ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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Question: I read that Al Davis, as part of the Raiders move to Oakland, received $54 million in tax-free loans from Oakland which he need never repay. How are loans taxed?
Answer: According to the loan documents, Al Davis signed on behalf of the corporate general partner for the Los Angeles Raiders, a California limited partnership. Mr. Davis did not receive these funds personally, the Raiders partnership did. (Curiously, the loan must be paid in full in 40 years, while the Raiders partnership terminates in 15 years).
The article was misleading if it suggested that the Raiders received a permanent tax-free benefit of $54 million. A loan is an extension of credit which must be repaid (usually with interest on the outstanding balance). The receipt of loan proceeds ("principal") is not a taxable event because, of the offsetting liability (the obligation to repay). But failure to repay will cause the debtor to be taxed on any outstanding principal (unless the borrower is insolvent or files for bankruptcy). In this case, the outstanding interest charges would be deductible if paid; consequently, the borrower is not taxed on this amount.
Personal loan example: If you obtain a $10,000 personal loan to buy household furniture, you are not taxed on the loan principal. Your payments of principal and interest cannot be deducted; therefore, you are repaying your lender with "after-tax" dollars. But if you fail to repay the loan, the outstanding principal and interest will be considered income to you at that time, unless you are insolvent or you file for bankruptcy.
Note: your interest payments are not deductible since the loan was used for personal items. Consider a home-equity loan to pay for personal expenses. This enables you to deduct your interest payments.
Business loan example: If you received a business loan for $10,000 to purchase computer equipment, youd have a $10,000 deduction (a small business may write-off up to $18,000 per year in business property purchases). Opposite to personal loans, interest payments would be deductible as a business expense, but repayments of principal would not. Note: the business deduction occurs because the loan principal was used for a business expense, but repayment of the loan principal is not a deductible business expense.
In the Raiders case, were the newspaper account true with no intent to ever repay the money, rather than being a loan, the transaction would be a fully taxable payment upon receipt.
If, as one article suggested, if principal repayments would be funded by parking lot revenue, this income would be taxed upon receipt and the Raiders could not deduct any loan principal payments. If it failed to repay the loan principal, then the outstanding loan balance would be taxable (unless the Raiders were insolvent or filed for bankruptcy).
The loan documents suggest the principal of the loan may not be repaid, although there is a provision for annual interest payments. The IRS could challenge this arrangement is an payment to the Raiders, rather than as a loan, thereby making it immediately taxable.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**