By Steve Lambert
I’ve been self employed since 1975. Most of my companies were corporations. Technically every corporation has a board of directors, so I guess I could have been a director. But I typically hired some company in New Jersey, Nevada, or Wyoming to set up the corporation and do the paperwork and automatically file reports of annual meetings that never happened. The exception was OTSI, where I had partners who dealt with such things.
But I’d never heard of a director’s loan until Scott’s accountant, Andrew, included it in the assets and liabilities used to calculate the inheritance tax the estate would have to pay to the Queen. When I heard that there was one associated with Info Express Ltd, I assumed that Scott had borrowed money from the company and the estate would have to pay it back. But after several exchanges of email with Andrew I learned that it was the other way around…Scott had loaned the company a fairly substantial amount over the years.
According to the annual reports, Info Express Inc started loaning money to Info Express Ltd back in the mid-90s, and apparently continued to do so up until current times. The total value of the loan went up and down as money was added to the loan or repayments were made. It was at its peak of £487,022 at the end of 2012. At the end of 2017 it was down to £144k. As of the date of Scott’s death it is currently estimated to have been £136k. This is a debt owed by the company to the estate, and therefore is subject to inheritance tax of 40%, which would be £52k. Now that got my attention. And it just didn’t make any sense to me.
Between 1991 and 1993 Info Express Inc worked on a big (by our standards) contract for the Royal Australian Navy. I thought it was worth a bit over $2M, but in statements Scott submitted during his application for permanent residence he claimed the RAN purchased over $4M of equipment and service from Info Express Inc. I had assumed at the time that Scott made out well on that.
I don’t know how much he cleared on that project, but when it ended he took off on a meandering trip around the world. He referred to this as a marketing trip to get Info Express Inc out in front of potential clients and get a few more big jobs. I think he hit every continent, other than the frozen ones at the poles, at least once. Apparently that didn’t out work real well. I have learned while going through all the records Scott left behind that when he returned to Seattle in early 1994 he was in debt and had to borrow money from his dad to survive.
Quite a few of the people Scott had worked with were based in the UK. Scott realized that there was a lot of survey work staging out of there, so he decided to move the company to the UK. He let all the Info Express Inc employees go and shut down the local office.
Shortly after getting to the UK he accepted an offer from Sage Engineering Ltd to have them be the sole representative of his software and the computer systems it ran on. They would lease this stuff to clients at a day rate during surveys and split the income with Scott.
Scott also had the option of going on the jobs to manage the setup and operation. He spent his spare time aboard ships tweaking the software to work better under special conditions that they encountered. Scott was extremely good at that, and could save a company lots of money if he got on top of a problem during the survey and corrected it then, rather than waiting until people realized there was a problem during post processing. Going back out to re-run a couple lines is very expensive.
Anyway…it appears that Scott divided his invoices to Sage into two categories. One was hardware and the other software and his personal time. He started invoicing Sage for the hardware rental through Info Express Ltd (IEL), and for his time and software through Info Express Inc (IEI). The IEL invoices were paid into a Barclays Bank account in the UK and treated as company income by Andrew The IEI invoices were initially paid into a Seafirst bank account in Seattle. I didn’t realize any of this until I started poking around in the old records…remember, Scott never threw anything away.
Scott’s first business was as a charter boat skipper. He owned his own boat, Moonlighter, and took clients bottom-fishing out of Westport, Washington. (I know there is a pun somewhere in the concept of bottom fishing, but I’m just not going to go there.)
As a sole proprietor there really isn’t a distinction between business and personal income. In the end it is all personal income and you pay only personal income tax, rather than personal and business taxes. Your tax is based on the difference between income and expenses. Ideally, for tax purposes, your expenses, which can include tricky stuff like depreciation, should pretty much wipe out your income. So a lot of effort is put into ways to make as many expenses as possible look like they applied to the business. Scott was good at that, and it pretty much set the stage for all future businesses.
In the early days Info Express Inc had a Seafirst bank account and over time several credit or debit cards. It appears that Scott charged all business and personal expenses to the same card, which really doesn’t matter as the only taxes Washington State required any corporation to pay was sales and excise tax on products they sold within the state. Since all Info Express clients were overseas Scott could logically justify turning over no tax to the state. If he had taken wages from Info Express then he would have had to pay Federal Income Tax on those wages…but he didn’t take wages. The company did pay employees and did file the appropriate forms about that with the IRS.
After Info Express Inc was dissolved, and Info Express Ltd came into existence in the UK, the money deposited by Info Express Ltd in the Barclays account was monitored by Andrew and others at the accounting firm. The money that went to the Seafirst account was managed by Scott’s dad, Aleck. I think Scott owed Aleck about $100k at this point, so when the deposits came in he would pay off Scott’s current credit card balance, then repay some of his loan, and then send the remainder to the same Barclays account in the UK that Info Express Ltd used, as a loan from the director.
As far as I can tell, Scott never took a paycheck at either the Inc or Ltd version of Info Express. He occasionally took a director’s draw at IE Inc, but as his Loan to IE Ltd piled up, he just used company money to pay all his bills and considered that as his payments against his loan.
He had several personal Barclays bank accounts as well as several other business accounts. He had a standing order (automatic transfer) to move a certain amount of money from his business to personal accounts every month. He also manually moved more as needed. And he used his company credit and debit cards to pay most of his personal expenses. This was justified on the belief that this was all just repayment of his ongoing loans.
Since Scott didn’t separate his expenses, at the end of each year it was up to the accounting firm to go through all records and sort expenses into business and personal, and decide whether the loan had gone up or down that year, and by how much. At the end of the year (actually a year or two after the end of the year, because communicating with Scott was sometimes difficult) they would produce an annual report, send three or four copies to Scott, and ask him to let them know if he disagreed with anything in them. Scott’s lack of response was taken to mean approval.
The last paragraph isn’t meant to imply any wrongdoing on the part of the accounting firm. Scott rarely opened mail. It would pile up for months while he was out to sea, and then be tossed into boxes that he stored in the garage. I know this because I have gone through about 25 years-worth of mail from those boxes and found that about 80% of it hadn’t been opened. Many of the letters were dunning notices threatening all kinds of dire consequences if he didn’t immediately pay some bill. He would eventually open one and pay the bill, along with any penalties.
In April of 1998 Scott opened an account at the Anglo Irish Bank, which was essentially an offshore numbered account in Austria. He changed the deposit location for his Info Express Inc invoices to there. They invested the money in short term funds and when those matured shipped it off to another bank…usually the Barclays bank account, but sometimes the Seafirst bank. What went into the Barclay account added to his director’s loan. In years where he invoiced more than he managed to spend, the value of the loan went up. If he spent more than he billed, it went down.
In December of 2012 Scott closed the Anglo Irish account. This was during a period when his financial affairs were under scrutiny as he was applying for permanent residence in the UK. And it was the year in which the director’s loan balance hit its highest point.
As far as I can tell, at no point did he take a paycheck. Andrew did go through the motions of issuing a monthly pay statement for something in the range of £600 to £800, which was low enough to avoid taxes, and recorded it as income, but Scott never received a check, so they all contributed to the loan.
He occasionally declared a dividend on his stock, but never took it…which also contributed to the loan. It wasn’t until Scott stopped going to sea that the loan started going down a bit more often than it went up…but it still did go up. I haven’t tracked down where the extra money came from during that period, but am working on it.
I don’t believe (because I haven’t seen the records and know he never threw anything away) he ever paid corporate or personal tax on the money earned through Info Express Inc. He said it was in international waters and not subject to taxation in any one country. However, googling this situation I find the following:
The United States taxes resident corporations, i.e. those organized within the country, on their worldwide income, and nonresident, foreign corporations only on their income from sources within the country.
After Scott shut down the office in Kirkland in 1994, Aleck continued to renew the corporate license at the end of each year…until he died in 2010. Scott continued to invoice in the name of Info Express Inc for three years after the company no longer existed.
I’ve gone through the past few years looking at what the accounting firm called business expenses and what they called loan repayments. Actually, that isn’t quite true. For each year I know the total up or down movement of the loan, but not specifically which expenses contributed to that. I’ve gone through the past few years pulling everything out that I thought was a real business expense, and not just a hobby, and came up with a much higher rate of repayment than they did.
Naturally, while Scott was alive, it was in his interest to count as many expenses as possible as business expenses, and in the accounting firm’s interest to err on the side of Scott when possible. My responsibility is now to the estate, not to Scott, and my criteria in evaluating expenses is whether or not each expense was actually used in any capacity by the business. If it wasn’t used, or didn’t generate income for the business, then to me it wasn’t a business expense. Andrew’s response to this was that Scott had an active mind and was always thinking about new ways to make money. My feeling about that is that just because an expense could be justified in some business, it wasn’t necessarily an Info Express Ltd expense. Scott opened a business bank account at HSBC bank in the UK and used that to pay his mortgage (with ‘loan repayment’ money provided by the Barclay’s business account) on the property referred to as Clegyr Boia, which was registered as a boat building facility. That was a different business, unrelated to Info Express Ltd. A lot of the research Scott did toward the end had to do with building boats and with new software that would be used to monitor all systems on a boat and essentially automate the operation of the boat.
So…was all this a brilliant business strategy? Or some kind of fraud?