-13-
using the Devon system was based on the midpoint between a swap’s
market bid and ask rates, or, in other words, the average of
those rates). FNBC’s swap fee carveout as to each of those swaps
represented the difference, determined at or about the time of
each swap’s initiation, between the swap’s midmarket value and
the bid or ask price which it paid or received for the swap.
FNBC treated the carved-out amounts as deferred income designed
to compensate it for (1) the perceived credit risks of its
counterparties (credit adjustments) and (2) the estimated
administrative costs which it expected to incur in holding and
managing the swaps until maturity (administrative costs
adjustments). Respondent determined that the method by which
FNBC claimed the carveouts was improper in that the method did
not clearly reflect FNBC’s swaps income in accordance with
section 4462 and section 1.446-3, Income Tax Regs. Respondent
determined that FNBC was required to report its swaps income by
using a method that reported each swap’s midmarket value without
any adjustment.
We hold that neither FNBC’s method of accounting as to its
swaps income nor respondent’s method of accounting as to that
income clearly reflected FNBC’s swaps income. We direct the
parties to file with the Court a computation (or computations)
2 Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011