-222-
Petitioner has failed to establish that FNBC relied on its
adjustments or adjusted midmarket values for any of these
purposes.74 In fact, the evidence establishes to the contrary
that FNBC used midmarket to price and risk-manage its swaps, to
ascertain employee bonuses, and to report to management. The
evidence also establishes that the adjustments at issue were
lower than the materiality standard for audited financial
statement purposes, so as not to draw any criticism from FNBC’s
auditors, and that where a fair value standard did apply to
FNBC’s financial reporting in the form of the footnote
disclosures under SFAS No. 107, FNBC used midmarket values.
The fact that FNBC risk-managed its swaps by using midmarket
values is supported by Parsons’s observation that FNBC’s risk
management personnel did not rely upon information on either of
the carve-outs. In terms of managing credit risk, as opposed to
market risk, FNBC used updated calculations of exposure in the
form of updated CEM figures for risk management purposes and did
not rely on the valuations made using the “stale” CEM figures
incorporated into the credit adjustment. Parsons also testified
credibly that the swap industry used midmarket value for doing
actual business, for pricing swaps, for trading swaps, and for
risk-managing swaps.
74 Even if it did, we agree with Sziklay that FNBC’s use of
its adjusted midmarket method for any or all these purposes is
not dispositive for Federal income tax purposes.
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