The federal government fired back last week as answered opposition to its ongoing court case between the Internal Revenue Service (IRS) and Coinbase, a company which facilitates transactions of digital currencies like Bitcoin and Ethereum. On Friday, the government filed answers to amicus curiae briefs filed by Competitive Enterprise Institute (CEI), Digital Currency & Ledger Defense Coalition (DCLDC), and Coin Center. The government also responded to opposition filed by Coinbase and John Doe 4.
Amicus curiae is a Latin phrase meaning “friend of the court.” For legal purposes, an amicus curiae is a party who is not formally involved in the case – meaning neither a plaintiff nor a defendant – but someone (or some organization) which does have a vested interest in the outcome. To be heard, the party petitions the court to make an argument. In the Coinbase case, a number of parties have filed as an intervenor (a party who had not been specifically named in the original summons but asks to participate) or amicus curiae.
The Competitive Enterprise Institute (CEI), founded in 1984, describes itself in court documents as “a public interest organization dedicated to protecting limited government and individual liberty.” The CEI notes that it does not have a direct interest in the case but rather “has extensive experience with the subjects addressed in their amicus curiae brief – such as the role of virtual currencies, the privacy and property implications of broad government data demands in the information age, and the use and misuse of government subpoenas.”
Coin Center describes itself in court documents as an “independent, non-profit research center focused on the public policy issues facing digital currency technologies such as Bitcoin and others.” Its experts have testified before Congress on issues including the consumer-protection and national-security implications of digital currencies and it works with the bipartisan Congressional Blockchain Caucus (yes, such a thing exists) to educate members about evolving digital-currency and blockchain technologies.
The DCLDC is a 501(c)(3) non-profit organization. It describes itself in court documents as an organization “that protects individual constitutional rights and civil liberties as they relate to digital currency (e.g., bitcoin) and its related blockchain technology.” DCLDC members are academics and attorneys (you can find a list here) with extensive digital currency and blockchain technology legal experience.
All of the parties argue that the subpoena sought by the IRS in an effort to identify and obtain Coinbase customer information is an overreach.
The original matter began in November of 2016 with a request filed on behalf of the IRS to serve a “John Doe” summons on all United States Coinbase customers who transferred Bitcoin, a convertible virtual currency, from 2013 to 2015. A “John Doe” summons is an order that does not specifically identify the person but rather identifies a person or ascertainable group or class through their activities. The IRS argued that the “John Doe” summons was necessary because they had found evidence of noncompliance and underreporting among Coinbase customers – the agency just couldn’t identify the exact identities and scale of the problem without more information. The IRS was initially seeking all records, including third party information, related to Bitcoin transactions conducted by U.S. Coinbase customers over the 2013 to 2015 time period.
The initial request was granted and in response, Coinbase customer and attorney Jeffrey K. Berns, the Managing Partner of Berns Weiss LLP, filed a motion seeking to be named an intervenor and argued that the ruling should be set aside, and the summons should not be issued. The IRS responded with a motion asking the court to deny Berns the right to intervene. The IRS argued, in part, that since Berns had “outed” himself as a Coinbase customer, he was no longer subject to the summons, making Berns’ motion moot. Eventually, Berns withdrew his motion to intervene, and in March of 2017, the IRS filed a new action seeking to enforce the summons on Coinbase.
Coinbase also argued against the subpoena, as have several “John Does.”
The IRS eventually narrowed the scope of its request and is now seeking information for Coinbase users with at least the equivalent of $20,000 in any one transaction type (buy, sell, send or receive) in any one year during the 2013-2015 period. The IRS has also agreed not to seek records for users for which Coinbase filed forms 1099-K during this period or for users whose identity is known to the IRS.
Those changes meant that the records belonging to John Does 1 and 2 were no longer covered by the summons and they cannot intervene. John Doe 3 was unable to determine if his records are covered by the narrowed summons, so the court denied his motion to intervene but did so without prejudice. That means that John Doe 3 could make a new request to intervene if he later determines that he would be affected by the narrowed summons. However, John Doe 4 could demonstrate to the court that his Coinbase records are covered by the narrowed summons. In July, “John Doe 4” was granted the right to intervene in the matter. The Judge’s Order found that “John Doe 4” made a “sufficient showing of abuse of process to support intervention as of right.”
In its defense of the subpoena, the IRS argued in its most recent filings that:
There has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.
The IRS also scoffed at the argument that “Bitcoin and blockchain are high regulated technologies,” writing:
In fact, the case of bitcoin exchanges is quite analogous to that of barter exchanges in the “Wild West” days of the late 1970s and early 1980s, before Congress imposed reporting requirements on these barter exchanges. In that time, like currently with bitcoin exchanges, the IRS’s only real recourse to investigate the improper tax reporting suspected to be occurring with these exchanges was to issue John Doe summonses to barter exchanges around the country.
There are state-level regulations in place in a number of states, but some states have excluded digital currency activities from those requirements. There is, argues the IRS, no federal-level requirement to track bitcoin and other digital currency, and no third-party reporting requirement for tax purposes. This means, claims the government that “bitcoin is anonymous in the sense that all parties to that transaction are anonymous to each other and to anyone scrutinizing the blockchain, which has been referred to as “pseudo-anonymity.”
The IRS went on to cite testimony from Senior Revenue Agent Utzke claiming that tax compliance is far higher when there is third-party reporting. According to that testimony, a recent study found that the overall rate of underreporting for taxpayers whose income was not subject to third-party reporting was 63%, compared to only 7% for those taxpayers subject to third-party reporting but not withholding, and a more respectable 1% for those taxpayers subject to both information reporting and withholding.
(You can read more on taxation of cryptocurrencies like Bitcoin here.)
The IRS also argues that some users of cryptocurrency “have openly acknowledged they consider using bitcoin in order to avoid tax reporting requirements.” How does the IRS purport to know this? Online activity. I’ve written about the dangers of posting about your tax avoidance online but years later, message boards are still a magnet for those posting declarations such as “I didn’t pay capital gain tax on bitcoin sales to IRS today.” Pro tip: If other users can see it, so can IRS.
As for privacy? The IRS suggests that the arguments against providing user data imply that cryptocurrency users are somehow entitled to a higher degree of privacy than other taxpayers. Coinbase user’s records are not entitled to a greater degree of privacy than those of a bank account or credit card holder’s, argues IRS, averring that “holders of bank accounts and credit cards have the same interests in autonomy, financial security, privacy of activities and priorities, and preserving privileged relationships as holders of Coinbase accounts.” Those requests for records are routinely approved by courts, claims IRS, writing, “There is no reason why Coinbase users should be an exception.”
After responding to the arguments, IRS made its final point: many of these arguments aren’t relevant, they claim, because the Court has already found that the IRS had a reasonable basis for the issuance of the subpoena. Writing that there has been no additional evidence introduced by third parties and that the arguments raised by third parties offer no grounds to change the initial order, the government asked the Court to enforce the summons request.
The case, United States v. Coinbase, Inc. (3:17-cv-01431-JSC), is assigned to Magistrate Judge Jacqueline Scott Corley in the U.S. District Court, California Northern District (San Francisco).
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