WILLIAM A. ZIETZKE, Petitioner, v. UNITED STATES OF AMERICA, Respondent.
CASE NO. C19-1234-JCC
November 25, 2019
THE HONORABLE JOHN C. COUGHENOUR
Document 38
ORDER
This matter comes before the Court on Petitioner‘s petition to quash an Internal Revenue Service summons (Dkt. No. 1) and on the Government‘s motion to enforce that summons (Dkt. No. 12). Having considered the parties’ briefing and the relevant record, the Court finds oral argument unnecessary and DENIES Petitioner‘s petition. However, because the Court finds the summons overbroad, the Court ORDERS the Government to file a proposed amended summons that complies with this order. Until the Court approves an amended summons, the Court postpones ruling on the Government‘s motion to enforce.
I. BACKGROUND
Bitcoin1 is a decentralized cryptocurrency that uses a distributed ledger system,
When two people agree for one person to send cryptocurrency to the other, the two reveal their public addresses to one another. Because the transferor‘s address is associated with their public and private keys, the transferee can confirm the transferor‘s ownership of the transferred cryptocurrency by verifying that the transferor‘s private key, public key, and address correspond. And once the cryptocurrency is transferred, the transferee can spend or withdraw the cryptocurrency with their own private key, which will now be associated with that cryptocurrency.
Although cryptocurrency transactions can occur directly between individuals, those transactions are often handled through digital currency exchanges. Digital currency exchanges are businesses that hold large amounts of traditional and cryptocurrency, allowing them to facilitate third-party transactions of traditional currency for cryptocurrency. To help facilitate such transactions, these businesses also provide hosted wallet services.
As with many things in life, cryptocurrency transactions have tax consequences. In 2014, the IRS set forth its position on those consequences in IRS Notice 2014-21, 2014-16 I.R.B. 938. Notice 2014-21 states, “virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” Cryptocurrency is, therefore, taxed according to the gain or loss a taxpayer realizes when they sell or exchange cryptocurrency. Id. A taxpayer‘s gain or loss is determined by looking at the difference between the cryptocurrency‘s basis and the amount the taxpayer receives in exchange for the currency. Id. The basis, in turn, “is the fair market value of the currency in U.S. dollars as of the date of receipt.” Id. And the cryptocurrency‘s fair market value is usually determined by the price at which the taxpayer purchases the cryptocurrency. Id.
Petitioner attempted to navigate the tax consequences of cryptocurrency transactions when he self-prepared his 2016 tax return using Turbo Tax. (Dkt. No. 23 at 2.) In his 2016 return, Petitioner reported Schedule D long-term capital gains of $104,482. (Dkt No. 19 at 2–3.) Petitioner calculated the $104,482 figure by including two Bitcoin transactions that he listed as having occurred in 2016. (Id.) According to Petitioner, these transactions did not actually occur in 2016. (Id. at 3.) However, Petitioner claims that he realized his mistake only after his Certified Public Accountant David Rumsey, whom Petitioner hired in 2017 to help him prepare for retirement, reviewed his tax returns and caught Petitioner‘s error. (Id.) Petitioner subsequently filed an amended return on August 14, 2017, that omitted the two transactions and thereby reduced his long-term capital gains in 2016 from $104,482 to $410. (Id.) If correct, this reduction would entitle Petitioner to a $15,475 refund. (Id.)
Although Petitioner initially told the IRS that he used only two hosted wallet platforms, the IRS discovered that Petitioner also used Bitstamp, another currency exchange. (Dkt. No. 13 at 5–6.) In addition, the IRS learned that Petitioner used Bitstamp to conduct at least one Bitcoin transaction in 2016. (Dkt. No. 23 at 2.) Upon learning of this transaction, the IRS issued a summons to Bitstamp. (Dkt. No. 1-1 at 3–15.) The summons directs Bitstamp to produce for examination books, records, papers, and other data relating to Petitioner‘s holdings with Bitstamp. (See id. at 12–15.) The requested data includes Petitioner‘s public keys and blockchain addresses. (Id. at 13.) It does not include Petitioner‘s private keys. (See id. at 12–15.)
On June 27, 2019, Petitioner filed a petition to quash the summons that the IRS served on Bitstamp. (Dkt. No. 1.) The IRS subsequently moved for the Court to enforce its summons and to deny the petition to quash. (Dkt. No. 12.)
II. DISCUSSION
Petitioner asks the Court to quash the Bitstamp summons for six reasons: (1) the IRS issued the summons in bad faith; (2) the IRS seeks information that is irrelevant to its audit of Petitioner‘s 2016 amended return; (3) the IRS already possesses the information that it seeks from Bitstamp; (4) the IRS failed to follow the administrative steps required by the United States Code for issuance and service of a summons; (5) the summons violates Petitioner‘s reasonable expectation of privacy in Bitstamp‘s records; and (6) the Government cannot guarantee the security of any records that it receives from Bitstamp. (See Dkt. No. 23 at 12–24.) Although five of Petitioner‘s arguments lack merit, he is correct that the summons is overbroad because it seeks both relevant and irrelevant material.
A. Legal Standard
Congress requires that the IRS investigate the tax liability of persons who may be liable to pay an internal revenue tax.
The
If the Government establishes a prima facie case, then the burden shifts to the petitioning taxpayer to show that the IRS is attempting to abuse the court‘s process or is lacking in good faith. United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir. 1993). The burden on the taxpayer to disprove the IRS‘s assertions is “heavy.” Id. (quoting United States v. Abrahams, 905 F.2d 1276, 1280 (9th Cir. 1990)).
B. The Powell Requirements
Petitioner argues that the Government did not meet any of the Powell requirements. (See Dkt. No. 23 at 12–19.) For the reasons explained below, the Court concludes that the Government has met all but the second Powell requirement. With respect to the second requirement, the Court concludes that, as written, the Bitstamp summons seeks irrelevant material because it lacks a temporal limitation.
1. Legitimate Purpose
In her sworn declaration, Ms. Snow articulates a legitimate purpose for the IRS‘s decision to serve a summons on Bitstamp. The IRS may issue a summons for a “civil tax collection purpose.” United States v. Stuckey, 646 F.2d 1369, 1375 (9th Cir. 1981). In addition, the IRS “can investigate merely on suspicion that the law is being violated, or even just because it wants assurances that it is not.” Powell, 379 U.S. at 57 (quoting United States v. Morton Salt Co., 338 U.S. 632, 642–43 (1950)). And according to Ms. Snow, that is exactly what is happening here: the IRS wishes to determine the tax implications of Petitioner‘s 2016 transaction involving his Bitstamp holdings and to figure out if Petitioner engaged in similar transactions that year. (See Dkt. No. 13 at 5–7.) The IRS therefore served a summons on Bitstamp to ascertain the number of Petitioner‘s Bitcoin transactions in 2016, what Bitcoins Petitioner used to conduct those transactions, when Petitioner acquired the relevant Bitcoins, and how Petitioner acquired those Bitcoins. (See id.) Ms. Snow‘s representations satisfy the Government‘s “slight” burden for showing that the IRS served the summons for a legitimate purpose. See Fortney, 59 F.3d at 120.
Notwithstanding Ms. Snow‘s stated rationale, Petitioner claims that the IRS served a summons on Bitstamp in a bad-faith attempt to “obtain details of his bitcoin holdings.” (See Dkt. No. 23 at 1–2) (emphasis in original). Petitioner argues that the IRS‘s bad faith is evident from the following: (1) the IRS has refused to accept Petitioner‘s representation that Bitstamp has no information relevant to the IRS‘s audit; (2) the audit has taken a
2. Relevance
In addition to needing a legitimate purpose, a summons must seek records that “may be relevant” to the purpose of the summons.
The language “may be” [in
§ 7602(a)(1) ] reflects Congress’ express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation . . . . The purpose of Congress is obvious: the Service can hardly be expected to know whether such data will in fact be relevant until it is procured and scrutinized.
Id. Thus, the IRS does not need to guarantee that the records it seeks will be relevant; it is enough that they “might . . . thro[w] light upon the correctness of the return.” Id. at 813 n.11 (quoting United Sates v. Wyatt, 637 F.2d 293, 300 (5th Cir. 1981)).
Here, the summons at issue seeks records that may be relevant to the IRS‘s audit of Petitioner‘s 2016 amended return. To determine whether Petitioner correctly amended his 2016 return, the IRS must determine how many Bitcoin transactions Petitioner engaged in that year. (See Dkt. No. 13 at 5.) In addition, the IRS must figure out Petitioner‘s basis for each transaction that did occur. See Notice 2014-21, 2014-16 I.R.B. 938; (Dkt. No. 13 at 6). These inquiries require that the IRS look at the records of exchanges that Petitioner used to hold Bitcoins. (See Dkt. No. 13 at 5–7.) Bitstamp is one such exchange, and the records the IRS seeks from the company might shed light on Petitioner‘s Bitcoin transactions in 2016. (See id.)
Despite the relevance of Bitstamp‘s records, Petitioner argues that the
The answer to that question is yes. While the IRS is correct that it “must have information for prior years in order to properly calculate any resulting loss or gain [in 2016],” (see Dkt. No. 12 at 13), the information that the IRS needs is the price Petitioner paid for Bitcoins he sold in 2016, see Notice 2014-21, 2014-16 I.R.B. 938 (explaining that the basis for cryptocurrency is usually the purchase price). Yet, the summons asks for far more than that. (See Dkt. No. 1-1 at 12–14.) Among other things, it requests “[a]ll account history information (on- chain and off-chain) for transactions or events relating to any Covered Accounts.” (Id. at 13.) This request would require Bitstamp to produce information relating to Petitioner‘s Bitcoin sales prior to 2016—even though such sales could not impact the gain or loss Petitioner realized if he sold Bitcoins in 2016. In this way, the summons requests information that is irrelevant to the IRS‘s stated purpose of auditing Petitioner‘s 2016 amended return. The summons is therefore overbroad. See Goldman, 637 F.2d at 667.
3. Documents the IRS Already Possesses
The third Powell requirement obligates the IRS to seek information that it does not already possess. Powell, 379 U.S. at 57–58. Ms. Snow states that the IRS does not already have the documents and information demanded in the Bitstamp summons. (See Dkt. No. 13 at 2.) Petitioner disagrees, arguing that “he has provided the IRS with all of the information related to the one and only transaction that he engaged in with Bitstamp during 2016.” (See Dkt. No. 23 at 18.) But the IRS is not required to rely on Petitioner‘s claim that he has provided the agency with everything it needs to know. Consequently, the Government has met the third Powell requirement.
4. The IRS‘s Compliance with Required Administrative Steps
To meet the fourth Powell requirement, the IRS must satisfy all administrative steps required by the United States Code. Powell, 379 U.S. at 57–58. If a taxpayer does not contest that the
Here, Petitioner does not argue in any properly filed motion that the IRS failed to satisfy an administrative requirement.3 (See generally Dkt. Nos. 1, 23.) In addition, Ms. Snow states that the administration complied with all administrative requirements. (See Dkt. No. 13 at 2.) As a result, the Government has met the fourth Powell requirement.
C. Petitioner‘s Privacy Concerns
In addition to arguing that the Government has not met the Powell requirements, Petitioner also asks the Court to quash the Bitstamp summons because of two privacy concerns. First, Petitioner argues that it would “violat[e] . . . [his] right to privacy” if the IRS gains access to his public keys or addresses. (See Dkt. No. 1 at 17.) Second, Petitioner asserts that “the IRS is unable to adequately secure such highly sensitive information.” (See id. at 8.) Neither argument has merit.
1. Petitioner‘s Right to Privacy
The Fourth Amendment protects people from “unreasonable searches and seizures” of “their persons, houses, papers, and effects.”
In United States v. Miller, 425 U.S. 435, 440–43 (1976), the Supreme Court held that a person lacks a reasonable expectation of privacy in a bank‘s records pertaining to the person. The Miller Court based its holding on two distinct grounds. First, citing its third-party exposure cases, the Supreme Court stated that “the Fourth Amendment does not prohibit the obtaining of information revealed to a third party and conveyed by him to Government authorities.” Id. at 443 (citing United States v. White, 401 U.S. 745, 752 (1971); Hoffa v. United States, 385 U.S. 293, 302 (1966); Lopez v. United States, 373 U.S. 427 (1963)). Second, the Supreme Court observed that bank records “[were] not the respondent‘s ‘private papers‘” but were instead “the business records of the banks.” Id. at 440. Accordingly, the Government could subpoena those records without infringing on the respondent‘s Fourth Amendment rights. Id. at 444.
In Carpenter, 138 S. Ct. 2206, 2217 & n.3, the Supreme Court distinguished Miller and held that a person has a reasonable expectation of privacy in seven days of historical cell-site location information (CSLI) produced by their cell phone. Although CSLI is revealed to and owned by wireless carriers, the Carpenter majority held that these factors did not necessarily render a person‘s expectation of privacy in CSLI unreasonable. Id. at 2219.
Instead, the majority concluded that it must consider “‘the nature of the particular documents sought’ to determine whether ‘there is a legitimate “expectation of privacy” concerning their contents.‘” Id. (quoting Miller, 425 U.S. at 442). The nature of CSLI is especially revealing, the majority reasoned, because “time-stamped data provides an intimate window into a person‘s life, revealing not only his particular movements, but through them his ‘familial, political, professional, religious, and sexual associations.‘” Id. at 2217–18 (quoting United States v. Jones, 565 U.S. 400, 415 (2012)). And given CSLI‘s revealing nature, the majority held that people retain an “expectation of privacy in the whole of their physical movements” even after they give data about those movements to wireless carriers. Id. at 2219.
Petitioner asks the Court to extend Carpenter to this case and hold that Petitioner has a reasonable expectation of privacy in Bitstamp‘s cryptocurrency records pertaining to him. (See Dkt. No. 23 at 19.) This request places the Court in the somewhat unenviable position of trying to reconcile Miller and Carpenter to determine what makes a person‘s expectation of privacy in bank records less reasonable than their expectation of privacy in CSLI. Unfortunately, lower courts trying to make that determination were given little guidance by the Carpenter majority. For while the majority said that “[t]here is a world of difference” between bank records and CSLI, Carpenter, 138 S. Ct. at 2219, the majority chose to not respond to Justice Kennedy‘s observation that bank records can reveal “how much money [persons] make; the political and religious organizations to which they donate; whether they have visited a psychiatrist, plastic surgeon, abortion clinic, or AIDs treatment center; whether they go to gay bars or straight ones; and who are their closest friends and family members,” id. at 2232 (Kennedy, J., dissenting).
Despite this lack of guidance, the Carpenter majority did make two points that are instructive here. First, the majority stated that its decision was “a narrow one” that “did not disturb the application of . . . Miller.” Id. at 2220 (majority opinion). The Court takes this statement seriously, and it will extend Carpenter to new circumstances only if they directly implicate the privacy concerns that animated the majority. Second, the majority was overwhelmingly concerned with “Carpenter‘s anticipation of privacy in his physical location.” See id. at 2217–20. In other words, Carpenter was about surveillance. See id. (discussing the Supreme Court‘s prior surveillance cases).
These two points compel the conclusion that Carpenter does not apply here. To begin with, this case does not involve
Because Bitstamp‘s records do not implicate the privacy concerns at issue in Carpenter, Petitioner lacks a legitimate expectation of privacy in those records. Consequently, the IRS‘s request for those records does not infringe upon Petitioner‘s Fourth Amendment rights. See Miller, 425 U.S. at 441.
5. The Security of the IRS‘s Records
Petitioner argues that the Court should quash the Bitstamp summons because the Government cannot adequately guarantee the security of any records that it receives from Bitstamp. (See Dkt. Nos. 1 at 8–9, 23 at 22–24.) This is, to put it bluntly, not a legal argument. Petitioner cites no law or case suggesting that a court may quash an IRS summons based on concerns about the Government‘s security practices. (See Dkt. Nos. 1 at 8–9, 23 at 22–24.) Petitioner should direct his concerns over such practices to the branches of government that are best positioned and constitutionally empowered to address those concerns: Congress and the Executive.
III. CONCLUSION
For the foregoing reasons, the Court ORDERS as follows:
- Petitioner‘s motion for leave to file a short supplement (Dkt. No. 30) is DENIED.
- Petitioner‘s petition to quash (Dkt. No. 1) is DENIED.
- The Government is ORDERED to file a proposed amended summons within 14 days of this order. The amended summons must modify requests four through nine so that those requests demand information relating only to transactions that Petitioner made in 2016. Those requests may ask for information prior to 2016 only to the extent that the information is relevant to determining the tax implications of transactions in 2016. The IRS does not need to modify its other requests.
- If Petitioner wishes to oppose the proposed amended summons, he must do so within seven days of the Government filing the proposed amended summons. Petitioner may oppose the proposed amended summons only insofar as it requests information that is not relevant to the tax implications of transactions in 2016.
DATED this 25th day of November 2019.
John C. Coughenour
UNITED STATES DISTRICT JUDGE