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Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 1 of 32

1 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
2 Albert G. Lum (SBN 259053)
alum@law111.com
3 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
4 Canoga Park, CA 91303
Telephone: (818) 961-2000
5 Facsimile: (818) 936-0232
6
Lee A. Weiss (SBN 297834)
7 lweiss@law111.com
BERNS WEISS LLP
8 585 Stewart Avenue, Suite L-20
Garden City, NY 11530
9 Telephone: (516) 222-2900
Facsimile: (818) 936-0232
10
11 Attorneys for Proposed Intervenors John
Does 1 and 2
12
13 UNITED STATES DISTRICT COURT
14 NORTHERN DISTRICT OF CALIFORNIA
15
16 UNITED STATES OF AMERICA, Case No.: 3:17-cv-01431-JSC
17 Petitioner,
NOTICE OF MOTION AND MOTION TO
18 v. INTERVENE, TO QUASH SUMMONS,
OR FOR PROTECTIVE ORDER, OR FOR
19 COINBASE, INC., AN ORDER SCHEDULING AN
EVIDENTIARY HEARING AND
20 Respondent. PERMITTING LIMITED DISCOVERY
21
Date: June 22, 2017
22 Time: 9:00 a.m.
Courtroom: F, 15th Floor
23 Judge: Hon. Jacqueline Scott Corley
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Case No.: 3:17-cv-01431-JSC
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 2 of 32

1 TABLE OF CONTENTS

2 PAGE

3 I. INTRODUCTION .............................................................................................................. 2
II. STATEMENT OF RELEVANT FACTS AND PROCEDURAL HISTORY .................... 4
4
A. IRS Guidance Concerning Virtual Currency .......................................................... 4
5 B. The Treasury Department Sharply Criticizes the IRSs Virtual Currency
Policies Due to the IRSs Inability to Provide Clear Guidance to
6 Taxpayers ................................................................................................................ 5
7 C. The IRS Acknowledges Its Failure to Provide Meaningful Virtual
Currency Guidance to Taxpayers and the Need for It to Promulgate Such
8 Guidance ................................................................................................................. 6
D. The IRS Fails to Issue Any Further Virtual Currency Guidance, but Seeks
9 Information on Over One Million Coinbase Customers for Supposed
Enforcement Purposes ............................................................................................. 6
10
E. The IRS Summons Covers Movants Personal Information ................................... 9
11 III. ARGUMENT .................................................................................................................... 10
12 A. Movants Are Entitled to Intervene in This Proceeding as of Right ...................... 10
1. This Application Is Timely ....................................................................... 10
13
2. Movants Have a Legally Protectable Interest ........................................... 10
14 3. There Is a Clear Risk That Movants Interests Will Be Impaired by
the Disposition of This Action .................................................................. 11
15
4. Coinbase Cannot Fully Represent Movants Interests, as the IRS Is
16 Not Investigating Coinbase ....................................................................... 12
B. Movants Readily Meet the Standards for Permissive Intervention Pursuant
17 to Fed. R. Civ. P. 24(b) ......................................................................................... 12
18 1. This Court Has Independent Jurisdiction Over Movants Challenge
to the IRS Summons ................................................................................. 13
19 2. Movants Defenses Are Relevant to the Validity of the Petition .............. 13
20 3. The IRS Will Suffer No Prejudice and There Will Be No Undue
Delay if Movants Are Permitted to Intervene ........................................... 13
21 C. The Court Should Quash the IRS Summons As It Is an Abuse of Process
by the Government Because It Was Issued in Bad Faith ...................................... 14
22
1. The IRS Does Not Have a Legitimate Purpose in Issuing the
23 Summons ................................................................................................... 14
a. The Governments Meager Foundation for a Summons
24 Seeking the Identities of, and Three Years of Transactions
for, over One Million Taxpayers Reflects That the IRS
25 Does Not Have a Legitimate Purpose ........................................... 15
26 b. The 9/21/16 TIGTA Report Shows That the IRS Does Not
Currently Have the Ability to Enforce Compliance with Its
27 Vague Virtual Currency Guidance Issued in 2014 ....................... 16

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Scheduling an Evidentiary Hearing and Permitting Limited Discovery
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1 TABLE OF CONTENTS (contd)

2 PAGE
c.
The IRS Summons Is Improper Because It Is Designed to
3 Seek Information for Research, as Opposed to Tax
Compliance, Purposes ................................................................... 16
4
d. The IRS Has Previously Been Accused of Abusing Its
5 Power to Improperly Further the Governments Political
Agenda .......................................................................................... 18
6 2. The Unjustifiably Broad Scope of the IRS Summons Indicates
That It Has Not Been Issued in Good Faith .............................................. 19
7
a. The Government Has Failed to Address the Significant
8 Risks Associated with Allowing the IRS to Maintain
Sensitive Virtual Currency Data ................................................... 20
9 D. If the Court Does Not Quash the IRS Summons, It Should Issue an
Appropriate Protective Order ................................................................................ 23
10
1. Movants Have Readily Demonstrated Good Cause .................................. 23
11 E. If the Court Does Not Quash the Subpoena or Issue a Protective Order,
Movants Are Entitled to Conduct Limited Discovery and Then an
12 Evidentiary Hearing Concerning the IRSs Bad Faith .......................................... 24
13 1. Movants Have Provided Specific Facts That Raise Doubts
Concerning the IRSs Good Faith in Issuing the IRS Summons .............. 24
14 IV. CONCLUSION ................................................................................................................. 25
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1 TABLE OF AUTHORITIES

2 CASES PAGES
2121 Arlington Heights Corp. v. I.R.S.,
3 109 F.3d 1221 (7th Cir. 1997) ...................................................................................... 11

4 California ex rel. Lockyer v. United States,


450 F.3d 436 (9th Cir. 2006) ................................................................................................. 11
5
Defs. of Wildlife v. Johanns,
6 No. C 04-4512 PJH, 2005 WL 3260986 (N.D. Cal. Dec. 1, 2005) ....................................... 12

7 E.E.O.C. v. Nevada Resort Ass'n,


792 F.2d 882 (9th Cir. 1986) ................................................................................................. 13
8
Hazel Green Ranch, LLC v. U.S. Dep't of Interior,
9 No. 1:07-CV-00414OWW-SMS, 2007 WL 2580570 (E.D. Cal. Sept. 5, 2007) ................... 12

10 In re Roman Catholic Archbishop of Portland in Oregon,


661 F.3d 417 (9th Cir. 2011) ................................................................................................. 23
11
LaSalle Nat. Bank,
12 437 U.S. 298 (1978) ............................................................................................................... 14

13 Matter of Does,
688 F.2d 144 (2d Cir. 1982) ......................................................................................... 15
14
Mishewal Wappo Tribe of Alexander Valley v. Salazar,
15 534 F. App'x 665 (9th Cir. 2013) .................................................................................. 12

16 Nu Image, Inc. v. Does 1-3,932,


No. 2:11-CV-545-FTM-29, 2012 WL 1890854 (M.D. Fla. May 10, 2012) ..................... 9
17
Pearson v. Miller,
18 211 F.3d 57 (3d Cir. 2000)..................................................................................................... 23

19 Ramirez v. United States,


No. SACV 13-00268 JVS, 2013 WL 10822053 (C.D. Cal. June 10, 2013) .......................... 14
20
Rivera v. NIBCO, Inc.,
21 364 F.3d 1057 (9th Cir. 2004) ............................................................................................... 23

22 Sagebrush Rebellion, Inc. v. Watt,


713 F.2d 525 (9th Cir. 1983) ................................................................................................. 12
23
Skellerup Indus. Ltd. v. City of Los Angeles,
24 163 F.R.D. 598 (C.D. Cal. 1995) ........................................................................................... 23

25 Sw. Ctr. for Biological Diversity v. Berg,


268 F.3d 810 (9th Cir. 2001) ................................................................................................. 11
26
Stewart v. United States,
27 511 F.3d 1251 (9th Cir. 2008) ............................................................................................... 14

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1 TABLE OF AUTHORITIES (contd)

2 CASES PAGES
Tax Liabilities of: John Does, All Unknown Employees of Boundary Waters Rest. v.
3 United States,
866 F.2d 1015 (8th Cir. 1989) ............................................................................................... 20
4
True the Vote, Inc. v. Internal Revenue Serv.,
5 831 F.3d 551 (D.C. Cir. 2016) ............................................................................................... 19

6 United States v. Andrews,


No. MISC-95-280 GEB PAN, 1996 WL 442730 (E.D. Cal. May 24, 1996) ........................ 10
7
United States v. Bisceglia,
8 420 U.S. 141 (1975) ................................................................................................................. 2

9 United States v. Church of Scientology of Cal.,


520 F.2d 818 (9th Cir. 1975) ........................................................................................ 24
10
United States v. Dauphin Deposit Trust Co.,
11 385 F.2d 129 (3d Cir. 1967)................................................................................................... 19

12 United States v. Humble Oil & Refining Co.,


488 F.2d 953 (5th Cir. 1974) ................................................................................................. 17
13
United States v. Kersting,
14 891 F.2d 1407 (9th Cir. 1989) ............................................................................................... 15

15 United States v. Kis


658 F.2d 526 (7th Cir. 1981) ................................................................................................. 24
16
United States v. Samuels, Kramer & Co.,
17 712 F.2d 1342 (9th Cir. 1983) ...................................................................................... 24

18 United States v. Powell,


379 U.S. 48 (1964) ........................................................................................................... 11, 14
19
United States v. Ritchie,
20 15 F. 3d 592 (6th Cir. 1994) .................................................................................................. 15

21 United States v. Sidley Austin Brown & Wood LLP,


No. 03 C 9355, 2004 WL 816448 (N.D. Ill. Apr. 15, 2004) .................................... 10, 13
22
United States v. State of Wash.,
23 86 F.3d 1499 (9th Cir. 1996) ................................................................................................. 10

24 United States v. Theodore,


479 F.2d 749 (4th Cir. 1973) ................................................................................................. 19
25
Venegas v. Skaggs,
26 867 F.2d 527 (9th Cir. 1989) ................................................................................................. 13

27
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1 TABLE OF AUTHORITIES (contd)

2 STATUTES PAGES
26 U.S.C. 7601(a) ...................................................................................................................... 17
3 26 U.S.C. 7602(a) ...................................................................................................................... 14

4
RULES
5 Fed. R. Civ. P. 24(a)(2) ....................................................................................................... 10
Fed. R. Civ. P. 24(b)(1)(B) .................................................................................................. 12
6 Fed. R. Civ. P. 24(b)(3) ....................................................................................................... 13

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Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
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1 TO ALL PARTIES AND THEIR COUNSEL OF RECORD:

2 PLEASE TAKE NOTICE THAT, on June 22, 2017, at 9:00 a.m., in the United States

3 District Court for the Northern District of California, Courtroom F, 15th Floor, located at 450

4 Golden Gate Avenue, San Francisco, California 94102, the Honorable Jacqueline Scott Corley,

5 presiding, proposed Intervenors John Doe 1 and John Doe 2 (Movants)1 will move to intervene

6 in the above-captioned proceeding pursuant to Federal Rule of Civil Procedure 24, for the purpose

7 of moving, in the alternative, (a) to quash the John Doe summons ordered to be served upon

8 Coinbase, Inc. pursuant to this Courts order dated November 30, 2016 (the IRS Summons), or

9 (b) for a protective order concerning the IRS Summons, or (c) for an order scheduling an

10 evidentiary hearing and permitting Movants to conduct limited discovery concerning the IRS

11 Summons.

12 The Motion to Intervene is made on the grounds that Movants have an interest in this

13 proceeding that will not be adequately and fully represented by the summoned party, Coinbase,

14 Inc., and that this interest is sufficient to warrant intervention as a matter of right under Rule 24(a),

15 or, alternatively, permissive intervention under Rule 24(b). The Motion to Quash, or, in the

16 alternative, for a Protective Order is made on the grounds that (i) the IRS has no legitimate purpose

17 in seeking all of the requested documents from Coinbase concerning its users, such that the

18 Government is not acting in good faith, (ii) enforcement of the IRS Summons would constitute an

19 abuse of process, and (iii) the categories of requested documents are so overbroad such that the IRS

20 Summons would require the disclosure of a substantial amount of information and documents that

21 are not relevant to the IRSs stated purpose in issuing the IRS Summons. The portion of the Motion

22 seeking the alternative relief of an Order Scheduling an Evidentiary Hearing and Permitting

23 Limited Discovery is made on the ground that Movants have alleged sufficient facts from which

24 the Court can readily question the IRSs good faith in issuing the IRS Summons.

25 The Motion will be based on this Notice of Motion, the below Memorandum of Points and

26
1
27 Simultaneously herewith, Movants are filing a motion for permission to proceed in this matter
anonymously.
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1 Authorities; the Declarations of John Doe 1, John Doe 2, Lee A. Weiss, and Albert G. Lum, with

2 exhibits; the accompanying request for judicial notice; the pleadings, orders, transcripts, and other

3 papers on file in this action and in the related action captioned In the Matter of the Tax Liabilities

4 of John Does, United States person who, at any time during the period January 1, 2013, through

5 December 31, 2015, conducted transaction in a convertible virtual currency as defined in IRS

6 Notice 2014-21, Case No. 3:16-cv-06658-JSC (N.D. Cal.); and any further evidence and arguments

7 as may be presented at the hearing of this motion.

8 MEMORANDUM OF POINTS AND AUTHORITIES

9 I. INTRODUCTION

10 More than 40 years ago, the Supreme Court stated that the duty of the District Court with

11 respect to an IRS summons was to see that a legitimate investigation was being conducted and

12 that the summons was no broader than necessary to achieve its purpose. United States v.

13 Bisceglia, 420 U.S. 141, 146 (1975). The Supreme Court expounded on the District Courts role by

14 stating, [o]nce a summons is challenged it must be scrutinized by a court to determine whether it

15 seeks information relevant to a legitimate investigative purpose and is not meant to harass the

16 taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting

17 on the good faith of the particular investigation. Id. at 151 (citing United States v. Powell, 379

18 U.S. 48, 58 (1964)). The IRS has not issued the subject summons pursuant to any legitimate

19 investigation, and, in any event, it is far broader than necessary to further the IRSs stated purpose

20 of monitoring virtual currency tax compliance.

21 The Government does not make any real attempt to offer facts concerning a legitimate IRS

22 investigation, but instead, only pays lip service to that requirement by claiming that the IRS is

23 conducting an investigation to determine the correct income tax liability of every U.S. citizen who

24 conducted virtual currency transactions over a three-year period, of which there are millions. Yet,

25 the only action the IRS claims to have taken with respect to this supposed investigation is the

26 issuance of the summons that is the subject of the enforcement petition. Apart from the obvious

27 circular reasoning on which the Government is relying, if the meager showing that the Government

28 has made was sufficient, then the IRS would have unrestricted power to issue a summons to any

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1 entity for any records it chose. For example, the IRS could claim that is investigating the correct

2 income tax liability of every U.S. citizen who has transacted in cash to justify the issuance of a

3 summons to every single bank for all of its customers ATM cash withdrawal activity. This type of

4 boundless summons power is unquestionably not what the Supreme Court envisioned.

5 Perhaps even more troubling is that in connection with the proceeding in which this Court

6 approved the issuance of the IRS Summons, Coinbase and one of its customers raised significant

7 issues concerning the overbreadth of the summons and the dangers of allowing the IRS to have

8 access to personal information related to virtual currency, yet in this proceeding the Government

9 has made no attempt to narrow the information or number of taxpayers covered by the summons to

10 reflect its stated goal of confirming compliance with the tax laws. Instead, the Governments

11 enforcement petition ignores those issues completely and provides a grossly insufficient foundation

12 for its request that this Court compel Coinbase to identify over 1 million American citizens that

13 have transacted in virtual currency and to provide every piece of information in its possession

14 regarding those clients, including data concerning every single transaction over a 3-year period.

15 The IRS Summons is certainly not what Congress and the Supreme Court envisioned. This

16 is not a circumstance where there is a well-defined group of taxpayers who are engaging in specific

17 activity that the IRS has deemed to be suspicious, such as using illegal tax shelters or engaging in

18 large cash transactions. Further, the breadth of the summons, which seeks substantial personal

19 information that is not at all relevant to tax compliance issues, and which could expose these

20 clients to significant risk of having their identity and funds stolen by hackers who have succeeded

21 previously in hacking the federal government, including the IRS, numerous times, makes it easy to

22 conclude that the Government is engaging in abuse of process.

23 Movants-Proposed Intervenors John Does 1 and 2, Coinbase customers whose accounts are

24 covered by the IRS Summons, are not filing this motion to prevent the IRS from seeking records

25 regarding their accounts due to a concern that they have violated any tax laws with respect to

26 virtual currency transactions. Instead, Movants intent is to protect the interests of all of Coinbases

27 customers who are subject to this overbroad summons, even though the IRS has made no showing

28 that any of them have engaged in suspect tax-avoidance conduct. Movants recognize that Coinbase

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1 plans to oppose the Governments petition to enforce the summons and fully supports those efforts.

2 However, as it is customers, and not Coinbases, privacy interests that are at stake, intervention is

3 appropriate to ensure that Coinbases customers are fully protected.

4 Alleging that the Government has abused the John Doe summons process based on

5 apparent ulterior motives is not done lightly here. However, the relevant facts readily support that

6 conclusion. Nearly eight months ago, the Inspector General of the Treasury Department publicly

7 slammed the IRS for issuing confusing and vague guidance regarding the taxation of virtual

8 currency transactions in 2014, and then failing to take any steps in the next two years to provide

9 taxpayers with any clarification. In response, the IRS conceded that such clarification was

10 necessary, but it has yet to provide any new guidance. Nevertheless, the IRS is now seeking

11 millions of records concerning virtual currency transactions under the guise of investigating

12 compliance with the vague tax guidance that it has been unwilling, or unable, to clarify. Further,

13 the Chairman of the IRS has repeatedly expressed his concern that the IRS is strapped for

14 resources, such that it cannot effectively investigate tax compliance. Finally, the IRS Summons

15 does not contain any dollar value or transaction thresholds, and seeks personal information

16 concerning Coinbases customers that has absolutely nothing to do with taxation issues. Putting

17 these facts together easily suggests that the IRS has an improper motive in issuing the subject

18 summons. Indeed, recent scandals reflect that the IRS is not unwilling to use its powers for non-tax

19 collection purposes.

20 II. STATEMENT OF RELEVANT FACTS AND PROCEDURAL HISTORY

21 A. IRS Guidance Concerning Virtual Currency

22 In March 2014, the IRS issued Notice 2014-21 (the 2014 Notice), which described how

23 the IRS applies U.S. tax laws and general tax principles to transactions involving virtual currency.

24 Declaration of David Utzke in Support of Petition to Enforce Internal Revenue Service Summons,

25 filed on March 16, 2017 (3/16/17 Utzke Declaration or 3/16/17 Utzke Decl.), Ex. B (Dkt. Nos.

26 1-1; 1-3). The 2014 Notice states that [convertible] virtual currency is treated as property, and

27 [g]eneral tax principles applicable to property transactions apply to transactions using virtual

28 currency. 2014 Notice, 4, A-1. Accordingly, a taxpayer must also pay capital gains tax if the

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1 fair market value of property received in exchange for [convertible] virtual currency exceeds the

2 taxpayers adjusted basis of the [convertible] virtual currency. 2014 Notice, 4, A-6, A-7.

3 B. The Treasury Department Sharply Criticizes the IRSs Virtual Currency

4 Policies Due to the IRSs Inability to Provide Clear Guidance to Taxpayers.

5 On September 21, 2016, the Treasury Inspector General for Tax Administration issued a

6 report titled As the Use of Virtual Currencies in Taxable Transactions Becomes More Common,

7 Additional Actions Are Needed to Ensure Taxpayer Compliance2 (9/21/16 TIGTA Report),

8 which criticized the IRS for, among other things, its failure to provide adequate guidance to

9 taxpayers concerning the tax consequences of virtual currency transactions. The Report noted

10 that while the IRS had received and reviewed 36 public comments concerning the 2014 Notice, it

11 had taken no action to address these comments even though information requested by the public

12 [would have been] helpful in understanding how to comply with the tax reporting requirements

13 when using or receiving virtual currencies. 9/21/16 TIGTA Report at 3. The Report further

14 stated that, while the IRS acknowledges there may be a risk of reporting noncompliance through

15 the use of virtual currencies in taxable transactions, the IRS does not even have a methodology

16 for gathering data on virtual currency use in taxable transactionsdata that are necessary to

17 analyze the risk of noncompliance and to estimate its significance. 9/21/16 TIGTA Report at 13.

18 To address the IRSs failures, the Treasury Inspector General recommended that the IRS:

19 1) develop a coordinated virtual currency strategy that includes outcome goals, a


description of how the agency intends to achieve those goals, and an action plan with
20 a timeline for implementation;

21 2) provide updated guidance to reflect the necessary documentation requirements and tax
treatments needed for the various uses of virtual currencies; and
22
3) revise third-party information reporting documents to identify the amounts of virtual
23 currencies used in taxable transactions

24 9/21/16 TIGTA Report at Highlights; 8-16.

25
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2
27 A copy of the 9/21/16 TIGTA Report is attached as Exhibit 1 to Movants Request for Judicial
Notice (RFJN).
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1 C. The IRS Acknowledges Its Failure to Provide Meaningful Virtual Currency

2 Guidance to Taxpayers and the Need for It to Promulgate Such Guidance.

3 The IRS agreed with all of the Treasury Inspector Generals recommendations (9/21/16

4 TIGTA Report at 8, 11, 16), but raised its limited budget as an excuse for any future delays in

5 issuing revised virtual currency guidance:

6 The IRS agreed that additional guidance would be helpful; however, the IRS
conveyed that guidance allocation decisions are based on available resources and
7 other competing organizational and legislative priorities. The IRS will share this
recommendation for guidance with the IRSs Office of Chief Counsel for
8 coordination with the Department of the Treasurys Office of Tax Policy.

9 9/21/16 TIGTA Report at 11. In response, the Treasury Inspector General noted the

10 importance of this guidance such that the IRS should make it a priority:

11 While we understand that resources are limited and subject to competing


priorities, the IRSs current guidance related to virtual currencies is insufficient.
12 To help taxpayers voluntarily comply with their tax obligations, the IRS should
devote some of its efforts to provide adequate direction in this new and complex
13 area.

14 9/21/16 TIGTA Report at 12.

15 D. The IRS Fails to Issue Any Further Virtual Currency Guidance, but Seeks

16 Information on Over One Million Coinbase Customers for Supposed

17 Enforcement Purposes.

18 Despite agreeing with the 9/21/16 TIGTA Reports recommendations, the IRS has not

19 issued any further guidance concerning virtual currency. Yet, not even two months later, on

20 November 17, 2016, the Government filed its Ex Parte Petition for Leave to Serve John Doe

21 Summons3 (the Summons Issuance Proceeding) upon Coinbase, Inc. pursuant to 26 U.S.C.

22 7609(h)(2). Coinbase is a virtual currency wallet and exchange where merchants and consumers

23 can transact with virtual currencies like bitcoin, which is registered with FinCEN (3/16/17 Utzke

24 Decl., 22) and a licensed money transmitter in 35 states, the District of Columbia, and Puerto

25
3
26 See related action In the Matter of the Tax Liabilities of John Does, United States person who, at
any time during the period January 1, 2013, through December 31, 2015, conducted transaction in
27 a convertible virtual currency as defined in IRS Notice 2014-21, Case No. 3:16-cv-06658-JSC
(N.D. Cal.).
28
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1 Rico. RFJN, Ex. 2. The IRS Summons seeks the identification of, and substantial personal and

2 transaction information for, over one million Coinbase customers.3/16/17 Utzke Decl., 20.

3 The IRS Summons (Exhibit 1 to the accompanying Declaration of Albert G. Lum (Lum

4 Decl.)), defines the class of persons purportedly under investigation as United States persons

5 who, at any time during the period January 1, 2013, through December 31, 2015, conducted

6 transactions in a convertible virtual currency as defined in IRS Notice 2014-21, and seeks the

7 following information and documents from Coinbase for each of its U.S. customers:

8 1. Account/wallet/vault registration records for each account/wallet/vault owned


or controlled by the user during the period stated above including, but not limited
9 to, complete user profile, history of changes to user profile from account
inception, complete user preferences, complete user security settings and history
10 (including confirmed devices and account activity), complete user payment
methods, and any other information related to the funding sources for the
11 account/wallet/vault, regardless of date.

12 2. Any other records of Know-Your-Customer due diligence performed with


respect to the user not included in paragraph 1, above.
13
3. For any account/wallet/vault with respect to which the registered user gave any
14 third-party access, control, or transaction approval authority, all powers of
attorney, letters of wishes, corporate minutes, or other agreements or instructions
15 granting the third party such access, control, or approval authority.

16 4. All records of account/wallet/vault activity including transaction logs or other


records identifying the date, amount, and type of transaction
17 (purchase/sale/exchange), the post transaction balance, the names or other
identifiers of counterparties to the transaction; requests or instructions to send or
18 receive bitcoin; and, where counterparties transact through their own Coinbase
accounts/wallets/vaults, all available information identifying the users of such
19 accounts and their contact information.

20 5. For each merchant user for which you act as Payment Service Provider, records
of all payments processed, including records identifying the user of the wallet
21 charged, if a Coinbase user, or the address of the wallet charged, if not, the date
and amount of the transaction, and any other information that will enable the
22 merchant to identify the transaction.

23 6. All correspondence between Coinbase and the user or any third party with
access to the account/wallet/vault pertaining to the account/wallet/vault, including
24 but not limited to letters, memoranda, telegrams, telexes, facsimiles, e-mail,
letters of instruction, and memoranda of telephone or oral instructions received.
25
7. All periodic statements of account or invoices (or the equivalent).
26
8. All records of payments to or from the user by checks, wire or other electronic
27 transfer, ACH transaction, PayPal transfer, credit or debit card transaction, money
order, transfer to or from other digital currency wallet address, or any other
28 method, including records reflecting the form, manner, nature, and purpose of

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1 such payment including, but not limited to, ABA routing number and other
routing information, payment instructions, and any and all invoices, billing
2 statements, receipts, or other documents memorializing and describing such
transaction.
3
9. All exception reports produced by your AML system, and all records of
4 investigation of such exceptions.

5 On November 30, 2016, this Court issued its Order Granting the Petition. Dkt. No. 7.4

6 On December 13, 2016, Coinbase user Jeffrey K. Berns filed a motion to intervene and to

7 quash the IRS Summons, arguing among other things that the IRS has no legitimate purpose in

8 seeking the requested documents from Coinbase concerning its users, enforcement of the IRS

9 Summons would constitute an abuse of process as the IRS does not currently have the ability to

10 enforce compliance with its 2014 virtual currency guidance or to prevent hackers from accessing

11 private user information, and the categories of requested documents are so overbroad such that the

12 IRS Summons would require the disclosure of a substantial amount of wholly irrelevant

13 information and documents. Dkt. No. 9.

14 On December 27, 2016, the Government filed its opposition brief to Mr. Berns motion and

15 a notice that it was withdrawing its request for records with respect to Mr. Berns account because

16 the IRS now knows Mr. Berns identity. Dkt. Nos. 16, 16-1. Mr. Berns filed a reply on January 3,

17 2017, in which he contended, among other things, that the Governments willingness to withdraw

18 the IRS Summons as to him, without obtaining any of the information sought by the summons,

19 other than his identity, was further evidence of bad faith. Dkt. No. 17.

20 On January 11, 2017, Coinbase filed a motion to intervene in the Summons Issuance

21 Proceeding to preserve its right to be heard on the merits (or lack thereof) of the IRS Summons,

22 which the Government opposed. Dkt. Nos. 19, 27.

23 On February 2, 2017, the Government filed a stipulation (Dkt. No. 28), in which it sought a

24 continuance of the hearing on the intervention motions because it was considering filing a petition

25 to enforce or taking other action. Counsel for Mr. Berns agreed to the continuance, and agreed to

26
4
27 Citations in the form Dkt. No. __ refer to docket entries in the Summons Issuance
Proceeding, unless otherwise indicated.
28
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1 withdraw the intervention motion, if the Government filed a petition to enforce the IRS Summons.

2 On February 3, 2017, the Court approved the stipulation and continued the hearing on Coinbases

3 and Mr. Berns motions to March 23, 2017. Dkt. No. 29.

4 On March 16, 2017, because Coinbase had not provided any documents in response to the

5 IRS Summons, the Government filed a Petition to Enforce Internal Revenue Service Summons

6 (Petition or Pet.). Pet., 16. The Government requested the Court enter an order directing

7 Coinbase to show cause why it should not fully comply with the IRS Summons, and directing

8 Coinbase to produce the requested records. Pet. at 4. That same day, Coinbase issued a statement

9 indicating that it planned to oppose the Petition if the Government refused to reconsider the focus

10 and scope of the IRS Summons. https://blog.coinbase.com/coinbase-irs-update-8f3af2c18eb1.

11 On May 4, 2017, rather than issuing the Governments proposed order to show cause, the

12 Court directed Coinbase and the Government to submit a proposed briefing schedule [i]n light of

13 the unique procedural history of this case, and especially given that Coinbase has already raised a

14 number of challenges to the summons in the context of the related case. Dkt. No. 9 in this

15 enforcement proceeding.

16 On May 15, 2017, Movants counsel notified counsel for the Government and Coinbase

17 that Movants were filing the motion to intervene, and requested that the parties allow Movants to

18 participate in the briefing schedule discussions. Declaration of Lee A. Weiss, 2.

19 E. The IRS Summons Covers Movants Personal Information.

20 Movants John Doe 1 and 2 are each within the class of persons described in the IRS

21 Summons. John Doe 1, a U.S. citizen residing in Florida, was a registered user of Coinbase

22 during the time period covered by the IRS Summons and has a U.S. telephone number, U.S.

23 email domain, and/or U.S. bank account. Declaration of John Doe 15 (Doe 1 Decl.), 2-3.

24 Between January 1, 2013, and December 31, 2015, John Doe 1 purchased bitcoin using

25 5
Federal courts have considered John Doe declarations. See, e.g., Nu Image, Inc. v. Does 1-
26 3,932, No. 2:11-CV-545-FTM-29, 2012 WL 1890854, at *5 (M.D. Fla. May 10, 2012), report
and recommendation adopted, No. 2:11-CV-545-FTM-29, 2012 WL 1890829 (M.D. Fla. May
27 24, 2012) (allowing John Doe declaration that is dated and given under penalty of perjury
because it complies with the statutory requirements of 28 U.S.C. 1746).
28
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1 Coinbases exchange, and John Doe 1 still owned all of that bitcoin as of December 31, 2015. Id.,

2 4.

3 John Doe 2 was a registered user of Coinbase during the time period covered by the IRS

4 Summons, is a U.S. citizen, and has a U.S. email domain, and/or U.S. bank account. Declaration

5 of John Doe 2 (Doe 2 Decl.), 2-3. Between January 1, 2013, and December 31, 2015, John

6 Doe 2 purchased bitcoin using Coinbases exchange, and John Doe 2 still owned all of that

7 bitcoin as of December 31, 2015. Id., 4.

8 III. ARGUMENT

9 A. Movants Are Entitled to Intervene in This Proceeding as of Right.

10 Fed. R. Civ. P. 24(a)(2) provides that a non-party is entitled to intervene as of right if it

11 proves that (1) their application was timely; (2) they have an interest relating to the subject

12 matter of the action; (3) there is a risk that their interests will be impaired by the actions

13 disposition; and (4) their interests are not represented by the Government or [the subpoenaed

14 party]. United States v. Sidley Austin Brown & Wood LLP, No. 03 C 9355, 2004 WL 816448, at

15 *3 (N.D. Ill. Apr. 15, 2004) (citation omitted). Movants can readily prove these elements.

16 1. This Application Is Timely.

17 The timeliness requirement of Rule 24 is to be construed broadly in favor of the party

18 seeking intervention. United States v. Andrews, No. MISC-95-280 GEB PAN, 1996 WL 442730,

19 at *1 (E.D. Cal. May 24, 1996). Courts look at three factors in making this determination: (1) the

20 stage of the proceeding at which an applicant seeks to intervene; (2) the prejudice to other parties;

21 and (3) the reason for and length of the delay. United States v. State of Wash., 86 F.3d 1499, 1503

22 (9th Cir. 1996) (citation omitted). Movants application is timely, as they are filing this motion

23 within 11 days of when the Court entered its order directing the parties to meet and confer

24 regarding the schedule for submissions on the merits of the Governments Petition.

25 2. Movants Have a Legally Protectable Interest.

26 The Supreme Court has recognized two legally protectable interests that may provide a

27 basis for a taxpayer to intervene under Rule 24(a)(2) in an IRS summons enforcement

28 proceeding: a privilege or a claim of abuse of process. Sidley Austin, 2004 WL 816448, at *3

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1 (citing Donaldson v. United States, 400 U.S. 517, 531 (1971)). Such an abuse would take place

2 if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put

3 pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith

4 of the particular investigation. United States v. Powell, 379 U.S. 48, 58, 85 S. Ct. 248, 255, 13

5 L. Ed. 2d 112 (1964); 2121 Arlington Heights Corp. v. I.R.S., 109 F.3d 1221, 1224 (7th Cir.

6 1997) (abuse of process with by the IRS can be demonstrated either by disproving the existence

7 of one of the Powell factors or pointing to specific facts suggesting that the IRS issued the

8 summons in bad faith).

9 As set forth below, the IRS has neither the intention nor the ability to review the tax

10 returns of the more than a million American citizens, who are Coinbase customers, for whom it is

11 seeking identity and detailed transaction information. Finally, the IRS has made no effort to tailor

12 the IRS Summons to any purported indicia of tax-avoidance conduct. Thus, Movants have

13 demonstrated that the IRS Summons constitutes a clear abuse of process.

14 3. There Is a Clear Risk That Movants Interests Will Be Impaired by

15 the Disposition of This Action.

16 [A] party has a sufficient interest for intervention purposes if it will suffer a practical

17 impairment of its interests as a result of the pending litigation. California ex rel. Lockyer v. United

18 States, 450 F.3d 436, 441 (9th Cir. 2006); Sw. Ctr. for Biological Diversity v. Berg, 268 F.3d 810,

19 822 (9th Cir. 2001) (We follow the guidance of Rule 24 advisory committee notes that state that

20 [i]f an absentee would be substantially affected in a practical sense by the determination made in

21 an action, he should, as a general rule, be entitled to intervene.).

22 In the event that Coinbase is unsuccessful in resisting the Summons, Movants transaction

23 records and other personal information will be released to the IRS even though Movants are not

24 the subject of an IRS investigation and there is no basis for such an investigation. Further, the

25 IRS has not identified any basis for the disclosure of this information (or the disclosure of

26 identification and transaction information for the other Coinbase customers), other than its

27 implied assertion that the mere fact that any taxpayer transacting in bitcoin means that the

28 taxpayer may be engaging in tax-avoidance behavior.

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1 4. Coinbase Cannot Fully Represent Movants Interests, as the IRS Is

2 Not Investigating Coinbase.

3 [T]he requirement of inadequacy of representation is satisfied if the applicant shows that

4 representation of its interests may be inadequate and that the burden of making this showing is

5 minimal. Sagebrush Rebellion, Inc. v. Watt, 713 F.2d 525, 528 (9th Cir. 1983) (citing Trbovich v.

6 United Mine Workers, 404 U.S. 528, 538 n.10 (1972)). Courts consider three factors: (1) whether

7 the interest of a present party is such that it will undoubtedly make all of a proposed intervenor's

8 arguments; (2) whether the present party is capable and willing to make such arguments; and (3)

9 whether a proposed intervenor would offer any necessary input to the proceedings that other parties

10 would neglect. Hazel Green Ranch, LLC v. U.S. Dep't of Interior, No. 1:07-CV-00414OWW-

11 SMS, 2007 WL 2580570, at *11 (E.D. Cal. Sept. 5, 2007). The court also may find that a

12 proposed intervenor's interests are not adequately represented where the intervenor would bring a

13 perspective none of the other parties to the litigation have. Defs. of Wildlife v. Johanns, No. C 04-

14 4512 PJH, 2005 WL 3260986, at *8 (N.D. Cal. Dec. 1, 2005).

15 The IRS is not investigating Coinbases tax liabilities, such that the IRS Summons seeks

16 only customer records. While Coinbase has so far resisted the Summons, Coinbase does not have

17 the same interest as Movants. Coinbases interest, first and foremost, is economic in nature.

18 Movants certainly do not begrudge Coinbase for attempting to protect that interest, but that does

19 not mean that Coinbases and Movants interests are completely aligned. Movants primary

20 interest is protecting the privacy of Coinbases users information, such that Movants

21 perspectives here are unique.

22 B. Movants Readily Meet the Standards for Permissive Intervention Pursuant

23 to Fed. R. Civ. P. 24(b).

24 Pursuant to Federal Rule of Civil Procedure 24(b)(1)(B) (formerly Rule 24(b)(2)), [o]n

25 timely motion, the court may permit anyone to intervene who has a claim or defense that

26 shares with the main action a common question of law or fact. Permissive intervention

27 requires: (1) an independent ground for jurisdiction; (2) a timely motion; and (3) a common

28 question of law and fact between the movant's claim or defense and the main action. Mishewal

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1 Wappo Tribe of Alexander Valley v. Salazar, 534 F. App'x 665, 667 (9th Cir. 2013) (citations

2 omitted). Courts must also consider whether the intervention will unduly delay or prejudice the

3 adjudication of the original parties' rights. Fed. R. Civ. P. 24(b)(3).

4 1. This Court Has Independent Jurisdiction Over Movants Challenge to

5 the IRS Summons.

6 A party seeking permissive intervention under Fed.R.Civ.P. 24(b) must establish a basis

7 for federal subject matter jurisdiction independent of the court's jurisdiction over the underlying

8 action. E.E.O.C. v. Nevada Resort Ass'n, 792 F.2d 882, 886 (9th Cir. 1986). Here, there is no

9 question that this Court has subject matter jurisdiction as Movants are challenging the IRS

10 Summons issued pursuant to this Courts November 30, 2016 Order granting the federal

11 governments Petition filed pursuant to 26 U.S.C. 7402(a), 7609(f), and 7609(h).

12 2. Movants Defenses Are Relevant to the Validity of the Petition.

13 Here, Movants are seeking to quash the IRS Summons that is the subject of this proceeding.

14 In Sidley Austin, the court permitted intervention under former Rule 24(b)(2), reasoning that a

15 dispute regarding the sufficiency of the description of the material to be produced is an appropriate

16 basis for a challenge to a summons in an enforcement proceeding. 2004 WL 816448, at *10

17 (citing United States v. Beacon Fed. Sav. & Loan, 718 F.2d 49, 54 (2d Cir. 1983) (citing legislative

18 history of I.R.C. 7609)).

19 3. The IRS Will Suffer No Prejudice and There Will Be No Undue Delay

20 if Movants Are Permitted to Intervene.

21 In exercising its discretion to grant or deny permissive intervention, a court must consider

22 whether the intervention will unduly delay or prejudice the adjudication of the rights of the

23 original parties. Rule 24(b). Venegas v. Skaggs, 867 F.2d 527, 530 (9th Cir. 1989), aff'd sub nom.

24 Venegas v. Mitchell, 495 U.S. 82, 110 S. Ct. 1679, 109 L. Ed. 2d 74 (1990). Additionally, judicial

25 economy is a relevant consideration in deciding a motion for permissive intervention. Id. at 531.

26 No undue delay or prejudice to the IRS would result in permitting Movants to intervene

27 to challenge the legitimacy and scope of the IRS Summons, as the parties have yet to submit the

28 proposed briefing and hearing schedule requested by the Court. Further, to avoid any undue delay

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1 or prejudice, Movants counsel has requested that he be included in the discussions of the

2 proposed briefing schedule, so that all future submissions will be coordinated.

3 C. The Court Should Quash the IRS Summons As It Is an Abuse of Process by

4 the Government Because It Was Issued in Bad Faith.

5 Once an IRS summons is challenged, the IRS must make a prima facie showing that the

6 summons was issued in good faith. Stewart v. United States, 511 F.3d 1251, 1254 (9th Cir. 2008)

7 (citing Powell, 379 U.S. at 57). Specifically, the IRS must establish that the summons (1) was

8 issued pursuant to a legitimate purpose; (2) seeks information relevant to that purpose; (3) seeks

9 information that is not already within the Commissioner's possession; and (4) satisfies all

10 administrative steps required by the Code. Id. If the government can satisfy this burden, the

11 party challenging the summons needs to show an abuse of process or a lack of good faith by the

12 IRS. Ramirez v. United States, No. SACV 13-00268 JVS, 2013 WL 10822053, at *3 (C.D. Cal.

13 June 10, 2013), aff'd, 604 F. App'x 567 (9th Cir. 2015) (citing Fortney v. United States, 59 F.3d

14 117, 120 (9th Cir. 1995)).

15 In Powell, the Court explained that in a summons enforcement proceeding:

16 It is the courts process which is invoked to enforce the administrative summons and
a court may not permit its process to be abused. Such an abuse would take place if
17 the summons had been issued for an improper purpose, such as to harass the
taxpayer or to put pressure on him to settle a collateral dispute, or for any other
18 purpose reflecting on the good faith of the particular investigation.

19 379 U.S. at 58. The purpose of the good-faith inquiry is to determine whether the agency is

20 honestly pursuing the goals of 76026 by issuing the summons. LaSalle Nat. Bank, 437 U.S. 298,

21 316 (1978). The facts and circumstances present here demonstrate that the IRS has not issued the

22 IRS Summons for tax enforcement purposes.

23 1. The IRS Does Not Have a Legitimate Purpose in Issuing the Summons

24
25 6
The IRS may only exercise its investigative powers [f]or the purpose of ascertaining the
26 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
27 fiduciary of any person in respect of any internal revenue tax, or collecting any such liability. 26
U.S.C. 7602(a).
28
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1 a. The Governments Meager Foundation for a Summons Seeking

2 the Identities of, and Three Years of Transactions for, over

3 One Million Taxpayers Reflects That the IRS Does Not Have a

4 Legitimate Purpose.

5 While the ex parte showing required for the issuance of a John Doe summons is relatively

6 minimal, as set forth above, the fact that the Court determined that the Government had met that

7 burden is not relevant in this enforcement proceeding. See, e.g., Matter of Does, 688 F.2d 144,

8 145-46 (2d Cir. 1982) (the criteria in 26 U.S.C. s 7609(f) governing ex parte issuance of a

9 John Doe summons pursuant to 26 U.S.C. s 7609(h)(1) are not appropriate grounds to

10 challenge enforcement of the summons). As the Movant-Proposed Intervenor in the Summons

11 Issuance Proceeding easily discredited the Governments evidence supporting the issuance of the

12 IRS Summons (primarily, information concerning 3 unnamed taxpayers) (Dkt. No. 9, at 18-21;

13 Dkt. No. 17, at 11-12), the Government has now retreated from that evidence. The sole basis on

14 which the Government bases its Petition to Enforce the IRS Summons is that several database

15 searches did not reveal that a substantial number of taxpayers had identified bitcoin transactions on

16 their tax returns. 3/16/17 Utzke Decl., 11-13. However, the Government only provides minimal

17 information concerning those searches and does not offer any statement as to why those figures are

18 meaningful, including whether the searches reasonably capture all individuals who reported capital

19 gains from virtual currency transactions. Instead, the Government merely provides the numbers

20 and is presumably implying that this means that many taxpayers are failing to report virtual

21 currency capital gains.

22 The statistics that the Government provides, without any explanation whatsoever as to their

23 significance, pale in comparison to the specific types of suspicious activity that the Government

24 has previously used to justify John Doe summonses, which include illegal tax shelters and large

25 cash transactions. See United States v. Kersting, 891 F.2d 1407 (9th Cir. 1989); United States v.

26 Ritchie, 15 F. 3d 592 (6th Cir. 1994). In those latter circumstances, the IRS sought the

27 identification of a narrow class of persons that had engaged in suspect activity. Here, the IRS is

28 seeking the identification of over a million individuals, and substantial transactional data, without

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1 any showing of suspect activity by any of these individuals, let alone a likelihood that any

2 significant number of them engaged in suspect activity.

3 b. The 9/21/16 TIGTA Report Shows That the IRS Does Not

4 Currently Have the Ability to Enforce Compliance with Its

5 Vague Virtual Currency Guidance Issued in 2014.

6 As set forth above, the 9/21/16 TIGTA Report demonstrates that the IRSs 2014 virtual

7 currency guidance is woefully insufficient, and thus, in the absence of clearer guidance, the IRS

8 is not in a position to enforce compliance with the tax code with respect to virtual currency. The

9 IRSs failure to issue any further virtual currency guidance since 2014, including in response to

10 the 9/21/16 TIGTA Report, is stunning. The Report noted that while the IRS received and

11 reviewed 36 public comments to its 2014 virtual currency guidance, it took no action in response

12 to these comments, even though information requested by the public [would have been] helpful

13 in understanding how to comply with the tax reporting requirements when using or receiving

14 virtual currencies. 9/21/16 TIGTA Report at 3. Further, the Treasury Department indicated that

15 regardless of the IRSs budget constraints, the IRS should focus resources on clarified guidance

16 to aid taxpayers in voluntarily complying with the tax code.

17 Despite the demonstrable need for clarifying virtual currency tax guidance, the IRS has

18 opted not to issue a single word of virtual currency guidance since promulgating admittedly

19 insufficient guidance more than two years ago. Having been unable, or unwilling, to issue such

20 new guidance, it is hard to believe that the IRS has now issued the IRS Summons for a legitimate

21 investigatory purpose. After all, if the IRS admits that it has not properly informed taxpayers of the

22 virtual currency taxation rules, how could it now reasonably seek to review the records of over one

23 million taxpayers for virtual currency tax compliance purposes?

24 c. The IRS Summons Is Improper Because It Is Designed to Seek

25 Information for Research, as Opposed to Tax Compliance,

26 Purposes.

27 As the IRS did not dispute the 9/21/16 TIGTA Reports conclusion that it did not have a

28 method for gathering the necessary data to analyze the risk and scope of non-compliance with the

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1 tax code with respect to virtual currency, how could enforcement possibly be the goal of a

2 summons issued only two months later for the mountain of data that it seeks from Coinbase?

3 Rather than enforcement, it appears that the IRS is trying to use a John Doe summons to gather

4 data for research purposes in response to the 9/21/16 TIGTA Reports criticism. This is improper in

5 the absence of a specific investigation regarding tax compliance. A summons issued under Section

6 7602 may not be used solely for research purposes under Section 7601.7 See United States v.

7 Humble Oil & Refining Co., 488 F.2d 953, 962-63 (5th Cir. 1974), vacated and remanded, 421

8 U.S. 943 (1975), aff'd. per curiam, 518 F.2d 747 (5th Cir. 1975) ([W]e hold that the Internal

9 Revenue Service is not empowered by section 7602 to issue a summons in aid of its section 7601

10 research projects or inquiries, absent an investigation of taxpayers or individuals and corporations

11 from whom information is sought.).

12 The Petition does not allege any particular investigation for which the IRS is seeking the

13 information in the IRS Summons. Instead, the Petition, and the 3/16/17 Utzke Declaration, merely

14 state generally that the IRS is conducting an investigation of all virtual currency users. Pet. at 1

15 (The IRS is conducting an investigation to determine the identity and correct federal income

16 tax liabilities, for the years ended December 31, 2013, 2014, and 2015, of United Sta tes

17 persons who conducted transactions in a convertible virtual currency as that term is defined in

18 IRS Notice 2014-21); 3/16/17 Utzke Decl., 2. However, the Government does not offer a

19 single detail concerning this supposed investigation of more than a million taxpayers. In fact, the

20 attempt to obtain the information concerning Coinbase users sought by the IRS Summons appears

21 to be the only action taken by the IRS in this regard.

22 The Governments assertion that the requested information is needed as part of its

23 investigation into the identity and correct federal income tax liability of U.S. persons who

24 conducted transactions in a convertible virtual currency as that term is defined in IRS Notice

25 7
26 U.S.C. 7601(a) provides: The Secretary shall, to the extent he deems it practicable, cause
26 officers or employees of the Treasury Department to proceed, from time to time, through each
internal revenue district and inquire after and concerning all persons therein who may be liable to
27 pay any internal revenue tax, and all persons owning or having the care and management of any
objects with respect to which any tax is imposed.
28
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1 2014-21 (3/16/17 Utzke Decl., 26) is undoubtedly a pretext, as the Commissioner of the IRS has

2 repeatedly stated that the IRS does not have sufficient funding to pursue enforcement efforts. See,

3 e.g., October 23, 2015 Prepared Remarks of Commissioner John A. Koskinen Before The Council

4 for Electronic Revenue Communication Advancement (Since 2010, the IRS has suffered deep,

5 dramatic funding reductions that have undermined our ability to provide taxpayers with top quality

6 service and ensure compliance with the tax laws.) (RFJN, Ex. 3). See also April 4, 2016 report

7 from Center on Budget and Policy Priorities, entitled IRS Funding Cuts Compromise Taxpayer

8 Service and Weaken Enforcement, at 6 (As a result of cuts, the IRS is conducting fewer audits

9 overall and fewer audits of high-income taxpayers and businesses.), a copy of which is attached as

10 Exhibit 2 to the Lum Declaration. It is hard to believe that the current budget-strained IRS is going

11 to review three years of tax returns for over one million taxpayers to determine if they properly

12 paid taxes with respect to their virtual currency transactions.

13 Moreover, based on the current dollar volume of virtual currency transactions, it seems

14 unlikely that the IRS would devote a substantial portion of its resources to enforcement of virtual

15 currency tax obligations. According to the IRS, the 2015 transactional value of bitcoin was

16 approximately $10 billion. 11/17/16 Utzke Decl., 27. Unpaid taxes on any portion of that amount

17 which reflects taxable gains in the trading or use of bitcoin would pale in comparison to the total

18 amount of U.S. tax revenue, which in 2014 was approximately $1.7 trillion,8 and the annual Tax

19 Gap, which is approximately $387 billion. It strains credulity that the financially-strapped IRS is

20 going to spend substantial resources on reviewing the trading data and tax return of Coinbase

21 customers, when that is not likely to yield tax revenue that would justify that expense.

22 d. The IRS Has Previously Been Accused of Abusing Its Power to

23 Improperly Further the Governments Political Agenda.

24 While the Court need not determine the IRSs true motive in order to find abuse of process

25 based upon bad faith, it is hardly far-fetched to conclude that the IRS has an ulterior motive for

26
8
27 See Tax Policy Center of the Urban Institute & Brookings Institution, Amount of Revenue by
Source, http://www.taxpolicycenter.org/statistics/amount-revenue-source.
28
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1 pursuing the IRS Summons. As this Court may be aware, the IRS recently used its power to

2 retaliate against anti-administration political associations and political speech. In 2013, the IRS

3 revealed that it had selected political groups applying for tax-exempt status, Tea Party, for

4 intensive scrutiny based on their names or political themes, which triggered widespread

5 condemnation of the agency. Multiple investigations of the IRS by the FBI and the U.S. Attorney

6 General are pending, while lawsuits filed against the IRS were recently reinstated by the D.C.

7 Circuit. See True the Vote, Inc. v. Internal Revenue Serv., 831 F.3d 551 (D.C. Cir. 2016).

8 It is not a stretch to conclude that the government is similarly using the IRSs John Doe

9 summons authority to harass taxpayers who use virtual currencies, as politicians and financial

10 leaders have suggested an anti-virtual currency bias by the government. For example, Jamie

11 Dimon, CEO of JPMorgan Chase, stated: Virtual currency, where its called a bitcoin vs. a U.S.

12 dollar, thats going to be stopped. No government will ever support a virtual currency that goes

13 around borders and doesnt have the same controls. Its not going to happen.9 Similarly, Sen. Joe

14 Manchin (D-W. Va.), a former member of the Senate banking committee, stated: If the feds can't

15 get their hands around [bitcoin] to where they can secure it, then I would be very leery of investing

16 in it or trading with it or buying with it."10

17 2. The Unjustifiably Broad Scope of the IRS Summons Indicates That It

18 Has Not Been Issued in Good Faith.

19 Even if the Court accepts the IRSs purported legitimate purpose, the IRS may not conduct

20 an unfettered fishing expedition through a taxpayers records, but must identify with some

21 precision the documents it wishes to inspect. United States v. Dauphin Deposit Trust Co., 385

22 F.2d 129, 131 (3d Cir. 1967); United States v. Theodore, 479 F.2d 749, 754-55 (4th Cir. 1973)

23 (concluding that summons directing [third-party accountant] to produce all of the returns and all

24
9
Stephen Gandel, Jamie Dimon: Virtual Currency Will Be Stopped, Fortune, Nov. 4, 2015,
25 available at http://fortune.com/2015/11/04/jamie-dimon-virtual-currency-bitcoin/.
10
26 Brian Fung, Last Month, Sen. Joe Manchin Wanteda to Ban Bitcoin. Now, Hes Not So Sure,
The Washington Post, Mar. 26, 2014, available at https://www.washingtonpost.com/news/the-
27 switch/wp/2014/03/26/last-month-sen-joe-manchin-wanted-to-ban-bitcoin-now-hes-not-so-
sure/?utm_term=.e2278c733b81.
28
Case No.: 3:17-cv-01431-JSC Page 19
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 26 of 32

1 of the work records relating to all of his clients for the years 1969-1971 is too broad and too vague

2 to be enforced). In testing for overbreadth, courts ask whether the summoned records are relevant

3 to the inquiry, Tax Liabilities of: John Does, All Unknown Employees of Boundary Waters Rest. v.

4 United States, 866 F.2d 1015, 1020-21 (8th Cir. 1989).

5 If the IRS is truly interested in policing virtual currency tax compliance and sending a

6 message that it is focusing on this issue, it could easily accomplish these goals through less onerous

7 methods. For example, as a general matter, the summons could have contained a certain dollar

8 threshold or volume of transactions. The IRSs failure to make any effort to limit the scope of the

9 IRS Summons or otherwise tailor it to the stated goal of enforcing compliance with the tax laws are

10 strong indicators that the IRS Summons has been issued in bad faith.

11 Moreover, the IRS Summons requests substantial personal and security information that has

12 absolutely nothing to do with tax compliance. If the IRS truly intended to compare tax returns to

13 Coinbases records for tax compliance purposes, the only information it would need are the names

14 and social security numbers of Coinbases customers, and their trading activity (i.e., bitcoin

15 purchases and sales). Indeed, as acknowledged by the IRS, Coinbase requires substantial personal

16 information before allowing a customer to use its service. 3/16/17 Utzke Decl., 22. Yet, rather

17 than just seeking the names and social security numbers for Coinbase customers, the first category

18 of information sought by the IRS Summons seeks profile information and security settings for all

19 Coinbase customers. The first category in the summons also requests, among other things, the keys

20 that a customer uses to access his or her Coinbase account, wallet or vault. Information concerning

21 a customers keys has no bearing on the issue of whether taxes have been paid on income related to

22 virtual currency. The IRSs justification for this highly sensitive information is that it may be

23 relevant in determining, and verifying, the identity and transaction activity of Coinbase users who

24 are U.S. persons. 3/16/17 Utzke Decl., 27. However, there is no need for such information as the

25 fourth category of the summons requests all records of account activity.

26 A further example of the overbreadth of the IRS Summons, is category 6, which seeks all

27 correspondence between Coinbase and its users. The IRS claims that this information is necessary

28 to verify the identities of Coinbase users and because it may reveal other accounts or persons

Case No.: 3:17-cv-01431-JSC Page 20


Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 27 of 32

1 involved in taxable events. 3/16/17 Utzke Decl., 32. First, the IRS does not indicate why

2 correspondence would assist it in verifying the identities of Coinbases customers. Second, apart

3 from the fact that the IRS is stating that it wants to take its improper fishing expedition even further

4 by seeking information concerning non-Coinbase accounts, there is no basis for the unsupported

5 statement that correspondence will reveal the information sought by the IRS. Third, and most

6 importantly, much of the correspondence is undoubtedly irrelevant to the IRSs stated goal of

7 monitoring tax compliance. For example, John Doe No. 2 communicated with Coinbase between

8 2013 and 2015 concerning issues related to setting up and using his Coinbase account. Doe 2 Decl.,

9 5. This has nothing to do with any tax issues, yet the Government has made absolutely no attempt

10 to exclude these types of documents from the IRS Summons.

11 a. The Government Has Failed to Address the Significant Risks

12 Associated with Allowing the IRS to Maintain Sensitive Virtual

13 Currency Data.

14 In connection with his motion to intervene in the Summons Issuance Proceeding, Coinbase

15 customer Jeffrey Berns identified numerous facts indicating that the IRS could not properly secure

16 Coinbase user information, including that 1) the IRS had been hacked for 17 months in 2014 and

17 2015 and a TIGTA Report had concluded that the IRS did not respond to this attack appropriately

18 because it failed to identify all the victims of the hack and provide sufficient relief to them (Dkt.

19 No. 9, at 14-15); 2) a March 2016 GAO audit of IRS cyber security uncovered IRS's failure to

20 perform comprehensive tests and evaluations of its information security controls which if not

21 corrected will leave taxpayer data unnecessarily vulnerable to inappropriate use (Dkt. No. 9, at

22 15);11 and 3) allowing the IRS to obtain personal taxpayer information that would allow access to

23 hundreds of millions of dollars in virtual currency would create a significant potential for

24
25 11
The audit also says the IRS claimed it had corrected previously identified control weaknesses
26 in 28 cases, but in nine of those instances, auditors determined they were not effectively
corrected.U.S. Government Accountability Report, GAO-16-398, Information Security: IRS
27 Needs to Further Improve Controls Over Financial and Taxpayer Data (Mar. 2016), available at
http://www.gao.gov/assets/680/676097.pdf. RFJN, Ex. 4.
28
Case No.: 3:17-cv-01431-JSC Page 21
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 28 of 32

1 wrongdoing by government employees, as there had already been several instances of such thefts

2 of virtual currency (Dkt. No. 9, at 16).12

3 These cybersecurity issues are particularly acute with respect to virtual currency. If this

4 security information is obtained by a hacker who uses the information to misappropriate virtual

5 currency, there is no way for the true owner of that virtual currency to recover it. If the IRS were to

6 obtain this information, which again, is unrelated to tax compliance, it could expose the

7 government to huge potential liability from Coinbase customers if the keys are not properly

8 safeguarded. Indeed, these concerns were corroborated by a recent TIGTA report, issued on March

9 23, 2017, titled Inconsistent Processes and Procedures Result in Many Victims of Identity Theft

10 Not Receiving Identity Protection Personal Identification Numbers (3/23/17 TIGTA Report), in

11 which TIGTA assessed the IRSs corrective actions to TIGTAs prior recommendations, and the

12 IRSs maintenance of the Identity Protection Personal Identification Numbers13 (IP PIN)

13 program that was intended to help identity theft victims. The 3/23/17 TIGTA Report made a

14 number of findings demonstrating that the IRS had failed to protect identity theft victims (see

15 3/23/17 TIGTA Report at 3) and found that even after being warned about potential breaches of its

16 systems, the IRS failed to protect taxpayers. TIGTA Report, at 5-7. Among many identified

17 failures by the IRS, the Report noted that the IRS had failed to take sufficient action with respect to

18 the taxpayers facing the highest risk of identity theft, which is contrary to the intent of the

19 program, which is to focus on taxpayers in States and locations with the highest per capita rate of

20 identity theft. 3/23/17 TIGTA Report, at 14. Thus, given the IRSs inability to properly protect

21 victims of identity theft (including its own admission that it lacks sufficient resources to implement

22 TIGTAs recommendation), the IRS should not be allowed to obtain the sensitive information

23 requested by the IRS Summons.

24
12
Movants are, of course, not suggesting that government employees are generally untrustworthy.
25 However, the potential for wrongful conduct here must be considered.
13
26 IP PINs are six digit numbers issued to identity theft victims that allows their tax
returns/refunds to be processed without delay and helps prevent the misuse of their Social
27 Security Numbers (SSN) to file fraudulent Federal income tax returns. RFJN, Ex. 5 (3/23/17
TIGTA Report, at 1).
28
Case No.: 3:17-cv-01431-JSC Page 22
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 29 of 32

1 D. If the Court Does Not Quash the IRS Summons, It Should Issue an

2 Appropriate Protective Order.

3 1. Movants Have Readily Demonstrated Good Cause.

4 A party seeking a protective order bears the burden of proving good cause, which

5 requires a showing that specific prejudice or harm will result if the protective order is not

6 granted. In re Roman Catholic Archbishop of Portland in Oregon, 661 F.3d 417, 424 (9th Cir.

7 2011); Rivera v. NIBCO, Inc., 364 F.3d 1057, 1063 (9th Cir. 2004). See also Skellerup Indus. Ltd.

8 v. City of Los Angeles, 163 F.R.D. 598, 600 (C.D. Cal. 1995) (confirming that a court should grant

9 a protective order when the moving party establishes good cause for the order and justice

10 requires it). The injury shown, however, need be no more than embarrassment; thus, a party

11 need not establish a monetizable injury. Pearson v. Miller, 211 F.3d 57, 73 (3d Cir. 2000).

12 As discussed above, the IRS has no legitimate purpose in seeking the requested documents

13 and information concerning Movants. Nor does the IRS have a legitimate purpose for seeking the

14 identification of Coinbases customers or all data and information concerning those customers for a

15 three-year period. Even if the IRS had not engaged in abuse of process and was acting in good

16 faith, there is no basis for seeking information from all of Coinbases customers, regardless of the

17 size and volume of their virtual currency activity, and the categories of information sought by the

18 IRS Summons are not related to the IRSs stated goal of enforcing compliance with the tax code.

19 Finally, the privacy interests of Movants and all of Coinbases customers substantially outweigh

20 the IRSs interest in enforcement where, as discussed above, the IRS has made no showing that

21 there is a significant risk that a meaningful portion of Coinbases customers have failed to pay

22 taxes on income related to virtual currency transaction. Accordingly, the Court should issue an

23 appropriate Protective Order that only allows the IRS access to information that is relevant to a

24 legitimate enforcement purpose from customers whom the IRS can demonstrate engaged in

25 behavior that evidences potential tax evasion. The Court should require the IRS to make a factual

26 showing that is more than the mere fact that a taxpayer transacted in virtual currency.

27
28
Case No.: 3:17-cv-01431-JSC Page 23
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 30 of 32

1 E. If the Court Does Not Quash the Subpoena or Issue a Protective Order,

2 Movants Are Entitled to Conduct Limited Discovery and Then an

3 Evidentiary Hearing Concerning the IRSs Bad Faith.

4 1. Movants Have Provided Specific Facts That Raise Doubts Concerning

5 the IRSs Good Faith in Issuing the IRS Summons.

6 A taxpayer, who has [made] a sufficient showing of bad faith on the Governments part,

7 is entitled to a limited evidentiary hearing. United States v. Samuels, Kramer & Co., 712

8 F.2d 1342, 1346-47 (9th Cir. 1983). To make a showing of bad faith, the taxpayer must introduce

9 some evidence to support his allegations. United States v. Church of Scientology of Cal., 520

10 F.2d 818, 824 (9th Cir. 1975) (quoting United States v. Salter, 432 F.2d 697, 700 (1st Cir. 1970)).

11 The burden is not strict, as the Ninth Circuit has explained:

12 A taxpayer must answer the Government's prima facie case through responsive pleadings,
supported by affidavits, that allege specific facts in rebuttal. [U.S. v. Kis, 658 F.2d 526,
13 539 (7th Cir. 1981)] (emphasis in original). The facts, however, need only raise sufficient
doubt about the Government's purposes in seeking enforcement of a summons. Church of
14 Scientology, 520 F.2d at 825. The taxpayer must thus allege facts from which a court
might infer a possibility of some wrongful conduct by the Government. Kis, 658 F.2d at
15 540 (emphasis in original). This implication alone is enough to trigger a limited evidentiary
16 hearing. At this stage, the taxpayer need not actually be able to prove the Government's lack
of good faith. See id.
17
Samuels, 712 F.2d at 134748 (emphasis in original); see also Church of Scientology, 520 F.2d at
18
825 (ordering limited evidentiary hearing where bad faith allegations were thin). On the basis of
19
evidence revealed at the limited evidentiary hearing, the court must determine whether the taxpayer
20
should be permitted further discovery to uncover facts to support the assertion of bad faith.
21
Samuels, 712 F.2d at 1347; Kis, 658 F.2d at 542 (If the court cannot decide the merits of the
22
enforcement petition at the hearing, then further discovery would clearly be helpful to the ultimate
23
resolution of the case. The district court should therefore permit some discovery at this stage.).
24
As set forth above, Movants have provided specific facts that, at the very least, raise serious
25
doubts concerning the IRSs good faith in issuing the IRS Summons, including 1) that over two
26
years ago the Treasury Department recommended that the IRS clarify its vague virtual currency
27
guidance and employ resources to educate taxpayers as to their obligations regarding the taxation
28
Case No.: 3:17-cv-01431-JSC Page 24
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 31 of 32

1 of virtual currency, yet the IRS has failed to do that; 2) the IRSs factual showing to support the

2 request for the identification of, and three years of transactional data for, Coinbases customers is

3 exceedingly weak and pales in comparison to the factual showings made by the IRS in connection

4 with other John Doe summonses; 3) the IRSs only real basis for seeking the information in the

5 IRS Summons is that Coinbases customers have transacted in virtual currency; 4) the IRS

6 Summons is extremely overbroad and not designed to elicit information concerning a legitimate

7 investigative purpose; 5) the IRS does not have the resources to allow it to effectively analyze the

8 data it is seeking; 6) the IRS has claimed that it is seeking information from Coinbase in

9 connection with tax compliance efforts, when it seems clear that the IRS is improperly using the

10 John Does summons procedure to obtain data for research purposes; and 7) the IRS has previously

11 used its power for improper purposes. Thus, at the absolute minimum, this Court should allow

12 Movants to take limited discovery regarding the IRSs bad faith and then set a limited evidentiary

13 hearing. That discovery should include the deposition of the IRS Agent who filed a declaration in

14 support of the Petition and the IRSs production of the documents that underlie that declaration.

15 Further, the Government has sought to imply that many Coinbase customers are not paying

16 taxes on their bitcoin trading gains by providing certain figures regarding the number of tax returns

17 that us[e] a property description likely related to bitcoin. 3/16/17 Utzke Decl., 11-13.

18 However, the Government has failed to provide any evidentiary basis for these figures, as it has not

19 provided any supporting evidence concerning the supposed searches that were performed to derive

20 these figures, or even a declaration from the IRS employee who purportedly performed these

21 searches. To the extent that the Court is not prepared to quash the IRS Summons based on this

22 motion alone, Movants should be granted leave to take appropriate discovery concerning the

23 unsubstantiated facts offered by the Government.

24 IV. CONCLUSION

25 Based on the foregoing, Movants respectfully request that the Court grant their motion to

26 intervene in this proceeding. Movants further request that the Court quash the IRS Summons or, in

27 the alternative, issue an appropriate protective order, or, in the alternative, allow Movants to pursue

28 reasonable discovery and then conduct an evidentiary hearing concerning the IRSs bad faith.

Case No.: 3:17-cv-01431-JSC Page 25


Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10 Filed 05/15/17 Page 32 of 32

1 Dated: May 15, 2017 /s/ Lee A. Weiss


Lee A. Weiss (SBN 297834)
2 lweiss@law111.com
BERNS WEISS LLP
3 585 Stewart Avenue, Suite L-20
4 Garden City, NY 11530
Telephone: (516) 222-2900
5 Facsimile: (818) 936-0232

6 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
7 Albert G. Lum (SBN 259053)
alum@law111.com
8 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
9 Canoga Park, CA 91303
Telephone: (818) 961-2000
10 Facsimile: (818) 936-0232
11 Attorneys for Proposed Intervenors John
Does 1 and 2
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Case No.: 3:17-cv-01431-JSC Page 26
Motion to Intervene, to Quash Summons, or for Protective Order, or for an Order
Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-1 Filed 05/15/17 Page 1 of 2

1 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
2 Albert G. Lum (SBN 259053)
alum@law111.com
3 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
4 Canoga Park, CA 91303
Telephone: (818) 961-2000
5 Facsimile: (818) 936-0232
6
Lee A. Weiss (SBN 297834)
7 lweiss@law111.com
BERNS WEISS LLP
8 585 Stewart Avenue, Suite L-20
Garden City, NY 11530
9 Telephone: (516) 222-2900
Facsimile: (818) 936-0232
10
Attorneys for Proposed Intervenors John
11 Does 1 and 2
12
13
14 UNITED STATES DISTRICT COURT

15 NORTHERN DISTRICT OF CALIFORNIA

16
17 UNITED STATES OF AMERICA, Case No.: 3:17-cv-01431-JSC

18 Petitioner,
DECLARATION OF JOHN DOE 1 IN
19 v. SUPPORT OF MOTION TO INTERVENE,
TO QUASH SUMMONS, OR FOR
20 COINBASE, INC., PROTECTIVE ORDER, OR FOR AN
ORDER SCHEDULING AN
21 Respondent. EVIDENTIARY HEARING AND
PERMITTING LIMITED DISCOVERY
22
23 Date: June 22, 2017
Time: 9:00 a.m.
24 Courtroom: F, 15th Floor
Judge: Hon. Jacqueline Scott Corley
25
26
27
28
Case No.: 3:17-cv-01431-JSC
Doe 1 Decl. i/s/o Motion to Intervene, to Quash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
~-------------------------------------------------------------------------------

Case 3:17-cv-01431-JSC Document 10-1 Filed 05/15/17 Page 2 of 2

1 I, John Doe 1, declare:

2 1. I am a proposed intervenor identified as John Doe 1 in this proceeding. I submit


3 this declaration in support of my Motion to Intervene, to Quash Summons or for Protective Order,

4 or for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery. I have

5 personal knowledge of the facts set forth herein and, if called as a witness, could and would testify

6 thereto.

7 2. I am a Florida resident and I have a U.S. telephone number, an email address at a

8 U.S. email domain, and a U.S. bank account.

9 3. During the period between January I , 2013 and December 31, 2015, I was a

10 registered Coinbase, Inc. user. I provided Coinbase with my personal information upon

11 registering my account.

12 4. Between January 1, 2013 and December 31, 20 15, I purchased bitcoin using

13 Coinbase's exchange. As of December 3 1,2015, I still owned all of that bitcoin.

14
15
16 I declare under penalty of perjury, under the laws of the United States of America, that the

17 foregoing is true and correct. Executed this _!}__th day of May, 2017, in Orange Park, Florida.

18 I
19 _.....John oe 1 ,

20
21
22
23
24
25
26
27
28
Case No.: 3: 17-cv-0 1431-JSC Page 1
Doe 1 Decl. i/s/o Motion to Intervene, to Ouash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary llearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-2 Filed 05/15/17 Page 1 of 2
Case 3:17-cv-01431-JSC Document 10-2 Filed 05/15/17 Page 2 of 2
Case 3:17-cv-01431-JSC Document 10-3 Filed 05/15/17 Page 1 of 5

1 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
2 Albert G. Lum (SBN 259053)
alum@law111.com
3 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
4 Canoga Park, CA 91303
Telephone: (818) 961-2000
5 Facsimile: (818) 936-0232
6
Lee A. Weiss (SBN 297834)
7 lweiss@law111.com
BERNS WEISS LLP
8 585 Stewart Avenue, Suite L-20
Garden City, NY 11530
9 Telephone: (516) 222-2900
Facsimile: (818) 936-0232
10
Attorneys for Proposed Intervenors John
11 Does 1 and 2
12
13
14 UNITED STATES DISTRICT COURT

15 NORTHERN DISTRICT OF CALIFORNIA

16
17 UNITED STATES OF AMERICA, Case No.: 3:17-cv-01431-JSC

18 Petitioner,
DECLARATION OF LEE A. WEISS IN
19 v. SUPPORT OF MOTION TO INTERVENE,
TO QUASH SUMMONS, OR FOR
20 COINBASE, INC., PROTECTIVE ORDER, OR FOR AN
ORDER SCHEDULING AN
21 Respondent. EVIDENTIARY HEARING AND
PERMITTING LIMITED DISCOVERY
22
23 Date: June 22, 2017
Time: 9:00 a.m.
24 Courtroom: F, 15th Floor
Judge: Hon. Jacqueline Scott Corley
25
26
27
28
Case No.: 3:17-cv-01431-JSC
Weiss Decl. i/s/o Motion to Intervene, to Quash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-3 Filed 05/15/17 Page 2 of 5

1 I, Lee A. Weiss, declare:

2 1. I am an attorney duly licensed to practice law before this Court, and a member of

3 Berns Weiss LLP. I am counsel for the Movants-Proposed Intervenors John Doe 1 and John Doe

4 2 (Movants). I make this declaration based on personal knowledge, and if called to do so, I

5 could testify competently thereto. I submit this declaration in support of Movants Motion to

6 Intervene, to Quash Summons or for Protective Order, or for an Order Scheduling an Evidentiary

7 Hearing and Permitting Limited Discovery.

8 2. On May 15, 2017, I notified counsel for the Government and Coinbase by e-mail

9 that Movants were filing a motion to intervene in this action, and I requested that counsel for the

10 Government confirm that it would include counsel for Movants in the parties briefing schedule

11 discussions pursuant to the Courts Order Directing Parties to Submit a Joint Proposed Briefing

12 Schedule, entered on May 4, 2017. Counsel for the Government responded that the Government

13 did not think that was appropriate because the motion to intervene had not yet been granted.

14 Attached hereto as Exhibit 1 is a true and correct my May 15, 2017 email.

15
16 I declare under penalty of perjury, under the laws of the United States of America, that the

17 foregoing is true and correct. Executed this 15th day of May, 2017, at Garden City, New York.

18
/s/ Lee A. Weiss
19 Lee A. Weiss
20
21
22
23
24
25
26
27
28
Case No.: 3:17-cv-01431-JSC Page 1
Weiss Decl. i/s/o Motion to Intervene, to Quash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-3 Filed 05/15/17 Page 3 of 5

Exhibit 1
Case 3:17-cv-01431-JSC Document 10-3 Filed 05/15/17 Page 4 of 5

From: Matchison, Amy T. (TAX) <Amy.T.Matchison@usdoj.gov>


Sent: Monday, May 15, 2017 2:06 PM
To: Lee Weiss
Cc: Ellis, Steven A (SEllis@goodwinlaw.com); gfondo@goodwinlaw.com; Hendon, Jeremy
(TAX)
Subject: RE: U.S. v. Coinbase, 3:17-cv-01431-JSC

Mr.Weiss,

Thankyouforsendingthisalong.Unfortunately,thegovernmentneedsmoretimetoconsiderthisthanyouareableto
provideus.Wewillfullyconsideryouradministrativemotiononthistopicandwillfilearesponseasnecessary.

From:LeeWeiss[mailto:Lweiss@bernsweiss.com]
Sent:Monday,May15,20174:40PM
To:Matchison,AmyT.(TAX)<Amy.T.Matchison@tax.USDOJ.gov>
Cc:Ellis,StevenA(SEllis@goodwinlaw.com)<SEllis@goodwinlaw.com>;gfondo@goodwinlaw.com;Hendon,Jeremy
(TAX)<Jeremy.Hendon@tax.USDOJ.gov>
Subject:RE:U.S.v.Coinbase,3:17cv01431JSC

Ms.Matchison,

Thankyoufortheresponse.Adraftstipulationisattached.Thesolepurposeforseekingthisreliefistoavoidanother
circumstancewheretheGovernmentwithdrawstheIRSSummonsastotheproposedintervenorsandthencontends
thattheirmotionismoot.Thus,iftheGovernmentwillrepresentthatitwillnotwithdrawtheSummonsastomovants
whenitlearnstheiridentities,wearepreparedtoforegotheadministrativemotionandfilethemotiontointervene
usingproposedintervenorsrealnames.PleaseletusknowtheGovernmentspositionbythecloseofbusinessPacific
time.

Asforscheduling,themotiontointerveneseeksadditionalrelief,includingtoquashthesummons,foraprotective
order,andforlimiteddiscoveryandalimitedevidentiaryhearing.Thus,wethinkthatthebriefing/hearingonthe
motionandthebriefing/hearingenvisionedbytheCourtinitsrecentordershouldbecoordinatedoratleastpartofa
singleschedulethatisacceptabletothepartiesandintervenors.

Lee A. Weiss
BERNS WEISS LLP
585 Stewart Avenue, Suite L-20
Garden City, New York 11530
Direct: (516) 501-9640
Main: (818) 961-2000
Cell: (917) 208-0078
Fax: (818) 936-0232
lweiss@bernsweiss.com

From: Matchison, Amy T. (TAX) [mailto:Amy.T.Matchison@usdoj.gov]


Sent: Monday, May 15, 2017 4:18 PM

1
Case 3:17-cv-01431-JSC Document 10-3 Filed 05/15/17 Page 5 of 5
To: Lee Weiss
Cc: Ellis, Steven A (SEllis@goodwinlaw.com); gfondo@goodwinlaw.com; Hendon, Jeremy (TAX)
Subject: RE: U.S. v. Coinbase, 3:17-cv-01431-JSC

Mr.Weiss,

Pleasesendmeyourdraftstipulation.Wewillreviewitandletyouknowifwecanagreetoallowyourclientsto
proceedanonymously.

Asforthecoordinatedbriefingschedule,wedonotfeelitwouldbeappropriatetoincludeyouinourscheduling
discussions.UnlessanduntiltheCourtallowsyourclientstointervene,anactionthatthegovernmentwilloppose,
thereisnobasisforthemtoparticipate.

From:LeeWeiss[mailto:Lweiss@bernsweiss.com]
Sent:Monday,May15,201712:22PM
To:Matchison,AmyT.(TAX)<Amy.T.Matchison@tax.USDOJ.gov>
Cc:Ellis,StevenA(SEllis@goodwinlaw.com)<SEllis@goodwinlaw.com>;gfondo@goodwinlaw.com
Subject:U.S.v.Coinbase,3:17cv01431JSC
Importance:High

Ms.Matchison,pleasebeadvisedthatlatertodaywearefilingamotiontointerveneintheabovereferenced
proceedingonbehalfoftwoindividualswhowereCoinbasecustomersduringthetimeperiodcoveredbytheIRS
Summons,alongwithanadministrativemotiontopermitmovantstoproceedanonymously.PursuanttoL.R.711,
pleaseletmeknowifyouwillconsenttothatrelief,sothatIcancirculateadraftstipulation.

Additionally,aswiththepriorproceeding,IthinktheCourtwillappreciateacoordinatedbriefingschedulebetweenthe
partiesandproposedintervenors.Thus,pleaseconfirmthatyouwillincludeusintheschedulingdiscussionsrecently
orderedbytheCourt.IhavecopiedcounselforCoinbaseinthepriorproceedingonthepresumptionthattheywillbe
representingCoinbaseinthisproceedingaswell.Thankyou.

Lee A. Weiss
BERNS WEISS LLP
585 Stewart Avenue, Suite L-20
Garden City, New York 11530
Direct: (516) 501-9640
Main: (818) 961-2000
Cell: (917) 208-0078
Fax: (818) 936-0232
lweiss@bernsweiss.com

2
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 1 of 24

1 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
2 Albert G. Lum (SBN 259053)
alum@law111.com
3 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
4 Canoga Park, CA 91303
Telephone: (818) 961-2000
5 Facsimile: (818) 936-0232
6
Lee A. Weiss (SBN 297834)
7 lweiss@law111.com
BERNS WEISS LLP
8 585 Stewart Avenue, Suite L-20
Garden City, NY 11530
9 Telephone: (516) 222-2900
Facsimile: (818) 936-0232
10
Attorneys for Proposed Intervenors John
11 Does 1 and 2
12
13
14 UNITED STATES DISTRICT COURT

15 NORTHERN DISTRICT OF CALIFORNIA

16
17 UNITED STATES OF AMERICA, Case No.: 3:17-cv-01431-JSC

18 Petitioner,
DECLARATION OF ALBERT G. LUM IN
19 v. SUPPORT OF MOTION TO INTERVENE,
TO QUASH SUMMONS, OR FOR
20 COINBASE, INC., PROTECTIVE ORDER, OR FOR AN
ORDER SCHEDULING AN
21 Respondent. EVIDENTIARY HEARING AND
PERMITTING LIMITED DISCOVERY
22
23 Date: June 22, 2017
Time: 9:00 a.m.
24 Courtroom: F, 15th Floor
Judge: Hon. Jacqueline Scott Corley
25
26
27
28
Case No.: 3:17-cv-01431-JSC
Lum Decl. i/s/o Motion to Intervene, to Quash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 2 of 24

1 I, Albert G. Lum, declare:

2 1. I am an attorney duly licensed to practice law before this Court, and an associate

3 attorney at Berns Weiss LLP. I am counsel for the Movants-Proposed Intervenors John Doe 1

4 and John Doe 2 (Movants). I make this declaration based on personal knowledge, and if called

5 to do so, I could testify competently thereto. I submit this declaration in support of Movants

6 Motion to Intervene, to Quash Summons or for Protective Order, or for an Order Scheduling an

7 Evidentiary Hearing and Permitting Limited Discovery.

8 2. Attached hereto as Exhibit 1 is a true and correct copy of the Internal Revenue

9 Service John Doe Summons on Coinbase, Inc., which was previously filed in this proceeding on

10 March 16, 2017, as Exhibit A to the Declaration of David Utzke in Support of Petition to Enforce

11 Internal Revenue Service Summons (Dkt. No. 1-2).

12 Attached hereto as Exhibit 2 is a true and correct copy of a report from the Center on

13 Budget and Policy Priorities, entitled IRS Funding Cuts Compromise Taxpayer Service and

14 Weaken Enforcement, dated April 4, 2016, which is available at

15 http://www.cbpp.org/sites/default/files/atoms/files/6-25-14tax.pdf.

16
17 I declare under penalty of perjury, under the laws of the United States of America, that the

18 foregoing is true and correct. Executed this 15th day of May, 2017, at Canoga Park, California.

19
/s/ Albert G. Lum
20 Albert G. Lum
21
22
23
24
25
26
27
28
Case No.: 3:17-cv-01431-JSC Page 1
Lum Decl. i/s/o Motion to Intervene, to Quash Summons, or for Protective Order, or
for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 3 of 24

Exhibit 1
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DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Washington, D.C. 20224

LARGE BUSINESS AND


INTERNATIONAL DIVISION
December 5, 2016

Coinbase, Inc.
Attn: Grant P. Fondo, Esq.
Goodwin Procter LLP
135 Commonwealth Drive
Menlo Park, CA 94025

RE: IRS Summons- Tax Liability of John Does


Coinbase, Inc.

Dear Mr. Fondo:

Enclosed please find an Order by the U.S. District Court of the Northern District of
California dated November 30, 2016 authorizing the issuance of an Internal Revenue
Service John Doe summons to Coinbase, Inc. ("Coinbase"). I have also enclosed IRS
Form 2039 Summons and attachment, which describes the information to be provided
by Coinbase pursuant to this summons.

In an e-mail to Amy Matchison of the Department of Justice on December 1, 2016, you


indicated that Coin base has authorized you to accept service of the above-described
summons, and thus waives the statutory service requirement. You indicated that the
preferred method of service is via overnight delivery. We understand that Coinbase will
not raise service as a defense to the enforcement of the summons. Should this
understanding be incorrect, please contact the undersigned and Ms. Matchison.

In lieu of personal appearance, Coinbase can provide the summonsed items to:

David J. Utzke, Sr.


Internal Revenue Service
MS LB&I, OCI
1818 E. Southern Ave.
Mesa, AZ 85204

If you have any questions, please contact me at (626) 237-1237.


cooperation.

e hD, CFE, CFI, CPO, CEPS


ue Agent

Enclosures: IRS Form 2039 (Summons) with attachment


Order dated November 30, 2016
Government
CC: Amy Matchison, Department of Justice Exhibit
Jeremy N. Hendon, Department of Justice _____________
A
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Summons
In the matter of Tax Liability of John Does*
Internal Revenue Service (Division): LarQ_~....:
B:.:u:.:s.:.:.in:.::e:.:s:.: :s..:&:...:.:.
ln:.::t:::er::..n:.::a::.:ti:.:::o.:.:n:::a:...:
l D:::.:.:iv.:.:is::.:io:::n.:__ _ _ __ ___________
Industry/Area (name or number): Withholding & International Individual Compliance, Offshore Compliance Initiatives
Periods: Years ending 12/31/2013 through 12/31/2015

The Commissioner of Internal Revenue


To: Coinbase, Inc.
At: Attn: CEO 548 Market St #23008, San Franscisco, CA 94563

You are hereby summoned and required to appear before David J. Utzke, Senior Revenue Agent or Designee
an officer of the Internal R.evenue Service, to give testimony and to bring with you and to produce for examination the following books, records, papers,
and other data relating to the tax liability or the collection of the tax liability or for the purpose of inquiring into any offense connected with the
administration or enforcement of the internal revenue laws concerning the person identified above for the periods shown.

See attachment

*. "John Does" are United States persons who, at any time during the period January 1, 2013, through December 31,
2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21.

Attestation

I hereby certify that I have examined and compared this copy of the summons with the original
and that it is a true and corr ct copy of the original.

Program Manager-OCI
TiUe

Business address and telephone number of IRS officer before whom you are to appear;
1818 East Southern Avenue, Mesa, AZ 85204/626-927-1237
Place and time for appearance at Internal Revenue Service, 450 Golden Gate Avenue, San Francisco CA 94102

m.
December 2016
(yeary
Department of the Treasury
lnte.mal Revenue Service Senior Revenue Agent
Title
www.irs_gov
Program Manager-OCI
Form 2039 (Rev. 10-2010) Title
Catalog Number 21405J
Part A - to be given to person summoned

- - -- - - - - - - -------- -
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Se c. 7603. Service of summons


Provisions of the (a) In general- A summons issued under section 642D(e)(2), 6421(g)(2), 6427(j)(2), or 7602
shall be seNed by the Secretary, by an attested copy delivered in hand to the person to
Internal Revenue Code whom it is directed, or left at his last and usual place of abode; and the certificate of service
signed by the person seNing the summons shall be evidence of the facts it states on the
hearing of an application for the enforcement of the summons. Vvhen the summons requires
Sec. 7602. Examination of books and witnesses the production of books, papers, records, or other data, it shall be sufficient if such books,
(a) Authority to Summon, etc. - For the purpose of ascertaining the correctness of any re- papers, records, or other data are described with reasonable certainty
turn, making a return where none has been made, determining the liability of any person for (b) SeNice by mail to third-party recordkeepers. -
any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any (1) In general. - A summons referred to in subsecti on (a) for the production of
person in respect of any internal revenue tax, or collecting any such liability, the Secretary books, papers, records, or other data by a third-party recordkeeper may also be
(s authorized - served by certified or registered mail to the last known address of such
(1) To examine any books, papers, records. or other data which may be relevant or recordkeeper.
material to such inquiry. (2) Third party record keeper.- For purposes of paragraph (1 ), the term third-party
(2) To summon the person liable for tax or required to perform the act, or any officer recordkeeper means -
or employee of such person, or any person having possession, custody, or care of (A) arw mutual savings bank, cooperative bank, domestic building and
books of account containing entries relating to the business of the person liable for loan association, or other savings institution chartered and supeNised
tax or required to perform the act, or any other person the Secretary may deem as a savings and loan or simil ar association under Federal or State law,
proper, to appear before the Secretary at a time and place named in the summons any bank (as defined in section 581 ), or any credit union (withi n the
and to produce such books, papers, records, or other data, a nd to give such meaning of section 501 (c)(14)(A));
testimony, under oath, as may be relevant or material to such inquiry; and (B) any consumer reporting agency (as defined under section 603(1) of
(3) To take such testimony of the person concerned, under oath, as may be relevant the Fair Credit Reporting Act (15 U.S.C. 1681 a(f));
or material to such inquiry. (C) Any person extending credit through the use of credit cards or
similar devices;
(b) Purpose may include inquiry into offense. -The purposes for which the Secretary may
(D) any broker (as defined in section 3(a)(4) of the Securities Exchange
take any action described in paragraph (1), (2), or (3) of subsection (a) include the purpose Act of 1934 (15 U.S.C. 78c(a)(4));
of inquiring into any offense connected with the administration or enforcement of the internal (E) any attorney;
revenue laws. (F) any accountant;
(c) N.otice of contact of third parties. - (G) any barter exchange (as defined in section 6045(c)(3));
(H) any regulated investment company (as defined in section 851-) and
(1) General Notice. - An officer or employee of the Internal Revenue Service may
any agent of such regulated investment company when acting as an
_not contact any person other than the taxpayer with respect to the determination or
collection of the tax l iability of such taxpayer without providing reasonable notice in agent thereof;
(I) any enrolled agent; and
advance to the taxpayer that contacts with persons other than the taxpayer may be
(J) any owner or developer of a computer software source code (as
made.
defined in section 7612(d)(2)). Subparagraph (J) shall apply only with
(2) Notice of specific contacts. - The Secretary sha ll periodically provide to a
respect to a summons requirin g the production of the source code
taxpayer a record of persons contacted during such period by the Secretary with referred to in subparagraph (J) or t he program and data described in
respect to the determination or collection of the tax liability of such taxpayer. Such
section 7612(b)(1)(A)(ii) to which source code relates.
record shall also be provided upon request of the taxpayer.
(3) Exceptions. - This subsection shall not apply-
(A) to any contact which the taxpayer has authorized, Sec . 7604. Enforcement of summons
(B) if the Secretary determines for good cause shown that such notice (a) Jurisdiction of District Court. - If any person is summoned under the internal revenue
would jeopardize collection of any tax or such notice may involve laws to appear, to testify, or to produce books, papers, records, or other data, the United
reprisal against any person, or States district court for the district in which such person resides or is found shall have
(C) with respect to any pending criminal investigation. jurisdiction by appropriate process to compel such attendance, testimony, or production of
books, papers, records, or other data.
(d) No administrative summons when there is Justice Department referral.-
(1) Limitation of authority. - No summons may be issued under this title, and the (b) Enforcement.- Whenever any person summoned under section 6420(e)(2), 642_1 (g)(2),
Secretary may not begin any action under section 7604 to enforce any summons, 6427(j)(2), or 7602 neglects or refuses to obey such summons, or to produce books, papers,
With respect to any person if a Justice Department referral is in effect with respect records, or other data, or to give testimony, as required, the Secretary may apply to the
judge of the district court or to a United States Commissioner for the district within which
to such person.
(2) Justice Department referral in effect. - For purposes of this subsection- the person so summoned resides o r is found for an attachment against him as for a
contempt. It shall be the duty of the judge or Commissioner to hear the application, and, if
(A) In general. -A Justice Department referral is in effect with respect
satisfactory proof is made, to issue an attachment, directed to some proper officer, for the
to any per son if-
arrest of such person, and upon his being brought before him to proceed to a hearing of the
(i) the Secretary has recommended to the Attorney General
case; and upon such hearing the judge or the United States Commissioner shall have
a grand jury investigation of, or the crimin al prosecution of, power to make such order as he shall deem proper, not inconsistent with the law for the
such person for any offense connected with the adminis- punishment of contempts, to enforce obedience to the requirements of the summons and to
tration or enforcement of the internal revenue laws or punish such person for his default or disobedience.
(ii) any request is made under section 6103(h)(3)(B) for the
disclosure of any return or return information (within the
meaning of section 6103(b)) relating to such person. Sec. 7605. Time and place of examination
(B) Termination.- A Justice Department referral shall cease to be in (a) Time and place. -The time and place of examination pursuant to the provisions of
effect with respect to a person when- section 6420(e)(2), 6421 (g)(2), 6427(j)(2), or 7602 shall be such time and place as may be
(i) the Attorney General notifies the Secretary, in writing, fixed by the Secretary and as are reasonable under the circumstances. In the case of a
that - summons under authority of paragraph (2) of section 7602, or under the corresponding
(I) he will not prosecute such person for any offense authority of section 6420(e)(2), 6421 (g)(2) or 6427(j)(2), the date fixed for appearance
connected with the administration or enforcement of the before the Secretary shall not be less than 1 0 days from the date of the summons.
internal revenue laws,
(II) he will not authorize a grand jury investi gation of such
person with respect to such an offense, or Sec. 761 0. Fees and costs for witn esses
(Ill) he will discontinue such a grand jury investigation. (a) In general. - The Secretary shall by regulations establi sh the rates and conditions under
(ii) a fimil disposition has been made of any crimi nal which payment may be made of -
proceeding pertaining to the enforcement of the internal (1) fees and mileage to persons who are summoned to appear before the
revenue laws which was instituted by the Attorney General Secretary, and
against such person, or (2) reimbursement for such costs that are reasonably necessary which have been
(iii) the Attorney General notifies the Secretary, in writing, directly incu rred in searching for, reproducing, or tran sporting books, papers ,
that he will not prosecute such person for any offense records, or other data required to be produced by summons.
connected with th e administration or enforcement of the (b) Exceptions. - No payment may be made under paragraph (2) of subsection (a) if -
internal revenue laws relating to the request described in (1) the person with respect to whose liability the summons is issued has a proprie-
sub paragraph (A)(ii). tary interest in the books, papers, records or other data required to be produced, or
(3) Taxable years, etc., treated separately. - For purposes of this subsection, each (2) the person summoned is the person with respect to whose liability the summons
taxable period (or, if there is no taxable period, each taxable event) and each tax is issued or an officer, employee, agent, accountant, or attorney of such person
imposed by a separate chapter of this title shall be treated separately. who, at the time the summons is seNed, is acting as such.

(e) Limitation on examination on unreported income. - The Secretary shall not use financial (c) Summons to which section applies. - This section applies with respect to any summons
status or economic reality examination techniques to determine the existence of unreported authorized under section 6420(e)(2), 6421 (g)(2), 6427(j)(2), or 7602,
i ncome of any taxpayer unless the Secretary has a reasonable indication t hat there is a
likelihood of such unreported income. Sec. 7210. Failure to obey summons
Any person who, being dul y summoned to appear to testify, or to appear and produce books,
accounts, records, memoranda or other papers, as required under sections 6420(e)(2),
Authority to examine books and witness is also provided under sec. 6420 (e)(2)- Gasoline 6421(g)(2), 64270)(2), 7602, 7603, and 7604(b), neglects to appear or to produce such
used on farms: sec. 6421 (g)(2)- Gasoline used for certain non highway purposes by local books, accounts, records memoranda, or other papers, shall, upon conviction thereof, be
transit systems, or sold for certain exempt purposes; and sec. 6427(j)(2) - Fuels not used for fined not more than $1 ,000, or imprisoned not more than 1 year, or both, tog ether with costs
taxable purposes. of prosecution.

Form 2039 (Rev. 10-201 0)


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Notice of Payment Information for


Recipients of IRS Summons
If you are a third-party recipient of a summons, you In addition to payment for search, reproduction, and
may be entitled to receive payment for certain costs transportation costs, persons who appear before an
directly incurred which are reasonably necessary to Internal Revenue Service officer in response to a
search for, reproduce, or transport records in order to summons may request payment for authorized witness
comply with a summons. fees and mileage fees. You may make this request by
This payment is made only at the rates established by contacting the Internal Revenue Service officer or by
th~ Internal Revenue Service to certain persons served claiming these costs separately on the itemized bill or
with a summons to produce records or information in invoice as explained below.
which the taxpayer does not have an ownership interest.
The taxpayer to whose liability the summons relates and Instructions for requesting payment
the taxpayer's officer, employee, agent, accountant, or
attorney are not entitled to this payment. No payment After the summons is served, you should keep an
will be made for any costs which you have charged or accurate record of personnel search time, computer
billed to other persons. costs, number of reproductions made, and
The rate for search costs is limited to the total amount transportation costs. Upon satisfactory compliance, you
of personnel time spent locating and retrieving may submit an itemized bill or invoice to the Internal
documents or information requested by the summons. Revenue Service officer before whom you were
Specific salaries of such persons may not be included in summoned to appear, either in person or by mail to the
search costs. In addition, search costs do not include address furnished by the Internal Revenue Service
salaries, fees, or similar costs for analysis of material or officer. Please write on the itemized bill or invoice the
for managerial or legal advice, expertise, research, or name of the taxpayer to whose liability the summons
time spent for any of these activities. If itemized relates.
separately, search costs may include the actual costs of If you wish, Form 6863, Invoice and Authorization for
extracting information stored by computer in the format Payment of Administrative Summons Expenses, may be
in which it is normally produced, based on computer used to request payment for search, reproduction, and
time and necessary supplies. Time for computer search transportation costs. Standard Form 1157, Claims for
may be paid. Witness Attendance Fees, Travel, and Miscellaneous
Expenses, may be used to request payment for
Rates for reproduction costs for making copies or authorized witness fees and mileage fees. These forms
duplicates of summoned documents, transcripts, and
are available from the Internal Revenue Service officer
other similar material may be paid at the allowed rates.
who issued the summons.
Photographs, films, and other material are reimbursed at
If you have any questions about the payment, please
cost.
contact the Internal Revenue Service officer before
The rate for transportation costs is the same as the whom you were summoned to appear.
actual cost necessary to transport personnel to locate Anyone submitting false claims for payment is subject
and retrieve summoned records or information or costs to possible criminal prosecution.
incurred solely by the need to transport the s~mmoned
material to the place of examination.

r;JIRS
Department of the Treasury
Internal Revenue Service

www.irs.gov
Form 2039 (Rev. 10-2010)
Catalog Number 2 1405J
Part B - to be given to person summoned
- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - -

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. Sec. 7609. Special procedures for third-party summons (d) Restriction on examination of records. - No examination of any records required to be
produced under a summons as to which notice is required under subsection (a) may be
(a) Notice- made -
(1) In generaL If any summons to which this section applies requires the giving of (1) before the close of the 23rd day after the day notice with respect to the
testimony on or relating to, the production of any portion of records made or kept summons is given in the manner provided in subsection (a)(2). or
on or relati ng to, or the production of any computer software source code (as (2) where a proceeding under subsection (b)(2)(A) was begun within the 20-day
defined in 7612(d)(2)) with respect to, any person (other than the person period referred to i n such subsection and the requirements of subsection (b)(2)(B)
summoned) who is identified in the summons, then notice of the summons shall be have been met, except in accordance with an order of the court having jurisdiction of
given to any person so identified within 3 days of the day on which such service is such proceeding or with the consent of the person beginning the proceeding to quash.
made, but no later than the 23rd day before the day fixed in the summons as the
day upon which such records are to be examined. Such notice shall be (e) Suspension of Statute of Limitations. -
accompanied by a copy of the summons which has been served and shall contain (1) Subsection (b) action. -If any person takes any action as provided in
an explanation of the right under subsection (b){2) to bring a proceeding to quash subsection (b) and such person is the person with respe ct to whose liability the
the summons. summons is issued (or is the agent, nominee, or other person acting under the
(2) Sufficiency of notice. - Such notice shall be sufficient if, on or before such third direction or control of such person), then the running of any period of limitations
day, such notice is served in the manner provided in section 7603 (relating to under section 6501 (relating to the assessment and collection of tax) or under
service of summons) upon the person entitled to notice, or is mailed by certified or section 6531 (relating to criminal prosecutions) with respect to such person shall
registered mail to the last known address of such person, or, in the absence of a be suspended for the period during which a proceeding, and appeals therein, with
last known address, is left with the person summoned. If such notice is mailed, it respect to the enforcement of such summons is pending.
shall be sufficient if mailed to the last known address of the person entitled to notice (2) Suspension after 6 months of service of summons. - In the absence of the
or, in the case of notice to the Secretary under section 6903 of the existence of a resolution of the summoned party's response to the summons. the running of any
fiduciary relationship, to the last known address of the fiduciary of such person, period of limitations under section 6501 or under section 6531 with respect to any
even if such person or fiduciary is then deceased, under a legal disability, or no person with respect to whose liability the summons is issued (other than a person
longer i n existence. taking action as provided i n subsection (b)) shall be suspended for the period-
(3) Nature of summons. -Any summons to which this subsection applies (and any (A) beginning on the date which is 6 months after the service of such
summons in aid of collection described in subsection (c){2)(D)) shall identify the summons. and
taxpayer to whom the summons relates or the other person to whom the reccrds (B) ending with the final resolution of such response.
pertain and shall provide such other infor mation as will enable the person
summoned to locate the records required under the summons. (f) Additional requirements in the case of a John Doe summons. -
Any summons described in subsection (c)(1) which does not identify the person with respect
(b) Right to intervene; right to proceeding to quash. - to whose liability the summons is i ssued may be served only after a court proceeding in
(1) Intervention. - Notwithstanding any other law or rule of law, any person who is which the Secretary establishes that -
entitled to notice of a summons under subsection (a) shall have the right to (1) the summons relates to the investigation of a particular person or ascertainable
intervene in any proceeding with respect to the enforcement of such summons group or class of persons.
under section 7604. (2) there is a reasonable basis for believing that such person or group or class of
(2) Proceeding to quash.- persons may fail or may have failed to comply with any provision of any internal
(A) In general. - Notwithstanding any other law or rule of law, any revenue law, and
person who is entitled to notice of a summons under subsection (a) (3) the information sought to be obtained from the examination of the records or
shall have the right to begin a proceeding to quash such summons not testi mony (and the identity of the person or persons with respect to whose liability
later than the 2oth day after the day such notice is given in the manner the summons is issued) is not readily available from other sources.
provided in subsection (a)(2). In any such proceeding, the Secretary
may seek to compel compliance with the summons. (g) Special exception for certain summonses. -
(B) Requirement of notice to person summoned and to Secretary.- If A summons is descri bed in this subsection if, upon petition by the Secretary. the court
any person begins a proceeding under subparagraph (A) with respect determines, on the basis of the facts and circumstances alleged, that there is reasonable
to any summons, not later than the close of the 20-day period referred cause to believe the giving of notice may lead to attempts to conceal, destroy, or alter
to in subparagraph (A) such person shall mail by registered or certified records relevant to the examination, to prevent the communication of information
mail a copy of the petition to the person summoned and to such office from other persons through intimidation, bribery, or collusion, or to flee to avoid
as the Secretary may direct in the notice referred to in subsection prosecution, testifying, or production of records.
[a) [1 ).
(C) Intervention, etc. - Notwithstanding any other law or rule of Jaw, the (h) Jurisdiction of district court; etc. -
person summoned shall have the right to intervene in any proceeding (1 ) Ju risdiction.- The United States district court for the district within which the
under subparagraph (A). Such person shall be bound by the decision in person to be summoned resides or is found shall have jurisdiction to hear and
such proceeding (whether or not the person intervenes in such determine any proceedings brought under subsection (b)(2), (f), or (g). An order
proceeding). denying the petition shall be deemed a final order which may be appealed.
(2) Special rule for proceedings under subsections (f) and (g).- The determinations
(c) Summons to which section applies. - required to be made under subsections (f) and (g) shall be made ex parte and shall
(1) In general.- Except as provided in paragraph ( 2), thi s section shall apply to be made solely on the petition and supporting affidavits.
any summons issued under paragraph (2) of section 7602(a) or under sections
6420(e)(2), 6421 (g)(2). 6427(j)(2). or 7612. (i) Duty of summoned party. -
(2) Exceptions. - This section shall not apply to any summons (1 ) Record keeper must assemble records and be prepared to produce records.-
{A) served on the person with respect to whose liability the summons is On receipt of a summons to which this secti on applies for the production of records,
issued, or any officer or employee of such person; the summoned party shall proceed to assemble the records requested, or suc h
(B) issued to determine whether or not records of the business portion thereof as the Secretary may prescribe, and shall be prepared to produce
transaction or affairs of an identified person have been made or kept; the records pursuant to the summons on the day on which the records are to be
(C) issued solely to determine the identify of any person having a examined.
numbered account (or similar arrangement) with a bank or other (2) S7cretary may give summoned party certificate. - The Secretary may issue a
institution described in section 7603{b)(2)(A) ; certificate to the summoned party that the period prescribed for beginning a
(D) issued in aid of the collection of- proceeding to quash a summons has expired and that no such proceeding began
{i) an assessment made or a judgment rendered against the within such period, or that the taxpayer consents to the examination.
person with respect to whose liability the summons is (3) Protection for summoned party who discloses. - Any summoned party, or agent
issued, or or employee thereof. making a disclosure of records or testimony pursuant to this
(ii) the liability at law or in equity of any transferee or section in good faith reliance on the certificate of the Secretary or an order of a
fiduciary of any person referred to in clause; or court requiring production of reccrds or the giving of such testimony shall not be
(E) (i) issued by a criminal investigator of the Internal Revenue liable to any customer or other person for such disclosure.
Service in connection with the investigation of an offense (4) Notice of suspension of statute of limitations in the case of a John Doe
connected with the administration or enforcement of the summons. - In the case of a summons described in subsection (f) with respect to
internal revenue laws. and which any penod of llm1tat1ons has been suspended under subsection (e)(2), the
(ii) served on a person who is not a third-party recordkeeper summoned party shall provide notice of such suspension to any person described
(as defined in section 7603(b)) . in subsection (f).
(3) John Doe and Certain Other Summonses. - Subsection (a) shall not apply to
any summons described in subsection (f) or (g). (j) Use of summons not required. -
(4) Records. - For purposes of this section, the term reccrds includes books, Nothing_ in this section shall be construed to limit the Secretary's ability to obtain
papers, and other data. mforma!Jon. other than by summons, through formal or informal procedures authorized
by sections 7601 and 7602.

Fo rm 2039 (Rev. 10-201 0)


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In the Matter of Tax Liability of John Does
Attachment to Form 2039 Summons to Coinbase, Inc. (d/b/a Coinbase)

DOCUMENTS

For each Coin base user for which your records show any U.S. address, U.S. telephone
number, U.S. e-mail domain, or U.S. bank account, produce the following records for
the period January 1, 2013 through December 31 , 2015 unless otherwise stated :

1. Account/wallet/vault registration records for each account/wallet/vault owned or


controlled by the user during the period stated above including, but not limited to,
complete user profile, history of changes to user profile from account inception,
complete user preferences, complete user security settings and history (including
confirmed devices and account activity), complete user payment methods, and
any other information related to the funding sources for the account/wallet/vault,
regardless of date.

2. Any other records of Know-Your-Customer due diligence performed with respect


to the user not included in paragraph 1, above.

3. For any account/wallet/vault with respect to which the registered user gave any
third party access, control, or transaction approval authority, all powers of
attorney, letters of wishes, corporate minutes, or other agreements or instructions
granting the third party such access, control, or approval authority.

4. All records of account/wallet/vault activity including transaction logs or other


records identifying the date, amount, and type of transaction
(purchase/sale/exchange), the post transaction balance, the names or other
identifiers of counterparties to the transaction ; requests or instructions to send or
receive bitcoin; and, where counterparties transact through their own Coinbase
accounts/wallets/vaults, all available information identifying the users of such
accounts and their contact information.

5. For each merchant user for which you act as Payment Service Provider, records
of all payments processed, including records identifying the user of the wallet
charged, if a Coinbase user, or the address of the wallet charged, if not, the date
and amount of the transaction, and any other information that will enable the
merchant to identify the transaction.

6. All correspondence between Coinbase and the user or any third party with
access to the account/wallet/vault pertaining to the account/wallet/vault, including
but not limited to letters, memoranda, telegrams, telexes, facsimiles , e-mail,
letters of instruction, and memoranda of telephone or oral instructions received .

7. All periodic statements of account or invoices (or the equivalent).

1 '
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8. All records of payments to or from the user by checks , wire or other electronic
transfer, ACH transaction, PayPal transfer, credit or debit card transaction ,
money order, transfer to or from other digital currency wallet address, or any
other method, including records reflecting the form, manner, nature, and purpose
of such payment including, but not limited to, ABA routing number and other
routing information, payment instructions, and any and all invoices, billing
statements, receipts, or other documents memorializing and describing such
transaction.

9. All exception reports produced by your AML system, and all records of
investigation of such exceptions.

For the purpose of this summons, you are required to produce all documents
described in this attachment, whether located in the United States or otherwise,
that are in your possession , custody, or control, or otherwise accessible or
available to you either directly or through other entities.

INSTRUCTIONS FOR PRODUCTION OF ELECTRONICALLY STORED RECORDS

If the records requested herein are stored in your record retention systems
and/or by your technology, data, or other service providers, it should be produced on
electronic media according to the following criteria:

I. Text Data
A. Text data relating to transactions shall be produced within a data file :
1. Using a delimited ASCII text data format; or
2. Using software that can export to a commonly readable , nonproprietary
file format without loss of data.
3. If text data is stored in a format readable only by proprietary software,
provide a copy of software necessary to enable the data to be retrieved,
manipulated, and processed by a computer.
B. Text data files relating to transactions shall include field descriptions (e.g. ,
account number, date/time, description , payee/payor, check number, item
identifier, amount, etc.)

II. Image Data


A. Image data shall be produced in graphic data files in a commonly readable ,
nonproprietary format with the highest image quality maintained .
B. Image data of items associated with transactions (e.g., cancelled checks,
deposit slips, etc.) shall be:
1. Produced in individual graphic data files with any associated
endorsements;
2. Linked to corresponding text data by a unique identifier; and

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In the Matter of Tax Liability of John Does
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3. Image collections, OCR (optical character recognition), and image


linking files must be produced in a Concordance load-ready format, ideally
in a Concordance database.

Ill. Encryption/Authentication
A. Electronically stored records may be transmitted in an encrypted container.
Decryption keys and/or passwords shall be produced separately at the time the
data is produced .
B. Authentication, such as hash coding , may be set by agreement.
C. Affidavits or certificates of authenticity for the records may be included as part
of the electronic production.

If you have questions about the format in which to provide electronic data, please
contact Revenue Agent David J. Utzke by telephone at (626) 927-1237.

Before you produce any of the above-listed records, please contact Revenue
Agent Utzke by telephone at (626) 927-1237 to discuss the terms of compliance.

The personal appearance requirement is waived when the requested information


is furnished by mail to Revenue Agent Utzke at 1818 East Southern Avenue, Mesa, AZ
85204.

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Case 3:16-cv-06658-JSC Document 7 Filed 11/30116 Pag e 1 of 2

CAROLINE D. CIRAOLO
Principal Deputy Assistant Attorney General
2
JEREMY N. HENDON (ORBN 982490)
3 AMY MATCHISON (CABN 217022)
4 Trial Attorneys
United States Department of Justice, Tax Division
5 P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044
6 Telephone: (202) 353-2466
(202) 307-6422
7
Fax: (202) 307-0054
8 E-mail: Jeremy.Hendon(alusdoj.gov
Amv.T.Matchison@usdoj.gov
9 Western.Taxcivil@ usdoj.gov

10 B~N J. STRETCH (CABN 163973)


United States Attorney
11
THOMAS MOORE (ALBN 4305-078T)
12 Chief, Tax Division
COLIN C. SAMPSON (CABN 249784)
13 Assistant United StatesAttorney
450 Golden Gate A venue, 11th Floor
14 San Francisco, California 94102
Tefepll.one: (415) 436-7020
15
Email: Colin.Sampson@.usdo j.gov
16
Attorneys for United States of America
17
UNITED STATES DISTRICT COURT FOR THE
18 NORTHERN DISTRICT OF CALIFORNIA

19 IN THE MATIER OF THE TAX )


LIABILITIES OF: ) Civil Number: 3:16-cv-06658-JSC
20 )
JOHN DOES, United States persons who, )
21 at any time during the period January 1, 2013, ) [PRBPBS~] ORDER GRANTING
through December 31, 2015, conducted ) EX PARTE PETITION FOR LEAVE TO
22 transactions in a convertible virtual currency ) SERVE "JOHN DOE" SUMMONS
as defined in IRS Notice 2014-21. )
23 )
____________________________)
24

25 THIS MA TIER is before the Court upon the United States of America' s "Ex Parte Petition for
26 Leave to Serve "John Doe" Summons" (the "Petition"). Based upon a review of the Petition and

' 27 supporting documents, the Court has determined that the "John Doe" summons to Coinbase, Inc. relates

fPropused] Order Granting Ex Parte Petition


For Leave to Serve John Doe Summons

- - -- - - - - __/'
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Case 3:16-cv-06658-JSC Document 7 Filed 11/30/16 Page 2 of 2

to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for

2 believing that such group or class of persons has failed or may have failed to comply with any provision
I
3 of any internal revenue laws, and that the information sought to be obtained from the examination of the

4 records or testimony (and the identities of the persons with respect to whose liabi lity the summons is

5 issued) are not readily available from other sources. It is therefore:


6 ORDERED AND ADJUDGED that the Internal Revenue Service, through Senior Revenue

7 Agent David Utzke or any other authorized officer or agent, may serve an Internal Revenue Service

8 John Doe summons upon Coinbase, Inc. in substantially the form as attached as Exhibit B to Declaration

9 of Senior Revenue Agent David Utzke. A copy of this Order shall be served together with the

10 summons.

11 IT IS SO ORDERED this 30t~ay of November


12

13
,,
14

15

16 Presented by:

17 CAROLINE D. CIRAOLO
Principal Deputy Assistant Attorney General
18
Is/ Jeremy N. Hendon
19
Is/ Amy Matchison
20 JEREMY N. HENDON
AMY MATCHISON
21 Trial Attorneys, Tax Division
U.S. Department of Justice
22

23 BRIAN J. STRETCH ::
United States Attorney
24 Northern District of California

25 Is/ Colin C. Sampson


COLIN C. SAMPSON
26 Assistant United States Attorney,
Tax Division
27

[Proposed] Order Granting Ex Parte Petition


For Leave to Serve John Doe Summons 2
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 14 of 24

Exhibit 2
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 15 of 24

820 First Street NE, Suite 510


Washington, DC 20002

Tel: 202-408-1080
Fax: 202-408-1056

center@cbpp.org
www.cbpp.org

Updated April 4, 2016

IRS Funding Cuts Compromise Taxpayer Service


and Weaken Enforcement
By Chuck Marr and Cecile Murray1

The Internal Revenue Service (IRS) budget has been cut by 17 percent since 2010, after adjusting
for inflation, forcing the IRS to reduce its workforce, severely scale back employee training, and
delay much-needed upgrades to information technology systems. These steps, in turn, have
weakened the IRSs ability to enforce the nations tax laws and serve taxpayers efficiently, as the
National Taxpayer Advocate, the Treasury Inspector General for Tax Administration, the IRS
Oversight Board, and the Government Accountability Office have all documented. As seven
former IRS commissioners from both Republican and Democratic administrations have written:
Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS
appropriations over the last five years and the impact these appropriations reductions are having on
our tax system.2

National Taxpayer Advocate Nina Olson recently highlighted an example underscoring the deep
impact of the budget crisis on taxpayer service. Taxpayers whose returns the IRS Taxpayer
Protection Program (TPP) flagged as potentially subject to identity theft need to contact the IRS by
phone or online to get their returns processed. All of these legitimate taxpayers were desperately
attempting to free up their refunds, she told Congress, yet at one point during the filing season [in
2015] the level of service on the TPP line was below ten percent for three consecutive weeks
meaning more than 90 percent of calls were not answered!3

In response to criticism, Congress agreed to a small nominal increase in IRS funding for fiscal year
2016, though funding was essentially flat in inflation-adjusted terms. The year-end omnibus
appropriations bill provided an additional $290 million to improve taxpayer services (in part by

1 Brandon DeBot, Joel Friedman, and Nathaniel Frentz contributed to earlier versions of this paper.
2
Former IRS Commissioners Mortimer M. Caplan, Sheldon S. Cohen, Lawrence B. Gibbs, Fred T. Goldberg, Jr., Shirley
D. Peterson, Margaret M. Richardson, and Charles O. Rossotti, Letter to the Honorable Thad Cochran, the Honorable
Barbara A. Mikulski, the Honorable Harold Rogers, and the Honorable Nita M. Lowey: IRS Appropriations for Fiscal
Year 2016, November 9, 2015, http://taxprof.typepad.com/files/former-irs-commissioners-letter-on-agency-
budget.pdf.
3
Nina E. Olson, 2015 Annual Report to Congress: Preface, National Taxpayer Advocate, January 6, 2016, p. vii,
http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_ExecSummary.pdf.

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hiring seasonal employees), strengthen cybersecurity, and expand the agencys ability to address
identity theft.

Still, this small increase is not enough to make up for the deep funding cuts, and the resulting
reductions in personnel, the IRS has experienced since 2010. IRS Commissioner John Koskinen
testified that despite the modest boost, the IRS is still under significant financial constraints, and
that he expects the permanent IRS workforce to continue shrinking this year.4 At the same time, the
IRS workload continues to increase (see Figure 1).

FIGURE 1

The Presidents fiscal year 2017 budget offers a framework for reversing these harmful cuts,
boosting IRS funding by about 9 percent over the 2016 level (or 7 percent, adjusted for inflation).
The increased funding focuses on enforcement, taxpayer services, and information technology
investments. But even with these additional resources, IRS funding would remain roughly 12
percent below the 2010 level, adjusted for inflation.

The IRS plays a fundamental role in our system of government by helping taxpayers comply with
the tax code and ensuring that the nations tax laws are enforced fairly and credibly, as well as by
collecting nearly all of the revenue that funds federal programs from national defense and the safety
net to roads, science research, and education. Policymakers must provide the resources it needs to
do these jobs effectively.

4
Testimony of IRS Commissioner John A. Koskinen on the IRS budget and current operations, hearing before the
Senate Finance Committee, February 10, 2016,
http://www.finance.senate.gov/imo/media/doc/2016%20JAK%20testimony%20SFC%20on%20FY17%20budget%20
021016x.pdf.

2
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IRS Funding Has Fallen Sharply Since 2010


Since regaining a majority in the 2010 elections, House Republicans have targeted the IRS for
sharp cuts. As Figure 2 shows, the agencys inflation-adjusted funding has fallen sharply since 2010.
Even though Congress and the Administration negotiated a small $290 million increase in 2016, it
was barely enough to keep up with inflation. As a result, IRS funding is still 17 percent below the
2010 level, adjusted for inflation. Even in nominal terms ignoring inflation IRS funding this
year is $900 million or 8 percent below its 2010 FIGURE 2
level.

To be sure, funding for non-defense


appropriations has been under pressure in
recent years, in large part due to the funding
caps set in the 2011 Budget Control Act and
subsequently lowered by sequestration. But the
IRS has been targeted for particularly deep cuts,
with inflation-adjusted cuts since 2010 that are
50 percent greater than the overall average cut in
non-defense appropriations.

Cuts in Workforce and Training


Three-quarters of the IRS budget goes to
personnel, 85 percent of whom are directly
involved in enforcing tax laws or providing
taxpayer services.5 Accordingly, in the face of
low funding, the IRS has cut its workforce
substantially by about 13,000, or 14 percent,
between 2010 and 2016 (see Figure 3). The
modest 2016 funding increase allowed the agency to hire additional staff, including seasonal
employees to assist with customer service during filing season. But the increase is insufficient to
stop all the bleeding: Commissioner Koskinen expects the permanent IRS workforce to shrink, as it
is unable to replace most employees leaving through attrition.6 Importantly, the total number of
enforcement employees continues to dwindle.

The IRS Oversight Board, an independent body that Congress created to provide long-term
guidance to the IRS, explained in 2014 how these cuts are affecting the IRS workforce:

The workforce has decreased over the last four years due to a longstanding combination of
attrition and a hiring freeze. As the result of the hiring freeze, new employees replace
outgoing employees at a rate of one to five. This means a current IRS employee will see five
coworkers leave, some of them the most experienced and well trained, before one new
employee is eventually hired to cope with a growing workload. This puts enormous stress

5Based on data in Government Accountability Office, Internal Revenue Service: Observations on IRSs Operations,
Planning, and Resources, February 27, 2015, http://www.gao.gov/assets/670/668769.pdf.
6
Testimony of IRS Commissioner Koskinen, hearing before the Senate Finance Committee, February 10, 2016.

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on new employees arriving at understaffed offices and those who remain as they shoulder
the burden of the work left behind until a new employee arrives to help.7

National Taxpayer Advocate Olson summed up the consequences of the shrinking workforce,
saying: I do not see any substitute for sufficient personnel if the IRS is to provide high-quality
taxpayer service.8

FIGURE 3

Decline in Taxpayer Services


The cuts since 2010 have significantly weakened taxpayer services. As the Government
Accountability Office (GAO) found last year, A reduced budget and increased workload has
contributed to performance declines across the agency, including serious concerns about service to
taxpayers during filing season.9

Last years tax filing season was particularly abysmal, according to IRS Commissioner Koskinen.
In 2010, about three-quarters of calls to the IRS were answered, with an average wait time of 11

7IRS Oversight Board, FY2015 IRS Budget Recommendation Special Report, May 2014, p. 15,
http://www.treasury.gov/IRSOB/reports/Documents/IRSOB%20FY2015%20Budget%20Report-FINAL.pdf.
8Written statement of Nina E. Olson, National Taxpayer Advocate, hearing before the House Committee on Oversight
and Government Reform, Subcommittee on Government Operations, April 15, 2015,
http://www.irs.gov/pub/tas/Testimony_House_Oversight_NTA_report-4-15-2015.pdf.
9Government Accountability Office, Internal Revenue Service: Observations on IRSs Operations, Planning, and
Resources, February 27, 2015, p. 33, http://www.gao.gov/assets/670/668769.pdf.

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minutes.10 During last years filing season, only 37 percent of calls were answered, with an average
wait of 23 minutes. This means that more than 60 percent of calls were not answered at all.11
Relatedly, the number of courtesy disconnects, when taxpayer calls are dropped because the IRSs
switchboard is overloaded, grew dramatically to about 8.8 million this year, up from 544,000 in
2014.12 The IRS also answered only basic tax questions this filing season, and it no longer helps
low-income, disabled, or elderly taxpayers prepare returns. Outside of tax season, the IRS no longer
answers any questions.

Similarly, while the IRS conducts important business with taxpayers through the mail (including
individual examinations and clarifications on how much tax a filer owes), it has failed to respond in a
timely manner to significant amounts of correspondence in recent years due to inadequate funding.13

These cuts threaten low-income and other vulnerable taxpayers in particular, as these populations
are more likely to need personal assistance to comply with their tax obligations. 14

Taxpayers caught up in identity theft issues faced particular frustration last year. The IRS must
aggressively combat identity theft but must also have the resources to limit the inconvenience of
taxpayers whose identities have been stolen or who have be incorrectly been captured by IRS
screening filters. Taxpayers caught up as a false positive must contact the IRS and verify who they
are to unlock the processing of their return and any refund. Yet during the 2015 filing season, the
Taxpayer Protection Program line that affected taxpayers were directed to call answered only 17
percent of calls. During some weeks, more than 90 percent of these calls went unanswered.15

The dismal state of taxpayer services last year helped convince Congress to boost IRS funding
modestly for 2016. About $178 million of the added $290 million is going to taxpayer services,
according to Commissioner Koskinen, including the hiring of seasonal employees to provide phone
and correspondence service during the 2016 tax filing season. He also projected that the phone
answer rate would be in the mid-60 percent range during filing season this year.16 Its essential that
this positive trend continue and that Congress commit itself to restoring the IRSs budget so that it
can provide the service that honest taxpayers deserve.

10
Government Accountability Office, Internal Revenue Service: Absorbing Budget Cuts Has Resulted in Significant
Staffing Declines and Uneven Performance, briefing for congressional committees, April 10, 2014, p. 13,
http://www.gao.gov/assets/670/662681.pdf.
11
National Taxpayer Advocate, FY 2016 Objectives Report to Congress: Review of the 2015 Filing Season, p. 9,
http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2016-JRC/2015_Filing_season_review.pdf.
12 Ibid., p. 18.
13 See, for example: GAO, February 27, 2015.
14 Olson, February 25, 2015.
15
National Taxpayer Advocate, FY 2016 Objectives Report to Congress: Review of the 2015 Filing Season, p. 26.
16
Internal Revenue Service, Commissioner Koskinens Speech to the National Press Club, March 24, 2016,
https://www.irs.gov/uac/March-24-2016-Commissioner-Koskinen-Speech-to-National-Press-Club.

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Weakening of Enforcement
Since 2010, the number of IRS staff devoted to enforcing tax laws has dropped from over 50,000
to below 39,000, a decline of 23 percent.17 (See Figure 4.) Among other things, the cuts have put
pressure on the IRSs Criminal Investigations Division (CI), which plays a crucial role in
enforcement by investigating potentially criminal tax code violations. This divisions activities not
only sanction tax evaders but also provide a strong incentive for voluntary compliance. However,
the number of these agents continues to fall as resources shrink. As former IRS Criminal
Investigation chief Mark Matthews recently put it, The inevitable result of CI budget declines is a
decline in CIs core product criminal cases and convictions.18

FIGURE 4

As a result of cuts, the IRS is conducting fewer audits overall and fewer audits of high-income
taxpayers and businesses. In 2010, it audited 1.1 percent of individual returns; in 2015, it audited
only 0.8 percent, the lowest level in a decade.19 The IRS audited 1.2 million taxpayers in 2015
13,700 fewer than in 2014 and over 350,000 below 2010.20 This represents a 22 percent drop.

17GAO, February 27, 2015, p. 35; Internal Revenue Service Congressional Budget Justification, Fiscal Year 2016,
https://www.treasury.gov/about/budget-performance/CJ16/02-06.%20IRS%20FY%202016%20CJ.pdf; Internal
Revenue Service Congressional Budget Justification, Fiscal Year 2017, https://www.treasury.gov/about/budget-
performance/CJ17/02-06.%20IRS%20FY%202017%20CJ%201%2022%2016%20v2%20FINAL%20CLEAN.PDF.
18
Mark Matthews, IRS Criminal Investigation: A National Asset Being Damaged, Tax Notes, March 15, 2016.
19
Internal Revenue Service, 2010 Data Book, https://www.irs.gov/pub/irs-soi/10databk.pdf; Internal Revenue
Service, 2015 Data Book, https://www.irs.gov/pub/irs-soi/15databk.pdf.
20Internal Revenue Service, Prepared Remarks of Commissioner Koskinen before the AICPA, November 3, 2015,
https://www.irs.gov/uac/Prepared-Remarks-of-Commissioner-Koskinen-before-the-AICPA.

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Audits recovered about 30 percent ($30 billion) less in revenue in the past five years than in the prior
five years.

Enforcement has suffered in part in spite of evidence that various IRS enforcement efforts save
many times what they cost. The Treasury estimates, for example, that every additional $1 invested in
IRS tax enforcement beyond current levels would yield $4 in increased revenue.21 As Commissioner
Koskinen summarized, Essentially, the government is losing billions to achieve budget savings of a
few hundred million dollars.22

Delays in Upgrading Information Technology and Cybersecurity


The IRS needs state-of-the-art information technology (IT) to perform its core functions of
collecting taxes and enforcing the nations tax laws while countering sophisticated identity thieves
and tax evaders and addressing taxpayers privacy concerns. The IRS lags behind in this area. For
example, some IRS computers still run on an operating system that is so outdated Microsoft no
longer services it; the IRS had to spend scarce funds to set up custom support.23 Commissioner
Koskinen notes that the IRS uses applications that were running when John F. Kennedy was
President.24 He concludes, Were falling behind in upgrading hardware infrastructure and
software. This compromises the stability and reliability of our information systems, and leaves us
open to more system failures and potential security breaches.25

GAO has reported that budget constraints have contributed to delays in two essential IT projects:
Information Reporting and Documentation Matching, designed to match documents such as 1099-
K forms with individual tax returns to help track down underreported income; and the Return
Review Program (RRP), designed to replace the outmoded Electronic Fraud Detection System, the
IRSs main system for detecting fraudulent returns.26 Part of the IRS effort to prevent identity
thieves from obtaining tax refunds fraudulently, the RRP is meant to allow the IRS to more quickly
and flexibly adjust its fraud detection filters to stay ahead of would-be identity thieves.27

Identity theft continues to present a major challenge for the IRS, making IT investments all the
more critical. The seven former IRS commissioners warned that increasing incidents of identity
theft and refund fraud are being perpetrated against our tax system by large crime syndicates around

21Internal Revenue Service, Prepared Remarks of Commissioner Koskinen before the AICPA, November 3, 2015.
The IRS calculates return on investment (ROI) performance measures for a variety of program areas; it estimates the
agency-wide ROI ratio is $4 to $1. However, ROI for specific enforcement activities is substantially higher.
22 John Koskinen, Koskinen Discusses Challenges Facing IRS, Tax Industry, Tax Notes, October 31, 2014.
23IRS Oversight Board, FY2015 IRS Budget Recommendation Special Report, May 2014, p. 15,
http://www.treasury.gov/IRSOB/reports/Documents/IRSOB%20FY2015%20Budget%20Report-FINAL.pdf.
24 John Koskinen, Koskinen Discusses Major Challenges Facing IRS, Tax Notes, February 24, 2015.
25 John Koskinen, Koskinen Discusses Challenges Facing IRS, Tax Industry, Tax Notes, October 31, 2014.
26Government Accountability Office, Letter to the Honorable Ron Wyden, the Honorable Tom Udall, and the
Honorable Charles W. Boustany, Jr., Absorbing Budget Cuts Has Resulted in Significant Staffing Declines and Uneven
Performance, April 21, 2014, p. 24, http://www.gao.gov/products/GAO-14-534R.
27
Testimony of J. Russell George, Treasury Inspector General for Tax Administration, before the Senate
Appropriations Committee, Subcommittee on Financial Services and General Government, March 8, 2016,
http://www.appropriations.senate.gov/imo/media/doc/030816%20-%20George%20-%20TIGTA%20-
%20Testimony.pdf.

7
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 22 of 24

the world.28 And last year GAO added tax refund fraud due to identity theft to its list of areas of
government operation that are especially vulnerable to fraud, waste, and abuse.29

In a recent Tax Notes article, former long-serving IRS officials commented that fighting identity
theft is increasingly challenging for the IRS, as thieves continue to develop more sophisticated ways
of stealing person and business information. 30 While the IRS has implemented new strategies to
combat identity theft, the means that identity thieves use are constantly evolving. IRS
Commissioner Koskinen put the issue in budgetary terms when he testified that, despite additional
funds in 2016 for cybersecurity and identity theft, the agency needs to continue investing in
resources and tools to stay ahead of criminals.31

IRS Responsibilities Growing


Restoring IRS funding to a more adequate level is important both to reverse the decline in
taxpayer service and enable the agency to handle its growing responsibilities in areas such as identity
theft and health reform.

Health reform contains an extensive array of tax law changes that, absent added funding, will
present budgetary challenges for the IRS in coming years, the Treasury Inspector General for Tax
Administration reports.32 Most importantly, the IRS administers the premium tax credits to help
millions of near-poor and middle-income taxpayers afford coverage in the health insurance
marketplaces as well as assistance with health insurance deductibles and co-payments for taxpayers
with modest incomes. The IRS also administers health reforms individual mandate, determining
whether people who dont buy health insurance during the year are subject to a penalty. But
Congress has failed to provide the IRS with any funds to implement health reform, forcing the
agency to divert funds from other areas, such as IT.33

Another major new set of IRS responsibilities concerns the Foreign Account Tax Compliance Act
(FATCA). Enacted in 2010, FATCA seeks to reduce illegal tax evasion by requiring filers and
financial institutions to report more information to the IRS about assets held in offshore accounts.

28
Letter from former IRS commissioners to the Appropriations Committees on the agencys budget, November 9, 2015,
http://static.politico.com/e6/8e/440d6ce747418acb1fe0cd09d04c/former-irs-commissioners-letter-on-agency-
budget.pdf.
29
GAO, Report to Congressional Committees: High-Risk Series, An Update, February 2015, p. 314,
http://www.gao.gov/assets/670/668415.pdf.
30
Kevin Brown and Beth Tucker, Identity Theft Challenges and the IRS, Tax Notes, March 15, 2016.
31
Testimony of John Koskinen before the Senate Appropriations Committee, Subcommittee on Financial Services and
General Government, March 8, 2016.
32Testimony of Alan R. Duncan, Assistant Inspector General for Audit, Treasury Inspector General for Tax
Administration, joint hearing before the House Committee on Oversight and Government Reform, Subcommittee on
Energy Policy, Health Care and Entitlements and the House Committee on Homeland Security, Subcommittee on
Cybersecurity, Infrastructure Protection, and Security Technologies, July 17, 2013, p. 1.
33
Commissioner Koskinen recently testified, We have had to defer hundreds of millions of dollars worth of important
information technology (IT) projects and improvements since FY 2014 in order to meet our statutory requirements to
implement the ACA. Hearing before the Senate Finance Committee, February 10, 2016.

8
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 23 of 24

More than 150,000 financial institutions in 112 FIGURE 5


countries have already registered under
FATCA.34 The IRS needs added personnel and
IT resources to collect and analyze the large
amounts of information that FATCA will
generate and to conduct enforcement activities
where warranted.35

Yet Congress has rejected requests for new


funding for these new responsibilities, instead
cutting the IRSs budget as noted.36

In addition, the number of tax filers continues


growing. The number of individual income tax
returns has grown by more than 9 million (7
percent) since 2010.37 (See Figure 5.) In 2015,
IRS funding was no higher than in 1998 after
adjusting for inflation, but the number of
returns filed was 30 million (23 percent) higher.38

More Adequate Funding Needed


Congress authorized a modest nominal
increase in IRS funding for fiscal year 2016,
though funding was flat in inflation-adjusted
terms. The bigger picture remains that IRS funding has been cut by nearly one-fifth since 2010,
despite Congresss enactment of new responsibilities for the agency and growing identity-theft
attacks on the tax administration system. There is an urgent need for Congress to quickly and
substantially build on the small funding step for 2016.

The Administration has requested $12.3 billion in IRS funding for fiscal year 2017, a 7 percent
increase (after adjusting for inflation), though it would still leave the IRS 12 percent below 2010
funding levels. The added funding would support specific initiatives such as:

34 John Koskinen, Koskinen Discusses Major Challenges Facing IRS, Tax Notes, February 24, 2015.
35Internal Revenue Service, FY 2016 Presidents Budget, February 2, 2015, http://www.treasury.gov/about/budget-
performance/CJ16/02-06.%20IRS%20FY%202016%20CJ.pdf.
36For more, see Brandon DeBot and Chuck Marr, Poor IRS Service Reflects Congresss Deep Funding Cuts, Center
on Budget and Policy Priorities, June 1, 2015, http://www.cbpp.org/research/federal-tax/poor-irs-service-reflects-
congresss-deep-funding-cuts.
37Based on data presented by the National Taxpayer Advocate in 2015 Annual Report to Congress, Volume 1,
Taxpayer Advocate Service, January 6, 2016,
http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_Volume1.pdf, p. 9.
38
Testimony of the Honorable John A. Koskinen, Commissioner of the Internal Revenue Service, hearing before the
House Appropriations Committee, Subcommittee on Financial Services and General Government, March 18, 2015,
http://docs.house.gov/meetings/AP/AP23/20150318/103111/HHRG-114-AP23-Wstate-KoskinenJ-20150318.pdf.

9
Case 3:17-cv-01431-JSC Document 10-4 Filed 05/15/17 Page 24 of 24

Answering 70 percent of calls to the agency throughout the year;


Providing additional staffing and technology to help prevent fraud related to identity theft and
assist taxpayers innocently caught up in it;
Addressing the recent defunding of tax enforcement and reversing the decline in audits; and
Implementing health reform, and reducing the need for the IRS to divert resources from other
areas.39
Collecting taxes is one of governments most essential functions, yet budget cuts in recent years
have made it harder for the IRS to enforce tax laws, and implementing new laws such as health
reform and FATCA has added to the agencys responsibilities. Policymakers should give the IRS
sufficient resources to carry out its mission. In particular, policymakers who profess to be
concerned about the nations fiscal course should provide the IRS with the funding it needs to
administer the nations tax laws and collect taxes due under the laws of the land.

39
Testimony of IRS Commissioner John A. Koskinen, hearing before the Senate Finance Committee, February 10,
2016.

10
Case 3:17-cv-01431-JSC Document 10-5 Filed 05/15/17 Page 1 of 3

1 Jeffrey K. Berns (SBN 131351)


jberns@law111.com
2 Albert G. Lum (SBN 259053)
alum@law111.com
3 BERNS WEISS LLP
6800 Owensmouth Avenue, Suite 310
4 Canoga Park, CA 91303
Telephone: (818) 961-2000
5 Facsimile: (818) 936-0232
6
Lee A. Weiss (SBN 297834)
7 lweiss@law111.com
BERNS WEISS LLP
8 585 Stewart Avenue, Suite L-20
Garden City, NY 11530
9 Telephone: (516) 222-2900
Facsimile: (818) 936-0232
10
11 Attorneys for Proposed Intervenors John
Does 1 and 2
12
13
UNITED STATES DISTRICT COURT
14
NORTHERN DISTRICT OF CALIFORNIA
15
16
UNITED STATES OF AMERICA, Case No.: 3:17-cv-01431-JSC
17
Petitioner,
18 [PROPOSED] ORDER GRANTING
v. MOTION TO INTERVENE, TO QUASH
19 SUMMONS, OR FOR PROTECTIVE
COINBASE, INC., ORDER, OR FOR AN ORDER
20 SCHEDULING AN EVIDENTIARY
Respondent. HEARING AND PERMITTING LIMITED
21 DISCOVERY
22
Date: June 22, 2017
23 Time: 9:00 a.m.
Courtroom: F, 15th Floor
24 Judge: Hon. Jacqueline Scott Corley
25
26
27
28
Case No.: 3:17-cv-01431-JSC
[Proposed] Order Granting Motion to Intervene, to Quash Summons, or for Prot. Order,
or for an Order Scheduling an Evidentiary Hearing and Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-5 Filed 05/15/17 Page 2 of 3

1 TO ALL PARTIES AND THEIR COUNSEL OF RECORD:

2 The Court has received and reviewed the Motion to Intervene, to Quash Summons, or for

3 Protective Order, or for an Order Scheduling an Evidentiary Hearing and Permitting Limited

4 Discovery by Movants-Proposed Intervenors John Doe 1 and John Doe 2 (Movants).

5 GOOD CAUSE APPEARING, it is hereby ORDERED that:

6 1. Movants Motion to Intervene is GRANTED; and

7 2. ____ Movants Motion to Quash is GRANTED. The United States of Americas

8 Summons to Coinbase, Inc. (the Summons), which was ordered to be served pursuant

9 to this Courts Order dated November 30, 2016, is quashed and Coinbase, Inc. is

10 ordered not to produce documents in response to the Summons; or

11
12 ____ Movants Motion for a Protective Order is GRANTED as follows

13 ______________________________________________________________________

14 ______________________________________________________________________

15 ____________________________________________________________________; or

16
17 ____ Movants Motion seeking an Order Scheduling an Evidentiary Hearing and

18 Permitting Limited Discovery is GRANTED. Movants are permitted to conduct limited

19 discovery concerning the Summons in advance of the limited Evidentiary Hearing.

20 Within thirty (30) days of this Order, the United States of America (the Government)

21 shall produce all documents related to the following facts alleged in the declaration

22 of Internal Revenue Service Senior Agent David Utzke (Utzke Decl.), filed in

23 this proceeding on March 16, 2017: The IRS is conducting an investigation to

24 determine the identity and correct federal income tax liability of United States

25 persons who conducted transactions in a convertible virtual currency as that term is

26 defined in IRS Notice 2014-21 for the years ended December 31, 2013, 2014, and

27 2015 (Utzke Decl, 2); and (2) The IRS searched the MTRDB for Form 8949

28 data for tax years 2013 through 2015. I received the results of those searches. Those
Case No.: 3:16-cv-06658-JSC Page 1
[Proposed] Order Granting Motion to Intervene, to Quash Summons, for Prot. Order, and
an Order Scheduling an Evidentiary Hearing and/or Permitting Limited Discovery
Case 3:17-cv-01431-JSC Document 10-5 Filed 05/15/17 Page 3 of 3

1 results reflect that in 2013, 807 individuals reported a transaction on Form 8949

2 using a property description likely related to bitcoin; in 2014, 893 individuals

3 reported a transaction on Form 8949 using a property description likely related to

4 bitcoin; and in 2015, 802 individuals reported a transaction on Form 8949 using a

5 property description likely related to bitcoin (Utzke Decl, 13).

6 The Government shall also produce Agent Utzke for a deposition by Movants on a

7 mutually convenient date, and at a mutually convenient location for the witness, the

8 Government, and Movants, no more than twenty-one (days) from when the Government

9 produces documents pursuant to this Order.

10 The Government shall also produce for deposition, consistent with Rule 30(b)(6) of

11 the Federal Rules of Civil Procedure, a witness knowledgeable about the IRSs

12 MTRDB search described in paragraph 13 of the Utzke Declaration, on a mutually

13 convenient date, and at a mutually convenient location for the witness, the Government,

14 and Movants, no more than twenty-one (days) from when the Government produces

15 documents pursuant to this Order.

16 Within fourteen (14) days of this Order, the Government and Movants shall jointly

17 provide the Court with three potential dates for a limited Evidentiary Hearing

18 concerning the Summons that is consistent with the foregoing schedule.

19
20 IT IS SO ORDERED.

21
22 Dated: __________________, 2017 ______________________________________
Hon. Jacqueline Scott Corley
23 UNITED STATES MAGISTRATE JUDGE
24
25
26
27
28
Case No.: 3:16-cv-06658-JSC Page 2
[Proposed] Order Granting Motion to Intervene, to Quash Summons, for Prot. Order, and
an Order Scheduling an Evidentiary Hearing and/or Permitting Limited Discovery