Opinion ID: 677125
Heading Depth: 2
Heading Rank: 4

Heading: Are Schiff and Jones Responsible?

Text: 14 Regarding Schiff, the court found that [a]s the landlord to whom the corporation owed substantial past due rent, Schiff was in a position to and did wield significant influence over the management decisions of the corporation. See Findings of Fact and Conclusions of Law at 4. The court also stated that Schiff was aware that the employment taxes for the first and second quarters were accruing, yet during that period he directed that a portion of the rent be paid to himself instead of directing that the delinquent taxes be paid to the Internal Revenue Service. Id. Deciding that Schiff met the definition of a responsible person, the court held that 15 [a]s the landlord of the corporation, and as a person who was interested in acquiring an interest in the corporation, Schiff was in reality one of the corporation's most important creditors. He had a vital interest in the continued viability of the business. At the same time he had the economic power to destroy the corporation. The context and dynamics of the relationship between Schiff and the corporation--more particularly between Schiff and the corporation's principal owner, Mariscal--clearly reflect that Schiff exerted enormous influence and control over the financial affairs of the corporation. As part of a plan to bring in a new management team Schiff required Mariscal to hire Jones. Schiff frequently demanded and received cash payments from the casino cage in partial satisfaction of rent past due to him. He infused cash into the business as loans to help it pay other high priority creditors. 16 Id. at 7. The court also found that Schiff participated in controlling the decision-making process regarding the allocation of funds among creditors. Id. 17 We find that on the basis of the record before us these findings, deeming Schiff a responsible person, are clearly erroneous because they are not supported by the evidence. 18 The record does not show that Schiff exercised significant influence over the management decisions of the corporation, nor does it indicate that Schiff helped control the decision-making process regarding the allocation of funds among creditors. 19 Schiff was never a shareholder, director, officer, or employee of the Nevada Palace and did not have signatory power on operational or payroll accounts. The fact that Schiff was an aggressive landlord who demanded and received cash payments to satisfy rent past due to him in no way suggests that Schiff had the authority to pay the payroll taxes. See Purcell, 1 F.3d at 937 (the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so). Further, although Schiff spent time in the hotel and casino and engaged in financial discussions with Mariscal and other management personnel, making Schiff aware of the Nevada Palace's liabilities, including the unpaid payroll taxes, he did not have the requisite status, duty, and authority to pay the taxes. See Alsheskie, 31 F.3d at 839 (upholding district court's finding that defendant was not a responsible person because he did not have discretionary authority to pay the Corporation's withholding taxes); Davis, 961 F.2d at 873 (responsibility is a matter of status, duty, and authority, not knowledge ) (emphasis added). 20 The record is void of any specific evidence that Schiff had or exercised any control over which creditors were paid. In fact, Schiff loaned money to Mariscal on the condition that Mariscal pay the payroll taxes, evidencing that Schiff had no authority to pay the taxes directly. Schiff even endorsed checks made out to Schiff for rent For Deposit to the Grand Opening Motor Inn Payroll Account. 21 Schiff did not have authority to hire or fire employees. While Schiff did bring in Jones, Mariscal and Jones signed the consulting agreement under which Jones reported to Mariscal. In addition, Mariscal fired Jones in late April 1980. 22 Therefore, the court's finding that Schiff was a responsible person because he exercised enormous influence over the corporation's financial affairs and the payment of creditors is clearly erroneous, and we reverse the district court's holding that Schiff is liable for the payroll taxes for the first and second quarters of 1980. 2
23 As to Jones, the court concluded that he had significant control over the corporation's finances. See Findings of Fact and Conclusions of Law at 6-7. The court found that 24 Jones had check writing authority and indeed issued checks to various creditors in preference to the Internal Revenue Service. For all practical purposes, Jones had succeeded Lucas as the general manager of the hotel and casino. He was hired precisely to lend a strong managerial hand to a faltering business. Due to meager revenues and the constant pressure of numerous creditors, Jones was integrally involved in the process of deciding which creditors to pay and which to stall. 25 Id. at 7. 26 The evidence in the record does not support the finding that Jones was integrally involved in the process of deciding which creditors to pay and which to stall. Instead, the record indicates that during his 45-day tenure, Jones signed checks out of the operational account to pay creditors on a list established by Mariscal. Jones did not have the authority to sign checks alone since the checks required two signatures of the several people authorized to sign. Jones testified that Mr. Mariscal made him a signatory on the operational account 27 because Mr. Mariscal did not want to have to be present to sign all of the daily operating checks himself, and he wanted to make sure that he had someone that he thought he could trust who would not overpay or pay improper amounts to creditors that he did not authorize. 28 Before paying checks that exceeded a certain amount of money or that went to creditors who were not on Mariscal's list, Jones was required to take those checks to Mariscal for approval. Jones testified that he 29 was put in the position as a damage control officer, so to speak, and it was to prevent checks from being sent out which had not been cleared or authorized by Mr. Mariscal, ho wasn't in the business of signing most of the checks on a day-to-day basis. So if the check had to come past [Jones], [he] would know what was being spent out of the operational account. 30 There is no evidence that Jones picked certain creditors to pay or that Jones had any authority or control over the payroll account. In addition, nothing in the record indicates that Jones prevented money from being put in the payroll account to pay the payroll taxes; in fact, the record is void of evidence that Jones had any connection to the payroll account. Jones' lack of control and authority over the payroll account and the payment of payroll taxes supports our holding that he was not a responsible person because he did not have the ability to pay the payroll taxes. See Alsheskie, 31 F.3d at 839 (upholding district court finding that defendant was not a responsible person because he did not have discretionary authority to pay the Corporation's withholding taxes). 31 Through meetings with Schiff and Mariscal, Jones was aware that employment taxes for the quarter ending March 30, 1980 had not been paid. This knowledge, however, in no way shows that Jones was a responsible person because he did not have authority over the payroll accounts or the payment of the taxes. See Davis, 961 F.2d at 873 (knowledge of unpaid payroll taxes does not render one a responsible person without the status, duty, and authority to pay the taxes). 32 At no time was Jones an officer, director, employee, attorney, or stockholder of the Nevada Palace. He only acted as consultant for 45 days and was out of town for part of that time. Within this short time, Jones did not have the status, duty, or authority to exercise significant control over financial affairs and to direct payment of creditors, especially the payroll taxes owed to the United States. In addition, the evidence as to whether Jones had the authority to hire and fire employees is ambiguous at best. The evidence seems to indicate that Jones recommended individuals to Mariscal who made the final hiring decisions. There is no evidence in the record that Jones fired anyone. 33 Jones was also aware of the limitations of his involvement at the Nevada Palace and discussed his and Schiff's involvement at the casino with the Nevada Gaming Control Board when subpoenaed. Because he did not have a gaming license, Jones understood that his involvement with the casino was limited; he testified that knew that 34 [b]ecause gaming is a privileged industry and [he had not] held nor applied for a gaming license, [he] was restricted and not allowed to have any operational control of any functions at the Nevada Palace, [he] was not allowed to give direction or exercise authority over any employees at the Nevada Palace, [he] was not allowed to be in the count room, [he] was not allowed to participate with respect to the handling of money, and it was clear to [him] that [he] was only allowed to act as a consultant because [he] was neither an employee, officer, shareholder, director, or licensee. 35 The record, therefore, lacks support for the court's finding that Jones was a responsible person because he was integrally involved in the decision-making regarding which creditors to pay and had significant control over the corporation's finances. Although Jones may have known that the payroll taxes were past due, his knowledge does not support the conclusion that he was a responsible person with the ability the pay the taxes. Accordingly, we reverse the district court's finding that Jones is liable for the payment of the payroll taxes for the first two quarters of 1980. 3