SUIT FOR DAMAGES DISMISSED; PREPARER LACKED STANDING.

                 IN THE UNITED STATES DISTRICT COURT

BACKGROUND

[2] Kevin Mirch is a tax attorney, who is licensed to practice in both California and Nevada. Mirch is a resident of Washoe County, Nevada. Robert Refvem is a former tax client of Mirch. Refvem is also a resident of Washoe County, Nevada.

[3] Refvem supplied financial data to Mirch, which Mirch used to prepare tax returns for Refvem. In February 1992, Refvem received a notice of deficiency from the Internal Revenue Service (IRS) for the 1986 tax year. In May 1992, Refvem received a notice of deficiency from the IRS for the 1987, 1988 and 1989 tax years. Refvem filed petitions with the United States Tax Court, requesting a redetermination of certain of these deficiencies. Mirch prepared these petitions, but they were filed by Refvem, acting as his own counsel.

[4] On May 10, 1993, Mirch filed a petition in the United States Bankruptcy Court for the Northern District of California, on behalf of Refvem. On July 2, 1993, Gary R. Brenner was substituted as Refvem's bankruptcy counsel, in place of Mirch.

[5] According to Mirch, the IRS informed Refvem that the bankruptcy stay had extinguished Refvem's tax liabilities. However, the IRS then continued to proceed against Refvem in the United States Tax Court, holding a hearing on October 10, 1995. As a result of that hearing, on July 19, 1996. the IRS placed a lien on Refvem's property.

[6] On March 27, 1997, Refvem brought a legal malpractice action against Mirch and Brenner in San Mateo County Superior Court. ¹ On July 23, 1998, Mirch filed a counterclaim against Robert Refvem, and a third party complaint against Pat Roe, Martin Refvem, the Roe Partnership and the United States of America, in San Mateo County Superior Court. ² Mirch's third-party complaint seeks indemnity and contribution from the United States, on the theory that if Refvem actually owed no tax, then based on 26 U.S.C. sections 7433 and 7430, the United States must indemnify Mirch for the damages he may incur if he is found liable to Refvem for legal malpractice. ³ Alternatively, Mirch alleges that if Refvem actually owed tax, then Refvem is liable to Mirch for breach of contract and fraud.

[7] On September 16, 1998, the United States removed Mirch's complaint to this Court, pursuant to 28 U.S.C. sections 1442(a)(1) and 1444. On February 10, 1999, the United States filed a motion to dismiss Mirch's causes of action under 26 U.S.C. sections 7433 and 7430 against the United States and to remand the remaining state law claims against Robert Refvem and the other defendants to state court, on the ground that this Court lacks subject matter jurisdiction. On March 10, 1999, Robert Refvem joined the United States' motion to dismiss.

LEGAL STANDARD

[8] Federal Rule of Civil Procedure 12(b)(1) allows a party to challenge a federal court's jurisdiction over the subject matter of the complaint. As the party invoking the jurisdiction of the federal court, the plaintiff bears the burden of establishing that the court has the requisite subject matter jurisdiction to grant the relief requested. See Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 376-78, 114 S.Ct. 1673, 1675 (1994) (citation omitted). A complaint will be dismissed if, looking at the complaint as a whole, it appears to lack federal either "facially" or "factually." Thornhill Publishing Co., Inc. v. General Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th Cir. 1979). When the complaint is challenged for lack of subject matter jurisdiction on its face, all material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Indus. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). The motion to dismiss is granted only if the plaintiff has failed to allege an element necessary for subject matter jurisdiction under a given statute. See 2A James W. Moore et. al., Moore's Federal Practice paragraphs 12.07-2.1 (2d ed. 1987).

DISCUSSION

[9] Mirch's claim against the United States is based on the IRS's alleged improper attempt to collect Refvem's tax liabilities by lien, in violation of the bankruptcy stay. Mirch contends that the imposition of the lien by the IRS precipitated Refvem's legal malpractice suit against Mirch, as Refvem chose to sue Mirch rather than sue the IRS for a refund. Compl. paragraph 10; Mirch's Opposition To The United States' Motion To Dismiss (Mirch's Opposition) at 2:12-18. Therefore, Mirch argues that he is an "involuntary taxpayer," and that pursuant to 26 U.S.C. sections 7426, 7433, 7430 and 28 U.S.C. section 2412, the United States must indemnify him, if Mirch is found liable to Refvem for legal malpractice. Compl. paragraph 10, 12-13; Mirch's Opposition at 3:19- 20. Mirch further argues that Refvem's failure to join the IRS as an indispensable party or to file a compulsory counterclaim against the IRS should result in the dismissal of Refvem's action against Mirch. Mirch's Opposition at 3:10-12, 11:24-25, 12:13-14.

[10] The United States argues that Mirch's claim against the United States should be dismissed for lack of subject matter jurisdiction, as the United States has not consented to be sued for indemnification for legal malpractice under any of the statutes upon which Mirch relies.

[11] In an action against the United States, in addition to statutory authority granting subject matter jurisdiction, there must be a waiver of sovereign immunity. DeMasters v. Arend, 313 F.2d 79, 84 (9th Cir. 1963). The United States may be sued only to the extent that it has waived sovereign immunity by enacting a specific statute consenting to suit. United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769 (1941). Waivers of sovereign immunity are narrow and must be strictly construed in favor of the sovereign. United States v. Nordic Village, Inc., 503 U.S. 30, 34, 112 S.Ct. 1011, 1014-1015 (1992). Absent express statutory consent to sue, the district court lacks subject matter jurisdiction and dismissal is required. See Fed. R. Civ. P. 12(h)(3); Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir. 1985).

1. MIRCH CANNOT SUE THE UNITED STATES UNDER 26 U.S.C. SECTION 7426(a)(1)

[12] Mirch argues that he has a claim against the United States under 26 U.S.C. section 7426(a)(1), because he has an interest in the real and personal property owned by Refvem that has allegedly been subjected to the IRS lien. Mirch's Opposition at 11:13-20. Section 7426 delineates the forms of action and relief available to a third party against the United States for the wrongful levy and sale of property. World Mktg. Ltd. v. Hallman, 608 F.2d 392, 394 (9th Cir. 1979). However, section 7426 is not a broad grant of jurisdiction for a suit brought by any third party interest-holder. Sessler v. United States, 7 F.3d 1449, 1452 (9th Cir. 1993). Instead, it waives the sovereign immunity of the United States only under limited circumstances. Id. at 1451-1452. Section 7426 contains two distinct prerequisites to its application: (1) the plaintiff must have an interest in or lien on the property at issue; and (2) the levy must be wrongful. Allied/Royal Parking L.P. v. United States, 166 F.3d 1000, 1005 (9th Cir. 1999). The first of these requirements ensures standing. Id.

[13] Here, Mirch does not meet either of these prerequisites. Mirch's complaint fails to assert that he has any type of interest in property that has been subjected to an IRS levy. See Frierdich v. United States, 985 F.2d 379, 383 (7th Cir. 1993) ("the right of a third party to challenge a wrongful levy is confined to persons who have a fee simple or equivalent interest, a possessory interest, or a security interest in the property levied upon"); Aspinall v. United States, 984 F.2d 355, 357 (10th Cir. 1993) ("[u]nder section 7426, a plaintiff must make an initial showing of some interest in the property levied upon to have standing"). Because Mirch lacks an interest in property levied upon by the IRS, he does not have standing to sue under section 7426 for wrongful levy. Allied/Royal Parking, 166 F.3d at 1005. Furthermore, Mirch's complaint does not state any facts showing that an IRS levy was wrongfully imposed. See 26 C.F.R. section 301.7426-1(b); Sessler, 7 F.3d at 1452 (innocent third-party purchasers challenging an IRS levy on their property must still show that the levy was wrongful). ⁴ As Mirch cannot meet either prerequisite, he cannot rely on the limited waiver of sovereign immunity provided by section 7426. Sessler, 7 F.3d at 1452. ⁵

[14] A party's remedies under section 7426 are strictly limited. Sessler, 166 F.3d at 1005. "Section 7426(b) provides that '[t]he district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances,' including an injunction, return of the property, or if the property has already been sold, recovery of the property's value." Id. (citing 26 U.S.C. section 7426(b)(1)-(2)). Here, Mirch seeks general and special damages against the United States. Compl. paragraphs 10 However, damages do not constitute one of the remedies available under section 7426. Ferrel v. Brown, 847 F.Supp. 1524, 1527 (W.D. Wash. 1993), aff'd, 40 F.3d 1049 (9th Cir. 1994) (per curiam). See also Allied/Royal Parking, 166 F.3d at 1005 (compensatory or punitive damages are not available under section 7426).

[15] Because Mirch's section 7426 claim against the United States does not fall within the narrow waiver of sovereign immunity granted by section 7426, this Court lacks subject matter jurisdiction over this claim. Ferrel, 847 F.Supp. at 1527. ⁶

2. MIRCH CANNOT SUE THE UNITED STATES UNDER 26 U.S.C. SECTION 7433

[16] Mirch claims that the IRS is liable to him under 26 U.S.C. section 7433 for any potential damages he may incur as a result of Refvem's legal malpractice action. Compl. paragraph 10. Section 7433 allows a taxpayer to sue the United States when an officer or employee of the IRS recklessly or intentionally disregards the Internal Revenue Code. 26 U.S.C. section 7433. Mirch argues that the term "taxpayer" in section 7433 should be interpreted broadly, to include any person subject to tax under the applicable revenue law. Mirch's Opposition at 9:3-6.

[17] Mirch's argument is without merit. The Ninth Circuit has held that section 7433's limited waiver of sovereign immunity must be read narrowly. Allied/Royal Parking, 166 F.3d at 1003. Section 7433 requires that the plaintiff be the direct taxpayer, from whom the IRS collected the tax, and not a third party. Id. See also Ferrel, 847 F. Supp. at 1528 (rejecting plaintiff's argument that section 7433 affords an additional remedy to a third party who qualifies for the general definition of a taxpayer). Because Mirch is not the direct taxpayer, his section 7433 claim against the United States does not fall within the narrow waiver of sovereign immunity granted by section 7433. Ferrel, 847 F.Supp. at 1528. Therefore, this Court lacks subject matter jurisdiction over Mirch's section 7433 claim. Id. at 1527.

3. THIS COURT CANNOT AWARD MIRCH ATTORNEY'S FEES UNDER EITHER 26 U.S.C. SECTION 7430 OR 28 U.S.C. SECTION 2412

[18] Mirch asserts that he is entitled to attorney's fees pursuant to 26 U.S.C. section 7430. Compl. paragraph 10. Section 7430 provides that the prevailing party may be awarded a judgment for reasonable litigation costs incurred in connection with a court proceeding against the United States for the determination, collection or refund of tax. 26 U.S.C. section 7430(a). However, section 7430 does not contain an independent grant of subject matter jurisdiction. Latch v. United States, 842 F.2d 1031, 1033 (9th Cir. 1988). As this Court lacks subject matter jurisdiction over Mirch's tax claims under sections 7426 and 7433, it has no authority to award Mirch attorney's fees. Id. ⁷ Accordingly, this Court need not address Mirch's argument that third parties other than the taxpayer may pursue a claim for relief under section 7430.

[19] Mirch also argues that if this Court finds that he does not have a claim under section 7430, he does have a claim for relief under the Equal Access to Justice Act (EAJA), 28 U.S.C. section 2412. Mirch's Opposition at 12:20-21. In cases to where section 7430 applies, however, it is exclusive and precludes recovery under the EAJA. Smith v. Brady, 972 F.2d 1095, 1099 (9th Cir. 1992). The test for the exclusive application of section 7430 is whether the claim arose "in connection with the determination, collection or refund of any tax, interest or penalty under this title." 26 U.S.C. section 7430(a); Smith, 972 F.2d at 1099. Mirch's claim for attorney's fees arises solely from his claim for damages against the United States, pursuant to sections 7433 and 7426 of the tax code. Compl. paragraph 10. Furthermore, Mirch asserts that his claim against the United States is based on the IRS's allegedly wrongful attempt to collect Refvem's taxes. Compl. paragraph 9. Therefore, Mirch's exclusive method for pursuing attorney's fees is under section 7430, and this Court must dismiss his claim for attorney's fees under the EAJA. Ferrel, 847 F.Supp. at 1530.

4. THE IRS IS NOT AN INDISPENSABLE PARTY

[20] Mirch argues that the United States is an indispensable party to this action, since its conduct in attempting to collect Refvem's taxes in spite of the bankruptcy stay caused Mirch to suffer damages. Mirch's Opposition at 9:18-20. Rule 19 of the Federal Rules of Civil Procedure provides that a district court may dismiss an action if an absent party is determined to be "indispensable." Quileute Indian Tribe v. Babbit, 18 F.3d 1456, 1458 (9th Cir. 1994) (citing Fed. R. Civ. P. 19(b)). Under Rule 19(a), a party must first be deemed "necessary" before the court considers whether that party is indispensable. Quileute Indian Tribe, 18 F.3d at 1458. Rule 19(a) contemplates a two-part analysis to aid the court in determining whether a particular party is necessary to an action. Id. The court must consider: (1) whether complete relief is possible among those parties already in the action; and (2) whether the absent party has claimed a legally protected interest in the outcome of the action. Id.

[21] Here, Mirch claims that the United States has an interest in this controversy, because the money Refvem allegedly owes in back taxes are the same funds that Refvem seeks to recover in his legal malpractice action against Mirch. Mirch's Opposition at 10:19-21. However, this argument does not support a finding that the IRS is a necessary party under Rule 19(a). In its motion papers, the United States expressly disclaims any interest in Refvem's malpractice action against Mirch. Reply To Opposition To The Government's Motion To Dismiss at 1:17-2:4. Mirch's contention that the IRS may have a competing claim to the funds Refvem seeks to recover from Mirch is based on speculation about a future event -- that Mirch will be found liable to Refvem for legal malpractice -- and does not make the IRS a necessary party. See Northrup Corp. v. McDonnell Douglas Corp., 705 F.2d 1030, 1046 (9th Cir. 1983) ("Speculation about the occurrence of a future event does not render all parties potentially affected by that future event necessary or indispensable parties under Rule 19"). Other than arguments related to the potential outcome of Refvem's malpractice action, Mirch states no facts that would allow the Court to conclude that complete relief in the malpractice action is not possible without the presence of the IRS. Therefore, because the IRS is not a necessary party under Rule 19(a), it cannot be an indispensable party under Rule 19(b). Eldredge v. Carpenters 46 N. Cal. Counties Joint Apprenticeship and Training Comm., 662 F.2d 534, 536 (9th Cir. 1981). ⁸

5. REFVEM IS NOT REQUIRED TO ASSERT A COMPULSORY COUNTERCLAIM AGAINST THE IRS

[22] Mirch argues that Refvem's failure to assert a compulsory counterclaim against the IRS requires that Refvem's entire action be dismissed. Mirch's Opposition at 11:24-27, 12:13-16. A counterclaim is a claim for affirmative relief asserted by a party against an opposing party. See William W. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure Before Trial section 8:256 (1995). A responding party must plead as a counterclaim any claim which at the time of responding, it has against the opposing party, if that claim: (1) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and (2) does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. Id. at section 8:267. A compulsory counterclaim is barred if not asserted in the pending action. Id. at section 8:274.

[23] Here, Refvem brought a legal malpractice action against Mirch and Brenner, so Refvem and the IRS are not opposing parties. Even if they were, Refvem's failure to assert a compulsory counterclaim against the IRS would preclude Refvem from maintaining a later action on the omitted claim. Sams v. Beech Aircraft Co., 625 F.2d 273, 276 n. 4 (9th Cir. 1980). It would not result in the dismissal of his legal malpractice action against Mirch. Therefore, Mirch's argument is without merit.

CONCLUSION

[24] For the foregoing reasons, the United States' motion to dismiss for lack of subject matter jurisdiction under 26 U.S.C. sections 7426 and 7433 is GRANTED. The United States' motion to dismiss for lack of subject matter jurisdiction on the issue of attorney's fees under 26 U.S.C. section 7430 and 28 U.S.C. section 2412 is GRANTED. The remaining claims against counterdefendant Robert Refvem, and third party defendants Pat Roe, Martin Refvem and the Roe Partnership, are REMANDED to the San Mateo County Superior Court, because there is no remaining federal jurisdiction.

[25] IT IS SO ORDERED

Dated March 31, 1999

² Mirch characterizes his action as a cross-claim. However, a cross-claim is a claim against a coparty. See William W. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure Before Trial section 8:327 (1995). A counterclaim is a claim for affirmative relief asserted by a party against an opposing party. Id. at section 8:256. Therefore, Mirch's claims against Robert Refvem are properly characterized as a counterclaim. To the extent that Mirch seeks indemnification from the United States, a party not named in the original complaint, this action is properly characterized as a third party complaint. Id. at section 8:339.

³ Mirch's complaint states that his claim for damages against the United States is based on sections 7030 and 7033 of the Internal Revenue Service Code. Compl. paragraph 10. However, the Internal Revenue Service Code (26 U.S.C.) does not contain a section 7030 or 7033. Mirch's opposition indicates that the correct citation is to sections 7430 and 7433 of the Internal Revenue Service Code. Mirch's Opposition at 1, n. 2.

⁴ Under 26 C.F.R. section 301.7426-1(b), a levy is wrongful if: (1) it is placed on property exempt under section 6334; (2) it was not placed on property in which the delinquent taxpayer had an interest; (3) it is invalid under sections 6323 or 6324(a)(2) or (b); or (4) the plaintiff's interest in the property is senior to the federal lien and will be destroyed by the levy.

⁵ Even if Mirch could meet both prerequisites required to bring an action under section 7426, his suit may be time-barred. The statute of limitations for filing a cause of action under section 7426 is governed by 26 U.S.C. section 6532(c). 26 U.S.C. section 7426(h). Section 6532(c) provides that no section 7426 suit "shall be begun after the expiration of 9 months from the date of levy or agreement giving rise to such action." 26 U.S.C. section 6532(c)(1). The date on which a levy is made is the date on which the notice of seizure under section 6335(a) is given. See 26 U.S.C. section 6502(b); 26 C.F.R. section 301.6532-3(c); Winebrenner v. United States, 924 F.2d 851, 855 (9th Cir. 1991). When a person files a written request for return of property wrongfully levied on, the statute of limitations is extended an additional twelve months from the date of the filing. See 26 C.F.R. sections 301.6343-1(b)(2), 301.6532-2(b)(1). If Mirch filed his suit after the nine-month period and did not make a timely return of property request, his suit is time-barred. See Winebrenner, 924 F.2d at 856. Mirch filed his complaint in San Mateo County Superior Court on July 23, 1998. The complaint contains no information on an IRS levy. In his opposition, Mirch asserts that a federal tax lien was placed on Refvem's property on July 19, 1996. Mirch's Opposition at 2:12-14.

⁶ At oral argument on March 26, 1999, Mirch argued that he could sue the United States pursuant to 28 U.S.C. section 1346(a)(1), and cited to Williams v. United States, 24 F.3d 1143 (9th Cir. 1994) in support of this argument. Williams was later heard and decided by the United States Supreme Court, in United States v. Williams, 514 U.S. 527, 115 S.Ct. 1611 (1995). In Williams, the IRS placed a lien on Lori Williams' home to cover taxes assessed against and owed by her husband. Id. at 529-530, 115 S.Ct. at 1614-1615. The Supreme Court held that a third party who is not liable for a tax, but who pays the tax under protest to remove a federal lien against his or her property, may sue the IRS for a refund under section 1346(a)(1). Id. at 529, 115 S.Ct. at 1614. Here, Mirch does not assert that he paid federal tax under protest to remove a lien imposed on his property by the IRS. Therefore, Mirch may not sue the IRS for a refund under 28 U.S.C. section 1346(a)(1). See Fidelity and Deposit Co. of Maryland v. City of Adelanto, 87 F.3d 334, 338 (9th Cir. 1996) (interpreting Williams, and finding that section 1346(a)(1) is a post-deprivation remedy available only where the federal tax has been paid in full).

⁷ Mirch quotes extensively from In re Grewe, 4 F.3d 299 (4th Cir. 1993), to support his entitlement to attorney's fees under 26 U.S.C. section 7430. In Grewe, the Fourth Circuit held that section 7430, and not 28 U.S.C. section 2412, applied to a debtor's action against the IRS for violating section 524 of the Bankruptcy Code by seeking to collect discharged taxes. Id. at 302-303. This holding does not support Mirch's argument that section 7430 can be broadly interpreted to allow an award of attorney's fees in any court proceeding brought against the United States in connection with the collection of any tax. Section 7430 is a waiver of sovereign immunity, and must be strictly construed in favor of the government. Campbell v. United States, 835 F.2d 193, 195 (9th Cir. 1987). Thus, even if this Court had jurisdiction over either of Mirch's tax claims, in order to recover attorney's fees under section 7430, Mirch would need to show that he is a prevailing party within the meaning of 26 U.S.C. section 7430(c)(4), that he has exhausted all available administrative remedies and that the fees requested are reasonable. Moreno-Padilla v. United States, No. Civ. S-93-758 WBSPAN, 1995 WL 396584, at *1 (E.D. Cal. May 16, 1995) (internal citations omitted).

⁸ Mirch cites extensively to In re Equinox, No. CV 95-785-AAH, 1995 U.S. Dist. LEXIS 10778 (C.D. Cal. June 29, 1995), to support his argument that the IRS is an indispensable party. In Equinox, both a bank and the United States claimed a right to the funds in Equinox's bank account, the bank to off-set monies owed pursuant to a loan, and the United States, for the IRS, to satisfy Equinox's tax liabilities. Id. at *1-*2. After Equinox filed for bankruptcy, the bank filed a motion for relief from the automatic stay, but failed to serve the IRS and the United States. Id. at *3-*4. The district court found that the IRS was interested in the controversy and should have been served as a necessary or indispensable party. Id. at *8-*9. Equinox does not support Mirch's argument, because in Equinox, the IRS expressly claimed an interest in the controversy. The IRS had served a notice of levy on Equinox's bank account, and then filed an objection to the bank's motion for relief from the automatic stay, stating that it should be brought as an adversary procedure. Id. at *3-*4. Mirch's claim is distinguishable, as the United States has expressly disclaimed any interest in Refvem's malpractice action against Mirch.