Accuracy-related penalty applied despite reliance on adviser.

• Author: Beavers, James A.

The Tax Court held that a corporation was liable for an accuracy-related penalty for a substantial understatement of tax related to a joint venture transaction even though the corporation had received an opinion from a national accounting firm that the transaction was not taxable. The Tax Court found that the firm's opinion was based on unreasonable assumptions and that the corporation did not rely on the opinion in good faith.

Background

Chesapeake Corporation (now renamed Canal Corporation) is the parent corporation of a group of corporations in the paper industry. In the 1990s, the group was involved in merchandising and specialty packaging, tissue paper products, and forest and land development. Chesapeake's largest subsidiary was Wisconsin Tissue Mills, Inc. (WISCO), which manufactured commercial tissue paper products. Due to its relatively small share of the tissue market and consolidation in the paper industry, Chesapeake found that it was no longer competitive in the tissue market. Thus, after hiring a new CEO in 1997, Chesapeake sought to restructure and refocus its business on specialty packaging and merchandising and to move out of the commercial tissue business.

At this time, Georgia Pacific (GP), another company in the tissue business, was seeking to expand its tissue operations and discussed with Chesapeake the possibility of acquiring WISCO. Chesapeake was interested in disposing of WISCO to generate capital for its specialty packaging business; however, the company had a low tax basis in WISCO, making a sale of the company an unattractive option. Therefore, Chesapeake hired an investment banking firm and the accounting firm that had been Chesapeake's longtime financial auditor to explore other alternatives for transferring WISCO to GP.

The investment bank recommended to Chesapeake that the best alternative for maximizing shareholder value would be a leveraged partnership structure with GP. The leveraged partnership structure would require WISCO to first transfer its tissue business assets to a joint venture. GP would then transfer its tissue business assets to the joint venture. Next, the joint venture would borrow funds from a third party and distribute the proceeds to Chesapeake (special distribution). Chesapeake would guarantee the third-party debt through a subsidiary. WISCO would hold a minority interest in the joint venture after the distribution, and GP would hold a majority interest. The investment bank presented the...