Summons Cases

The IRS won two summons cases, one in the U.S. Court of Appeals for the Ninth Circuit and the other in the U.S. District Court for the Northern District of California, but the summons approved by the district court was narrower than the IRS wanted.

In Agrama, 1 the Ninth Circuit affirmed a district court denial of a request for an evidentiary hearing and enforced an IRS summons against Frank Agrama for certain records, including records related to his prosecution for tax crimes in Italy.

Agrama argued that the summons was issued in bad faith and that, at a minimum, the district court erred by ordering enforcement of the summons without an evidentiary hearing.

In an unpublished opinion, the Ninth Circuit held that the district court did not clearly err by enforcing the summons, nor did it abuse its discretion by denying Agrama an evidentiary hearing. To enforce an IRS summons, the government must make a prima facie showing that the summons was issued in good faith by showing that:

  • the summons is for a legitimate purpose;
  • the information sought may be relevant to that purpose;
  • the information sought is not already within the IRS's possession; and
  • the administrative steps required by the IRC have been followed (the Powell factors).2

If the government meets its burden, the taxpayer challenging the summons then has the heavy burden of proving either a lack of institutional good faith or an abuse of process.3 A taxpayer challenging a summons is entitled to an evidentiary hearing only when there are specific facts or circumstances plausibly raising an inference of bad faith.

The court stated that Agrama offered no evidence to prove — or even to raise a plausible inference — that the IRS summons was motivated by anything other than a desire to ensure that the IRS had accurate and complete copies of anything it obtained from other sources.

In the U.S. District Court for the Northern District of California case, on July 30 the court granted the government's February petition to enforce an IRS summons against Kraken.4 The summons at issue is similar to the summons enforced by the same district court in 2017 against Coinbase. Kraken is a centralized cryptocurrency exchange founded in 2011 that offers its exchange and related services to users in more than 190 countries, including the United States.

The summons sought information about activities of various users of the Kraken platform, including the user's identity (name, date of birth, taxpayer identification number, physical address, telephone number, and email address), use and access of the platform (including, among other things, payment cards, IP addresses, and other similar information), and information about the transactions in which they engaged (including the full transaction history and cryptographic records and ledgers relating to the transactions).

Kraken alleged the summons was overbroad and would impose too heavy a compliance burden. Kraken argued that the summons was significantly broader than the summons that the IRS issued to Coinbase, which was limited by a judge.5 The government argued that the limitations on the Coinbase summons were excessive.

Applying the Powell factors (specifically, whether the Kraken summons served a legitimate purpose and sought relevant information), the district court limited the summons to identifying information and certain transaction history. The court found that certain information requested by the government, including an individual user's employment, net worth, and source of wealth, as well as anti-money-laundering logs and records, was outside the proper scope of a summons at this stage in the IRS investigation. As the district court stated:

While this information might shed light on a tax violation by an account holder, at this stage of the Government's investigation, it is only speculating on that point. To move beyond speculation, it must first address whether there is anything in the user's transaction history — whether considered on its own or in combination with other information the IRS has collected on that user after it has identified the account holder — that makes it reasonable to conclude that the information it seeks in these requests will actually yield information relevant to that user's tax compliance. At that point, the Government can issue another Doe summons or follow the preferable path of issuing a summons to the account holder.6

The Coinbase and Kraken cases show that district courts continue to apply a significant, substantive review of the broad John Doe summonses that are, and have been, issued to centralized cryptocurrency exchanges. Here, the district court required the government to demonstrate that it is legitimately seeking relevant information before enforcement, and the court narrowed the summons. Importantly, however, the court allowed transaction hashes and blockchain addresses to be included within the summons based on the government's evidence showing it needed this information to analyze transactions for tax compliance purposes.

Constitutionality of Section 958(b)(4) Repeal

On August 2 the Justice Department filed an answer in Altria regarding the constitutionality of the repeal of the limitation on downward attribution in section 958(b)(4).

Altria's complaint, filed in May in the U.S. District Court for the Eastern District of Virginia,7 seeks a refund of $105 million in taxes for its 2017 tax year. Altria owned slightly more than 10 percent by vote and value of Anheuser-Busch InBev SA/NV (ABI), a Belgian publicly traded multinational brewing and beverage company, and, thus, was a U.S. shareholder under section 951.

ABI was not a controlled foreign corporation under section 957 (that is, 50 percent or less of both the vote and the value of the foreign corporation's stock was owned by U.S. persons that each owned at least 10 percent by vote or value of the foreign corporation's stock) before repeal of section 958(b)(4). ABI owned foreign subsidiaries and wholly and directly owned a domestic subsidiary. Therefore, after the Tax Cuts and Jobs Act's repeal of section 958(b)(4), downward attribution resulted in ABI foreign subsidiaries being treated as CFCs and Altria being required to include subpart F income of those foreign subsidiaries.

Altria asserts that it is unconstitutional to tax a U.S. shareholder on a CFC's subpart F income unless U.S. shareholders have control over the applicable CFC. Altria argues that a tax on U.S. shareholders that are in control of a foreign corporation is constitutional because the U.S. shareholders effectively realize the foreign corporation's income. Realization occurs because the U.S. shareholders have the power to determine whether to receive that income through distributions. Altria argues that when subpart F was enacted, Congress explained that it did not violate the constitutional realization requirement because U.S. shareholders are deemed to have constructively received a distribution from a CFC they control.

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Footnotes

1. United States v. Jehan Agrama, No. 22-55447.

2. United States v. Powell, 379 U.S. 48, 57-58 (1964).

3. United States v. LaSalle National Bank, 437 U.S. 298, 316 (1978).

4. United States v. Payward Ventures Inc., No. 23-mc-80029-JCS (N.D. Cal. July 30, 2023).

5. United States v. Coinbase Inc., No. 17-cv-01431-JSC, at *6-7 (N.D. Cal. Nov. 28, 2017).

6. Coinbase, No. 17-cv-01431-JSC, at *77.

7. Altria Group Inc. v. United States, No. 3:23-cv-00293.

Originally Published by TAX NOTES INTERNATIONAL

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