Canal Corporation and Subsidiaries, formerly Chesapeake Corporation and Subsidiaries v. Commissioner

Kroupa, Judge:

Respondent determined a $183,458,981 1 deficiency in petitioner’s (Chesapeake) 2 Federal income tax for 1999, the year at issue. Respondent asserts in his amended answer that Chesapeake owes a $36,691,796 substantial understatement of income tax penalty under section 6662(a) 3 for 1999. We must determine whether Chesapeake’s subsidiary’s contribution of its assets and most of its liabilities to a newly formed limited liability company and the simultaneous receipt of a $755 million distribution should be characterized as a disguised sale, requiring Chesapeake to recognize a $524…