Zietzke v. United States

Background

William Zietzke filed a petition to quash, meaning cancel, an Internal Revenue Service summons issued to Coinbase, a cryptocurrency exchange. The IRS was investigating whether Zietzke correctly reported cryptocurrency transactions for 2016. Zietzke and his wife had filed a joint 2016 federal income tax return reporting $36,594 in tax, which they paid. They later filed an amended return reporting $21,119 and seeking a $15,475 refund. The requested refund was based on removing two bitcoin transactions from the long-term capital gains reported on the original return.

The government moved to enforce the summons and for summary denial of the petition to quash. The summons sought information about accounts Zietzke owned or controlled, account and identity information, transaction histories, and information about people or entities involved in transactions.

Legal standard

The court applied the four requirements from United States v. Powell for enforcing an IRS summons. The government had to show that the summons was issued for a legitimate purpose, sought information relevant to that purpose, requested information not already in the IRS’s possession, and followed required administrative steps. After that showing, Zietzke had the burden of presenting specific facts and evidence challenging one of those requirements or showing that the government acted in bad faith.

Analysis

The court found that investigating Zietzke’s 2016 tax liability was a legitimate purpose. The IRS agent explained that the information could help determine how many transactions Zietzke conducted, which bitcoins he used, and when and how he acquired them.

The court found relevant the requests for information about covered accounts, user names, identity-confirming personal information, and transaction counterparties. It accepted the IRS’s explanation that this information could help connect accounts to Zietzke, determine account ownership or control, and determine whether transfers were taxable events. The court did not find the summons equivalent to the broader summons previously issued to Coinbase concerning thousands of unidentified account holders.

The court did find the summons overbroad because it had no time limitation. The IRS could seek earlier information when necessary to determine the tax consequences of Zietzke’s 2016 transactions, including the cost basis of cryptocurrency used in those transactions. But the summons had to be limited to Zietzke’s 2016 transactions and information needed to determine their tax consequences.

The court also recommended clarifying that “user profile information” did not include passwords, security settings, or account-recovery information. The parties apparently agreed that the IRS should not seek those materials, but the summons did not expressly exclude them.

Zietzke did not challenge whether the IRS already possessed the requested information. The court also found that the IRS gave reasonable advance notice before contacting Coinbase. It relied on an April 22, 2019 letter that discussed unresolved questions about Zietzke’s 2016 bitcoin transactions, referred to the IRS’s earlier requests for information, stated that the IRS had been unable to obtain requested information from him, and warned that a summons seeking third-party information would be issued.

The court rejected Zietzke’s Fourth Amendment privacy argument. It concluded that the Supreme Court’s decision in Carpenter v. United States did not apply because that case involved cell-site location information, while this case involved financial and transaction information that Zietzke voluntarily provided to Coinbase. The court also rejected Zietzke’s claim that the summons was issued to build a surveillance database, finding that he had not provided specific facts and evidence showing bad faith or an improper purpose.

Recommended disposition

The court recommended granting the government’s motion to enforce the summons and for summary denial of the petition to quash, with limitations on the summons’s scope. It recommended that the district court order the government to file a proposed amended summons within 14 days, excluding passwords, security settings, and account-recovery information and limiting the requested time period to Zietzke’s 2016 transactions and their tax consequences. The recommendation stated that a party could file specific written objections within 14 days after being served.