Taxes for borrowing private money?

[Sean Waits]

So I have been in talks with someone to get private money.  I have gone through purchasing the PPI and giving up 10% of the purchase price as security, as per the contract.  Now the lender is telling me that there is a tax due based on the IRS AFR from March table (not Septemeber/October??) of 6.48% due before he can release the loan.  Why would a borrower be paying taxes on a loan unless it were a gift?  As far as I can tell AFR doesn't even come into the equation since he is charging 7% in interest.  Can anybody explain to me why this would be and if it is normal when dealing with private money?  Thanks.