1 District Judge of the Southern District of Texas, sitting by designation. United States Court of Appeals,

Fifth Circuit.

No. 92-1585.

INFORMATION RESOURCES, INC., a corporation, Petitioner-Appellant,

v.

UNITED STATES of America, Respondent-Appellee.

July 30, 1993.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, GARWOOD and LAKE 1 , Circuit Judges.

REAVLEY, Circuit Judge:

This is a Taxpayer Bill of Rights case. Information Resources, Inc. sued the United States,

claiming that the Internal Revenue Service (IRS) erroneously filed tax liens on its property and failed

to t imely release those liens. Following a bench trial, the district court awarded Information

Resources $1,000. Information Resources appeals, claiming that the district court erred in (1)

rejecting its demand for a jury trial, (2) awarding only $1,000 in damages, and (3) failing to award

attorney's fees. We affirm.

I. BACKGROUND

Information Resources sells computer software. It was delinquent in paying it s federal

employ ee wit hholding taxes for the fourth quarter of 1988. On April 10, 1989, Information

Resources received a Notice of Intent to Levy, indicating that the IRS could file a notice of tax lien

if Information Resources did not satisfy its tax liabilit y within ten days. On or about April 18, 1989,

Information Resources hired a tax expert, David Salinas, to assist in settling this matter with the IRS.

On April 20, 1989, David Salinas met with IRS Officer Kriss Brooks. According to Information

Resources, Brooks promised that he would not file a notice of federal tax lien or institute an enforced

co llect io n action if Information Resources paid the taxes by April 24, 1989. Despite this alleged

agreement, Brooks initiated on April 21, 1989 the IRS procedures necessary to file notices of tax lien.2 Subsequent to our decision, the Department of Treasury promulgated regulations specifically

addressing the administrative remedies available for actions brought under I.R.C. §§ 7432 and

7432. See 26 C.F.R. §§ 301.7432-1; 301.7433-1. Those regulations apply to actions filed after

January 30, 1992. On April 24, 1989, Information Resources delivered to Brooks a company check covering the unpaid

taxes plus accrued interest and penalties. Brooks accepted the check but did not attempt to prevent

the filing of the notices of federal tax liens. On April 25, 1989, the notices of federal tax liens were

filed in the Dallas County Clerk's Office and the Texas Secretary of Sta te's Office, pursuant to

Brooks's request of April 21, 1989.

After se veral attempts by Salinas to obtain a release, the IRS finally issued a Certificate of

Release of Federal Tax Lien on September 22, 1989. Some time after the issuance of the tax lien,

Salinas wrote the district director of the IRS requesting his acknowledgment that the IRS erroneously

filed the liens against Information Resources. In October 1989, the IRS sent a letter to Information

Resources apologizing for the "erroneous" filing of the liens.

In November 1989, Information Resources brought this lawsuit pursuant to I.R.C. §§ 7432

and 7433, claiming that the IRS erro neo usly filed liens on its property and failed to timely release

those liens. Information Resources asserts that IRS's wrongful conduct caused it to lose a lucrative

business deal with Ward Petroleum Company fo r t he sale of a computer software package.

According to Information Resources, Ward Petroleum was i nt erest ed in purchasing a software

package until it discovered the fede ral tax liens. In addition to seeking lost profits, Information

Resources seeks to recover the expenses that it incurred in hiring Salinas to negotiate the release of

the tax liens.

In January 1991, the district court entered summary judgment in favor of the government on

the ground that Information Resources failed to exhaust its administrative remedies. On appeal, this

court held that the administrative remedy available under I.R.C. § 7432 was inadequate and that

Informatio n Reso urces had no administrative remedies under I.R.C. § 7433 to exhaust. 950 F.2d

1122. 2 This court reversed the district court's summary judgment and remanded the action. Id. at

1128.On remand, the district court denied Information Resources's demand for a jury trial. At trial,

the government defended against both liability and damages. Following the bench trial, the district

court determined that the IRS negligently failed to release the liens against Information Resources

(§ 7432) and recklessly or intentionally disregarded the IRS regulations concerning the release of the

liens (§ 7433 ). The district court found that Information Resources's failure to obtain Ward

Petroleum's business was not due to the filing of the tax liens. Accordingly, the district court did not

award Information Resources any damages for lost profits. The district court did, however, award

Information Resources $1,000 for expenses incurred in hiring Salinas to negotiate release of the tax

liens. Finally, the district court denied Information Resources's request for the attorney's fees that

it incurred in pursuing this lawsuit.

Information Resources appeals, arguing that (1) it has a right to a jury trial, (2) the district

court erred in awarding only $1,000, and (3) the district court erred in not awarding attorney's fees.

II. ANALYSIS

Info rmat ion Resources brought this action pursuant to I.R.C. §§ 7432 and 7433, which

Congress enacted in 1988 as part of the "Taxpayers Bill of Rights." Section 7432 provides:

(a) In general.—If any officer or employee of the [IRS] knowingly, or by reason of

negligence, fails to release a lien under section 6325 on property of the taxpayer, such

taxpayer may bring a civil action for damages against the United States in a district court of

the United States.

(b) Damages.—In any action brought under subsection (a), upon a finding of liabilit y on the

part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the

sum of—

(1) actual, direct economic damages sustained by the plaintiff which, but fo r t he

actions of the defendant, would not have been sustained, plus

(2) the costs of the action.

I.R.C. § 6325, the provision applicable in determining liabilit y under I.R.C. § 7432, requires the IRS

to issue a certificate o f release o f lien "not later than 30 days after the ... Secretary finds that the

liabilit y for the amount assessed, together with all interest in respect therof, has been fully satisfied...."

Section 7433 provides:

(a) In general.—If, in connection with any collection of Federal tax with respect to a taxpayer,

any officer or employee of the [IRS] recklessly or intentionally disregards any provision ofthis title, or any regulation promulgated under this title, such taxpayer may bring a civil action

for damages against the United States in a district court of the United States....

(b) Damages.—In any action brought under subsection (a), upon a finding of liabilit y on the

part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the

lesser of $100,000 or the sum of—

(1) actual, direct economic damages sustained by the plaint iff as a proximate result

of the reckless or intentional actions of the officer or employee, and

(2) the cost of the action.

Information Resources based its § 7433 claim on the IRS's reckless or intentional disregard of I.R.C.

§§ 6321, 6322, and 6325. I.R.C. § 6321 provides: "If any person liable to pay any tax neglects or

refuses to pay the same after demand, the amount

... shall be a lien in favor of the United States upon

all property and rights to property ...." I.R.C. § 6322 provides that "the lien imposed by section 6321

shall arise at the time the assessment is made and shall continue until the liability for the amount so

assessed ... is satisfied...."

A. D EMAND FOR A J URY T RIAL

Information Resources asserts that it has a Seventh Amendment rig ht t o a jury trial.

Information Resources is wrong. The Seventh Amendment provides a right to a jury trial in "suits

at common law." At common law, there was no right of action against a so vereign. G alloway v.

United States, 319 U.S. 372, 388, 63 S.Ct. 1077, 1086, 87 L.E d. 1458 (1943); M athes v.

Commissioner, 576 F.2d 70, 71 (5th Cir.1978), cert. denied, 4 40 U.S. 911, 99 S.Ct. 1223, 59

L.Ed.2d 459 (1979). So the Seventh Amendment is inapplicable in actions against the United States.

Lehman v. Nakshian, 453 U.S. 156, 160, 162 n. 9, 101 S.Ct. 2698, 2701, 2702 n. 9, 69 L.Ed.2d 548

(1981).

A right to a jury trial against the United States exists only if Congress has created such right

by statute. In Lehman, the Court recognized that Congress has generally prohibited trial by jury in

actions against the United St at es. Given this traditional practice of Congress, the L ehman Court

concluded that a "plaintiff in an action against the United States has a right to trial by jury only where

Congress has affirmat ively and unambiguously granted that right by statute." Id. at 168, 101 S.Ct.

at 2705.3 Information's reliance on United States v. Pfitsch, 256 U.S. 547, 41 S.Ct. 569, 65 L.Ed. 1084

(1921) is to no avail given the Supreme Court's discussion of Pfitsch in Lehman. See Lehman,

453 U.S. at 165 n. 13, 101 S.Ct. at 2704 n. 13. Under Lehman, which was decided several years

before Congress enacted I.R.C. §§ 7432 and 7433, the test is whether Congress has affirmatively

and unambiguously departed from its normal practice of not providing a right to trial by jury in an

action against the United States.

4 Section 2402 provides that "any action against the United States under section 1346(a)(1)

shall, at the request of either party to such action, be tried by the court with a jury." 28 U.S.C. §

2402. In Lehman, the Court recognized that § 2402 is an exception to Congress' usual practice of

not permitting jury trials in actions against the United States. 453 U.S. at 161 n. 8, 101 S.Ct. at

2702 n. 8. Information Resources brought this actio n under §§ 7432 and 7433. Neither provision

mentions a right to a trial by jury, and we have found no legisl at ive hist ory demonstrating that

Congress intended to confer such a right. S ee id. at 165-66, 101 S.Ct. at 2704 ("[I]t is unnecessary

to go beyond the language of the statute itself to conclude that Congress did not intend to confer a

right to trial by jury.... But it is helpful briefly to explore the legislative history, if only to demonstrate

that it no more supports [a right to a jury trial] than does the statutory language itself."). Congress

has not "affirmatively and unambiguously" granted a right to a jury trial to plaint iffs bringing actions

under § 7432 or § 7433. 3

In a final effort to convince us of its right to a jury trial, Information Resources argues that

its action falls under 28 U.S.C. § 1346(a)(1), which provides district courts with original jurisdiction

in

[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged

to have been erroneously

o r illegally assessed or collected, or any penalty claimed to have

been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.

A taxpayer bringing an action pursuant to § 1346(a)(1) is entitled to a jury trial, as explicitly provided

in 28 U.S.C. § 2402. 4 But § 1346(a)(1) involves actions to r ecover internal revenue taxes, penalties,

or other sums alleged to have been wrongfully assessed or collected. Information Resources does

not seek to recover amounts collected by the IRS. Rather, it seeks damages for lost profits caused

by the IRS's filing of a lien and failure to t imely release that lien. We reject Information Resources's

attempt to obtain a jury trial pursuant to 28 U.S.C. §§ 1346(a)(1) and 2402.

B. D AMAGESInformation Resources has three complaints concerning the district court's damage award of

$1,000. First, it contends that t he district court erred in finding that IRS's conduct did not cause

Information Resources to lose Ward Petroleum's business. Second, it contends that the court should

have awarded $2,500, rather than $1,000, for costs incurred in negotiating a release of the tax liens.

Third, Information Resources contends that the district court improperly excluded its evidence of loss

of goodwill.

1. Lost Profits

Information Resources contends that the IRS's wrongful conduct caused it to lose a potential

customer, Ward Petroleum. In 1989, Ward Petroleum sought to acquire a software system to run

its business activities. It sent requests for proposals to fifteen companies. After receiving responses,

Ward Petroleum selected three companies, including Information Resources, for on-site visits. After

the init ial on-site visit t o Information Resources's facility, Ward Petroleum did not eliminate

Information Resources from consideration. Ward Petroleum ruled out the other two companies

following the on-site visits to thei r facilit ies. The bidding process, however, remained open.

A pproximately three weeks after Ward Petroleum's visit to Information Resources, Ar tesia Data

Systems (Artesia) entered the bidding competition.

In July 1989, some time after the on-site visit to Information Resources's facilit ies, but before

Ward Petroleum received the proposal from Artesia, Ward Petroleum learned of the existence of the

tax liens on Information Resources's property

. After learning o f t he tax liens, Ward Petroleum

became concerned abo ut Information Resources's financial stability. In October 1989, Ward

Petroleum expressed its concerns to Information Resources and continued investigating Artesia's

proposal. After an extensive investigation into Artesia's operations, Ward Petroleum awarded the

contract to Artesia in January 1990.

Following the bench trial, the district court found: the IRS issued Information Resources a

certificate of release of tax liens on September 22, 1989; Ward Petroleum did not make a final

decision until January 1990; Information Resources did not advise Ward Petroleum that a release of

the liens had be en o bt ained; Ward Petroleum was not in a position to say that it would havepurchased the software from Information Resources but for existence of the tax liens; Information

Resources's software proposal was inadequate for Ward Petroleum's needs; and Artesia had a more

powerful software program that was more appe aling to Ward Petroleum. Based on the above

findings, the district court found that

[Information Resources] fail ed to obtain the Ward Petroleum Company business, not by

reason of the filing of the tax lien. [Information Resources] failed to get Ward Petroleum

Company's business because its software program was inadequate to meet the needs of Ward

Petroleum, in comparison to the more powerful software offered by Artesia Data Systems.

We review t h e district court's fact findings for clear error. Richard R. Tozzi, Ward

Petroleum's chief financial officer, testified t hat when he learned of the tax liens, he felt that Ward

Petroleum should not waste time with a company having financial problems. When asked specifically

wheth er t he existence of the tax liens was the reason for not doing business with Information

Resources, Tozzi testified, "It could be considered one of the reasons, yes. But it's all speculative

from that point forward." Tozzi's testimony suggests that the tax liens did create a problem, but that

it would be speculative to conclude that "but for" the existence of the tax liens Information Resources

would have earned the contract. As fo r the superiority of Artesia's software, the government

presented evidence t hat Art esia's software package was more powerful and better-suited to Ward

Petroleum's needs than Information Resources's software package.

Based on our review of the record, we cannot conclude that the district court clearly erred

in finding that the IRS's filing of tax liens did not cause Information Resources to lose the contract

with Ward Petroleum.

2. Costs Incurred in Negotiating Release of Tax Liens

The district cour t fo und t hat Information Resources paid Salinas an initial retainer fee of

$1,500 and later paid him an additional $1,000. In its determination of damages, the district court

held that Information Resources should recover $1,000 for expenses incurred in retaining Salinas to

obtain a release of the tax liens. On appeal, Information Resources contends that the district court

should have awarded the entire $2,500 that Information Resources paid to Salinas. Salinas was

retained, however, before the tax lien notices were even filed. Information Resources fails to explain

to us why it is entitled to the entire $2,500. We hold that the district court did not err in awarding5 The language "in connection with" is broad enough to permit taxpayers to recover fees in

actions brought under I.R.C. § 7432 and § 7433. The applicability of § 7430 precludes recovery

of attorney's fees under the Equal Access to Justice Act. 28 U.S.C. § 2412(e); see Smith v.

Brady, 972 F.2d 1095, 1099 (9th Cir.1992).

6 But such fees shall not be in excess of $75 per hour unless the court determines that an

increase costs of living or a special factor justifies a higher rate. I.R.C. § 7430(c)(1)(B)(iii). Information Resources $1,000 for expenses incurred in retaining Salinas to obtain a release of the tax

liens.

3. Loss of Goodw ill

Approximately one week before the trial, Information Resources supplemented its discovery

re sponses to include a claim for loss of goodwill in the amount of $2.4 million. Before then,

Information Resources's discovery responses claimed only $100,357 in damages. Because of

Information Resources's delay, the district court refused to allow Information Resources to introduce

evidence of loss of goodwill. The district court did not abuse its discretion.

C. A TTORNEY ' S F EES

I.R.C. § 7430 governs the district court's award of costs and fees to a litigant in a tax case:

"In any

... court proceeding which is brought by or against the United States in connection with the

determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party

m ay be awarded

... reasonable litigation costs incurred in connection with such court proc eeding"

(emphasis added). S ee Huckaby v. United States Dept. of Treasury, 804 F.2d 297, 298 (5th

Cir.1986) (applying I.R.C. § 7430 to taxpay er's acti on brought pursuant to I.R.C. § 7431). 5

"Reasonable litigation costs" includes reasonable attorney's fees. 6 To recover reasonable litigation

costs, the litigant must qualify as a "prevailing party," which is defined as a party

(i) which esta blishes that the position of the United States in the proceeding was not

substantially justified [and]

(ii) which—

(I) has substantially prevailed with respect to the amount in controversy, or

(II) has substantially prevailed with respect to th e mo st significant issue or set of

issues presented....

I.R.C. § 7430(c)(4)(A). The district court below determined that the government was substantially7 The government's defense was based on Officer Brooks's testimony that (1) he did not agree

to wait until April 24, 1989 to file the tax liens, (2) he requested an expedited tax lien on April 21,

1989, (3) when he finally received Information Resources's check on April 24, 1989, it was too

late for him to stop the filing of the liens, and (4) he could have obtained an immediate release of

the lien if Information Resources had paid with a certified check. (Despite Brooks's testimony,

the district court found that Brooks agreed to refrain from filing the tax liens until April 24,

1989.) The government also presented evidence that the October 12 letter from the IRS

apologizing for the filing of an "erroneous" lien was sent before a full investigation into the facts.

8 Information Resources argues that it is entitled to attorney's fees under § 7432 and § 7433,

the two sections that serve the basis of this lawsuit. Both sections provide that, "upon a finding of

liability on part of the defendant, the defendant shall be liable [for] ... the costs of the action. "

I.R.C. §§ 7432(b), 7433(b) (emphasis added). But the term "costs" does not include attorney's justified in

defending against Information Resources's damage claims and refused to award

Information Resources attorney's fees.

A position is "substantially justified" if "there is a reasonable basis both in law and in fact."

Portillo v. Commissioner, 988 F.2d 27, 28 (5th Cir.1993). The government's failure to prevail on

a liabilit y issue does not mandate a determination of lack of substantial justification. S ee Heasley v.

Commissioner, 967 F.2d 116, 120 (5th Cir.1992).

Information Resources bears the burden of establishing that the government's position was

not substantially justified. E state of Johnson v. Commissioner, 985 F.2d 1315, 1318 (5th Cir.1993).

We have found no indication in the record that Information Resources attempted to establish lack of

substantial justifica t io n in t he district court. On appeal, Information Resources states that it has

"[e]stablished that the position of the United States in the proceeding was not substantially justified."

But that is the full extent of Information R esources's argument on appeal. We have no trouble

concluding that the government was substantially justified in defending against the alleged damages.

And our review of the record reveals that the government was also substantially justified in defending

against Info rmat ion Resources's claim that the IRS "recklessly or intentionally" disregarded

pro cedures for filing the liens. 7 We do, however, have some questions about the government 's

defense agains t liability under § 7432 for failure to timely release a lien. But because Information

Resources did not attempt to establish lack of substantial justification in the court below and has not

provided us a basis for finding lack o f substantial justification, we cannot conclude that the court

abused its discretion in denying fees under § 7430. 8fees. AFFIRMED.