120 T.C. No. 11
UNITED STATES TAX COURT
BANK ONE CORPORATION (SUCCESSOR IN INTEREST TO FIRST
CHICAGO NBD CORPORATION, FORMERLY NBD BANCORP, INC.,
SUCCESSOR IN INTEREST TO FIRST CHICAGO CORPORATION)
AND AFFILIATED CORPORATIONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5759-95, 5956-97. Filed May 2, 2003.
F, a financial institution, enters into bilateral
contracts which are a type of derivative financial
product known as interest rate swaps. Most of F’s
swaps are of the plain vanilla type where one party
(first party) agrees to pay to the other party (second
party) amounts ascertained as of certain dates by
applying a fixed rate of interest to a set notional
amount. The second party agrees to pay to the first
party amounts ascertained as of the same dates by
applying a floating rate of interest (e.g., LIBOR rate)
to the same notional amount. For purpose of the
mark-to-market rule of sec. 475(a)(2), I.R.C., which
applies to taxable years ended after Dec. 30, 1993, F
reported that the fair market value of its swaps as of
Dec. 31, 1993, equaled their mid-market values; i.e.,
the values derived through a net cashflow/present value
analysis that was based on the average of each swap’s
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