Government Opposes Motion to Quash John Doe Summons to Coinbase

On December 13, 2017, Jeffrey K. Berns filed this motion, seeking to intervene, to quash the John Doe summons to Coinbase, for a protective order, or for an order scheduling an evidentiary hearing and permitting discovery. By the underlying motion, movant, Jeffrey K. Berns, has identified himself as covered by the summons to Coinbase. As a result of learning his identity, the IRS has withdrawn the summons as to him and has notified Coinbase that it no longer seeks any records related to him. Consequently, Mr. Berns' motion is moot and should be dismissed in its entirety.

In addition, the comprehensive statutory scheme governing the issuance and enforcement of Internal Revenue Service administrative summonses does not allow movants such as Mr. Berns to intervene in this now closed ex parte proceeding and does not create jurisdiction in this Court to grant him the relief he seeks. Furthermore, the rules relied upon by Mr. Berns, Rules 24 and 26 of the Federal Rules of Civil Procedure, do not given him the necessary standing to seek relief. For these reasons, and as set forth below, the Court should deny his motion.

The judicial power of the United States extends only to actual cases and controversies. See U.S. CONST., art. III, § 2; Spencer v. Kemna, 523 U.S. 1, 7 (1998). Moreover, the controversy that is required must survive all stages of review, not merely the filing of the complaint. See Steffel v. Thompson, 415 U.S. 452, 459 n.10 (1974). Thus, a case that may have been live when a complaint was filed may lose its character as a case or controversy when the incident is resolved during the pendency of the action. "The starting point for analysis is the familiar proposition that 'federal courts are without power to decide questions that cannot affect the rights of litigants in the case before them.'" DeFunis v. Odegaard, 416 U.S. 312, 316 (1974) (quoting North Carolina v. Rice, 404 U.S. 244, 246 (1971)).

If an event occurs while a case is pending that "makes it impossible for the court to grant 'any effectual relief whatever' to a prevailing party," the case becomes moot and must be dismissed for lack of jurisdiction. Church of Scientology v. United States, 506 U.S. 9, 12 (1992) (quoting Mills v. Green, 159 U.S. 651, 653 (1895)). When a claimant receives the relief that he sought to obtain through the claim in the case, even after the complaint had been filed, it is impossible for the court to grant any effectual relief and the case becomes moot and must be dismissed for lack of jurisdiction. See Williams v. Alioto, 625 F.2d 845, 847-848 (9th Cir. 1980); see also Church of Scientology, 506 U.S. at 12. In such a case, the action has "lost its character as a present, live controversy of the kind that must exist if we are to avoid advisory opinions on abstract propositions of law." Hall v. Beals, 396 U.S. 45, 48 (1969). A case becomes moot when it is impossible for a court to grant any effectual relief. Campbell-Ewald Co. v. Gomez, ___ U.S. ___, 136 S.Ct. 663, 669 (2016); see also Pacific Fisheries Inc. v. United States, 484 F.3d 1103, 1105-06 (9th Cir. 2007).

In this case, after obtaining authorization to do so, the IRS served a summons on Coinbase asking it to produce information revealing the identity of certain unknown taxpayers. Since Mr. Berns has come forward and identified himself as one such taxpayer, the government has given notice to Coinbase that is has withdrawn its summons insofar as it relates to him. Mr. Berns' motion is therefore moot. United States v. Does, No. CA-02-42-MC (E.D. Va. filed December 20, 2002; entered December 31, 2002), aff'd, 61 Fed.Appx. 895 (4th Cir. 2003) (finding both that court was without jurisdiction to consider a motion to quash a John Doe summons and that it was also mooted based on the movant's revelation of her name and the IRS's subsequent withdrawal of the summons as to her) (a copy of the Reporter's Transcript including the Order is attached herewith); In re Tax Liabilities of John Does Who During the Years ending December 31, 1998 and 1999, Had Signatory Authority Over American Express or Mastercard Credit, Charge, or Debit Cards Issued by or Through, Or For Which Payment Was Received from Banks in Antigua and Barbuda, the Bahamas or the Cayman Islands, or Issued to Persons or Entities in Antigua and Barbuda, the Bahamas, or the Cayman Islands, Order, Docket No.57, Case No. 00-3919-CIV-JORDAN (S.D. Fl. November 26, 2002) (denying as moot individual movants' motions to quash a John Doe summons after the IRS had withdrawn the summons as to those individual movants and was no longer seeking enforcement as to them because they had identified themselves) (a copy of this Order is attached herewith); see also Dame v. United States, 643 F. Supp. 533, 534 (S.D.N.Y. 1986); United States v. Community Bank & Trust Co., 768 F.2d 311, 314 (10th Cir. 1985); United States v. Ford, 650 F.2d 1141, 1142-43 (9th Cir. 1981); Malone v. IRS, 237 F.2d 54, 54 55 (6th Cir. 1956).

Absent any claim for relief that the Court could afford him that he has not already received, Mr. Berns' motion is moot in its entirety and should be denied on that ground. Moreover, this action was concluded once the Court entered its order granting the United States' ex parte petition seeking permission to serve a John Doe summons upon Coinbase on November 30, 2016. Because the matter has been resolved, there is nothing in which Mr. Berns can intervene and his motion should be denied.

B. The Internal Revenue Code Sets Forth A Comprehensive Scheme Governing the Issuance and Enforcement of Internal Revenue Service Summonses Which Preclude Mr. Berns From Intervening to Enjoin Enforcement of the Summons

Mr. Berns' motion is primarily predicated on his misguided belief and assumption that intervention under Rule 24 automatically applies in all summons proceedings. But what Mr. Berns fails to recognize is that Congress has created a comprehensive scheme governing the issuance and enforcement of IRS summonses. That scheme, as discussed below, precludes Mr. Berns' attempt to intervene.

The United States has a system of taxation that relies on the good faith and integrity of each taxpayer to disclose completely and honestly all information relevant to his or her tax liability. See United States v. Clarke, ___ U.S. ___, 134 S.Ct. 2361, 2365 (2014); United States v. Arthur Young & Co., 465 U.S. 805, 815-16 (1984). "Nonetheless, it would be naive to ignore the reality that some persons attempt to outwit the system." United States v. Bisceglia, 420 U.S. 141, 145 (1975). Accordingly, Congress has conferred upon the IRS the duty to make inquiries, determinations, and assessments of all taxes, and has correspondingly given it expansive information gathering authority, including the power to compel disclosure, for that purpose. I.R.C. §§ 6201(a), 7601(a), 7602; see Arthur Young & Co., 465 U.S. at 816.

The summons power granted to the IRS under Section 7602 is the centerpiece of that authority. That power is broad, and is designed to enable the IRS to conduct effective tax investigations. See Arthur Young & Co., 465 U.S. at 816. That statute authorizes the IRS to examine records, issue summonses, and take testimony for the purpose of "ascertaining the correctness of any return," "making a return where none has been made," "determining the liability of any person for any internal revenue tax," or "inquiring into any offense connected with the administration or enforcement of the internal revenue laws." I.R.C. § 7602(a), (b); see United States v. Euge, 444 U.S. 707, 710-11 (1980).

An IRS summons is not self-enforcing, however. See Clarke, 134 S.Ct. at 2367; Donaldson v. United States, 400 U.S. 517, 524 (1971); United States v. Gilleran, 992 F.2d 232, 233 (9th Cir. 1993). If a party refuses to comply with a summons, the Government may enforce the summons only after filing a petition in a district court and obtaining an order compelling the production of the requested materials or testimony. See I.R.C. §§ 7402(b), 7604; Clarke, 134 S.Ct. at 2367; Gilleran, 992 F.2d at 233. This judicial involvement provides the appropriate check on the executive branch in its exercise of the summons power and serves to safeguard the taxpayer's procedural rights. See Reisman v. Caplin, 375 U.S. 440, 449 50 (1964); Bisceglia, 420 U.S. at 146.

Congress has specified certain additional procedures that the IRS must follow in issuing a summons directed to a third party concerning the tax liability of another person. Generally, if the IRS serves a summons on a third party that requests the production of records pertaining to the tax liability of an identified person other than the third party itself, then that other person must be served with timely notice of the summons. I.R.C. § 7609(a)(1). That "noticee" acquires certain procedural rights, including the right to file a petition in the district court to quash the summons, see I.R.C. § 7609(b)(2)(A), and -- if the Government brings an enforcement action under Section 7604 against the summoned party -- the right to intervene in that proceeding, see I.R.C. § 7609(b)(1).

The investigative power of the IRS also includes the power to issue "John Doe" summonses, that is, summonses that do not identify the person or persons with respect to whose tax liabilities information is sought. See Bisceglia, 420 U.S. at 148-49. In such a case, "where the IRS does not know the identity of the taxpayer under investigation, advance notice to that taxpayer is, of course, not possible." Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 316-17 (1985) (emphasis in original). As a substitute for that notice, the Code requires the IRS first to obtain leave from a district court before it may serve a "John Doe" summons on a third party. See I.R.C. § 7609(f); Tiffany Fine Arts, 469 U.S. at 317. In order to obtain such leave, the IRS must demonstrate to the district court that: (1) "the summons relates to the investigation of a particular person or ascertainable group or class of persons;" (2) "there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law;" and (3) the information sought to be obtained from the summons, and the identity of the person or persons with respect to whose liability the summons will be issued, are "not readily available from other sources." I.R.C. § 7609(f). The proceeding before the district court is ex parte, and the district court makes its determination whether the statutory requirements have been satisfied solely on the basis of the Government's petition and its supporting affidavits. I.R.C. § 7609(h)(2); see Tiffany Fine Arts, 469 U.S. at 317.

The district court's review of a John Doe summons under Section 7609(f) prior to its issuance operates as a substitute for the review that would take place if a noticee were to file a motion to quash a summons under Section 7609(b). "In effect, in the John Doe context, the court takes the place of the affected taxpayer under §§ 7609(a) and (b) and exerts a restraining influence on the IRS." Tiffany Fine Arts, 469 U.S. at 320. Because the district court acts in this capacity in a Section 7609(f) proceeding, Congress did not see fit to duplicate that proceeding by extending the right to bring a motion to quash to a John Doe; instead, the statute authorizes such a motion to be brought only by a person who is identified in the summons. I.R.C. § 7609(a)(1), (b)(2)(A); see also I.R.C. § 7609(c)(3) (excluding John Doe summonses from petitions to quash). Similarly, Congress extended an automatic right of intervention in an enforcement proceeding against a summoned party only to a noticee. I.R.C. § 7609(a)(1), (b)(1), (c)(3).

Moreover, neither a John Doe nor any other party may intervene in a Section 7609(f) proceeding, given the statute's mandate that the district court's determination whether to authorize a summons under that provision must be made ex parte. See I.R.C. § 7609(h)(2). Section 7609 thus precludes the participation of any other party in the district court's determination whether a summons may be issued:

In summary, "[t]he mechanism for a taxpayer's challenge to a summons differs according to the statutory provision under which the summons is issued." United States v. Ritchie, 15 F.3d 592, 597 (6th Cir. 1994). The proper procedure for a taxpayer who receives an IRS summons but does not wish to comply is to wait for the IRS to bring an enforcement proceeding in district court and challenge the summons in that proceeding. See Strong v. United States, 57 F. Supp. 2d 908, 915 (N.D. Ca. June 22, 1999). If the summons is issued to a third party and it concerns an identified taxpayer, that taxpayer may move to quash the summons, or he may intervene in an enforcement action brought by the IRS against the third party. See I.R.C. § 7609(b)(1), (b)(2)(A); Ritchie, 15 F.3d at 597. If the summons is issued to a third party and it concerns an unidentified taxpayer, a district court must first grant the IRS leave to serve the summons under Section 7609(f). The taxpayer may not intervene in the Section 7609(f) proceeding and may not move to quash the summons after its issuance. See I.R.C. § 7609(f), (h)(2), (c)(3).

This Court's review of the John Doe summons to Coinbase prior to its issuance under Section 7609(f) served as a substitute for the review that a named taxpayer could seek through a motion to quash. See Tiffany Fine Arts, 469 U.S. at 320. The statute accordingly precludes any party from duplicating this review by filing a motion to quash a John Doe summons. See I.R.C. § 7609(c)(3); Ritchie, 15 F.3d at 397.

Taxpayers do not have a general right, apart from the statutory grant of jurisdiction in Section 7609, to move to quash an IRS summons. See Reisman, 375 U.S. at 450. Because Mr. Berns does not fall within the class of taxpayers who are authorized under Section 7609 to file a motion to quash, he is foreclosed from seeking judicial review of the summons issued to Coinbase. This is as Congress intended:

The United States accordingly has retained its sovereign immunity from any suit that seeks to challenge a John Doe summons prior to enforcement that is outside the waiver of immunity found in Section 7609. See Clay v. United States, 199 F.3d 876, 879 (6th Cir. 1999); Upton v. IRS, 104 F.3d 543, 545 (2d Cir. 1997). Because the United States has not waived its immunity from a motion to quash a John Doe summons, this Court lacks jurisdiction over Mr. Berns' motion.

C. Mr. Berns Does Not Have a Right, Nor Should He Be Permitted, to Intervene in This Closed Ex Parte Proceeding

Only under certain circumstances may a John Doe taxpayer have a right to intervene in an enforcement action under Fed. R. Civ. P. 24(a), or may a district court exercise its discretion under Fed. R. Civ. P. 24(b) to permit him to intervene. Rule 24 extends a mandatory right of intervention only where a taxpayer has a "significantly protectable interest" in the property that is the subject of the summons enforcement proceeding, that is, a claim of privilege or claim of abuse of process. Donaldson, 400 U.S. at 531. Mr. Berns suggests that his legally protectable interest here is based on an abuse of process claim rooted in the following: 1) that the IRS is not investigating him and has no reason to investigate him; 2) that the IRS is not able and does not intend to review the tax returns of the Coinbase customers for which it seeks identities; and 3) that the summons has not been tailored to "indicia of tax-avoiding conduct." Docket No. 9 at 8:25-9:2. None of these three, or the combination of all three, constitutes an abuse of process. And, that the IRS might make inquiries into the tax liability of every person who may be liable to pay an internal revenue tax, as is its Congressional mandate, is not an abuse of process. Furthermore, Mr. Berns' recommendation that the summons should have been tailored with specific "indicia" (whatever those might be) is totally irrelevant and the absence of such is certainly not an abuse of process. Mr. Berns' baseless speculation does not amount to a protectable interest sufficient to justify intervention as a matter of right.

Rule 24(b) allows for permissive intervention; however, Mr. Berns fails there too. As he acknowledges, a party seeking permission to intervene must establish federal subject matter jurisdiction. Docket No. 9 at 10:13-28. As discussed above, the United States has not waived its sovereign immunity for a motion to quash a John Doe summons and therefore Mr. Berns cannot establish the necessary subject matter jurisdiction to permit his intervention.

Furthermore, his citation to United States v. Sidley Austin Brown & Wood LLP, No. 03 C 9355, 2004 WL 816448 (N.D. Ill. April 15, 2004) in which a court granted permission for a limited intervention in a John Doe summons "reasoning that 'a dispute regarding the sufficiency of the description of the material to be produced is an appropriate basis for a challenge to a summons in an enforcement proceeding'" is distinguishable. Docket No. 9 at 11:9-13. First, this is not an enforcement proceeding. Second, and as the court cautioned in Sidley, even if the requirements of Rule 24(b)(2) are technically met, which they are not here, intervention is still discretionary and a court must consider "whether the intervention will unduly delay or prejudice the adjudication of the original parties' rights." Fed. R. Civ. P. 24(b)(2). Mr. Berns has already requested both discovery and an evidentiary hearing on the IRS's good faith, clearly if he is permitted to intervene at this point in this now closed proceeding there would be undue delay and prejudice to the United States and Coinbase. Finally, the court did permit intervention in Sidley on the grounds that the limited area for inquiry, the sufficiency of the description of the material to be produced, would not be challenged by the summoned party, would not require discovery or an evidentiary hearing, would not require that any factual determinations be made, and it could be accomplished without undue delay. 2004 WL 816448 at *10. None of the same can be said for the sweeping relief sought by Mr. Berns' intervention here.

D. The John Doe Summons Was Not Sought in Bad Faith and its Issuance and Service Was Not an Abuse of this Court's Process

Mr. Berns' argument that the John Doe summons was issued in bad faith and that enforcement would be an abuse of this Court's process is misplaced. That type of argument can only be made in an enforcement proceeding. Again, this is not an enforcement proceeding. This was an ex parte proceeding pursuant to Section 7609(h) in which the United States sought, and was granted, leave to serve a John Doe summons on Coinbase. Because the Court approved the service of the summons, this ex parte proceeding is complete. As a result, none of the speculative and inflammatory theories Mr. Berns advances in support of his alleged bad faith argument merit consideration. However, because of the reckless nature of many of the allegations made, the United States will briefly address them in turn.

Mr. Berns also raises a concern that because the government, and more specifically agencies in the Executive Branch to include the IRS, has had their computer systems hacked that the IRS is essentially not qualified to handle the information sought by the summons. Docket No. 9 at 14:22-15:18. This is not a relevant inquiry for a summons proceeding, and certainly not this now closed one. Moreover, followed to its logical conclusion, what Mr. Berns is really suggesting is that the IRS should never be able to audit any taxpayer or even accept the filing of any tax return since that also involves the use of the IRS computer systems. That would be an absurd result.

Finally, Mr. Berns is concerned that if the summoned information is put in the hands of government employees that malfeasance will result; seemingly suggesting that IRS employees will use their access to account information to steal virtual currency from account holders. Docket No. 9 at 16:1-9. This offensive accusation is not only unfounded, but also totally irrelevant to the inquiry that was before this Court.

However, what Mr. Berns really seems to be arguing is that this Court should adopt a new standard (contrary to the relevant statutory framework already discussed) based upon the showings in two examples he cites, United States v. Kersting, 891 F.2d 1407, 1408 (9th Cir. 1989) and United States v. Ritchie, 15 F.3d 592 (6th Cir. 1994)). Docket No. 9 at 20:11-21:4. Mr. Berns seems to cite to these cases for the proposition that some sort of heightened and particularized evidentiary showing is required prior to issuance of a John Doe summons. Id. But that is not what these cases stand for and is not what is required before a John Does summons is properly authorized. As this Court correctly found and as the statute requires, the John Doe summons to Coinbase relates to the investigation of an ascertainable group or class of persons, there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws, and the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summons is issued) is not readily available from other sources. Docket No. 7.

E. A Protective Order is Not Appropriate

In requesting a protective order, Mr. Berns has failed to cite any statutory provision that would allow him to bar the United States from seeking records pursuant to a John Doe summons duly authorized by the Court. And, the four cases to which Mr. Berns cites, presumably as authority for this Court entering a protective order, all involve Fed. R. Civ. P. 26(c). Docket No. 9 at 22. This rule, however, is not applicable in this proceeding. Rule 26(c) allows a party or a person from whom discovery is sought to seek a protective order regarding discovery. The John Does summons served upon Coinbase is not a discovery mechanism under the discovery provisions of Fed. R. Civ. P. 26 et seq. Moreover, Mr. Berns is not a party to this proceeding and no discovery has been sought from him.

F. Mr. Berns is Not Entitled to Conduct Discovery or an Evidentiary Hearing in This Summary Proceeding

As a last resort, Mr. Berns demands that the Court allow him to conduct limited discovery and then hold an evidentiary hearing. Once again Mr. Berns misunderstands the procedural posture of the John Doe summons and attempts to confuse the Court by relying on caselaw applicable only after the government seeks to enforce, or a proper party files an action to quash, an IRS summons. As discussed above, this case concerns the government obtaining permission for the IRS to issue and serve the summons. It does not concern enforcement of the summons. While a party who has standing to oppose enforcement may, in limited circumstances, seek limited discovery and an evidentiary hearing in order to challenge enforcement of the summons, the primary case relied upon by Mr. Berns in making his argument makes clear such relief is not applicable or appropriate regarding the issuance of John Doe summonses. See Samuels, Kramer and Co., 712 F.2d at 1345-46 (describing the difference between proceeding to obtain permission to serve a John Doe summons and one to enforce the summons). Since this proceeding was about issuance and service of the John Doe summons, relief in the form of discovery and an evidentiary hearing is not available.

Dated this 27th day of December, 2016.

CAROLINE D. CIRAOLO