
USCA1 Opinion

	




          April 23, 1993    UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT                                 ____________________        No. 92-1759                                JOHN C. TALLEY, ETC.,                                 Plaintiff, Appellee,                                          v.                              UNITED STATES OF AMERICA,                                Defendant, Appellant.                                 ____________________                                     ERRATA SHEET                                     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 & 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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -16-
