-221-
earlier valuation date simply does not meet that legislative
requirement.73
Nor was FNBC’s practice of valuing nonperforming swaps at
modified lower of cost or market consistent with the last
business day mark-to-market requirement of section 475. A policy
of valuing nonperforming swaps at lower of cost or market is not
mark-to-market accounting. A lower of cost or market method
recognizes losses in market value below the amortized cost value,
but it does not recognize gains in market value above the
amortized cost value. Gains in market value are recognized under
a lower of cost or market method only to the extent that they
recoup previously recognized losses. The legislative history of
section 475 also states specifically that a lower of cost or
market method is not acceptable for purposes of section 475.
That history notes that such a method generally understates the
income of securities dealers.
C. Adjustments in General
Petitioner argues that FNBC’s adjustments are allowed under
section 475 because, petitioner asserts, FNBC used and relied
upon its adjusted swap values for various nontax purposes; e.g.,
pricing swaps, risk managing swaps, reporting to regulatory
agencies and shareholders, and ascertaining employee bonuses.
73 We note that Dec. 31 was on a weekday during each of the
years 1990 through 1992.
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