Bank One Corporation v. Commissioner of Internal Revenue

120 T.C. 174 (2003)

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Bank One Corporation v. Commissioner of Internal Revenue

United States Tax Court
120 T.C. 174 (2003)

  • Written by Brett Stavin, JD

Facts

Interest-rate swaps are derivatives instruments that allow parties to manage risks associated with interest-rate fluctuations. The interest-rate-swap market is made up of three broad categories—end users, dealers, and brokers. The end-user group is generally composed of parties that use interest-rate swaps for the purposes of either hedging or speculation. This includes corporations, financial institutions, and even governments. These parties can use interest-rate swaps to protect themselves against the financial risks associated with the fluctuation of interest rates. Additionally, end users can use interest-rate swaps to take speculative positions depending on their forecasts of how interest rates may move in the future. If entering into an interest-rate swap, parties must agree on the notional amount of the swap, the fixed interest rate, the index for measuring the floating interest rate, the duration of the agreement, its effective date, the payment schedule, and the currency in which payments are made. The dealer group is composed of market intermediaries that serve to provide liquidity in the market by entering into swaps with end users. Swap dealers typically manage their risks by either entering into matching swaps or by adjusting their overall portfolios. The third group, brokers, also serve as intermediaries. However, unlike dealers, brokers do not take positions. Instead, brokers simply facilitate the transactions by matching dealers that are interested in effectuating particular swaps.

Rule of Law

Issue

Holding and Reasoning (Laro, J.)

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