In the Matter of the Tax Liabilities of John Does

Filing 6

ORDER TO SHOW CAUSE why #1 Petition should not be denied. Response due by April 14, 2021. Signed by Chief Magistrate Judge Joseph C. Spero on March 31, 2021. (jcslc2S, COURT STAFF) (Filed on 3/31/2021)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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In re TAX LIABILITY OF JOHN DOES.

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Case No. 21-cv-02201-JCS
ORDER TO SHOW CAUSE WHY
PETITION SHOULD NOT BE DENIED

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Re: Dkt. No. 1

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United States District Court
Northern District of California

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The United States has filed a petition to authorize service of an Internal Revenue Service

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(“IRS”) “John Doe” summons to the cryptocurrency exchange Payward Ventures Inc. d/b/a/

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Kraken (“Kraken”) and its subsidiaries under 26 U.S.C. § 7609(f), to aid in assessing the potential

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tax liability of Kraken users. That statute provides as follows:

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Any summons described in subsection (c)(1) which does not identify
the person with respect to whose liability the summons is issued may
be served only after a court proceeding in which the Secretary
establishes 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 examination of the
records or testimony (and the identity of the person or persons with
respect to whose liability the summons is issued) is not readily
available from other sources.
The Secretary shall not issue any summons described in the preceding
sentence unless the information sought to be obtained is narrowly
tailored to information that pertains to the failure (or potential failure)
of the person or group or class of persons referred to in paragraph (2)
to comply with one or more provisions of the internal revenue law
which have been identified for purposes of such paragraph.
26 U.S.C. § 7609(f).

The United States has likely made a sufficient showing of the first three elements of the

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statute to warrant issuance of at least some form of summons. See generally Cincotta Decl. (dkt.

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1-2); In re Tax Liability of John Does, 671 F.2d 977 (6th Cir. 1982). The Court has concerns,

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however, with respect to scope.
In addition to basic registration, identification, and transaction information, the proposed

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summons seeks broad categories of information such as “complete user preferences,” “[a]ny other

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records of Know-Your-Customer due diligence,” and “[a]ll correspondence between Kraken and

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the User or any third party with access to the account pertaining to the account,” among other

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similarly expansive requests. See Prop’d Summons (dkt. 1-3) at ECF p. 13.1 The IRS relies on
Supervisory Internal Revenue Agent Karen Cincotta’s declaration to support its request. Although

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United States District Court
Northern District of California

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Cincotta addresses each category of information sought, her explanations for some of them rest on

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conclusory assertions that such information “may be relevant in determining, and verifying, the

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identity of the account user” or “revealing other accounts controlled by the same user.” See, e.g.,

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Cincotta Decl. ¶ 99 (addressing correspondence).

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Addressing the analogous standard of whether information sought is “relevant” in a post-

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issuance challenge under United States v. Powell, 379 U.S. 48 (1964), to enforcement of an IRS

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summons issued to another cryptocurrency exchange, the Honorable Jacqueline Scott Corley

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rejected the IRS’s position that similarly broad categories of information were relevant, and held

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that the IRS should first review basic user information and transaction histories before determining

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whether further subpoenas—either to the cryptocurrency exchange or to individual users—were

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necessary. United States v. Coinbase, Inc., No. 17-cv-01431-JSC, 2017 WL 5890052, at *6–7

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(N.D. Cal. Nov. 28, 2017).

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The United States is therefore ORDERED TO SHOW CAUSE why its petition should not

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be denied for failure to meet the “narrowly tailored” requirement of 26 U.S.C. § 7609(f), by filing

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a response to this order (which may include an amended petition or summons) no later than

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Due to the relatively complex structure of attachments-to-attachments submitted in support of the
petition, each with its own page numbering scheme, the Court cites this document using the page
numbers assigned by the ECF filing system.
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April 14, 2021. Any such response must specifically address why each category of information

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sought is narrowly tailored to the IRS’s investigative needs, including whether requests for more

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invasive and all-encompassing categories of information could be deferred until after the IRS has

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reviewed basic account registration information and transaction histories. After the United States

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has filed its response, the Court will determine whether to set a hearing.

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IT IS SO ORDERED.
Dated: March 31, 2021
______________________________________
JOSEPH C. SPERO
Chief Magistrate Judge

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United States District Court
Northern District of California

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