-242-
Respondent asserts that for plain vanilla swaps with AA
dealers for counterparties, midmarket value is precisely equal to
fair market value. Respondent asserts that for plain vanilla
swaps between counterparties with different credit ratings, some
may have a fair market value less than midmarket whereas others
will have a fair market value greater than midmarket values.
Respondent contends that dealers that value their swaps on a
portfolio basis therefore have an accurate valuation by using
midmarket values without adjustment.
We decline respondent’s invitation to value FNBC’s swaps by
reference to the quoted regulations. As petitioner correctly
notes, all of the experts agree that the fair market value of a
swap must take into account credit risk and administrative costs
adjustments. Nor do we agree with respondent that it is
appropriate to value FNBC’s swaps collectively rather than
individually. As noted explicitly by the members of the House
Committee on Ways and Means: “For purposes of the provision,
fair market value generally is determined by valuing each
security on an individual security basis.” H. Rept. 103-111,
supra at 665, 1993-3 C.B. at 241; see also sec. 20.2031-1(b),
Estate Tax Regs.
XII. Conclusion
We conclude that FNBC’s mark-to-market method of tax
accounting for its swaps income failed for nine reasons to
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