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its business judgment, (3) the valuation of swaps is a novel and
complex issue, (4) the Treasury Department has yet to fulfill a
congressional mandate to issue regulations on the valuation of
financial derivatives under section 475, and (5) FNBC’s
methodology is supported by the legislative history of section
475. FNBC’s methodology was reasonable, petitioner asserts,
because: (1) That methodology was recognized by the industry,
regulators, and accounting profession as the best approach for
valuing financial derivatives, (2) FNBC’s valuations met the fair
value standard of accounting, a standard, petitioner contends,
that is identical in all pertinent respects to the concept of
fair market value, and (3) whereas an undervaluation of swaps
would have lowered reported earnings, FNBC had strong incentives
not to undervalue its swaps and to report strong earnings.
B. Identification of a Method of Accounting
We decide first whether the reporting of income under
section 475, inclusive of the valuation requirement subsumed
therein, is a method of accounting. Respondent argues that such
reporting of income is a method of accounting. Petitioner argues
that such reporting of income is not a method of accounting but
is a question of valuation. We agree with respondent.
Although the Internal Revenue Code does not define the term
“method of accounting”, the regulations do. Those regulations
provide that the term “method of accounting” includes both:
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