Court Opinion

ID: 7801810
Source: CourtListenerOpinion
Date Created: 2022-08-18 21:00:18.533925+00
Date Added: 2024-06-11T16:29:21.096931
License: Public Domain

United States Court of Appeals
                     For the First Circuit

No. 21-1316

                         JAMES HARPER,

                     Plaintiff, Appellant,

                               v.

 CHARLES P. RETTIG, in his official capacity as Commissioner of
the Internal Revenue Service; INTERNAL REVENUE SERVICE; JOHN DOE
                        IRS AGENTS 1-10,

                     Defendants, Appellees.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
               FOR THE DISTRICT OF NEW HAMPSHIRE

      [Hon. Joseph A. DiClerico, Jr., U.S. District Judge]

                             Before

                   Kayatta, Lipez, and Gelpí,
                        Circuit Judges.

     Richard Abbott Samp, with whom Aditya Dynar, Caleb
Kruckenberg, and New Civil Liberties Alliance were on brief, for
appellant.
     Kathleen E. Lyon, with whom John J. Farley, Acting United
States Attorney, David A. Hubbert, Acting Assistant Attorney
General, Francesca Ugolini, and Jennifer M. Rubin were on brief,
for appellees.

                        August 18, 2022
            LIPEZ, Circuit Judge.         In August 2019, the Internal

Revenue Service ("IRS") notified appellant James Harper that it

possessed information about his virtual currency accounts and

transactions and warned him that he could face civil or criminal

enforcement action for inaccurately reporting such transactions.

Believing that the IRS had acquired his personal financial records

from a digital currency exchange via a third-party summons, see 26

U.S.C. §§ 7602 and 7609, appellant sued the IRS and its agents for

injunctive relief and monetary damages, alleging that the third-

party summons process violated his constitutional and statutory

rights. The district court concluded that it lacked subject matter

jurisdiction over appellant's suit under the Anti-Injunction Act

of the Internal Revenue Code, 26 U.S.C. § 7421,1 and dismissed the

complaint.2    We vacate the judgment of the district court.

                                     I.

A. Factual Background

            We draw the relevant facts from appellant's complaint.

In 2013, appellant opened an account with Coinbase, which he

describes     as   "a   non-party    digital   currency   exchange   that

     1 The Anti-Injunction Act of the Internal Revenue Code is
distinct from the better-known Anti-Injunction Act, codified at
28 U.S.C. § 2283, which generally prohibits the federal courts
from enjoining proceedings in state courts. See 28 U.S.C. 2283.
     2 The district court also dismissed appellant's claims for
money damages under the doctrine of sovereign immunity. Appellant
does not appeal the dismissal of those claims.

                                    - 2 -
facilitates      transactions      in     virtual     currencies,"      including

bitcoin.   Appellant deposited bitcoin in his Coinbase account in

2013 and 2014.     Appellant began liquidating his Coinbase holdings

of bitcoin in 2015, ultimately transferring what remained in his

account to a hardware wallet3 such that, by early 2016, he no

longer held bitcoin via Coinbase.           Appellant declared and reported

income from his Coinbase transactions on his 2013, 2014, 2015, and

2016 income tax returns.           Beginning in 2016, appellant and his

wife sold bitcoin through the digital exchanges Abra and Uphold.

Appellant declared and paid taxes on the capital gains on his

bitcoin holdings in tax years 2016, 2017, 2018, and 2019.

           In    2016,   the      IRS    filed   an    ex    parte    "John   Doe"

administrative summons on Coinbase in the U.S. District Court for

the   Northern    District   of    California.4        See   United    States   v.

      3A hardware wallet is a "secure offline" version of a virtual
currency wallet that "can be used securely and interactively."
Virtual Currency Storage, IRM 5.1.18.20.2 (July 17, 2019).
Hardware wallets "are immune to computer viruses, the keys stored
cannot be transferred out of the device in plaintext (unencrypted),
and in most instances their software is not open source." Id. In
contrast, "[a] software wallet is connected to the internet,
downloaded, and installed on a computer or mobile device and stores
private keys on the device's hard drive." Id.
      4Section 7602 of the Internal Revenue Code authorizes the
IRS to issue summonses "[f]or the purpose of ascertaining the
correctness of any return, making a return where none has been
made, determining the liability of any person for any internal
revenue tax or the liability at law or in equity of any transferee
or fiduciary of any person in respect of any internal revenue tax,
or collecting any such liability." 26 U.S.C. § 7602(a). A "John
Doe" summons is a third-party summons issued "where the IRS does

                                        - 3 -
Coinbase, Inc., No. 17-cv-1431-JSC, 2017 WL 5890052, at *1 (N.D.

Cal. Nov. 28, 2017).     Under § 7609 of the Internal Revenue Code,

a "John Doe" summons can issue only after a court proceeding in

which the IRS 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.

26 U.S.C. § 7609(f).     The initial summons sought nine categories

of "information regarding United States persons who at any time

during the period January 1, 2013 through December 31, 2015

conducted   transactions   in   a    convertible   virtual   currency   as

defined in IRS Notice 2014-21."       Coinbase, 2017 WL 5890052, at *1.

            After Coinbase opposed the initial summons, the IRS

narrowed its scope.      The narrowed summons sought the following

information, with respect to accounts "with at least the equivalent

of $20,000 in any one transaction type . . . in any one year during

the 2013-2015 period":

            Request 1: [Account] registration records for
            each [account] owned or controlled by the user

not know the identity of the taxpayer[s] under investigation."
Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 316 (1985).

                                    - 4 -
          during the period stated above limited to
          name, address, tax identification number, date
          of birth, account opening records, copies of
          passport or driver's license, all wallet
          addresses, and all public keys for all
          [accounts].

          Request 2:    Records   of   Know-Your-Customer
          diligence.

          Request 3: Agreements or instructions granting
          a third-party access, control, or transaction
          approval authority.

          Request 4: All records of [account] activity
          including transaction logs or other records
          identifying the date, amount, and type of
          transaction . . .,    the   post   transaction
          balance, the names or other identifiers of
          counterparties to the transaction; requests or
          instructions to send or receive bitcoin; and,
          where counterparties transact through their
          own   Coinbase   [accounts],   all   available
          information identifying the users of such
          accounts and their contact information.

          Request 5: Correspondence between Coinbase and
          the user or any third party with access to the
          [account] pertaining to the [account] opening,
          closing, or transaction activity.

          Request 6: All periodic statements of account
          or invoices (or the equivalent).

Coinbase, 2017 WL 5890052, at *2.      Coinbase and John Doe 4, who

was permitted to intervene, opposed the narrowed summons.       Id.

Although appellant did not intervene in the litigation, he alleges

that he "participate[d] as an expert in an amicus filing."5   After

     5 "Jim Harper" is listed as an attorney in the signature block
of the amicus brief filed by the Competitive Enterprise Institute.
See Brief of Amicus Curiae Competitive Enterprise Institute in

                              - 5 -
hearing argument, the district court permitted the government to

enforce the summons with respect to Requests 1, 4, and 6.           Id. at

*7.6

              In August 2019, appellant received a letter from the IRS

notifying him that the agency "ha[d] information that you have or

had one or more accounts containing virtual currency but may not

have       properly   reported   your   transactions   involving   virtual

currency."       The letter warned him that he could face civil or

criminal enforcement action if he failed to accurately report his

virtual currency transactions.

B. Procedural History

              In July 2020, appellant filed a complaint against the

IRS, Commissioner Charles P. Rettig in his official capacity

(collectively, "the IRS"), and ten unidentified IRS agents.            The

amended complaint alleges that the IRS and its agents violated the

Fourth and Fifth Amendments, as well as 26 U.S.C. § 7609(f), by

acquiring appellant's personal financial information from Abra and

Coinbase through the third-party summons process.7          Specifically,

Opposition to Petition to Enforce Internal Revenue Service Summons
at 15, Coinbase, 2017 WL 5890052, ECF No. 50-2.
       The district court further found that Coinbase and John
       6

Doe 4 had failed to show that the government engaged in abuse of
process or to demonstrate their entitlement to an evidentiary
hearing on whether the government acted in bad faith. Coinbase,
2017 WL 5890052, at *8.
       Appellant suggests that the "IRS probably obtained [his]
       7

private information either from an unlawful John Doe subpoena

                                    - 6 -
appellant contends that he had an ownership interest, as well as

a reasonable and subjective expectation of privacy, in the personal

financial    information       Abra    and    Coinbase     maintained    about      his

accounts.        He     contends   that      the   IRS's   acquisition       of    that

information from Coinbase and Abra violated the Fourth Amendment

because    the    IRS    lacked    particularized      suspicion      that    he    had

violated any laws and the IRS did not obtain a judicial warrant or

subpoena prior to accessing his information.                        Appellant also

alleges that this "unlawful seizure" violated his rights under the

Fifth Amendment because of the IRS's failure to provide direct

notice    of,    and    an   opportunity      to   challenge,   the     third-party

summons.     Appellant initially sought damages and declaratory and

injunctive relief, including an order requiring the IRS to expunge

his financial information from its records.

             The district court granted the IRS's motion to dismiss

appellant's request for money damages as to the IRS and the

Commissioner based on sovereign immunity. The court also dismissed

appellant's money-damages claims as to the individual IRS agents

under     Bivens8      for   failure   to     state   a    claim,    finding       that

appellant's Fourth and Fifth Amendment claims extended Bivens to

issued to Coinbase or without any subpoena issued to Abra or a
comparable exchange."
     8 Bivens v. Six Unknown Named Agents of Fed. Bureau of
Narcotics, 403 U.S. 388 (1971).

                                       - 7 -
a new context and that special factors counseled against such an

extension.     Appellant does not appeal either of those decisions.

Finally, the district court dismissed his claims for declaratory

and injunctive relief for lack of subject matter jurisdiction,

finding that the Anti-Injunction Act of the Internal Revenue Code,

26 U.S.C. § 7421, represents an exception to the Administrative

Procedure Act's ("APA") waiver of sovereign immunity, 5 U.S.C.

§ 702.   Appellant timely appealed.

                                   II.

A. Standard of Review

            We review de novo dismissals for lack of subject matter

jurisdiction.    Lyman v. Baker, 954 F.3d 351, 359 (1st Cir. 2020).

Although     dismissals   under   Rules   12(b)(1)      and   12(b)(6)   are

"conceptually distinct, . . . the same basic principles apply in

both situations."    Id. (quoting Hochendoner v. Genzyme Corp., 823

F.3d 724, 730 (1st Cir. 2016)).           Ignoring "statements in the

complaint that simply offer legal labels and conclusions or merely

rehash cause-of-action elements," we take the complaint's non-

conclusory, non-speculative facts as true and draw all reasonable

inferences in the plaintiff's favor to determine whether the

complaint     indicates    that   the     court   has     subject    matter

jurisdiction.     Id. at 360 (quoting Schatz v. Republican State

Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012)).            We may also

                                  - 8 -
consider   information   attached   to   or   incorporated   into   the

complaint and facts susceptible to judicial notice.      Id.

B. Discussion

           The doctrine of sovereign immunity prevents the United

States from being sued without its consent. United States v. Dalm,

494 U.S. 596, 608 (1990); Muirhead v. Mecham, 427 F.3d 14, 17 (1st

Cir. 2005).     "[T]he terms of [the United States'] consent to be

sued in any court define that court's jurisdiction to entertain

the suit." Dalm, 494 U.S. at 608 (quoting United States v. Testan,

424 U.S. 392, 399 (1976)). A waiver of sovereign immunity "'cannot

be implied but must be unequivocally expressed,'" and, "[e]ven

then, the waiver must be strictly construed."      Muirhead, 427 F.3d

at 17 (quoting United States v. King, 395 U.S. 1, 4 (1969)).

           Appellant identifies the waiver provision of the APA,

5 U.S.C. § 702, as the basis for subject matter jurisdiction.

Section 702 of the APA provides, in part:

           A person suffering legal wrong because of
           agency action, or adversely affected or
           aggrieved by agency action within the meaning
           of a relevant statute, is entitled to judicial
           review thereof. An action in a court of the
           United States seeking relief other than money
           damages and stating a claim that an agency or
           an officer or employee thereof acted or failed
           to act in an official capacity or under color
           of legal authority shall not be dismissed nor
           relief therein be denied on the ground that it
           is against the United States or that the
           United States is an indispensable party.

                               - 9 -
5 U.S.C. § 702 (emphases added).    Appellant's suit, which seeks

injunctive and declaratory relief from IRS action taken pursuant

to its statutory authority under 26 U.S.C. §§ 7602 and 7609,

appears to fit comfortably within the plain language of this

waiver.9   But § 702 also includes two limitations on the United

States' waiver of sovereign immunity: it expressly leaves in place

"other limitations on judicial review or the power or duty of the

court to dismiss any action or deny relief on any other appropriate

legal or equitable ground," and it withholds "authority to grant

relief if any other statute that grants consent to suit expressly

or impliedly forbids the relief which is sought."    Id.; see also

Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak,

567 U.S. 209, 215 (2012) (describing the second exception).

     9 On appeal, appellant also invokes the exception to sovereign
immunity recognized in Larson v. Domestic & Foreign Commerce Corp.,
337 U.S. 682 (1949).     As we have previously explained, Larson
described two situations in which a government officer is not
entitled to sovereign immunity: (1) when the officer acts beyond
his statutory authority; and (2) when "the statute that confers
the power to act is unconstitutional or if the officer exercises
that power in an unconstitutional manner." Muirhead, 427 F.3d at
19. "[A] suit, although nominally aimed at an official, will be
considered one against the sovereign" -- and therefore not within
the Larson exception -- "'if the judgment sought would . . .
interfere with the public administration, or if the effect of the
judgment would be to restrain the [g]overnment from acting, or to
compel it to act.'" Id. at 18 (quoting Dugan v. Rank, 372 U.S.
609, 620 (1963)). Appellant's suit does not fall within the Larson
exception because the remedies it seeks -- an order directing the
IRS to expunge its records of appellant's personal financial
information and a declaration that the process through which the
IRS acquired this information was unlawful -- are clearly aimed at
the IRS itself.

                              - 10 -
           The IRS argues -- and the district court agreed -- that

the Anti-Injunction Act of the Internal Revenue Code, 26 U.S.C.

§ 7421, is a statutory exception to the United States' waiver of

sovereign immunity in § 702.10     The Anti-Injunction Act provides

that "no suit for the purpose of restraining the assessment or

collection of any tax shall be maintained in any court by any

person, whether or not such person is the person against whom such

tax was assessed."      26 U.S.C. § 7421(a).11     Relying on Colangelo

v. United States, 575 F.2d 994, 996 (1st Cir. 1978), the IRS

contends   that   the   Anti-Injunction   Act    bars   appellant's   suit

because it seeks to restrain "activities which are intended to or

may culminate in the assessment or collection of taxes."

           The Supreme Court recently clarified that the Anti-

Injunction Act "is 'not keyed to all activities that may improve

a [s]tate's ability to assess and collect taxes.'          It is instead

'keyed to the acts of assessment [and] collection themselves.'"

CIC Servs., LLC v. IRS, 141 S. Ct. 1582, 1589 (2021) (quoting

Direct Mktg. Ass'n v. Brohl, 575 U.S. 1, 11-12 (2015)).12         Noting

     10 The IRS also argues that the Declaratory Judgment Act,
28 U.S.C. § 2201, precludes jurisdiction over appellant's suit.
Appellant and the IRS agree, however, that the Anti-Injunction Act
and the Declaratory Judgment Act are interpreted in the same way.
Consequently, we refer only to the Anti-Injunction Act.
     11The statute contains several exceptions not relevant here.
See 26 U.S.C. § 7421(a).
     12Direct Marketing involved the Tax Injunction Act, which
"was modeled on the Anti–Injunction Act" and contains nearly

                                - 11 -
that    "'[i]nformation              gathering' . . .           is    'a    phase    of    tax

administration           procedure         that    occurs       before     assessment      [or]

collection,'" the Court explained that the Anti-Injunction Act

would     not       bar    a     lawsuit          challenging         ordinary      reporting

requirements,         even      if    those        requirements        "facilitate        [the]

collection of taxes" by identifying taxpayers who owe tax, because

reporting requirements are part of the information-gathering phase

of tax administration. Id. (emphasis added) (quoting Direct Mktg.,

575    U.S.    at    8,   12);       see    also    id.    at    1588-89     ("A    reporting

requirement is not a tax; and a suit brought to set aside such a

rule is not one to enjoin a tax's assessment or collection.                                That

is so even if the reporting rule will help the IRS bring in future

tax revenue . . . .").

               Appellant challenges the IRS's summons authority under

26 U.S.C. §§ 7602 and 7609. As previously noted, § 7602 authorizes

the IRS to issue summonses "[f]or the purpose of ascertaining the

correctness of any return, making a return where none has been

made, determining the liability of any person for any internal

revenue       tax   or    the    liability         at     law    or   in    equity    of    any

identical language but applies to challenges to state tax laws.
575 U.S. at 8. The Court "assume[d] that words used in both Acts
are generally used in the same way," id., and subsequently adopted
Direct Marketing's interpretation of "assessment" and "collection"
activities as applied to the Anti-Injunction Act in CIC Services,
see 141 S. Ct. at 1588-89 & n.1.

                                             - 12 -
transferee . . ., or collecting any such liability."                    26 U.S.C. §

7602(a).   Pursuant to this authority, the IRS may issue a summons:

           (1) To examine any books, papers, records, or
           other data which may be relevant or material
           to such inquiry;

           (2) To summon the person liable for tax or
           required to perform the act, or any officer or
           employee of such person, or any person having
           possession, custody, or care of books of
           account containing entries relating to the
           business of the person liable for tax or
           required to perform the act, or any other
           person the Secretary may deem proper, to
           appear before the Secretary at a time and
           place named in the summons and to produce such
           books, papers, records, or other data, and to
           give such testimony, under oath, as may be
           relevant or material to such inquiry; and

           (3) To take such testimony of the person
           concerned, under oath, as may be relevant or
           material to such inquiry.

Id.   These    activities         clearly   fall    within    the       category    of

information gathering, which the Supreme Court has distinguished

from acts of assessment and collection.             Compare Direct Mktg., 575

U.S. at 8 (identifying the "reporting of information used to

determine tax liability, including reports by third parties who do

not owe the tax" as part of the "information gathering . . . phase

of tax administration procedure that occurs before assessment

. . . or collection" (citation omitted)), with id. at 9 (defining

"[a]ssessment"      as    "the    official     recording      of    a    taxpayer's

liability,    which      occurs    after     information      relevant        to   the

calculation    of     that   liability       is    reported    to       the    taxing

                                     - 13 -
authority"), and id. at 10 (suggesting that "collection" begins

after assessment when the tax collector "giv[es] notice to each

person liable to pay any taxes . . . stating the amount of such

taxes and demanding payment thereof").         Because appellant's suit

challenges the IRS's information-gathering authority and the Anti-

Injunction Act limits our jurisdiction only in suits involving

assessment and collection, the Act is not an applicable exception

to the United States' waiver of sovereign immunity in 5 U.S.C. §

702.   See CIC Servs., 141 S. Ct. at 1588-89; Direct Mktg., 575

U.S. at 14 ("[A] suit cannot be understood to 'restrain' the

'assessment . . . or collection' of a [] tax if it merely inhibits

those activities.").

           Despite   the   seemingly        clear    demarcation        between

information   gathering,   on   the   one    hand,       and   assessment   and

collection, on the other, the IRS insists that the purpose of

appellant's suit is restraining the assessment or collection of

taxes, thereby bringing it within the scope of the Anti-Injunction

Act.   Invoking language from CIC Services, the IRS contends that

"'the substance of the suit' is directed at the alleged harm of

having the IRS retain and use information about [appellant]'s

virtual   currency   transactions     for    use    in    determining     [his]

compliance with his income tax obligations," and "[t]he 'relief

requested' is the expungement of information that would allow the

IRS to do so."   (Emphasis added.)       See CIC Servs., 141 S. Ct. at

                                - 14 -
1589 ("In considering a 'suit['s] purpose,' [courts] inquire not

into    a   taxpayer's          subjective     motive,     but   into     the    action's

objective aim -- essentially, the relief the suit requests.").

The IRS also cites out-of-circuit case law that predates both

Direct      Marketing          and   CIC     Services    to   suggest     that     "suits

challenging        the    IRS's      investigatory       processes      leading    up   to

assessment and collection are barred."

             As the Court observed in CIC Services, however, "[t]he

Anti-Injunction Act kicks in when the target of a requested

injunction is a tax obligation -- or stated in the Act's language,

when that injunction runs against the 'collection or assessment of

[a] tax.'"         Id. at 1590.              Here, the target of the requested

injunction     is        the    IRS's      continued    retention    of       appellant's

personal financial information, which appellant alleges the IRS

acquired      in     violation          of    the     Constitution      and     26 U.S.C.

§ 7609(f).13        Contrary to the IRS's suggestion that appellant's

suit is "a 'preemptive' suit to foreclose tax liability" (which

would be barred by the Anti-Injunction Act), this suit, like the

suit at issue in CIC Services, "falls outside the Anti-Injunction

Act because the injunction it requests does not run against a tax

at all."      Id. at 1593.           Rather, "[t]he suit contests, and seeks

        The IRS itself appears to recognize this reality, as it
       13

describes the goal of the suit as seeking to "order[] the IRS to
destroy information obtained pursuant to an enforcement order as
part of a legitimate investigation."

                                             - 15 -
relief from, a separate legal" wrong -- the allegedly unlawful

acquisition and retention of appellant's financial records.            Id.

Like the plaintiff in CIC Services, appellant "stands nowhere near

the cusp of tax liability," id. at 1591, and "the dispute is [not]

about a tax rule," where "the sole recourse" in light of the Anti-

Injunction Act "is to pay the tax and seek a refund," id. at 1593.

Consequently, the Anti-Injunction Act does not bar appellant's

suit and the district court's judgment of dismissal under Federal

Rule of Civil Procedure 12(b)(1) must be vacated.

                                    III.

          The IRS urges that we should nevertheless affirm the

dismissal of the case under Federal Rule of Civil Procedure

12(b)(6) for failure to state a claim. Although the IRS made this

argument below and both sides fully briefed the issue, the district

court   declined   to   evaluate     the    government's   Rule   12(b)(6)

arguments after concluding that dismissal was required under Rule

12(b)(1). We therefore vacate the judgment of dismissal for lack

of subject matter jurisdiction and remand to the district court to

consider, in the first instance, whether appellant has stated a

claim on which relief can be granted.         See Town of Barnstable v.

O'Connor, 786 F.3d 130, 141 (1st Cir. 2015).

          So ordered.

                                   - 16 -