|Peoria Journal Star
August 31, 2003
IRS slaps $70 million lien on Bielfeldt
One of Peoria's richest continues 12-year battle with tax agency
FIRST OF THREE PARTS
By DORI MEINERT
of Copley News Service
WASHINGTON, D.C. - Gary and Carlotta Bielfeldt have donated millions of
dollars over the years to Glen Oak Zoo, the RiverPlex, Lakeview Museum
and other local projects. Their name adorns the University of Illinois
Athletic Center administration building at Champaign.
But the man lauded for his aggressive trading style in the 1989 book "Market Wizards" now faces $69.6 million in Internal Revenue Service tax liens on his Peoria Heights property.
The tax agency at one point had been seeking upwards of $90 million in
back taxes, penalties and fines from Bielfeldt and his family. Now,
after years of legal wrangling, the Bielfeldts and the IRS are close to
And the man who once might have been Peoria's richest faces other
Bielfeldt is fighting efforts by lawyers at the Commodity Futures
Trading Commission (CFTC) to slap him with a $4.6 million fine and
six-month suspension for alleged violations in futures trading.
In addition, foundation and tax law specialists question financial
dealings of the Bielfeldt Foundation, including the payment of millions
of dollars in investment commissions to Bielfeldt and his son in recent
years while the tax-exempt organization's assets shrank dramatically.
Neither Bielfeldt nor his firm is accused of criminal wrongdoing. But
they face civil penalties for alleged violations of the U.S. Internal
Revenue Code, the Commodity Exchange Act and CFTC regulations.
Some see the Bielfeldt story as an example of over-zealous tax
enforcement and trade regulation. Others see it as an example of how
wealthy Americans can stave off federal enforcement in ways that people
without money can't.
The IRS and the Bielfeldts declined to be interviewed for this story.
But the Bielfeldts' lead attorney, Edward Sutkowski, blamed the family's
legal problems on convoluted federal tax laws and trading regulations.
"Gary is not trying to avoid paying his fair share of taxes. As a matter
of fact, he's paid more taxes than any human being downstate," Sutkowski
said. "Yes, he's made a lot of money. And he's given a lot of money
Huge risks, huge payoffs
After graduating from the University of Illinois in 1959 with a master's
degree in agricultural economics, Gary Bielfeldt ran a small brokerage
in Peoria and started his own investment account with $1,000. He emerged
in the 1980s as one of the most successful traders in the country, and
he regularly bought and sold $50 billion worth of Treasury bond futures
a year, according to one book about him. His huge risks resulted in huge
In a rare interview 14 years ago, Bielfeldt compared his trading to
"I learned how to play poker at a very young age. My father taught me
the concept of playing the percentage hands. You don't just play every
hand and stay through every card, because if you do, you will have a
much higher probability of losing," he told Jack D. Schwager, who
interviewed him for his 1989 book, "Market Wizards: Interviews With Top
"When the percentages seem to be strongly in your favor, you should be
aggressive and really try to leverage the trade similar to the way you
raise on the good hands in poker," Bielfeldt said at that time.
In 1991, Bielfeldt tried his luck with the IRS.
He filed amended tax returns for 1985 through 1989 seeking an $85
million refund and started a chain of events he later would come to
"I made the biggest mistake of my life when I filed for a tax refund,"
Bielfeldt told the Center for Public Integrity, which quoted him in a
book titled "The Cheating of America."
The IRS responded to his refund request by launching an extensive audit
of Bielfeldt, his wife and children, his partnership, Bielfeldt & Co.,
and the company's pension plan.
In 1996, the IRS concluded that instead of being entitled to a refund,
Bielfeldt owed the federal government upwards of $90 million.
In a Nov. 21, 1996, joint court motion to consolidate all IRS complaints
against Bielfeldt, the two sides itemized $84.9 million in contested
taxes, penalties and interest. It is unclear whether that represented
all of the IRS' claims against the Bielfeldts. The Center for Public
Integrity tallied the IRS debt at $94 million.
What is clear, however, is that the IRS denied deductions Bielfeldt had
taken for trading losses. It also denied deductions on the business use
of his company's two jets, depreciation of Downtown Peoria property and
losses on the sale of a condominium on Marco Island, Florida.
Bielfeldt challenged the IRS in eight U.S. Tax Court petitions. The
sheer volume of the court files gives a hint of the extent of the legal
battle. When stacked, the files stand 3 feet tall.
In his effort to get a big refund, Bielfeldt claimed he was a "dealer"
rather than a "trader," as he had reported on his original tax returns.
The error, he said, left him unable to deduct $172 million in losses in
1987, 1988, and 1989 as ordinary rather than capital losses, according
to court documents.
At trial in U.S. Tax Court in 1998, Bielfeldt blamed his former
accountant, Jack Williams of KPMG Peat Marwick, for labeling him a
trader on his initial tax returns rather than the more favorable
designation as a dealer.
"I tried to explain to him the activities that I was involved with, how
the activities had grown and expanded, and I was relying on him to give
me the best accounting advice," Bielfeldt testified.
But on Nov. 6, 1998, U.S. Tax Court Judge David Laro ruled that
Bielfeldt was in fact a trader - not a dealer - and thus owed the
federal government $44.9 million in taxes and penalties for 1984 through
One of the key legal differences is that a dealer has customers; traders
make money from their own investments.
"The fact that petitioner (Bielfeldt) did not have himself licensed as a
dealer, that he did not consider himself a dealer, and that he did not
hold himself out as a dealer undercuts his argument that he was one,"
Judge Laro concluded.
The 7th Circuit Court of Appeals agreed. Bielfeldt appealed to the U.S.
Supreme Court, which refused to hear his case in 2001.
A year earlier, Bielfeldt had filed a lawsuit in Peoria County Circuit
Court alleging negligence on the part of his former accounting firm,
KPMG, seeking damages of about $200 million, said his attorney Jerome
Mirza of Bloomington. The case is scheduled for a jury trial in January.
The KPMG accountant, John "Jack" Williams, was based in Peoria when he
prepared Bielfeldt's tax returns but now lives in Fort Lauderdale, Fla.
He no longer works for KPMG and he's no longer in the accounting
In court documents, KPMG contends the 1984 to 1988 tax returns were
based on "reasonable interpretations" of the facts provided by Bielfeldt
and the applicable law and that Bielfeldt "failed to mitigate his
damages by refusing to enter into a favorable agreement with the IRS."
Outside the courtroom
Separately, numerous tax disputes have been resolved outside the
courtroom. Bielfeldt won some and he lost some. Sutkowski said that no
money has yet changed hands, and it remains unknown how much Bielfeldt
ultimately is likely to have to pay to resolve all the tax issues.
"No one can give you a net number," Sutkowski said, adding that interest
and penalties complicate any final tally.
The IRS' $69.6 million in liens on Bielfeldt's property don't take into
account refunds to which he is entitled, Sutkowski said. On the other
hand, interest and penalties apparently are still being tallied.
The Bielfeldts have hired Chicago lawyer Robert McKenzie, one of the
nation's top tax lawyers, to negotiate a final agreement with the IRS.
McKenzie refused to discuss the case, saying he's been told to refer
calls to Sutkowski.
The team of lawyers has faced a host of issues other than the
high-stakes question of whether Bielfeldt was a futures dealer or
trader. Chief among them is the dim view the IRS took of how Bielfeldt
managed the tax-exempt pension plan for Bielfeldt & Co.'s 20 employees.
Of special interest was his handling of his own personal pension
Bielfeldt's personal retirement account grew from $11 million to $50
million between 1984 and 1988, even though the maximum tax-exempt
contribution he could make was $15,000 a year, according to court
documents filed by the IRS.
His attorneys claimed the increase was interest earned by the account,
but the IRS said there were no records to prove that.
The IRS revoked the tax-exempt status of the company's pension fund in
1996 after concluding that Bielfeldt improperly used his own pension
funds in trading and that the trading he conducted was overly risky.
In 1989, Bielfeldt incurred severe losses in government securities
trading, and the only way his partnership showed a positive equity on
the books was by including the positive equity in his pension accounts,
according to the IRS.
Bielfeldt in 1991 cashed out his pension account - valued then at $29.8
million, according to court records filed by the Bielfeldts' attorney.
The IRS initially had sought $45 million in connection with Bielfeldt's
pension activities. In 1999, Bielfeldt and the IRS agreed out of court
to a much smaller payment - $500,000 in excise taxes.
Center for Public Integrity
The Center for Public Integrity says the epic struggle between Bielfeldt
and the IRS shows how wealthy people wear down the limited resources of
"I think the majority of Americans who run afoul of the IRS, they're
willing to concede their mistake and write out a check. And, if they
don't think they're wrong, a lot of times they'll settle simply because
they don't have the resources to fight the government," said Bill
Allison, managing editor for the Washington, D.C.,-based center, which
functions as a private watchdog on corporate and government practices.
Allison co-authored the 2001 book "The Cheating of America: How Tax
Avoidance and Evasion by the Super Rich are Costing the Country Billions
- And What You Can Do About It." He and the center's other investigators
found the Bielfeldts' tax problems intriguing enough to merit a whole
"What we found in the book over and over again was wealthy individuals
who did have the resources to fight the government and were very adept
at it," Allison said.
Other public policy advocates see it differently.
A spokesman for the National Taxpayers Union said wealth sometimes is a
detriment in dealings with the IRS.
"In our experience, the IRS' desire to nail a high-profile person and
set an example erase many of the advantages that money can normally buy
in court," said NTU spokesman Pete Sepp.
Bielfeldt has largely prevailed against the IRS' rejection of his $4.9
million in deductions sought for expenses and depreciation on the
Learjet his firm bought in 1986 and another plane, an Aero Commander
At trial, Bielfeldt testified that he used the Learjet in 1988 to fly
then-House Minority Leader Bob Michel and former Federal Reserve
Chairman Paul Volcker as well as some investment firm executives to
Peoria to discuss the markets.
"Peoria is not an easy place to get in and out of and if you're going to
fly customers in, it's much more convenient for them if you pick them
up, fly them in and take them back," Bielfeldt testified.
He also won some ground on IRS claims that he owed more than $1 million
in taxes and penalties for 1989 and 1990. The IRS had denied his
deductions for depreciation and expenses on property in Downtown Peoria,
then known as the old Bergner's block. His company bought the property
and planned to redevelop it. He later sold the property with few
MONDAY: Trading practices under fire