Sixth Circuit Revives Constitutional Challenge to Crypto Transactions Reporting Rule

(Parker Tax Publishing August 2024)

The Sixth Circuit affirmed in part and reversed in part a district court's finding that it lacked jurisdiction to consider the merits of a lawsuit challenging the constitutionality of Code Sec. 6050I, which was amended by Congress in 2021 to include digital assets in the definition of "cash" for purposes of the reporting requirement for trade or business transactions in excess of $10,000. The Sixth Circuit found that the plaintiffs had standing to bring their claims under the enumerated powers provision, the First Amendment, and the Fourth Amendment and the claims were ripe for adjudication. Carman et al. v. Yellen, 2024 PTC 283 (6th Cir. 2024).

Background

Under Code Sec. 6050I(a), any person who is engaged in a trade or business who, in the course of such trade or business, receives more than $10,000 in cash in one or more related transactions is required to report the transaction on Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business. In the Infrastructure Investment and Jobs Act (Pub. L. 117-58), enacted in 2021, Congress amended the definition of "cash" in Code Sec. 6050I(d)(3) to include "any digital asset." The term "digital asset" generally means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. One type of digital asset is cryptocurrency, the hallmarks of which are decentralization and anonymity.

Dan Carman, Coin Center, Raymond Walsh, and Quiet Industries Corp. (the plaintiffs) regularly transact in cryptocurrency for both personal and business matters. In 2022, The plaintiffs filed a lawsuit in a district court and launched five distinct constitutional attacks on the amended Code Sec. 6050I. They argued that the new reporting rule violates the Fourth Amendment because it compels senders and receivers of cryptocurrency in reported transactions to share their sensitive personal identifying information with the government. They claimed that, as a result of the private nature of cryptocurrency transactions, they have a reasonable expectation of privacy and the amended law will invade their privacy without the need for a warrant. They also claimed that the government will conduct searches by violating their property rights. Their other arguments included a violation of their freedom of association under the First Amendment and a vagueness challenge under the Fifth Amendment. In addition, the contended that Congress exceeded its enumerated powers by promulgating Code Sec. 6050I, which amounts in their view to a disproportionate "surveillance" regime that is not necessary to carry out Congress's taxing powers. Finally, they argued that the amended Code Sec. 6050I violates the Fifth Amendment's protection against self-incrimination.

The district court found that the plaintiffs' Fourth Amendment claim was not yet ripe because Code Sec. 6050I was not yet effective, the Treasury Department had not yet promulgated rules implementing the reporting requirements, and the plaintiffs' theory of harm rested on a number of contingent events. Next, the district court found that the plaintiffs lacked standing to bring a First Amendment challenge because any injuries were not imminent. Turning to vagueness, the district court found that the claim was not ripe because the Treasury Department had not yet engaged in rulemaking and court should refrain from interpreting the statute before final agency action. The district court found the plaintiffs' enumerated-powers claim unripe for the same reasons it found the Fourth Amendment claim unripe. Finally, the district court found that the plaintiffs' Fifth Amendment self-incrimination claim was not ripe because the plaintiffs have yet to assert the right against self-incrimination.

At the end of its analysis, the district court also commented on certain of the plaintiffs' claimed injuries, including harms to their businesses and compliance costs. The district court stated that these injuries could not suffice to create standing or to overcome the ripeness issues in the case because the injuries were not linked to the plaintiffs' claims. The district court found that this was not the case for the enumerated-powers claim but that the claim was nonetheless not ripe and any injuries connected to that claim were too speculative. The plaintiffs appealed to the Sixth Circuit.

Observation: In Announcement 2024-4, the IRS provided transitional guidance under Code Sec. 6050I with respect to reporting transactions involving receipt of digital assets. The announcement clarifies that, until regulations are published that specifically address the application of Code Sec. 6050I to digital assets, persons engaged in a trade or business who, in the course of that trade or business, receive digital assets or digital assets and other cash in one transaction (or two or more related transactions) will not be required to include those digital assets when determining whether cash received has a value in excess of the $10,000 reporting threshold.

Analysis

The Sixth Circuit affirmed in part and reversed in part the district court's judgment. The Sixth Circuit said that the district court was correct in finding that the vagueness claim was not ripe but erred by finding that the plaintiffs' enumerated powers, Fourth Amendment, and First Amendment claims were not reviewable by the court.

With regard to the plaintiffs' vagueness argument, the Sixth Circuit found that the hypothetical nature of the claim meant that it was not yet fit for review. For example, the plaintiffs suggested that it is difficult to determine who is a "person from whom [the digital assets were] received" when it comes to miners, decentralized exchanges, and transactions involving numerous users. The court pointed out that the plaintiffs may never engage in these transactions and that individual-to-individual transactions would not cause this kind of vagueness. Similarly, the court found that the plaintiffs' self-incrimination claim under the Fifth Amendment was not ripe because such a claim generally cannot be brought until a claim of privilege is actually made.

However, the Sixth Circuit found that the plaintiffs did have ripe claims for purposes of their enumerated powers, First Amendment, and Fourth Amendment claims. In the court's view, the enumerated powers argument was clearly ripe. There was no realistic suggestion, the court noted, that the plaintiffs would not be subject to Code Sec. 6050I. And even if the precise contours of how Code Sec. 6050I will be implemented were unknown, the court said that such uncertainty did not undermine that the very statute's existence imposes costs on the plaintiffs and subjects them to regulations with which they do not wish to comply. The court found that the enumerated-powers claim presents an exceedingly simple, pure legal issue: either Congress exceeded the powers given to it by the Constitution or it did not.

Regarding the plaintiffs' First Amendment claims, the Sixth Circuit found that they were constitutionally ripe, but only if the plaintiffs narrowly argued that the mere disclosure of transactions to the government impedes their First Amendment associational rights regardless of whether the government undertakes further investigation. The court explained that because at least some of the plaintiffs unquestionably will need to make Code Sec. 6050I reports, it is appropriate for a court to consider whether the mere disclosure of covered transactions implicates the First Amendment and, if so, passes the requisite level of constitutional scrutiny. The court said that the plaintiffs may not proceed on theories that the government may abuse the information it obtains via disclosures, which are too speculative. But they can, the court said, advance arguments that require no further factual development and raise only legal issues stemming from the face of the statute.

The Sixth Circuit further found that for the claims were ripe for review - the enumerated powers claim, First Amendment claim, and Fourth Amendment claim - the plaintiffs also adequately set forth injuries-in-fact. In the court's view, the plaintiffs pleaded facts showing that they will indeed be subject to the reporting requirements in some form or another and pay compliance costs, so the district court should have proceeded to the merits on these claims. The Sixth Circuit concluded that the district court's approach of disregarding the plaintiffs' claimed injuries did not appear appropriate at the motion-to-dismiss stage, when the question for the court is only whether such injuries are sufficient to meet the injury-in-fact requirement and accord with the rest of the standing analysis.

For a discussion of reporting digital asset transactions on Form 8300, see Parker Tax ¶252,598.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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