Zietzke v. United States

Opinion

AMENDED REPORT AND RECOMMENDATION REGARDING MOTION FOR SUMMARY DENIAL OF PETITION TO QUASH AND FOR ENFORCEMENT OF IRS SUMMONS

Regarding Docket No. 10

This matter was referred to the undersigned for a report and recommendation on the motion to enforce a summons and for a summary denial of the petition to quash filed by the Defendant, the United States of America ("Government"). For the reasons set forth below, the Court RECOMMENDS enforcing the summons with some limitations on its scope.

BACKGROUND

Petitioner William Zietzke ("Petitioner") filed a petition to quash a summons issued by the Internal Revenue Service ("IRS") to Coinbase, Inc. ("Coinbase"), a "cryptocurrency" exchange, regarding his federal tax liability for the tax year 2016 (the "Summons"). (Dkt. No. 1.) On September 13, 2019, the Government moved to [*2]  enforce the Summons and for a summary denial of the petition to quash. (Dkt. No. 10.) On December 19, 2019, the motion was referred to the undersigned to prepare a report and recommendation. (Dkt. No. 31.)

The IRS is investigating whether Petitioner correctly reported his cryptocurrency transactions in 2016. The District Court for the Western District of Washington addressed the validity of a summons relating to Petitioner's 2016 tax liability which was issued to a Bitstamp, another cryptocurrency exchange. Zietzke v. United States, 426 F. Supp. 3d 758, 2019 U.S. Dist. LEXIS 204274, 2019 WL 6310661 (W.D. Wash. Nov. 25, 2019). The court in Zietzke provided the following description of cryptocurrency, also referred to as "virtual currency":

Bitcoin is a decentralized cryptocurrency that uses a distributed ledger system, or "blockchain," to ensure the cryptocurrency's security and integrity. To use a blockchain system, a user first creates a wallet, which contains information used to move units of a cryptocurrency on a blockchain. When the user downloads or purchases a wallet, software in the wallet generates a private key (a large integer number). That private key is then used to mathematically generate a public key (also a large integer number), which is used to create an address (a mix of numbers and [*3]  symbols). This address functions as the name suggests: it is the destination for a cryptocurrency payment.

When two people agree for one person to send cryptocurrency to the other, the two reveal their public addresses to one another. Because the transferor's address is associated with their public and private keys, the transferee can confirm the transferor's ownership of the transferred cryptocurrency by verifying that the transferor's private key, public key, and address correspond. And once the cryptocurrency is transferred, the transferee can spend or withdraw the cryptocurrency with their own private key, which will now be associated with that cryptocurrency.

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