Carney v. Internal Revenue Service

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 00-10746

In the Matter of: JOHN H. CARNEY,

Debtor
--------------------

JOHN H. CARNEY

Appellant,

versus

INTERNAL REVENUE SERVICE

Appellee.

--------------------
Appeal from the United States District Court
for the Northern District of Texas
--------------------
July 16, 2001
Before HIGGINBOTHAM and BENAVIDES, Circuit Judges, and
DUPLANTIER, District Judge.*

BENAVIDES, Circuit Judge:

John H. Carney appeals from an adverse summary judgment in

his challenge to the validity of tax deficiency claims made

against him by the Internal Revenue Service (IRS). The

deficiencies stem from the IRS’s determination that certain

partnership investments by Carney lacked economic substance, and

hence could not support tax credits and depreciation deductions

*
District Judge of the Eastern District of Louisiana, sitting by
designation.
that Carney claimed. We AFFIRM the grant of summary judgment

based on Carney’s Rule 36(a) deemed admission that the proof of

claim filed by the IRS in his bankruptcy proceeding accurately

described his tax obligations.

FACTUAL AND PROCEDURAL BACKGROUND

Carney, an attorney licensed to practice in Texas,

participated as a limited partner in the Cinema ‘84 and Cinema

‘85 limited partnerships (the Cinema Partnerships) from 1984

through 1989. On his tax returns for these periods, Carney

claimed deductions, depreciation, and tax credits with respect to

his investments in the Cinema Partnerships. In 1991, the IRS

determined that the Cinema Partnerships were tax shelter

investments lacking economic substance. Consequently, credits

and deductions claimed by individual Cinema partners, such as

Carney, were no longer viable. In 1992, the Cinema Partnerships’

tax matters partner petitioned the Tax Court for judicial review

of the IRS’s determination.1

In January 1995, Carney filed a petition for relief under

Chapter 11 of the Bankruptcy Code.2 The petition was later

1
On September 1, 2000, the Tax Court dismissed the Cinema
Partnerships proceedings for failure to prosecute.
2
As a partner, Carney was originally a party to Cinema
Partnerships’ Tax Court proceeding. Carney’s bankruptcy petition
severed him from that case, however. See 26 U.S.C. §§
6226(d)(1)(A), 6231(c)(2); Treas. Reg. §301.6231(c)-7T(a), 52
Fed. Reg. 6779, 6793 (1987).

2
converted to Chapter 7. In May 1995, the IRS filed a proof of

claim against Carney relating, inter alia, to unpaid federal

income taxes from the 1984, 1985, 1986, 1987 and 1989 tax years.

The claimed deficiencies stemmed from the IRS’s disallowance of

the deductions and credits claimed by Carney in relation to the

Cinema Partnerships and the Bellbrook Joint Venture Partnership.

Carney did not object to the IRS’s proof of claim. In December

1995, the IRS issued to Carney notices of deficiencies and

penalties with respect to the claimed obligations. Carney

received a general bankruptcy discharge in December 1996.

The IRS assessed the 1986, 1987 and 1989 deficiencies and

penalties on July 16, 1997, and the 1984 and 1985 deficiencies

and penalties on August 11, 1997. When the IRS attempted to

collect the assessments in 1998, Carney commenced the present

action in the bankruptcy court seeking a determination that his

obligations had been discharged. Carney later amended his

complaint to challenge the validity of the claimed deficiencies.

After a period of discovery and negotiation, the IRS moved for

summary judgment in September 1999. In addition to responding to

the IRS’s motion for summary judgment, Carney filed a motion to

compel responses to certain interrogatories and requests for

production previously served on the IRS, as well as a request for

a scheduling order setting a future date to hear summary judgment

arguments.

3
 The bankruptcy court granted the IRS’s motion for summary

judgment. As to the validity of the deficiency claims, the court

stated that Carney failed to produce sufficient evidence creating

a material fact question with respect to his claim for the

deductions and tax credits. Alternatively, the court held that

Carney’s failure to respond to the IRS’s requests for admission

created a deemed admission conclusively establishing the validity

of the IRS’s claims. With respect to the dischargeability of the

tax claims, the court relied on Bankruptcy Code sections

523(a)(1)(A) and 507(a)(8)(A)(iii) to hold that the taxes owed

were non-dischargeable because they were assessable, but not

assessed at the time that Carney filed his bankruptcy petition.

See 11 U.S.C. §§ 523(a)(1)(A); 507(a)(1)(A)(iii). The court

denied Carney’s discovery requests, concluding that Carney “could

have and should have been diligent in filing his Motion to Compel

Discovery Responses, but he was not.” The court suggested that

Carney made his motion to compel discovery “as some sort of

defensive measure in order to distract the Court’s attention from

the Summary Judgment Motion.” Carney appealed these rulings to

the district court, which affirmed summarily. This appeal

followed.

DISCUSSION

Pursuant to section 158(d) of Title 28, this Court exercises

jurisdiction over the bankruptcy court’s final orders fixing the

4
amount of Carney’s tax debt and holding that debt to be non-

dischargeable. 28 U.S.C. § 158(d). Carney has waived the

dischargeability issue on appeal by failing to offer a legal or

factual explanation of how the bankruptcy court erred when it

held his tax obligations non-dischargeable. See American States

Ins. Co. v. Bailey, 133 F.3d 363, 372 (5th Cir. 1998) (“Failure

to provide any legal or factual analysis of an issue results in

waiver.”).3 Thus, our review focuses on the bankruptcy court’s

summary judgment that the IRS’s amended proof of claim correctly

stated the value of Carney’s tax obligations.

Carney essentially argues that the bankruptcy court granted

summary judgment in this case prematurely, before the IRS had

responded to his discovery requests. His appellate brief and

oral argument have both focused on the bankruptcy court’s

consideration of allegedly improper evidence introduced by the

IRS to challenge Carney’s credibility with respect to his motion

to compel discovery. If the bankruptcy court considered improper

evidence when denying his motion to compel, Carney reasons that

the grant of summary judgment should be overturned. In the

alternative, Carney maintains that his affidavit testimony

3
Even if Carney had not waived error, his failure to present any
evidence to rebut the IRS’s explanation that his tax obligations
fall within the exception to discharge described in section
523(a)(1)(A) and 507(a)(8)(A)(iii) would support the grant of
summary judgment on this issue.

5
creates a genuine issue of material fact as to his entitlement to

claimed credits and deductions.

Carney’s arguments neglect his own failures to comply with

the Federal Rules of Civil Procedure governing discovery. As

explained below, Carney’s failure to respond to the IRS’s Federal

Rule of Civil Procedure 36 request that he admit the accuracy of

the IRS’s proof of claim conclusively established the validity of

that claim.4 Carney’s attempt to contradict this admission

through his affidavit testimony is precluded by the plain

language of Rule 36 and this Circuit’s precedent. Though Rule 36

allows litigants to request leave to withdraw or amend an

admission, Carney never made such a motion before the bankruptcy

court in this case. Consequently, we affirm the grant of summary

judgment based on Carney’s deemed admissions.

We review orders granting summary judgment de novo, guided

by the same standard as the bankruptcy and district courts:

Federal Rule of Civil Procedure 56. Stults v. Conoco, Inc., 76

F.3d 651, 654 (5th Cir. 1996). Pursuant to Rule 56, a party may

obtain summary judgment when "the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

4
Bankruptcy rule 7036 provides that Federal Rule of Civil
Procedure 36 operates in bankruptcy proceedings. BANKR. R. 7036.

6
material fact and that the moving party is entitled to judgment

as a matter of law." FED. R. CIV. P. 56(c). The IRS argues, and

the bankruptcy court alternatively held, that Carney admitted the

validity and value of the IRS’s deficiency claims by failing to

respond to the IRS’s Rule 36 requests for admission.

Specifically, Carney failed to respond to the IRS’s request that

he admit the following: “You owe the [IRS] the taxes reflected on

the Proof of Claim attached hereto as Government Exhibit 1.”

According to the IRS, this admission resolves all material fact

questions regarding the validity of its claims against Carney.

Federal Rule of Civil Procedure 36(a)states in pertinent

part:

A party may serve upon any other party a written
request for the admission, for purposes of the pending
action only, of the truth of any matters within the
scope of Rule 26(b) set forth in the request that
relate to statements or opinions of fact or of the
application of law to fact, including the genuineness
of any documents described in the request. ....
The matter is admitted unless, within 30 days after
service of the request, or within such shorter or
longer time as the court may allow or as the parties
may agree to in writing, subject to Rule 29, the party
to whom the request is directed serves upon the party
requesting the admission a written answer or objection
addressed to the matter....

FED. R. CIV. PROC. 36(a)(West 2001). Rule 36 allows litigants to

request admissions as to a broad range of matters, including

ultimate facts, as well as applications of law to fact.

7
See, e.g., Stubbs v. Comm’r Internal Rev., 797 F.2d 936, 938

(11th Cir. 1986); Campbell v. Spectrum Automation Co., 601 F.2d

246, 253 (6th Cir. 1979). C.f. Playboy Enterprises, Inc. v.

Welles, 60 F.Supp.2d 1050, 1057 (S.D. Cal. 1999) (“Requests for

admissions cannot be used to compel an admission of a conclusion

of law.”); Kosta v. Connolly, 709 F. Supp. 592, 594 (E.D. Pa.

1989)(suggesting that Rule 36 should not be employed to establish

facts that are obviously in dispute). Such breadth allows

litigants to winnow down issues prior to trial and thus focus

their energy and resources on disputed matters. WRIGHT, MILLER &

MARCUS, FEDERAL PRACTICE AND PROCEDURE: Civil 2d § 2254 (1994). For

Rule 36 to be effective in this regard, litigants must be able to

rely on the fact that matters admitted will not later be subject

to challenge. American Auto Ass’n v. AAA Legal Clinic, 930 F.2d

1117, 1119 (5th Cir. 1991). Thus, Rule 36(b) provides that

“[a]ny matter admitted . . . is conclusively established unless

the court on motion permits withdrawal or amendment of the

admission.” FED. R. CIV. PROC. 36(b).

This Circuit has stressed that a deemed admission can only

be withdrawn or amended by motion in accordance with Rule 36(b).

American Auto, 930 F.2d at 1120. In order to allow withdrawal of

a deemed admission, Rule 36(b) requires that a trial court find

that withdrawal or amendment: 1) would serve the presentation of

8
the case on its merits, but 2) would not prejudice the party that

obtained the admissions in its presentation of the case.

American Auto, 930 F.2d at 1119 (citations omitted); FED. R. CIV.

P. 36(b). Even when these two factors are established, a

district court still has discretion to deny a request for leave

to withdraw or amend an admission. United States v. Kasuboski,

834 F.2d 1345, 1350 n. 7 (7th Cir. 1987) (“[R]ule 36(b) allows

withdrawal of admissions if certain conditions are met and the

district court, in its discretion, permits the withdrawal.”);

Donovan v. Carls Drug Co., Inc., 703 F.2d 650, 652 (2d Cir. 1983)

(“Because the language of [Rule 36(b)] is permissive, the court

is not required to make an exception to Rule 36 even if both the

merits and the prejudice issues cut in favor of the party seeking

exception to the rule.”). Like other discovery rulings, we

review rulings granting or denying leave to withdraw or amend

Rule 36 admissions for abuse of discretion. American Auto, 930

F.2d at 1119.

Carney does not dispute that he failed to respond to the

IRS’s requests for admission. Instead, he first argues that he

and the IRS entered into informal stipulations pursuant to Rule

29 according to which he had 10 days to respond to the requests

for admission from the date that the IRS complied with its

discovery obligations to him. This argument is without merit

9
because Carney fails to support his Rule 29 argument by

identifying a written stipulation agreement altering the 30-day

time limit for replying to the IRS’s discovery requests. FED. R.

CIV. P. 29(a) (requiring “written stipulation” for extension of

response periods provided for in the rules of procedure).

Alternatively, Carney argues that the bankruptcy court

should have allowed him to file responses to the IRS’s requests

for admission out of time. This argument fails because Carney

never filed a Rule 36(b) motion requesting leave to amend the

admissions in the bankruptcy court. Rather than move the court

for permission to withdraw the admissions prior to or

concurrently with the IRS’s motion for summary judgment in

accordance with the Rule 36(b), Carney made no effort to address

the effect of the default admissions. He cannot make such a

motion for the first time on appeal. See Stults v. Conoco, Inc.,

76 F.3d 651, 657 (5th Cir. 1996); Wright v. Hartford Acc. &

Indem. Co., 580 F.2d 809, 810 (5th Cir. 1978) (“It is a well-

accepted rule that an appellate court will not review actions of

omission or commission by a trial court unless the defendant

makes known to the court the action which he desires the court to

take or his objection to the action taken by the court and the

grounds therefor.")(quotations omitted). Even if we were to

construe Carney’s motion to compel as requesting the bankruptcy

10
court for leave to withdraw the deemed admissions, he has not

convinced the Court that the district court’s denial of such a

request would have constituted an abuse of discretion.5

Federal Rule of Civil Procedure 56(c) specifies that

“admissions on file” can be an appropriate basis for granting

summary judgment. FED. R. CIV. PROC. 56(c). Since Rule 36

admissions, whether express or by default, are conclusive as to

the matters admitted, they cannot be overcome at the summary

judgement stage by contradictory affidavit testimony or other

evidence in the summary judgment record. Dukes v. South Carolina

Ins. Co., 770 F.2d 545, 548-49 (5th Cir. 1985); Kasuboski, 834

F.2d at 1350. See also American Auto, 930 F.2d at 1119 (default

admissions cannot be overcome by conflicting trial testimony).6

5
In Dukes, we affirmed a district court’s decision to strike out
of time responses to a Rule 36 request for admissions based on
the court’s findings that the plaintiffs had been “evasive and
dilatory throughout the litigation.” Dukes, 770 F.2d at 549.
Though never asked by Carney for leave to file out of time
responses, the bankruptcy court’s opinion reflects its general
impression that Carney had not been diligent during the discovery
phase of the case and had made his motion to compel “to distract
the Court’s attention from the summary judgment motion.” This
language in the bankruptcy court’s opinion suggests that it would
have had a basis to deny a request for leave to file amended
responses, had it been asked to do so.
6
Various federal courts from around the country have relied on
default admissions to support a grant of summary judgment. See,
e.g., United States v. 2204 Barbara Lane, 960 F.2d 126, 129 (11th
Cir. 1992); Hulsey v. State of Texas, 929 F.2d 168, 171 (5th Cir.
1991); Stubbs, 797 F.2d at 938 (11th Cir. 1986); Campbell v.

11
Instead, the proper course for a litigant that wishes to avoid

the consequences of failing to timely respond to Rule 36 requests

for admission is to move the court to amend or withdraw the

default admissions in accordance with the standard outlined in

Rule 36(b).

Carney did not avail himself of the procedural mechanism for

attempting to avoid the effect of his default. Consequently,

application of this Court’s precedent applying the plain language

of Rule 36 compels us to conclude, on the record before us, that

the validity of the tax deficiencies stated in the IRS’s proof of

claim has been conclusively established. We note that other

courts have reached similar results in tax cases.7 Moreover,

Spectrum Automation Co., 601 F.2d 246, 253 (6th Cir.1979);
Chicago Dist. Council of Carpenters Pension Fund v. P.M.Q.T.,
169 F.R.D. 336, 341 (N.D. Ill. 1996); Wallace v. Best Western
Northeast, 183 F.R.D. 199, 202-3 (S.D. Miss. 1995); Cereghino v.
Boeing Co., 873 F.Supp 398, 401 (D. Or. 1994); Gardner v. Borden,
Inc., 110 F.R.D. 696, 697 (S.D. W.Va. 1986); In re Niswonger, 116
B.R. 562, 565 (Bankr. S.D. Ohio 1990); In re Sweeten, 56 B.R.
675, 677 (Bankr. E.D. Pa. 1986) (all noting that Rule 36 allows
party to seek admissions as to matters dispositive of a case and
granting summary judgment on basis of deemed admissions).
7
See Stubbs, 797 F.2d at 938 (affirming grant of summary judgment
against taxpayer on challenge to tax obligations because “facts
deemed admitted by [the plaintiff] established his liability” for
the asserted deficiencies and penalties); National Advertising
Co., Inc. v. Dick, 640 F. Supp 1474, 1475 (S.D. Ind. 1986)
(plaintiff’s failure to respond to IRS’s requests for admission
supported summary judgment for IRS as to IRS’s ability to levy on
certain funds to satisfy settled tax obligation); United States
v. DiFonzo, 654 F. Supp. 263, 264 (D. Mass. 1986) (granting

12
this Court has affirmed a grant of summary judgment based on

default admissions coupled with a district court’s denial of a

request to withdraw those admissions. See Dukes, 770 F.2d at

548. Carney’s failure to move the bankruptcy court to withdraw

his admission prior to or concurrently with the IRS’s motion for

summary judgment simply compels affirmance of the grant of

summary judgment. Like the Seventh Circuit,

We recognize the potential harshness of this result.
The failure to respond to admissions can effectively
deprive a party of the opportunity to contest the
merits of a case. This result, however, is necessary
to insure the orderly disposition of cases; parties to
a lawsuit must comply with the rules of procedure. In
addition, the harshness is tempered by the availability
of the motion to withdraw admissions, a procedure which
[Carney] did not employ.

Kasuboski, 834 F.2d 1345.

Because of Carney’s default admissions, we need not explore

in detail the bankruptcy court’s alternative holding that summary

judgement was appropriate based on the absence of genuine

material fact.8 Similarly, we need not address Carney’s argument

summary judgment for IRS after taxpayers were deemed to have
admitted validity of notices of assessments and demands for
payment pursuant to Rule 36). See also Alexander v. C.I.R., 926
F.2d 197, 197 (2d Cir. 1991) (affirming grant of summary judgment
based on default admissions of taxpayer’s liability pursuant to
Tax Court Rule 90(c)).
8
The bankruptcy court rejected Carney’s affidavit testimony as
conclusory, and thus determined that Carney had presented “no

13
on appeal that summary judgment should have been deferred to

allow more discovery, since the deemed admission is conclusive as

to the central factual issue in his case.9 Finally, the

discovery issues that form the crux of Carney’s argument on

appeal are irrelevant since additional discovery could not alter

our resolution of the summary judgment against him.10

competent summary judgment evidence” supporting his claims to the
deductions and credits. Because Carney’s affidavit contains
specific factual allegations supporting its conclusions, we would
have had reservations dismissing it simply as conclusory. See
Rushing v. Kansas City Southern Ry. Co., 185 F.3d 496, 513 (5th
Cir. 1999) (en banc) (distinguishing conclusory statements from
conclusions based on specific facts). For example, Carney’s
affidavit specifies that the Cinema Partnerships acquired
specific films for distribution using cash and recourse
promissory notes. The affidavit testimony also indicates that
partners assumed pro rata liability in bank debt that was used to
market films. Nevertheless, because of Carney’s lack of
diligence in responding to the IRS’s request for admission we
cannot reach these issues.
9
We note, however, that Carney again failed to properly raise
this issue before the bankruptcy court by filing a Rule 56(f)
motion and explaining specifically how additional discovery would
aid his attempt to respond to the IRS’s motion for summary
judgment. See Robbins v. Amoco Prod. Co., 952 F.2d 901, 907 (5th
Cir. 1992) (requiring Rule 56(f) motion that specifically
demonstrates how additional discovery will establish a genuine
issue of material fact). So long as the default admissions
remain in the record, no amount of additional discovery could
overcome their effect.
10
Carney argues that entry of testimony regarding the facts
surrounding a state court contempt order was error, since the
order was vacated on appeal to the Texas Supreme Court. See Ex
parte Carney, 903 S.W.2d 345 (Tex. 1995). This Court previously
held that introduction of the contempt order prejudiced Carney’s
substantial rights in an unrelated criminal proceeding. See

14
 CONCLUSION

For our litigation system to work effectively, litigants

must comply with the Federal Rules of Civil Procedure. Carney’s

plight in this case exemplifies how repeated failures to do so

ultimately preclude a party from presenting the merits of his

case. Carney complains that the bankruptcy court should not have

rendered summary judgment based on a default admission, but he

never moved the court to withdraw the admission. Similarly,

Carney argues that the court should have deferred granting

summary judgment to allow for more discovery, but he filed only a

motion to compel discovery at the same time as his reply to the

IRS’s motion for summary judgment, not a Rule 56(f) motion as

required in this Circuit. Carney’s pattern of non-responsiveness

to the mandates of our rules of procedure require affirmance of

the summary judgment against him.

United States v. Fisher, 106 F.3d 622 (5th Cir. 1997), abrogated
in part by Ohler v. United States, 529 U.S. 753, 120 S.Ct. 1851
(2000). Neither the contempt conviction nor this Court’s
reversal of Carney’s criminal conviction have any relevance to
the merits of this tax case. We need not reach Carney’s
evidentiary complaints in so far as they relate to the bankruptcy
court’s ruling on his motion to compel, since further discovery
could not have altered our resolution of this case. We note,
however, that it is apparent from the record that the bankruptcy
judge recognized that the state contempt conviction had been
overturned and that this Court had overturned Carney’s federal
criminal conviction.

15
DUPLANTIER, District Judge, Dissenting:

I respectfully dissent. The majority opinion affirms the

summary judgment entered against plaintiff on the sole basis that

plaintiff did not timely file a denial of the following request

for admission: "You owe the taxes reflected on the Proof of Claim

attached hereto as Government Exhibit 1."

Rule 36(a) of the Federal Rules of Civil Procedure permits

the service by one party upon the other of a "written request for

the admission ... of the truth of any matters within the scope of

Rule 26(b)(1)11 set forth in the request that relate to

statements or opinions of fact or of the application of law to

fact . . . ." Whatever "any matters . . . that relate to

statements or opinions of fact or of the application of law to

fact" may mean, it is beyond the intent of the Rule to

countenance a request for admission such as the one by the

I.R.S., which can be paraphrased: "Admit that we win the case."

Clearly, Rule 36 can be used to request admissions of fact

which effectively dispose of all of the issues in a case, with

the result that the propounding party would be entitled to

11
Rule 26(b)(1) permits discovery regarding any matter relevant to the claim or defense of any party.

16
summary judgment in the absence of a denial. But the request at

issue was not that plaintiff admit any facts, but that he admit

that he owed the taxes which in his complaint he denied owing.

Clearly, Carney displayed a complete lack of diligence in

failing to respond to the request that he admit that he owed the

taxes at issue and in failing to move to withdraw the admission

pursuant to Rule 36(b). Such conduct on the part of an attorney

is not to be condoned. However, Carney made it clear to the

trial court throughout the proceedings that he never intended to

give up his claim that the income tax deductions disallowed by

the I.R.S. were in fact genuine and lawful. Indeed, as foot-

noted by the majority, the court had before it Carney's affidavit

containing specific factual allegations to support his contention

that the partnerships were not merely sham tax shelters but

instead were operating entities. Had Carney been given the

opportunity to do so and had he succeeded in proving those

allegations he likely would have obtained the judgment he sought.

Under such circumstances, dismissal of his suit is a draconian

penalty for failure to file another denial that he owed the

taxes.

Plaintiff's various other written submissions pending at the

time summary judgment was entered should have been construed as a

request to withdraw the deemed admission that his claim lacked

17
merit. His affidavit evidence submitted in response to the

motion for summary judgment created genuine issues of material

fact sufficient to defeat that motion. I would reverse the

summary judgment and remand.

18