [and] followed the law, complied with the spirit and letter of the law, and again it’s a private company. Those financial matters end up being more complex.”
His office has not responded to several inquiries from TPM.
While Johnson’s public statements could be difficult to defend in an IRS audit, the agency has not shown a great propensity to go after violations of the new 2005 law, Martin pointed out.