Bank One Corporation - Page 43

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          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.            





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