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Bielfeldt are husband and wife, and they resided in Peoria
Heights, Illinois, when they petitioned the Court. They are cash
method taxpayers, and they filed joint Federal income tax returns
for the subject years. Their 1984 through 1988 tax returns were
prepared by Peat, Marwick, Mitchell & Co., or a successor thereto
(collectively, Peat, Marwick). Their 1989 return was prepared by
Coopers & Lybrand. Petitioner holds a bachelor's degree and a
master's degree.
During the subject years, petitioner bought and sold
Treasury securities, and his tax returns for those years reported
his sales as capital gains or capital losses. Petitioner's 1984
return reported that he was an "investor" in Treasury securities.
Petitioner's 1985 through 1989 returns reported that he was a
"trader" in Treasury securities. Petitioner notified respondent
of his claimed change in status by attaching a statement to his
1985 tax return that read in relevant part as follows:
During 1985 the above-named taxpayer had a very extreme
change in the volume of trading activities conducted on
his own behalf. The magnitude of trading activities
now qualify the taxpayer as "trader" for tax purposes
rather than an "investor".
Respondent audited petitioner's 1984 through 1989 taxable
years, and, at or about the same time, respondent audited the
related years of Bielfeldt & Co. (B&C) and its predecessor
Bielfeldt, Lauritsen & Hagemeyer (BL&H), general partnerships in
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