In 2021, we reported that the United States District Court for the District of New Hampshire dismissed a lawsuit that sought to block the United States Internal Revenue Serviceās effort to obtain records from cryptocurrency exchanges that included account information about individual accounts. In a decision on September 24, 2024, the First Circuit Court of Appeals affirmed that dismissal.
The case concerned a 2019 episode in which the IRS sent about 10,000 letters to taxpayers who, supposedly, may have failed to properly report income and pay taxes associated with cryptocurrency transactions (Letter 6173). One recipient of such a letter, James Harper, sued the IRS claiming that it violated his rights under the Fourth and Fifth Amendments of the U.S. Constitution by demanding his information from third parties without any specific suspicion of wrongdoing and doing so without notifying him or allowing for him to challenge the seizure of such property.
The district court described the facts as follows. In 2013, Harper opened an account with Coinbase. The terms of agreement provided that “Coinbase takes reasonable precautions, as described herein, to protect your personal information from loss, misuse, unauthorized access, disclosure, alteration, and destruction. ” In 2013 and 2014, Harper deposited Bitcoin into his Coinbase account. Harper primarily received the Bitcoin as income from consulting work. Harper alleged that he declared the transactions on his 2013 and 2014 tax returns, declared all appropriate income from Bitcoin payments, including capital gains tax, and paid appropriate capital gains on any Bitcoin income for tax years 2015 and 2016. In 2015, Harper liquidated his holdings in the Coinbase account and by 2016 Harper no longer held any Bitcoin in the Coinbase account. When Coinbase received a so-called John Doe summons for Harperās information in 2016, it opposed enforcement, but, ultimately, the court ordered Coinbase to comply with a narrowed version of the summons. In 2019, the IRS sent Harper the Letter 6173. He then brought suit.
In an Order dated March 23, 2021, the district court dismissed the lawsuit. On appeal, the First addressed each of Harperās three arguments.
Harperās first argument concerned the Fourth Amendment, which protects “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.” But, as the First Circuit explained, the Supreme Court “consistently has held that a person has no legitimate expectation of privacy in information he voluntarily turns over to third parties,” a principle that holds true “even if the information is revealed on the assumption that it will be used only for a limited purpose and the confidence placed in the third party will not be betrayed.” The Supreme Court had already held, in the Miller case, that an individual has no legitimate expectation of privacy in information kept in bank records and, according to the First Circuit, this case fell under the very same āthird party doctrine.ā
Harper attacked that doctrine by invoking sentiment by academics and individual Supreme Court justices that the “doctrine is not only wrong, but horribly wrong.” However, the court was bound to faithfully apply Supreme Court precedent notwithstanding the concerns of scholars and some justices.
Harper also tried to rely on the Sixth Circuitās decision in US v Warshak, which held that individuals have a legitimate expectation of privacy in the contents of their emails, notwithstanding the third-party doctrine. In that case, federal agents obtained a criminal defendant’s emails via a subpoena served on his internet service provider, which stored the email content in the process of delivering messages sent by or to the defendant. Warshak distinguished between an “intermediary” of emails (its case) and the “intended recipient” (the Miller case). The ISP did not “put th[at] information to use ‘in the ordinary course of business'” in the same manner that a financial institution generates and uses its records regarding account activity as a core component of its business model. The Harper case, the First Circuit held, was like Miller because the IRS sought business records generated by Coinbase in its “ordinary course of business” as a financial institution and consisting of information “voluntarily conveyed to[Coinbase].”
Because Harper lacked a reasonable expectation of privacy in his Coinbase account information, the First Circuit rejected his privacy based theory for his claim of a Fourth Amendment violation.
Harper next argued that the IRS violated his Fifth Amendment right to procedural due process when it used the summons to obtain his Coinbase account records without providing him notice or an opportunity to be heard.Ā The court acknowledged that there were cases that establish that the substantive component of the Due Process Clause protects a limited liberty interest in the confidentiality of certain intimate information.Ā And the court said it could assume, without deciding, that Harper was correct that this protectable privacy interest may encompass certain sensitive financial information. Even with that assumption, however, Harper’s claim that the IRS deprived him of such a liberty interest failed nonetheless because — as the court already concluded — he lacked any reasonable expectation of privacy in the circumstances here.
The First Circuit noted also that the Supreme Court had held in SEC v. Jerry T. O’Brien, that “the Due Process Clause of the Fifth Amendment . . . is [not] offended when a federal administrative agency, without notifying a person under investigation, uses its subpoena power to gather evidence adverse to him.” Here, just as in Jerry T. O’Brien, the IRS’s summons of Coinbase’s records was quintessential fact-finding that did not involve any sort of adjudication of Harper’s rights or liabilities.
Because Harper’s Fifth Amendment claim failed at this threshold step, it was not necessary for the court to consider whether he received constitutionally adequate process.
Harperās third argument was that he was entitled to a declaratory judgment that the IRS’s summons was not issued in compliance with the factors set out in 26 U.S.C. Ā§ 7609(f) for a John Doe summons. Harper advanced this claim under the Administrative Procedures Act (APA). But the APA provides for judicial review of “final agency action for which there is no other adequate remedy in a court.” And, in the words of the First Circuit, the IRS’s summons of Coinbase’s records is a preliminary investigative step, far upstream of any potential tax enforcement actions against Coinbase accountholders like Harper or any broader agency action regarding the reporting of digital asset transactions. Nor was the court aware of any judicial decision holding that an agency’s issuance of a summons or similar investigatory instrument is final agency action reviewable under the APA. Because there was no final agency action, the court affirmed this part of the district court’s dismissal of Harper’s statutory claim without needing to address the requirements of Ā§ 7609(f).
Having rejected all three of Harper’s arguments, the First Circuit affirmed the district court’s dismissal of Harper’s complaint.
