Talley v. U.S.
| Decision Date | 05 November 1992 |
| Docket Number | No. 92-1759,92-1759 |
| Citation | 990 F.2d 695 |
| Parties | -1539, 25 Fed.R.Serv.3d 519 John C. TALLEY, etc., Plaintiff, Appellee, v. UNITED STATES of America, Defendant, Appellant. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
D. Patrick Mullarkey, Atty., Dept. of Justice, with whom Richard S. Cohen, U.S. Atty., James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen, Atty., Dept. of Justice, Kenneth L. Greene, Atty., Dept. of Justice, and Paula K. Speck, Atty., Dept. of Justice, Washington, DC, were on brief, for defendant, appellant.
Joseph J. Rodio with whom Jeffrey M. Gibson, Charles D. Mills and Rodio & Ursillo, Ltd., Providence, RI, were on brief, for plaintiff, appellee.
Before BREYER, Chief Judge, CYR and BOUDIN, Circuit Judges.
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.
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 $56,266.24 was a "[d]eficiency (to be assessed)." 1
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, 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.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 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 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.
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 $977.65. 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 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, 65 S.Ct. 1232, 1239-40, 89 L.Ed. 1670 (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...
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