Nonprofits Side With Coinbase in Fight Against IRS Summons

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By Allyson Versprille

The IRS is under fire from several nonprofit groups for its summons on Coinbase Inc., the U.S.'s largest virtual currency exchange.

If the court doesn’t quash the recently narrowed IRS summons, it risks sending a message that it’s OK for litigants to waste judicial resources by issuing overly broad subpoenas to see what they can get away with, the Competitive Enterprise Institute said in a brief filed Aug. 3 with the U.S. District Court for the Northern District of California ( United States v. Coinbase, Inc. , N.D. Cal., No. 3:17-cv-01431, amicus brief filed 8/3/17 ).

“The IRS’s subpoena should be quashed in its entirety, not just narrowed,” said CEI, a public policy nonprofit. “To do otherwise would reward the practice of issuing overbroad subpoenas as a sort of bargaining position that produces better results for the government than coming to court with a well-framed subpoena in the first instance.”

CEI isn’t the only outside group that is opposing the IRS summons. The nonprofit Digital Currency & Ledger Defense Coalition filed a brief Aug. 3 in which it said the summons in “even its more narrowed form, remains overly-broad and amounts to fishing with dynamite” ( United States v. Coinbase Inc. , N.D. Cal., No. 3:17-cv-01431, amicus brief filed 8/3/17 ).

The public policy nonprofit Coin Center also filed an Aug. 3 brief opposing the summons ( United States v. Coinbase Inc. , N.D. Cal., No. 3:17-cv-01431, amicus brief filed 8/3/17 ).

The court battle between the government and Coinbase—the U.S.'s largest virtual currency exchange—began Nov. 30, 2016, when Judge Jacqueline Scott Corley granted the Internal Revenue Service permission for a “John Doe summons.” The summons allowed the agency to demand that Coinbase produce records related to U.S. taxpayers without identifying individuals in an ascertainable group. The subpoena pertains to customers who conducted transactions in a convertible virtual currency from 2013 to 2015.

The IRS narrowed the summons in July after Coinbase, several of its users, and Republican lawmakers raised concerns that it was too broad.

The Department of Justice Tax Division, which represents the IRS, declined to comment on the pending litigation. Coinbase declined to comment.

‘Demand the Moon’

Allowing the IRS to enforce its now-narrowed summons would “encourage litigants to demand the moon thinking they can always fall back to something reasonable,” the nonprofit said in the brief. In addition, while the scope of the summons has been pared back, it’s still too broad, CEI said.

Coinbase agrees. In a brief filed July 27 opposing the government’s summons enforcement petition, the company said the modified summons still requests information regarding more than 8.9 million transactions and 14,355 account holders.

CEI said the court has wide latitude to limit or quash the subpoena even without a showing of improper motive or abuse of process—arguments that have been made by both Coinbase and an anonymous intervenor.

Privacy Concerns

CEI said the court also needs to consider Coinbase’s privacy policies and the contract it has with its users.

The virtual currency exchange’s privacy policy says the company may share users’ personal information with law enforcement, government officials, or other third parties when compelled to do so by a subpoena, court order, or similar legal procedure. “This provision does not give Coinbase free rein to hand data over to the government when asked,” CEI said.

“Coinbase can only do so when ‘compelled,’” the group said. “That strong term, ‘compelled,’ implies that the process must overcome resistance. Coinbase is obligated by the contract to resist invalid subpoenas, as in the instant case,” CEI said.

According to CEI, “Coinbase is rightly resisting in this case. And to the extent Coinbase does not resist an invalid or overbroad subpoena, the data is not Coinbase’s to turn over. It remains the property of the customer.”

Stifling Innovation

The DCLDC and Coin Center both expressed concern that the IRS summons would stifle innovation.

“Bitcoin and its supporting blockchain technology are revolutionary innovations that should be fostered and not discouraged through actions like the Summons,” the DCLDC said. “These technologies bring much needed advancements and innovations to numerous fields like finance and healthcare.”

Coin Center said bitcoin’s invention has directly spurred the creation of other innovations including: alternative digital currency systems, decentralized computing platforms, and enterprise-grade software for banks and other large institutions.

Bitcoin solves the problem “of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet” through the blockchain technology it employs to record transactions, the DCLDC said.

“Solving this problem permits one to transfer any type of digital information in a quick, secure, and verifiable fashion anywhere in the world,” the coalition said. “The ownership and transfer of stock, bonds, homes, healthcare documents, and other types of records could be recorded on a public (or private) blockchain, eliminating the need for third-parties and drastically reducing the expenses and redundancies that plague current verification systems.”

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

Coin Center's amicus brief is at http://src.bna.com/rqr.

DCLDC's amicus brief is at http://src.bna.com/rqq.

CEI's amicus brief is at http://src.bna.com/rmP.

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