-91-
The adjusted midmarket method generally did not include an
adjustment for the dealer’s profit margin. Nor did FNBC’s
implementation of that method include such an adjustment.
V. Los Alamos Project
In 1994, the Commissioner entered into a contract with the
Los Alamos National Laboratory under which the Los Alamos
scientists (including quantum physicists and mathematicians) were
to develop in the form of software a sophisticated model to
assist the Commissioner in valuing interest rate swaps, currency
swaps, and other financial derivative products for which mark-to-
market reporting was required under section 475. This software
was intended to produce a narrow range of values for swaps that a
revenue agent could use as a litmus test for ascertaining whether
a more thorough audit would be necessary as to a dealer’s
valuation of its swaps. The Commissioner contemplated that a
more detailed audit would be required if the dealer’s valuation
fell outside the range of values.
The Los Alamos team was to address during the first 12
months of the project the following nine issues:
1. Address security and disclosure issues. –- Some of
the data required in the model development must
use sensitive unclassified information about
taxpayers’ market transactions. Procedures must
be put in place to handle these requirements.
2. Determine how the various forms of tax information
data are handled and its impact on models. –- For
example much of the data on transaction is only
available in paper format. In this case
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