TPM: Ron Johnson Likely in Serious Trouble With IRS For Tax Evasion

Printer-friendly versionSend by email

Talking Points Memo's Susan Crabtree (formerly of the The Hill) is reporting that Ron Johnson's multi-million dollar loans to himself for .69% likely violated tax law:

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."

In addition, Johnson's latest pay-out of 10 million also is likely illegal because he didn't have a written agreement in place:

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.