In the recently decided case of Canal Corp. and Subsidiaries v. Commissioner, 135 T.C. No. 9, the U.S. Tax Court rejected the claim of a sophisticated corporate taxpayer that its reliance upon a tax opinion rendered by an international accounting firm should constitute a defense to the imposition of a 20 percent accuracy-related penalty in connection with the reporting of a corporate transaction. This decision highlights the limits the IRS and the courts impose on the ability of a taxpayer to avoid penalties based upon the claim that the taxpayer relied upon professional tax advice.
The underlying facts in Canal Corp. are complex but involve a transaction pursuant to which Chesapeake Corp. (now known as Canal Corp.) contributed a wholly owned subsidiary to a joint venture with an unrelated party in exchange for a 5 percent interest in the joint venture and a special cash distribution of $755 million. Chesapeake treated the transaction as a tax-free contribution of property to a partnership pursuant to Section 721(a) of the Internal Revenue Code.
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