## Facts

- The U.S. Department of the Treasury issued marketable debt in three common forms: Treasury bills (issued at a discount with no stated interest), Treasury notes (fixed interest paid semiannually with shorter maturities), and Treasury bonds (fixed interest paid semiannually with longer maturities).
- Treasury securities were initially sold through auctions and thereafter commonly traded over the counter, either directly between market participants or through interdealer brokers.
- Prices in the Treasury market were commonly expressed as bid and ask quotes; trades occurred when a buyer accepted an ask or a seller accepted a bid.
- The Federal Reserve Bank of New York recognized certain firms as “primary dealers” and expected them to participate in auctions, report to the Fed, maintain adequate capital, and make markets in Treasury securities.
- Primary dealers sometimes traded Treasury securities for their own accounts (proprietary trading) and sometimes traded for customers; even when customer-related, the counterparty was often another primary dealer.
- Gary K. Bielfeldt (and related petitioners in consolidated dockets) participated in high-volume transactions in U.S. Treasury notes and bonds, seeking profit from price changes in those instruments.
- The IRS treated Bielfeldt’s gains and losses from Treasury securities as capital in character, limiting the use of losses under the capital-loss rules.
- Bielfeldt contended he functioned as a dealer or market-maker in Treasury securities and that the instruments were held primarily for sale to customers, so that gains and losses should be ordinary under the dealer/inventory exclusion in I.R.C. § 1221(1).
- Although multiple dockets were consolidated, the court noted that the issue addressed in the opinion ultimately applied only to the docket of Gary K. and Carlotta J. Bielfeldt.

## Issues

1. Whether Bielfeldt’s U.S. Treasury securities were “capital assets” under I.R.C. § 1221 or were excluded under § 1221(1) as property held primarily for sale to customers in the ordinary course of a dealer business.
2. Whether Bielfeldt’s trading activity in Treasury securities constituted dealing (serving customers in a distribution or market-making role) or trading for his own account (profiting from market fluctuations).

## Decision

- The Tax Court held that Bielfeldt was not a dealer in U.S. Treasury securities for federal income tax purposes.
- The court concluded that Bielfeldt did not hold Treasury securities primarily for sale to customers in the ordinary course of business within the meaning of § 1221(1).
- As a result, the Treasury securities were capital assets, and Bielfeldt’s gains and losses from the securities were capital in character (subject to the capital-loss limitations).

## Legal Principles

- I.R.C. § 1221 defines “capital asset” broadly; § 1221(1) excludes stock in trade, inventory, and property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.
- A dealer’s income is tied to providing a market or distribution service—buying and reselling to customers, commonly earning compensation through spreads or similar dealer activity—rather than solely from price movements.
- A trader’s income is generally derived from market fluctuations on positions taken for the trader’s own account; frequent or large-volume trading alone does not create dealer status.
- For § 1221(1), “customers” are not established merely because a taxpayer transacts with sophisticated market counterparties; the relationship must reflect a customer-facing resale function rather than proprietary speculation.

## Conclusion

The Tax Court treated Bielfeldt’s Treasury positions as proprietary trading rather than dealer inventory because the securities were not held primarily for sale to customers as part of a customer-service resale business; therefore, the securities remained capital assets under § 1221 and the resulting gains and losses were capital.


In the Matter of Bielfeldt, T.C. Memo. 1998-394 (1998)