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
                                         

No. 92-1759

                    JOHN C. TALLEY, ETC.,

                     Plaintiff, Appellee,

                              v.

                  UNITED STATES OF AMERICA,

                    Defendant, Appellant.

                                         

         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 &amp; 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

                             -2-

     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).

                             -3-

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.

                             -4-

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

                             -5-

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

                             -6-

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

                             -7-

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

                             -8-

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.

                             -9-

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

                             -10-

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).

                             -11-

     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.

                             -12-

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

                             -13-

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

                             -14-

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

                             -15-

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.  

                             -16-
