A bigger tax problem for Johnson could be the two loans he took out from Pacur in 2004 and 2007 for $1 to $5 million each. He reported the loans on his most recent personal financial disclosure report as having an interest rate of .69 percent - virtually interest free.
The IRS frowns on loans taken out from companies at below market rates and issues a chart of what is known as applicable federal rates, i.e. reasonable market rates, on a monthly basis. In 2007, the applicable federal rates on loans ranged from roughly 4 to 6 percent, and in 2004 they hovered between 2.5 percent to 5.5 percent.
Johnson’s interest rate of .69 percent “certainly would have to be lower than any definition of what the market rate would be,” Oswald said. “It would raise significant red flags.”
“Generally, executives should not be receiving loans at anything but the same rate that they would receive from a local bank or other financial institution,” he added.
The IRS could collect taxes on the difference between the actual interest rate and the market rate or it could determine that the loan does not meet the standard definition of a loan, and could tax the entire amount of the loan at normal income tax levels for the year it was taken out.
Real, bona fide loans must meet certain requirements laid out in a written document, such as the interest rate, payment schedule and specified collateral, Martin noted. The IRS is on the lookout for fake loans that are issued by a company to individuals but later forgiven without full payment.
Even though Johnson owned the company and controlled its decisions and finances, that’s no excuse for failing to document loans or deferred compensation agreements, Oswald said.
“Even when it’s a closely held corporation, it’s a separate entity” under the law, Oswald said. “And the individuals who work for the corporation have a fiduciary obligation to meet their duty of loyalty to the company … to treat it like a separate entity when there’s this kind of [financial deals] involved.”