-211-
3. Conclusion
For the foregoing reasons, we conclude that the fair value
of FNBC’s swaps does not equal their fair market value.67
VII. Property To Be Valued
We consider next the specific property that must be valued.
Each piece of property is an interest rate swap to which FNBC is
a party.68 Each swap’s benefit is realized by the party thereto
that is entitled to receive the higher interest rate on the
valuation date. Each swap’s detriment is suffered by the party
thereto that is required to pay that higher rate.
Given the bilateral nature of a swap, we believe that the
fair market value of an interest rate swap is best ascertained by
67 As to the specifics of FNBC’s swaps income methodology,
and the question of whether that method arrived at the fair
market value of FNBC’s swaps for Federal income tax purposes,
Sziklay testified credibly that he was unable to answer that
question. He opined that the adjusted midmarket method is a
customized version of the discounted cashflow method, and that a
proper implementation of the adjusted midmarket method may result
in a fair market value consistent with the meaning of that term
for Federal income tax purposes. He testified, however, that
FNBC’s sole use of its adjusted midmarket method to value its
swaps was inconsistent with the general practice of the business
appraisal profession to use more than one approach to value an
asset. He specifically took exception to the fact that
petitioner produced no evidence of ever using the market
comparables approach to valuation, even as to a sample of its
financial derivative transactions.
68 We hereinafter limit our analysis to the treatment of
interest rate swaps. We believe on the basis of our
understanding of the other financial derivatives at issue that
the tax treatment of those derivatives follows naturally from our
decision as to FNBC’s interest rate swaps. If we are mistaken on
that point, then either party may bring this to our attention.
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