Last Thursday, the public learned that Joshua and Jessica Jarrett, on behalf of the Attorney General of the United States, had been offered a full refund of $3,793, plus statutory interest, for the 2019 tax year in response to their complaint concerning the taxation treatment of cryptocurrency tokens they obtained. According to the court documents, a trial meeting is set for next Thursday, February 10, between the judge, the Department of Justice attorneys representing the Defendant and attorneys for the Jarretts, to discuss next steps in the case.
Jarrett, the President and CEO of Quantify Fitness, a gym in Nashville, Tennessee released a statement indicating he would not accept the refund from the IRS, but rather continue on in the trial to help get an explanation along with his money back. For Jarrett, part of his complaint is the result of a lack of guidance from the IRS on how to treat cryptocurrencies that are received from blockchain networks in return for their efforts to validate transactions and create the next block on a blockchain.
On the court documents, six attorneys from two separate law firms are listed that include J. Abraham Sutherland, who has been making a name for himself in cryptocurrency circles recently and also serves as an Advisor to the Proof of Stake Alliance and as an Adjunct Professor to the University of Virginia School of Law. Leading the negotiations for the case with the DOJ is David L. Forst, a tax partner at Fenwick and West LLP. Fenwick represented Coinbase in its direct listing of COIN on the Nasdaq, which after the first day of trading was valued at $85 billion dollars and even has a testimonial from Paul Grewal, Chief Legal Officer of Coinbase, about how helpful the firm was in understanding a new technologies like cryptocurrency.
The Court of Public Opinion
The news that broke on Tuesday that sparked such a high degree of public attention to the case was written by Casey Wagner, Senior Reporter at Blockworks, a publication co-founded by Jason Yanowitz. Wagner is formerly a reporter at Bloomberg News and the Editor-In-Chief of Blockworks is Dan Keeler, who formerly served as the Frontier Markets Editor at the Wall Street Journal.
As the cryptocurrency community reacted to the news, it was clear that beyond the court of law, a major fight in public discourse between the various blockchain protocols will ultimately have to surface as this could not only impact various blockchain protocols, but the future growth and appreciation of cryptocurrencies in general.
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Should the crypto community be able to come together and unite on issues relating to taxation, regulators such as the IRS and the SEC will no longer be able to provide loose or no guidance in areas such as the tax code and the general treatment of cryptocurrencies by regulators. With the Biden Administration taking a keen interest in crypto and lawmakers holding hearings almost every week, the industry will need to provide a professional and credible relationship with Capitol Hill. Otherwise, the potential benefits to the crypto ecosystem will simply be brushed aside by Members of Congress and Senators who may be willing to engage in bipartisan policy for cryptocurrency.
Timeline of the Court Case Asking For A Refund And An Explanation
Below is a timeline that will help us to reset the events of the trial in court, and then I will share quotes from an expert on these types of cases who will help to better understand what could come next for the Jarretts in court.
July 31, 2020 – The Jarretts seek a refund in the amount of as the couple seeks a refund of $3,793 plus statutory interest, and a brief filed in support of the Jarrett’s claim that the “8,876 New Tezos Cryptocurrency Reward Tokens Are Not Taxable Income in 2019 Under the Internal Revenue Code.” The author of the brief was J. Abraham Sutherland, who is quickly growing in popularity amongst the cryptocurrency community for this and other notable work related to additional language he brought to the public’s attention in the Infrastructure and Investment Jobs Act that could have impact on cryptocurrency holders when they engage in peer-to-peer transactions.
May 26, 2021 – A lawsuit is filed in the U.S. District Court Middle District of Tennessee, Nashville Division “for a refund of federal income taxes paid to Defendant United States of America, by and through its agency the Internal Revenue Service (the “IRS”), with respect to the Jarretts’ taxable year ending December 31, 2019, and statutory interest thereon.” Attorneys listed for the plaintiff on court documents show Jeffrey M. Harris and Cameron T. Norris of Consovoy Mcarthy PLLC, and David L. Forst and Sean P. McElroy of Fenwick and West LLP, and Sutherland, the previously mentioned author of the brief in 2020.
December 20, 2021 – This is the date of a letter from the U.S. Department of Justice, Tax Division, notifying the Jarretts that the Attorney General of the U.S. that a full refund of $3,793, plus statutory interest, sought in the complaint for the 2019 tax year has been approved on behalf of the Attorney General. The letter notifies the Jarretts that the Internal Revenue Service has been authorized and directed to schedule an overpayment of $3,793, plus statutory interest as provided by law for the 2019 tax year.
January 5, 2022 – Forst of Fenwick and West LLP receives an email from DOJ that includes a draft stipulation of dismissal.
January 14, 2022 – Forst speaks with the DOJ on a phone call.
January 25, 2022 – Forst writes a letter that is addressed to Ryan McMonagle in the Tax Division of the United States Department of Justice where he indicates it is implied that the DOJ’s offer to direct the IRS to provide a full refund to the Jarretts that this brings the parties’ dispute to an end. Forst goes on to point to the phone call itself on January 14th as reason why the plaintiffs do not share the view that the case can be dismissed and closed. Forst then provides the details of the January 14th phone call with the DOJ, stating, “ During the call, you were unable or unwilling to explain the reasons for the Department’s proffer, or its meaning for the Jarretts in subsequent tax years – or, indeed, in 2019 itself.” Forst also expressed frustration in the call that, “The IRS will also apparently not provide any assurances with respect to the sole issue that gave rise to this litigation – whether tokens created through staking a particular cryptocurrency constitute taxable income at the time of their creation.”
February 3, 2022 – Court documents reveal the above communications that a case management conference is set for February 10, 2022, which is typically when the judge and the parties (the Plaintiff and Defendant) meet prior to setting a trial date.
Exclusive Interview With Former DOJ Attorney On What The Trial Means
I had the honor of speaking with Christopher S. Rizek, Member at Caplin and Drysdale and Adjunct Professor at Georgetown, who has previously served as a Trial Attorney with the U.S. Department of Justice, Tax Division, as well as an Attorney-Advisor and Associate Tax Legislative Counsel with the U.S. Treasury Department, Office of Tax Legislative Counsel, where he had substantial responsibilities for legislation and regulatory actions involving taxpayer rights, tax practice and procedure, and tax compliance.
Jason Brett: Would you consider this a test case for the tax treatment of crypto?
Christopher S. Rizek: As of now, not taking the refund from the IRS makes it clear this is a test case; however, until the judge decides to write an opinion, there is no real precedent set for anyone. It is simply Mr. Jarrett and his wife being offered an IRS refund.
Brett: What if the IRS processes and sends the check to Jarrett? Is the case over?
Risek: That is interesting, and it seems clear that the hope of Mr. Jarrett and his lawyers was to have a precedent set through this lawsuit. However, all of this area around crypto and taxation is a hot topic and still lacks a great deal of clarity. The IRS could send a check and technically close out the case, assuming the court lets them. It’s apparent the IRS does not want to resolve the substantive issues using this case as the vehicle, and may choose to resolve them through policymaking on its own.
Brett: Why is there a tax break for ‘newly created property’? Can you provide another example where this applies?
Risek: The basic idea is that there is no “realization” event until the property is sold. Self-created art works are a classic example.
Brett: What happens next, now that the taxpayer has refused the refund? Presumably DOJ will move for dismissal of the case with prejudice, and the taxpayer will object. Will he get his day in court?
Risek: That’s up to the judge. The initial issue will be whether to even proceed to the merits of the crypto issues or just grant the DOJ’s motion.
Brett: Does this mean there is one judge who could very well set a precedent if he or she were to provide an opinion on staking?
Risek: If the court proceeds to the merits, and the judge writes an opinion, then yes it could be cited by others as the correct way to resolve the substantive tax issues.
Brett: If you are the Jarretts, are you better off taking the money and assuming in future years now that you do not have to pay tax on your staking rewards? Should others follow this example and simply file their taxes in a way that shows there is no tax owed on the staking as newly created property?
Risek: People who do staking should talk to their own tax advisors about that, I can’t advise them. But I can say that if DOJ prevails and the court declines to address the merits, then this case won’t establish any principle that is necessarily applicable in other situations or cases.
Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street
America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.
Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.
For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.
Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”
Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.
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But that’s not good enough to protect public pension stakeholders.
No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.
The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.
Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?
Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.
Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.
Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.
It Is Time To Buy Bonds
US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.
Monthly Return- US 10-Year Notes
Blue: Average Percentage Change
Red: Probability of a rise on that day
Green: Expected Return (Product of the first 2)
These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.
10-Year Note Monthly Cycle
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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.
The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.
10-Year Notes Broke Through Resistance
Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.
Will There Be War Over Taiwan – The Next Spy Thriller
I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.
The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.
Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.
It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).
These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.
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One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.
I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).
In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.
Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).
In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).
On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.
Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).
So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.
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