Article on Filings in Coinbase John Doe Summons Case (3/20/17)

I recently reported on the IRS John Doe Summons for bitcoin records of Coinbase.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.  That matter is still churning as the parties spar over whether and how Coinbase should comply.  Part of the sparring undoubtedly involves negotiations between the IRS and Coinbase, but some of the sparring is on the public record in court.  Fortune has this article about a recent filing:  Jeff John Roberts, Only 802 People Told the IRS About Bitcoin - Lawsuit (Fortune 8/19/17), here.

The principal feature of the Fortune article is a new filing of an IRS affidavit in the court case.  The filing is styled:  Declaration of David Utzke in Support of Petition to Enforce Internal Revenue Summons.  The article links the affidavit on the Scribd website here.

I refer readers to the affidavit which provides some detail into the operation of the bitcoin virtual currency.

Also, the affidavit indicates a low level of tax compliance on Form 8949 for bitcoin users.

The article also indicates that this JDS initiative may be an opening gambit for negotiations that may result is Coinbase producing less than the universe of documents requested in the JDS.

The article concludes:

Finally, it's unclear if the IRS is also targeting other virtual currency operators. While Coinbase is the most popular and mainstream bitcoin platform, there are numerous others. Meanwhile, the growing value of other virtual currencies, including Ethereum, mean firms that offer such currencies could soon find themselves in the cross-hairs of the IRS too.

JAT Comments:

Court Denies Petition to Quash IRS Summons Issued Pursuant to Russian Request Under Double Tax Treaty (9/2/16)

In Maxcrest Ltd. v. United States, 2016 U.S. Dist. LEXIS 118481 (ND CA 2016), here, the IRS issued a summons under the exchange of information clause of the U.S./Russian Federation double tax treaty.  The summons was issued in the investigation of potential Russian tax liability and sought email information from Google.  The taxpayer, identified Maxcrest Ltd., moved to quash the summons.  Google's headquarters is within the Northern District of California, hence the motion to quash was filed there.  There was some intermediate sparring and a new summons substantially like the first one was issued.  The Court denied the taxpayer's motion, thus requiring the summons to proceed.

The opinion presents standard fare for summonses issued pursuant to the various treaties, here the Russian Federation version of the double tax treaty.  Under those treaties, the U.S. is required to use its internal processes (here the IRS summons) to obtain the information.  While proceeding under the double tax treaty is not everyday fare, the only difference between that and normal summons enforcement is that the summons is issued pursuant to a treaty request related to the requesting treaty partner's taxes.  Then the normal summons procedures and requirements a la United States v. Powell, 379 U.S. 48 (1964), kick in, but they are minimal and almost surely will be met if the IRS acts on the exchange of information request.

There is one key exception to the normal summons requirements in addition to those in Powell.  The exception was not involved in the case (perhaps because the issue had long since been decided in a treaty request context).  IRC § 7602(d), here, prohibits the issuance of a summons where a "Justice Department Referral," as defined, is in effct.  That limitation is designed to create a bright line as to when the IRS should stop using the administrative summons in a criminal investigation that has reached the stage of a Justice Department Referral. When it has reached that stage, the notion is that further investigation should use the grand jury subpoena as the compulsory process rather than the IRS administrative summons. In United States v. Stuart, 489 U.S. 353 (1989), here, the issue was whether, in a summons enforcement proceeding, the limitation in § 7602(d) could be given some effect in a summons issued pursuant to a treaty request by inquiring into whether the foreign investigation might have reached the stage equivalent to the Justice Department Referral.  A treaty related issue was whether the enactment of § 7602(d) after the treaty was ratified by both nations meant that § 7602(d) overrode the treaty and required the equivalency inquiry.  The Supreme Court said no to both issues.  So long as the Power requirements are met, the summons is enforceable.

Seventh Circuit Ducks On Use of IRS Summons for Criminal Investigation (5/11/15)

Section 7602(a), here, provides that the IRS may issue administrative summonses "[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability."  The stated purposes seem to be civil in nature.  But, § 7602(b) says that the purposes may include "inquiring into any offense connected with the administration or enforcement of the internal revenue laws.  Section 7602(d) provides that the IRS summons or summons enforcement action may not be issued if the IRS has made a "Justice Department referral."

Subsections (b) and (d) were enacted in 1982 to provide a bright line test to determine when the IRS should not use the IRS summons.  Congress felt the bright line test was needed because of the decision in United States v. LaSalle Nat’l Bank, 437 US 298 (1978), here, which held that even prior to the DOJ referral, the IRS could not enforce the summons after it had institutionally abandoned its civil purpose and was pursuing enforcement solely for criminal purposes.  One would have thought that the 1982 additions of subsections (b) and (d) would have put to rest the issue of whether the IRS could use the IRS summons and seek judicial enforcement for criminal purposes, so long as there was no DOJ referral in effect.

But, in United States v. Michaud, 907 F.2d 750 (7th Cir. 1990) (en banc), here, the Seventh Circuit seemed to say the LaSalle still had life after the 1982 additions (bold face supplied by JAT):

Beyond this "good faith" requirement, the Code has long prohibited enforcement of a Service summons after the matter has been referred to the Justice Department for criminal prosecution. See 26 U.S.C. § 7602(c) and its predecessors. See also Donaldson v. United States, 400 U.S. 517, 532-36, 27 L. Ed. 2d 580, 91 S. Ct. 534 (1971). The Supreme Court, in United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), read § 7602 to include a prohibition against the Service's use of an administrative summonses solely for criminal investigatory purposes. In LaSalle, the Court reviewed a decision of this court in which we held that enforcement can also be denied in certain cases short of a formal referral to the Justice Department: HN5 "The use of an administrative summons solely for criminal purposes is a quintessential example of bad faith." United States v. LaSalle National Bank, 554 F.2d 302, 309 (7th Cir. 1977). The Supreme Court agreed that enforcement can and should be denied when the Service is attempting to exploit its civil investigatory powers as a de facto grand jury: "We shall not countenance delay in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution." LaSalle, 437 U.S. at 316-17. (The Court reversed our decision on the outcome, however, because it found insufficient evidence of such an institutional commitment. Id. at 318-19.) Thus, under § 7602 and LaSalle, a summons issued by the Service after it has referred the matter to the Justice Department, or after it, in an institutional sense, has abandoned any proper civil purpose, should not be enforced. 

In United States v. Procknow, ___ F.3d ___, 2015 U.S. App. LEXIS 6942 (7th Cir. 2015), here, the Seventh Circuit again addressed the issue in an identity theft case.  In Procknow, the facts are skimpy.  A local police officer acting at the request of a probation officer had arrested Procknow and, after what was determined to be a consensual initial search of a hotel room Procknow was using, obtained a search warrant to search the room.  Pursuant to the search warrant, the local police officer seized various items and turned them over to an IRS criminal investigation agent.  The IRS criminal investigation agent then obtained a search warrant for a UPS box.  Some months thereafter, the IRS CI special agent "sent administrative summonses to several financial institutions requesting information about accounts held by Procknow and suspected victims and aliases."  Then, in the following month: