Jpmorgan Chase & Co. v. C.I.R., No. 07-3042.

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Writing for the CourtFlaum
Citation530 F.3d 634
PartiesJPMORGAN CHASE & CO. (Successor in interest to Bank One Corporation, Successor in interest to First Chicago NBD Corporation, Formerly NBD Bankcorp, Inc., Successor in interest to First Chicago Corporation) and Affiliated Corporations, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Docket NumberNo. 07-3042.
Decision Date01 July 2008
530 F.3d 634
JPMORGAN CHASE & CO. (Successor in interest to Bank One Corporation, Successor in interest to First Chicago NBD Corporation, Formerly NBD Bankcorp, Inc., Successor in interest to First Chicago Corporation) and Affiliated Corporations, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 07-3042.
United States Court of Appeals, Seventh Circuit.
Argued May 29, 2008.
Decided July 1, 2008.

[530 F.3d 635]

Richard W. Skillman (argued), Caplin & Drysdale, Washington, DC, for Petitioner-Appellant.

Richard Farber, Gilbert S. Rothenberg, Judith A. Hagley (argued), Department of Justice, Tax Division, Appellate Section, Washington, DC, for Respondent-Appellee.

Before FLAUM, MANION, and EVANS, Circuit Judges.

FLAUM, Circuit Judge.


This case concerns the taxation of JPMorgan's income from swap transactions. JPMorgan tried to carve out and defer a part of this income for certain costs and expenses associated with the swaps. The Commissioner of the Internal Revenue Service ("Commissioner"), and ultimately the Tax Court, concluded that these income deferrals were not proper, and that JPMorgan's valuation methodology did not clearly reflect income. JPMorgan then appealed the Tax Court's decision to this Court, and we remanded the case so that the Tax Court could apply a more deferential standard of review to the Commissioner's valuation methodology. After the proceedings below were again decided in the Commissioner's favor, JPMorgan now appeals here for a second time. On this appeal, JPMorgan does not contest the income deferral and valuation issues— it only disputes certain computations regarding

530 F.3d 636

the amounts of these carve-outs. Because we find no error in the Tax Court's acceptance of the Commissioner's computations, we affirm.

I. Background1

JPMorgan Chase & Company ("JPMorgan")2 is one of the largest dealers of a set of contracts known as "swaps." While the mechanics are not especially relevant in this case, these are essentially contracts between two parties designed to serve as protection against fluctuations embedded in an investment. These fluctuations can come from a number of sources, such as interest rates, commodities, or currencies. The two parties to a swap contract agree to exchange payments at specified intervals. The value inherent in a swap is a function of the difference between the amount of money that one party takes in from and gives out to the other party (i.e., the "counterparty"). To clarify, in the context of an interest rate swap, the magnitude of payments in both directions is determined by multiplying the relevant interest rate by some constant referred to as the "notional amount."3 Usually, one party multiplies this notional amount by a fixed interest rate, and the other party multiplies this amount by a floating interest rate (e.g., the London Interbank Offered Rate). These payments are then exchanged, or swapped, periodically. If the floating rate is, for instance, below the fixed rate, the party paying out the floating rate takes in money, and the other party loses money on the swap.

In 1993, JPMorgan had at least 100 billion dollars worth of swaps on its books. Valuing these instruments even independent of this vast quantity can be difficult.4 Even so, JPMorgan had to do so on an annual basis in order to report income accurately and pay taxes. At first, JPMorgan deferred a portion of this income for (1) administrative costs associated with handling the swaps, and (2) risk associated with counterparties who may default on their obligations. It is the latter portion of these deferrals—the credit risk—that is at issue in this appeal. Specifically, JPMorgan used two different methods to calculate the annual income deferrals associated with credit risk. The amount that it deferred was then "amortized," or put back, into income in some future year. The deferrals, known as "swap fee carve-outs," were designed to prevent the full valuation of a swap from being recognized up front.

In the Commissioner's view, JPMorgan's deferral accounting method did not clearly reflect income. Accordingly, JPMorgan received notices of deficiency from the Internal Revenue Service ("IRS") that, in essence, required it to add back the deferrals taken for administrative and credit

530 F.3d 637

risk costs into income for each relevant year. The amounts ranged from about $3.5 to $5.8 million each year, from 1990 through 1993. After receiving its first notice of deficiency, JPMorgan filed suit in the Tax Court arguing that its method of deferral accounting (which deferred income to match related expenses) was an accurate way to reflect income. While the case was being argued in that court, JPMorgan turned about-face and conceded that the deferral method was actually not allowed under these circumstances.

The Tax Court then issued its ruling and concluded that neither party's method for calculating income was appropriate. Understanding these various methods for valuing swaps is not specifically relevant to the issue in this appeal, but we mention and summarize them for completeness. Overall, the Tax Court agreed with the Commissioner that JPMorgan could not defer swap-related income associated with administrative costs and credit risk. But it also determined that these amounts should not be fully added back into income for the years 1990 through 1993. Instead, it advocated an "adjusted midmarket valuation" which would essentially allow for no deferrals and exclude the income associated with administrative costs and credit risk. The Commissioner agreed with this methodology in theory, but believed that JPMorgan's method for calculating administrative cost and credit risk deferrals was flawed. From the Commissioner's perspective, JPMorgan's poor recordkeeping made it difficult to ascertain the extent to which the midmarket value should be adjusted for credit risk-related expenses.

Regardless, the Tax Court then ordered the parties to compute JPMorgan's deficiency given this new valuation methodology pursuant to Tax Court Rule 155.5 JPMorgan and the Commissioner came to an agreement regarding administrative costs for each year and for credit risk in 1993, but they could not reach an agreement on the amount of credit risk deferrals taken from 1990 to 1992. The Commissioner calculated this amount to be approximately $14.4 million total from 1990 to 1993. It relied primarily on the notices of deficiency for arriving at this value because, in its view, JPMorgan did not keep the statutorily mandated records that would be needed to arrive at a more precise estimate. In contrast, JPMorgan capped this amount at approximately $3.6 million total over the 1990-1993 period, and relied on a disputed summary chart (prepared for this litigation) to arrive at this result. The Tax Court was not pleased with either result, and ordered both parties to submit supplemental computations. Nothing new surfaced in these additional proceedings. The Tax Court then entered its decision in favor of the Commissioner's computations.

JPMorgan then appealed the decision to this court and challenged both the Tax Court's valuation methodology and the Rule 155 computations. We did not reach the substance of this issue because we remanded back to the Tax Court on the grounds that it should apply a deferential...

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9 practice notes
  • United States v. Frankie L. Sanders & Ill. Dep't of Revenue, Case No. 11-CV-912-NJR-DGW
    • United States
    • United States District Courts. 7th Circuit. Southern District of Illinois
    • February 18, 2016
    ..."to keep adequate records from which their correct tax liability may be determined." JPMorgan Chase & Co. v. Comm'r, 530 F.3d 634, 638-39 (7th Cir. 2008) (citing I.R.C. § 6001). When the taxpayer has failed to maintain adequate records of income, and other available records ar......
  • United States v. Frankie L. Sanders & Ill. Dep't of Revenue, Case No. 11-CV-912-NJR-DGW
    • United States
    • United States District Courts. 7th Circuit. Southern District of Illinois
    • October 20, 2016
    ..."to keep adequate records from which their correct tax liability may be determined." JPMorgan Chase & Co. v. Comm'r, 530 F.3d 634, 638-39 (7th Cir. 2008) (citing I.R.C. § 6001). When the taxpayer has failed to maintain adequate records of income, and other available records ar......
  • Greenberg v. Comm'r of Internal Revenue, 20-13001
    • United States
    • United States Courts of Appeals. United States Court of Appeals (11th Circuit)
    • August 20, 2021
    ...adoption of the Commissioner's Rule 155 computation is likewise reviewed for an abuse of discretion. JPMorgan Chase &Co. v. Comm'r, 530 F.3d 634, 638 (7th Cir. 2008). With these standards in mind, we turn first to the jurisdictional issues raised by Greenberg and then to the merits. III......
  • Greenberg v. Comm'r of Internal Revenue, 20-13001
    • United States
    • United States Courts of Appeals. United States Court of Appeals (11th Circuit)
    • August 20, 2021
    ...adoption of the Commissioner's Rule 155 computation is likewise reviewed for an abuse of discretion. JPMorgan Chase & Co. v. Comm'r , 530 F.3d 634, 638 (7th Cir. 2008). With these standards in mind, we turn first to the jurisdictional issues raised by Greenberg and then to the merits.II......
  • Request a trial to view additional results
9 cases
  • United States v. Frankie L. Sanders & Ill. Dep't of Revenue, Case No. 11-CV-912-NJR-DGW
    • United States
    • United States District Courts. 7th Circuit. Southern District of Illinois
    • February 18, 2016
    ...responsibility "to keep adequate records from which their correct tax liability may be determined." JPMorgan Chase & Co. v. Comm'r, 530 F.3d 634, 638-39 (7th Cir. 2008) (citing I.R.C. § 6001). When the taxpayer has failed to maintain adequate records of income, and other available records a......
  • United States v. Frankie L. Sanders & Ill. Dep't of Revenue, Case No. 11-CV-912-NJR-DGW
    • United States
    • United States District Courts. 7th Circuit. Southern District of Illinois
    • October 20, 2016
    ...responsibility "to keep adequate records from which their correct tax liability may be determined." JPMorgan Chase & Co. v. Comm'r, 530 F.3d 634, 638-39 (7th Cir. 2008) (citing I.R.C. § 6001). When the taxpayer has failed to maintain adequate records of income, and other available records a......
  • Greenberg v. Comm'r of Internal Revenue, 20-13001
    • United States
    • United States Courts of Appeals. United States Court of Appeals (11th Circuit)
    • August 20, 2021
    ...adoption of the Commissioner's Rule 155 computation is likewise reviewed for an abuse of discretion. JPMorgan Chase &Co. v. Comm'r, 530 F.3d 634, 638 (7th Cir. 2008). With these standards in mind, we turn first to the jurisdictional issues raised by Greenberg and then to the merits. III. AN......
  • Greenberg v. Comm'r of Internal Revenue, 20-13001
    • United States
    • United States Courts of Appeals. United States Court of Appeals (11th Circuit)
    • August 20, 2021
    ...adoption of the Commissioner's Rule 155 computation is likewise reviewed for an abuse of discretion. JPMorgan Chase & Co. v. Comm'r , 530 F.3d 634, 638 (7th Cir. 2008). With these standards in mind, we turn first to the jurisdictional issues raised by Greenberg and then to the merits.III. A......
  • Request a trial to view additional results

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