A group of states and nonprofit policy organizations encouraged the Supreme Court to grant cert to a digital asset exchange customer who asked the Court to consider the limits of the third-party doctrine under the Fourth Amendment in his financial records privacy complaint against the IRS.
Background.
Petitioner James Harper first started trading digital assets on exchange platform Coinbase in 2013. As part of the account creation process, Harper agreed with Coinbase’s terms and conditions “that expressly guaranteed the privacy and security of his financial information,” he wrote to the Supreme Court in his petition for a writ of certiorari dated February 21.
Harper deposited Bitcoin using his Coinbase account across several transactions in 2013 and 2014 before either liquidating his digital assets or transferring them to a separate crypto wallet throughout 2015. He had no Bitcoin holdings in his Coinbase account as of early 2016.
The IRS sent Harper a letter in 2019 stating he may have failed to report the transactions involving virtual currency, the term used by the agency at the time to refer to digital assets. This was based on financial records the IRS obtained from Coinbase in 2016 via so-called John Doe summons.
Generally, the IRS uses these third-party summonses when it suspects probable tax noncompliance. The IRS at the time identified virtual currency transactions as an area of likely tax noncompliance.
Coinbase challenged the John Doe summons in the U.S. District Court for the Northern District of California, which allowed the summons to proceed after some narrow tailoring (130 AFTR 2d 2022-5550).
Per the district court, the IRS could obtain documents containing taxpayer ID numbers, names, dates of birth, addresses, transaction logs, and account statements.
Harper filed a complaint against the IRS in the U.S. District Court for the District of New Hampshire alleging the agency’s summons violated the Fourth and Fifth Amendments, as well as Code Sec. 7609(f) (127 AFTR 2d 2021-1321). The district court dismissed all of Harper’s claims and he appealed to the 1st U.S. Circuit Court of Appeals, which affirmed the district court’s ruling (134 AFTR 2d 2024-5748).
Supreme Court petition.
Harper’s cert petition to the Supreme Court asks for resolution on the application of the Fourth Amendment and the third-party doctrine to digital records “routinely stored with service providers.”
He argued that the “government’s warrantless acquisition of vast amounts of sensitive financial information … stands in stark contrast with both the original meaning of the Fourth Amendment” and Court precedent, “underscoring the need for constitutional protections to adapt to modern digital realities.”
Specifically, the high court is a proper venue for review because the third-party doctrine “was wrongly conceived in the first place and is “especially maladapted to the modern era of the internet, cloud storage, and widespread digital transactions.”
He cited Supreme Court rulings from the 1970s in U.S. v. Miller (37 AFTR 2d 76-1261) and Smith v. Maryland, which formed the basis of the third-party doctrine. These prior rulings, Harper described, “held that individuals lack a reasonable expectation of privacy in records shared with third parties.”
Harper said the IRS keeping these records invites the risk of “hacking and breaches” from its systems, which poses to Harper an “unnecessary risk.” He maintains that he does not owe the IRS any outstanding amounts and there is no enforceable tax obligation, thus the “continued retention” of his records “serves no legitimate purpose.”
The government’s response to Harper’s petition is due April 30.
Amicus briefs.
Several amicus briefs supporting Harper were filed March 28. Notable among them include the joint brief filed by the states of West Virginia, Kansas, Nebraska, North Dakota, and Ohio. According to the states, the IRS through its John Doe summons “conducted a warrantless dragnet search of 14,355 Coinbase accounts’ registration information.”
The Court should grant Harper’s petition because the application of the third-party doctrine to financial records “has distorted the Fourth Amendment’s delicate balance, elevating order over liberty,” the states argued. The “major technological innovations” necessitates the Court to revisit the third-party doctrine “as our economy relies more on companies storing and aggregating” troves of personal information, they continued.
The CATO Institution’s amicus brief agrees that Harper’s case shows how “the third-party doctrine is outdated and increasingly unworkable. Since the doctrine’s formalization almost 50 years ago, the government has relied on it to circumvent the warrant requirement and obtain Americans’ most sensitive records,” the institute wrote. Coinbase’s user agreement and privacy policy make a compelling argument that its customers have ownership of their digital records, the brief added.
Another amicus brief, filed by the Americans for Prosperity Foundation, emphasized the aspect of John Doe summons that leads to the agency obtaining personal records from taxpayers “who are not even known to the IRS and whose conduct the IRS has no probable cause to suspect of wrongdoing.”
Harper, the foundation said in support, was never personally believed to be involved in criminal activity. The summons “was worded so generally” that the IRS obtained $8.9 million financial transactions” from Coinbase. Harper’s constitutional rights “under the property and trespass approach to Fourth Amendment jurisprudence” were violated by the IRS, according to the foundation.
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