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United States v. Coinbase, Inc.

United States District Court, N.D. California

July 18, 2017

UNITED STATES, Plaintiff,
v.
COINBASE, INC., Defendant.

          ORDER RE: MOTIONS TO INTERVENE RE: DKT. NOS. 10, 17, 19, 39

          JACQUELINE SCOTT CORLW UNITED STATES MAGISTRATE JUDGE

         The United States of America has petitioned to enforce an Internal Revenue Service (“IRS”) summons served on respondent Coinbase, Inc. (“Coinbase”) pursuant to 26 U.S.C. §§ 7402(b) and 7604(a). (Dkt. No. 1) Does 1, 2, and 3 moved to intervene and quash the summons, or alternatively for a protective order or evidentiary hearing permitting limited discovery. (Dkt. Nos. 10, 17.) Does 1 and 2 also moved to proceed under fictitious names. (Dkt. Nos. 12, 14.) The parties stipulated to a scheduling order, requesting that the Court first determine whether to grant the motions to intervene, which the Court granted. (Dkt. Nos. 20, 22.) Now pending before the Court are the motions to intervene. After the Court heard oral argument, however, the IRS narrowed its subpoena such that it no longer seeks records belonging to Doe 1, 2 and maybe 3. (Dkt. No. 39.) Accordingly, the parties stipulated to substitute Doe 4, whose records are covered by the narrowed summons, for Doe 1 and 2 and asked the Court to decide the motion to intervene as if it had been brought by Doe 4 in the first instance. (Id.)

         After carefully considering the parties' arguments, including those made orally, the Court GRANTS Doe 4 intervention to challenge enforcement of the subpoena. Doe 3's motion is denied as there is no evidence that his records are covered by the narrowed summons and thus that he has any interest in this action.

         BACKGROUND

         In March 2014, the IRS issued Notice 2014-21, which describes how the IRS applies U.S. tax principles to transactions involving virtual currency. (Case No. 3:16-cv-06658-JSC, Dkt. No. 2-4 at 3 ¶6.) In Notice 2014-21, the IRS stated its position: virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer's cost to purchase the virtual currency. (Id.)

         On November 17, 2016, the United States filed an ex parte petition pursuant to 26 U.S.C. § 7609(h)(2) (“Petition to Serve”) for an order permitting the United States to serve a “John Doe” administrative summons (“IRS Summons”) on Coinbase, Inc. (“Coinbase”). (Id. Dkt. No. 1.) Coinbase is an exchange that deals in convertible virtual currency, operating a bitcoin wallet and exchange business headquartered in San Francisco. (Id. Dkt. No. 2-4 at 11 ¶39.) The company currently offers buy/sell trading functionality in 32 countries, maintains over 4.9 million wallets with wallet services available in 190 countries with 3.2 million customers served, and $2.5 billion exchanged in bitcoin. (Id.) In 2014, Coinbase grew to one million users. (Id. at ¶40.) The IRS Summons “seeks information regarding 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.” (Id. at 13 ¶48.) The requested information included:

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).
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 numbers 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 exception.

(Id. Dkt. No. 2-6 at 13-14.) On November 30, 2016, this Court granted the petition to serve the Summons. (Id. Dkt. No. 7.)

         The following month, a Coinbase Customer, Jeffrey K. Berns, filed a motion to intervene and quash the summons, or alternatively for a protective order or evidentiary hearing. (Id. Dkt. No. 9). The United States responded by withdrawing its request that Coinbase provide records that pertain to Berns' account and arguing that Berns' motion was therefore moot. (Id. Dkt. No. 16). The IRS explained that because it now knew Berns' name, it no longer needed his records. (Dkt. No. 16-2.)

         In early January, Coinbase moved to intervene and quash the summons, or for a protective order limiting its scope. (Id. Dkt. No. 19). The United States subsequently initiated this current action to enforce the IRS Summons. (Dkt. No. 1.) Shortly thereafter, Berns and Coinbase withdrew their motions to quash. (Case No. 3:16-cv-06658-JSC, Dkt. Nos. 31, 34). The Court then related the Petition to Serve action (No. 3:16-cv-06658-JSC) to this Petition to Enforce action. (Dkt. No. 6). Rather than issue an Order to Show Cause to Coinbase to show cause why the Summons should ...


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