## Facts

- Gary K. and Carlotta J. Bielfeldt filed joint federal income tax returns and reported large losses from trading U.S. Treasury notes and bonds during the mid-to-late 1980s.
- Bielfeldt conducted most Treasury-securities trading through a partnership, Bielfeldt & Co., and traded in very large volumes.
- The IRS determined deficiencies and additions to tax for tax years 1984–1988, treating the Treasury-securities positions as capital assets and limiting loss offsets under the capital-loss rules.
- The taxpayers claimed Bielfeldt was a securities “dealer,” so that the Treasury securities were excluded from “capital asset” treatment as “stock in trade” or property held primarily for sale to customers in the ordinary course of business.
- Bielfeldt’s trading was primarily for his own account in an over-the-counter market, commonly transacting with sophisticated counterparties (including primary dealers), rather than selling to a customer base.

## Issues

1. Whether Bielfeldt’s Treasury-securities activity made him a “dealer” so that the securities were excluded from “capital assets” under I.R.C. § 1221(1).
2. Whether losses from Bielfeldt’s Treasury-securities transactions were ordinary losses or capital losses subject to the individual limitation in I.R.C. § 1211(b).
3. Whether the Tax Court clearly erred in finding that Bielfeldt did not hold Treasury securities primarily for sale to “customers” in the ordinary course of a dealer business.

## Decision

- The Tax Court sustained the IRS’s characterization of the Treasury-securities positions as capital assets and found Bielfeldt was not a dealer with respect to the securities at issue.
- The Seventh Circuit affirmed the Tax Court’s decision.
- The court held that Bielfeldt’s gains and losses from the Treasury-securities trading were capital in nature, not ordinary.
- The court relied on factual findings that Bielfeldt traded for his own speculative account, did not provide dealer-type distribution services, and did not sell primarily to “customers” as required by § 1221(1).

## Legal Principles

- I.R.C. § 1221(1) excludes from “capital assets” a taxpayer’s stock in trade and property held primarily for sale to customers in the ordinary course of a trade or business; the “customers” requirement is central.
- A securities “dealer” earns income from providing distribution or market-making services (typically through spreads) to customers; a “trader” earns income from market price fluctuations on positions taken for the trader’s own account.
- High volume, sophistication, and frequent trading do not, without sales to customers and dealer-type services, convert a trader into a dealer for § 1221(1) purposes.
- Classification is fact-intensive; absent clear error in the Tax Court’s findings about the presence of customers and the nature of the taxpayer’s activity, the appellate court will affirm the resulting tax characterization.
- If securities are capital assets, individual taxpayers’ net capital losses generally may offset only limited ordinary income per year under I.R.C. § 1211(b).

## Conclusion

The Seventh Circuit affirmed that Bielfeldt’s Treasury-securities losses were capital losses because his activity reflected trading for his own account rather than dealing: he did not hold securities primarily for sale to customers or perform dealer-type distribution functions required to invoke the § 1221(1) exclusion from capital-asset treatment.


Bielfeldt v. Commissioner, 231 F.3d 1035 (7th Cir. 2000)