April 23, 1993 UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
No. 92-1759
JOHN C. TALLEY, ETC.,
Plaintiff, Appellee,
v.
UNITED STATES OF AMERICA,
Defendant, Appellant.
ERRATA SHEET
The opinion of this Court issued April 14, 1993, is amended as follows:
On the cover sheet: after Hon. Juan M. Perez-Gimenez, add an asterisk, and in the corresponding footnote state: "Of the District of Puerto Rico, sitting by designation."
On the cover sheet: after Hon. Juan M. Perez-Gimenez, substitute "U.S. District Judge" for "U.S. District Court."
On page 6, line 2: substitute "his refund" for "its refund."
On page 15, lines 7-8: substitute "he offered" for "it offered."
On page 15, line 13: substitute "he has" for "it has."
On page 15, line 14: substitute "his refund" for "its refund."
On page 16, line 1: substitute "his refund" for "its refund."
UNITED STATES COURT APPEALS FOR THE FIRST CIRCUIT
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Juan M. Perez-Gimenez*, U.S. District Judge]
Before
Breyer, Chief Judge,
Cyr and Boudin, Circuit Judges.
D. Patrick Mullarkey, Attorney, Department of Justice, with whom
Richard S. Cohen, United States Attorney, James A. Bruton, Acting
Assistant Attorney General, Gary R. Allen, Attorney, Department of
Justice, Kenneth L. Greene, Attorney, Department of Justice, and
Paula K. Speck, Attorney, Department of Justice, were on brief for
appellant. Joseph J. Rodio with whom Jeffrey M. Gibson, Charles D. Mills and
Rodio & Ursillo, Ltd. were on brief for appellee.
* Of the District of Puerto Rico, sitting by designation.
April 14, 1993
BOUDIN, Circuit Judge. This case started as a dispute
between John Talley ("Talley"), co-executor of the estate of
Percy Talley, and the United States over the tax liability of
the estate. The tax issues have become snarled in confusion
wrought by a cryptic notice from the Internal Revenue
Service, a loosely worded request to admit filed by Talley,
and a set of litigation errors by the government. After
trial, the district court entered judgment for Talley on his
tax refund claim and disallowed the government's effort to
assert a counterclaim. We reverse the district court and
remand for further proceedings.
I. THE FACTS
In October 1984, Talley, acting as co-executor for the
estate, entered into a stipulation with the IRS regarding the
amount of taxes owed by the estate. This stipulation, filed
in the Tax Court, provided that the estate's total tax
liability was $345,103.21. Of this, $222,000 had been paid,
leaving an outstanding liability of $125,103.21. The
stipulation also provided that the estate could submit proof
that it had paid certain state taxes, which would further
reduce its outstanding liability. The stipulation also noted
that of the $345,103.21 tax liability, $288,836.97 had been
"assessed"and $56,266.24was a"[d]eficiency (tobe assessed)."2
2Assessment is the formal step in which the IRS determines that a specific amount of tax is currently due and owing to the government from the taxpayer, making the
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In November 1984, the IRS sent the estate a notice
which, as it is the cause of half the confusion, requires
description. Under the heading "Statement of Tax Due On
Federal Tax Return," it showed as the first entry in the
"Assessment" column the figure $56,266.24, designated "tax";
under this was the figure $1,478.80, designated "int,"
presumably interest. The second column, under the heading
"Adjustment or Credit," contained the figure $57,767.39,
apparently designed to reflect credits against liability
allowed by the IRS. Finally, in a third column headed
"Balance Due" there appeared the figure $977.65, which
reflected the difference between the first column figures and
the second column figure. In January 1985, the estate paid
this net amount, $977.65.
Six months later, in May 1985, the IRS sent the estate a
"Statement of Adjustment to Your Account," fixing the
estate's outstanding tax liability at $294,046. The stated
liability, much above the net amount due under the Tax Court
stipulation, appears to include penalties and interest not
previously assessed. In any event, the estate declined to
pay. In response, the IRS began to levy on bank accounts
held by the estate and its distributees, ultimately
collecting approximately $94,000. In the government's view,
taxpayer liable for that amount. Rambo v. United States, 492
F.2d 1060, 1061 n.1 (6th Cir. 1974), cert. denied, 423 U.S.
1091 (1976).
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it was still owed at least $200,000, with interest continuing
to accrue. Talley, by contrast, took the position that no
taxes were owing and that the levies were therefore unlawful.
After exhausting administrative remedies, the estate in
January 1989 filed a complaint in the district court seeking
a refund of the approximately $94,000. The complaint
contended that the estate's outstanding tax liability had
been wholly eliminated prior to the levies. Talley's
complaint averred that this happy situation resulted from a
combination of state tax credits, allegedly amounting to
$77,544, and the November 1984 notice, which (according to
the complaint) "zeroed out" any remaining obligations of the
estate to the IRS. The concept of "zeroing out" was not
explained in the complaint, nor has it been explained since.
Although the government believed that it was still owed
$200,000 or more by the estate, it neglected in answering the
complaint to file a timely counterclaim for the balance. See
Fed. R. Civ. P. 13. It then failed to respond at all to
Talley's request for admissions served on the government on
October 11, 1989, pursuant to Fed. R. Civ. P. 36. Request
no. 12 asked the government to admit that the estate's $977
disbursement in response to the November 1984 notice
"constituted full payment of the balance due on the estate of
Percy Talley as set forth in that notice." Under Fed. R.
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Civ. P. 36(a), the failure to respond to a such a request is
deemed a binding admission, unless the court later grants
leave under Fed. R. Civ. P. 36(b) to withdraw the admission.
New government counsel took over the case in spring
1990, and the case was set for trial in July 1990. In June
1990 the government sought leave to amend its answer and
assert a counterclaim. The government's excuse for this
belated action was that at the time of the original answer,
counsel had lacked the Secretary of the Treasury's approval
to assert a counterclaim. That motion was denied by the
district court on June 19, 1990, even though in the meantime
the court had (for other reasons) deferred the trial until
October 1990. The court's reasons for refusing to allow the
counterclaim are discussed more fully below.
Government counsel also advised the district court in
June 1990 that the government would promptly file a motion
seeking leave to withdraw its admission by default to request
no. 12. The government never filed such a motion, later
taking the view (in a pretrial statement filed on September
10, 1990) that the admission was literally accurate and
harmless to the government's position. The government's new
interpretation was that it had properly admitted that the
$977 payment constituted full payment of the estate's
liability "as set forth in" the notice; but since the notice
was inaccurate, this admission (the government argued) did
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not establish that the payment discharged the taxpayer's
actual liability.
A trial was held before the district court on October
12, 1990. At trial, Talley based his refund claim primarily
upon the government's admission to request no. 12. Over
Talley's objection, the court permitted the government to
introduce evidence of Talley's tax liability according to the
government's calculations. But the court accepted the
evidence subject to the court's reserved ruling on Talley's
claim that the government's admission of request no. 12
barred the evidence and resolved the case. The court stated:
Just so we are clear, I'm allowing [the government] to present this evidence because I do not know what I'm going to do and I wouldn't like to have to come back and get some more hearing or get some more testimony. . . [i]f I decide that you are stuck with your admission . . ., it would mean you would be precluded.
The government also moved to amend its pleadings to conform
to the evidence introduced.
After trial, the district court issued a memorandum
opinion in which it rejected the government's interpretation
of request no. 12, and concluded that the request referred to
the estate's actual liability. The court held that the
admission conclusively established that the estate's $977
payment satisfied its total tax liability, and the court
therefore entered judgment in favor of the estate for the
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approximately $94,000 seized from the estate's bank accounts.
The government then appealed, arguing that its admission
pursuant to request no. 12 had been wrongly construed and
that its counterclaim should have been allowed.
II. DISCUSSION
Talley has not claimed in this court any prejudicial
reliance on the original November 1984 notice. It would be
difficult as a factual matter to make any such claim since
about six months later the IRS asserted that the estate owed
over $294,000, and there is no indication that in the
meantime any detrimental reliance had occurred. Indeed,
authorities do not give much comfort to taxpayers invoking
estoppel even when there has been reliance. On the contrary,
the government has even prosecuted taxpayers for cashing
refund checks issued in error. See, e.g., United States v.
McRee, 984 F.2d 1144 (11th Cir. 1993).
Talley's position on appeal, however, does not depend
directly on the original notice or upon estoppel doctrine.
Rather, it is based upon request no. 12 which the government
"admitted" by failing to answer. The district court read the
request, as admitted, to establish that the estate's total
tax liability in November 1984 was only $977.66. An
admission under Fed. R. Civ. P. 36(a) is, by the terms of the
rule, binding on the party making the admission and cannot be
contradicted. Thus, if the district court properly construed
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request no. 12, the government was bound by its admission
(unless the court sua sponte should have permitted the
government to withdraw the admission).
Although the question is a close one, we believe that
both the November 1984 notice and request no. 12 have been
misconstrued. The construction of documents presents, in the
absence of contested background facts, a pure issue of law
open to de novo review. See Trust Under the Will of Bingham
v. Commissioner, 325 U.S. 365, 379-80 (1945). The district
court's effort at construction was complicated by the
government's own changes in position and its failure
adequately to place the documents in context. Nevertheless,
we conclude that the original November 1984 notice did not
state that the estate's total tax liability was only $977,
and the admission by default to request no. 12 did not do so
either.
The November 1984 notice is, of course, an opaque and
potentially misleading document, but in these respects it
does not differ from many IRS notices apparently generated by
computers. No doubt taken in isolation the notice could be
misunderstood by a lay reader to suggest that the estate owed
only $977; but it cannot be taken in isolation and that is
not what it says. Juxtaposed with the Tax Court stipulation,
it is clear that the November 1984 notice merely reflects
three separate tax events: the original additional deficiency
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assessment promised by the stipulation ($56,266.24), plus a
small amount of accrued interest ($1,478), minus credits
($57,767.39) allowed by the IRS to reduce the estate's
outstanding liability.
The net effect of these three adjustments was to
increase the estate's assessed liability by $977.65
($56,266.24 + $1,478 - $57,767.39). That figure was, as the
notice said, a "Balance Due" but only as the net result of
the three adjustments. The notice did not say that the
balance-due figure captured the estate's total tax liability.
One who looked only at the notice might think otherwise, but
any lawyer or estate executor who looked also at the
stipulation would understand how these figures fit together
and recognize the limited role of the notice. Indeed, only a
month before the estate had stipulated to a vastly larger
debt of $123,103.21 ($66,836.97 assessed but unpaid plus
$56,266.24 not yet assessed but conceded) and had apparently
made no payments since then.3
This brings us to request no. 12. This request was the
last one in Talley's first set of requests to admit, and it
followed 11 individual paragraphs that asked only that the
3In other words, as of October 29, 1984, the estate had agreed that it owed $123,103.21. The IRS notice the next month allowed a credit of only $57,767.39, so--quite apart from any accrued interest or penalties--Talley should have known that over $65,000 remained unpaid as of the date of the notice.
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government admit that the listed documents (in the first 11
request paragraphs) were "true copies" of what they purported
to be. No. 12 was worded somewhat differently:
Request No. 12
12. Admit that the payment of Nine Hundred Seventy-seven ($977.65) Dollars and 65/100 by John Talley concerning the Notice of Tax Due dated November 29, 1984 (Exhibit 1), constituted full payment of the balance due on the estate of Percy Talley as set forth in that notice.
This last request, whether deliberately or not, is an
invitation to confusion. First, it misstates by implication
the gist of the notice, leaving the impression (with the
words "full payment") that total tax liability was the
subject of the notice when in fact the notice did not reflect
the total balance due from the estate. Second, by ending
with the phrase "as set forth in that notice," the request
allows one reader to think that an admission would merely
concede that the estate had in fact paid the amount "set
forth in the notice" and another reader to think that it
would concede that the notice correctly stated the estate's
tax liability.
Of course, neither reading makes much sense. The first
reading of the request asks the government to admit a fact
that no one would dispute; the second, to admit a point that
the government could not ever intentionally concede, since--
apart from inaccuracy--it would give away the lawsuit. If
the government had bothered to read the request, presumably
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it would have said in response that the payment of $977.65
did constitute "full payment" of the amount stated in the
notice but that the amount stated at the end of the notice
did not reflect--or even purport to reflect--the full tax
liability of the estate. Instead, the government let the
request go unanswered.4
In all events, we think that request no. 12, read
against the background of the October 1984 stipulation and
the November 1984 notice, cannot fairly be read as a request
by Talley that the government admit that the $977.65 payment
satisfied the actual total liability of the estate. To the
extent that the request is ambiguous, that ambiguity is to be
construed against Talley (whose lawyer drafted the request).
See Dixon v. Commissioner, 62 T.C.M. (C.C.H.) 1440, 1511
(1991). And to the extent that common sense is a guide to
construction, a reading that trivializes the request is
preferred to one that renders the request absurd. In short,
treating the government as bound by its admission of the
request, we believe it has admitted only what it has never
denied: that the $977.65 payment corresponded to the amount
set forth in the notice.
4When it got around to reading the request in June 1989, the government then compounded the confusion by first reading the request as Talley now urges (and telling the district court that it would move to withdraw the admission) and then reading the request merely to admit that the amount stated in the request had been paid (making a withdrawal of the admission unnecessary).
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Since in our view the district court misconstrued
request no. 12, its judgment in favor of Talley--which rests
solely on the government's admission of request no. 12--
cannot stand. The scope of the remand is addressed at the
conclusion of this opinion. We do not reach the government's
alternative argument that, if the request were read in
Talley's favor, then the government should have been
permitted to withdraw its admission. Such an argument itself
raises troublesome questions that we readily leave for
another day.5
The other issue presented by the government on this
appeal is whether the district court erred when it refused to
permit the government belatedly to file a counterclaim. It
will be recalled that Talley sued the government to recover
the levies against the estate bank account amounting to about
$94,000. From the government's standpoint, not only did
Talley have no right to a refund but, in addition, the estate
still owed the government for unpaid taxes, penalties and
interest, which the levies had only partially recovered. It
is undisputed that the government's claim for any balance due
5For example, whether Talley's reliance on the admission was unreasonable; whether Talley would suffer any "prejudice" from a belated withdrawal in the technical sense specified by Rule 36(b); and whether the government's motion to conform the pleadings to the evidence could be construed as an implied, conditional request to withdraw the admission.
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is a compulsory counterclaim which, if not properly asserted
in this case, is lost forever. Fed. R. Civ. P. 13(a).
Under the rules, the government should have asserted its
counterclaim when answering Talley's complaint. Fed. R. Civ.
P. 13(a). Instead, it waited for over a year and a half to
do so, explaining that it had not asserted the claim in its
answer because it needed to await approval from the Secretary
of the Treasury. At the time its motion to amend the answer
was filed in June 1990, the case was then on the eve of
trial. The trial date was then postponed for several months,
from June to October, when the government proposed to call
Talley's counsel as a witness, but the district court
nevertheless ruled after the postponement that the motion for
leave to file the counterclaim came too late.
"It is incomprehensible," said the district court, "that
it took the government well over one year to obtain authority
from the Secretary of the Treasury . . . ." The court also
said that allowing the counterclaim at this point would
expose Talley "to significant prejudice at this stage of the
proceeding," as well as "to substantial inconvenience." The
district court did not explain the basis for any finding of
either prejudice or inconvenience. Talley's memorandum
opposing the motion to assert the counterclaim did make a
claim of prejudice; in somewhat veiled fashion, it suggested
that, if the estate had been timely advised of the
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counterclaim, it would have summoned witnesses to show that
oral statements of an IRS representative in July 1988
conceded "that no liability remained with regard to this
estate."
How this issue--the district court's refusal to permit a
belated counterclaim--should be resolved in the ordinary case
is open to debate. On the one hand, the government's 18-
month delay in advancing its counterclaim is substantial and
its excuse lame; perhaps the Secretary had not approved the
counterclaim when the answer was due but that did not require
the government to wait for 18 months, until after discovery
was completed, to assert a counterclaim that was evident from
the outset. Trial judges, who have considerable discretion
in such matters, are understandably loath to entertain new
claims in June when trial is scheduled for July, when
discovery has been completed, and when the government has
little excuse for so long a delay in asserting its claim.
The government, on the other hand, reasonably argues
that its counterclaim motion was not resolved until after the
trial had been postponed until October, alleviating
inconvenience. More important, virtually the same evidence
the government would be expected to offer to refute Talley's
refund claim would, if the government's proof were valid,
also establish its own right to affirmative recovery.
Finally, the only "prejudice" from a withdrawal described by
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Talley is not very persuasive: Talley's bare claim of an IRS
oral misstatement in 1988 would not, even if proved,
establish a conventional estoppel, no detriment of reliance
having been described; and even a conventional estoppel might
well not prevail against the government in a tax case.
Office of Personnel Management v. Richmond, 496 U.S. 414, 427
(1990) ("not a single [Supreme Court] case has upheld an
estoppelclaim against thegovernment forthe paymentof money").
We have concluded that in the somewhat unusual
circumstances of this case, we need not decide whether the
district court in July 1990 should have allowed the
counterclaim to be pleaded. Here, a reopening of the trial
record is warranted, in the interests of justice, based
solely upon our decision that the district court misread
request no. 12. Strictly speaking Talley could be held to
the proof he offered at trial, which was little beyond the
admission to request no. 12. But we think that the
government bears much of the responsibility for the
imbroglio, first by not responding to the request, and then
by offering inconsistent readings of it to the district
court. Thus, our remand will permit Talley to assert
whatever evidence he has or can develop in a reasonable time
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to support his refund claim and to contest the government
computations on a basis other than request no. 12.6
By the same token, we think that in the interests of
justice, the government should be entitled to assert its
counterclaim. Whatever the situation may have been in July
1990, Talley now has ample time to adduce whatever facts may
be relevant to either the refund claim or the counterclaim--
and they are likely to be pretty much the same facts. There
is no surprise element now and the trial record must be
reopened in any event to permit Talley to support his refund
claim. Our outcome--allowing Talley to pursue his refund
claim and the government to pursue its counterclaim--appears
to us to be the most equitable way to shape the required
remand.
The judgment of the district court is vacated and the
case remanded for further proceedings in accordance with this
opinion.
6There is no reason why this opportunity should not include reasonable additional discovery if Talley provides the district court with a basis to think discovery might be fruitful.
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