The predecessor to Canal Corporation (plaintiff), Chesapeake Corporation, considered selling stock in its subsidiary Wisconsin Tissue Mills (WISCO) to Georgia Pacific (GP), but Chesapeake’s low basis meant a sale would trigger taxes. Instead Chesapeake contributed WISCO’s assets to a partnership, Georgia-Pacific Tissue LLC (the LLC). GP contributed over $376 million in assets for a 95 percent interest, while WISCO contributed $775 million in assets for a 5 percent interest. The LLC borrowed $755.2 million from the bank, which was immediately transferred to Chesapeake’s account. WISCO’s $775 million contribution less the $755.2 million distribution equaled the $19.8 million value of its 5 percent interest. GP guaranteed the loan, but Chesapeake’s tax advisor said that deferring tax required indemnity and WISCO maintaining a $151 million net worth. WISCO indemnified GP in limited ways and used the special distribution to repay an intercompany loan, pay Chesapeake a dividend, and lend Chesapeake $151 million for another intercompany note. At that point WISCO’s assets totaled $157 million, just 21 percent of its indemnity exposure for the bank loan. A Chesapeake executive told credit-rating agencies that the transaction’s only risk was tax risk, and both the executive and the agencies referred to the transaction as a sale. Chesapeake reported no tax gain, treating the special distribution as a non-taxable debt-financed transfer of consideration, not a sale, and later canceled the intercompany note. The commissioner assessed a deficiency—and a penalty for inaccurate reporting. Canal petitioned the tax court for review.