Canal Corp. v. Comm'r, 2010 U.S. Tax Ct. LEXIS 25 (T.C. Aug. 5, 2010)

The Service determined a $183,458,981 deficiency in the Chesapeake Corporation's  Federal income tax, asserting that Chesapeake owed a $36,691,796 substantial understatement of income tax penalty under section 6662(a) for 1999. Chesapeake's subsidiary's contributed its assets and most of its liabilities to a newly formed limited liability company, simultaneously receiving a $755 million distribution. In Canal Corp. v. Comm'r, 2010 U.S. Tax Ct. LEXIS 25 (T.C. Aug. 5, 2010), the court held that the transaction was a disguised sale, requiring Chesapeake to recognize a $524 million gain for the year of contribution and distribution. Chesapeake was liable also for the substantial understatement penalty under section 6662(a).

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