Bank One Corporation - Page 133

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                    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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