Court Opinion

ID: 4245189
Source: CourtListenerOpinion
Date Created: 2018-02-14 22:00:17.165865+00
Date Added: 2024-06-11T07:48:06.710829
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 17-1265

                          TRANSUPPORT, INC.,

                        Petitioner, Appellant,

                                  v.

                   COMMISSIONER OF INTERNAL REVENUE,

                         Respondent, Appellee.

                APPEAL FROM THE UNITED STATES TAX COURT
              [Hon. Mary Ann Cohen, U.S. Tax Court Judge]

                                Before

                       Lynch, Stahl, and Barron,
                            Circuit Judges.

     Michael S. Lewis, with whom Rath, Young and Pignatelli, P.C.
was on brief, for appellant.
     Anthony T. Sheehan, with whom David A. Hubbert, Acting
Assistant Attorney General, and Richard Farber, Attorney, Tax
Division, Department of Justice, were on brief, for appellee.

                           February 14, 2018
             LYNCH, Circuit Judge.        Transupport, Inc. appeals from

the Tax Court's decision upholding the Commissioner's notice of

deficiency,    which,     for   tax   years   2006   through   2008,   reduced

Transupport's cost of goods sold, reduced deductions it took for

compensation paid to four employee-shareholders, and assessed a

20% accuracy-related penalty.            See Transupport, Inc. v. Comm'r

(Transupport II), 112 T.C.M (CCH) 580, 2016 WL 6900913 (2016).

This is the Tax Court's second opinion in this case.               The first

addressed whether Transupport committed fraud.             See Transupport,

Inc. v. Comm'r (Transupport I), 110 T.C.M. (CCH) 268, 2015 WL

5729787 (2015).     We affirm the Tax Court's decision in Transupport

II, as to which this appeal is taken.

                                I. Background

A.    Transupport's Business

             Transupport is a wholesaler of engines and engine parts

used in military vehicles.            Transupport II, 2016 WL 6900913, at

*1.   The portion of its business that is relevant to this dispute

involved buying parts in bulk lots from the U.S. Government and

reselling them.     Id.     Harold Foote ("Foote") founded Transupport

in 1972 and served as its president and chief executive officer.

Id.   Foote's sons, William ("W. Foote"), Kenneth, Richard, and

Jeffrey ("J. Foote"), were Transupport's only other full-time

employees.    Id.   Foote owned almost all of Transupport's stock in

                                      - 2 -
1999, but transferred Transupport's nonvoting common stock to his

sons in equal portions in 2005.        Id. at *2.

             At all relevant times, Elaine Thompson, a certified

public accountant, served as Transupport's outside accountant.

Id.       Thompson   prepared    Transupport's   tax   returns   based   on

handwritten summaries of the company's financials, which were

usually prepared by J. Foote.          Id.   Thompson did not audit or

verify the summaries.      Id.

B.    Cost of Goods Sold

             A taxpayer's income from selling goods is calculated by

taking the income generated by selling goods and subtracting the

amount that the taxpayer paid for those goods, which is also known

as the "cost of goods sold."        Treas. Reg. § 1.61-3(a) (as amended

in 1992). The cost of goods sold for a given tax year only includes

the cost of the goods that the taxpayer sold in that tax year.

See id.    Given this constraint, the cost of goods sold for a given

tax year usually equals the beginning inventory (at cost) plus

inventory     purchases   and    inventory   costs,    minus   the   ending

inventory (at cost).      Huffman v. Comm'r, 126 T.C. 322, 324 (2006).

             Transupport used the gross profit method to determine

its cost of goods sold.         See Transupport II, 2016 WL 6900913, at

*2.   So, instead of calculating the cost of goods sold by tracking

changes in its inventory, Transupport selected a percent profit

that it claimed to make on the sale of goods and used that figure

                                    - 3 -
to generate its cost of goods sold as well as estimates of its

beginning and ending inventory.          Id.   Transupport allegedly used

a   percent     profit   consistent    with    industry   standards.       See

Transupport I, 2015 WL 5729787, at *6. Transupport's cost of goods

sold   "varied     without      explanation"   from   year   to    year,   and

Transupport kept no records indicating how it selected its gross

profit percentage.       Id.

              Transupport was audited by the IRS in 1984, and "the

examining agent was aware that petitioner did not maintain a

physical inventory of the unsold parts in its warehouse and backed

into the closing inventory, reported in its returns, by using a

percentage of sales as costs of goods sold."          Transupport II, 2016

WL 6900913, at *2.       The IRS expressed disapproval of Transupport's

methodology, but did not meaningfully adjust Transupport's cost of

goods sold for the years under audit. Id. Transupport was audited

again in 1992.       Id.       The IRS was again aware of Transupport's

practice of not taking a physical inventory, and again the IRS

auditor did not require changes.         Id.

              Transupport continued its use of the gross profit method

after the 1992 audit.          Its gross profit percentage changed each

year, but remained between 39.3% and 31% from 1999 through 2008.

Id.    It reported a cost of goods sold of $6,951,132 in 2006;

$6,365,543 in 2007; and $7,519,086 in 2008, based on gross profit

percentages of 33.4%, 39.3%, and 37%, respectively.               Id.

                                      - 4 -
C.    Reasonable Compensation

            Foote's      sons    were     officers       of    Transupport,        but

"performed     various    and    overlapping          tasks    for    the     company,

including tasks that might have been performed by lower level

employees."     Id. at *1.       Transupport paid each of Foote's sons

$575,000 in 2006, $675,000 in 2007, and $720,000 in 2008.                      Id. at

*3.    Foote     made    the    compensation      decisions          alone,    without

consulting his accountant.              Id.     "The only apparent factors

considered in determining annual compensation were reduction of

reported taxable income, equal treatment of each son, and share

ownership."     Id.     Transupport did not pay dividends in the years

at issue.     See id.

D.    IRS Audit in 2009

            Foote considered selling Transupport in 2007, and hired

Richard Lodigiani, a consultant from BTS New England, to help him.

Id.   "Foote provided Lodigiani with estimates of inventory and

profit margins on surplus parts," which Lodigiani used to draft a

"Confidential Offering Memorandum."             Id.    The financial summary in

the memorandum, based on information Foote had provided, asserted

that "[i]t is conservatively estimated that actual gross profit on

sales exceeds 75% on general part sales" and that "[m]anagement

believes      that      non-obsolete       inventory          on     hand      exceeds

$100,000,000.00 at cost."        Id.     The summary also "recast to market

rate of $50,000 annually each" the salaries of Transupport's five

                                        - 5 -
officers.     Id.   Lodigiani prepared an executive summary that

asserted    Transupport   "currently   has   inventory    in   excess    of

$100,000,000.00 at cost with a retail market value that exceeds

$500,000,000.00."   Id.

            Copies of these documents were circulated to potential

purchasers, one of whom notified the IRS Whistleblower Office in

February 2008 of potential tax fraud.    Id. at *4.      In January 2009,

the IRS commenced an audit, which originally focused on tax years

2006 and 2007, but was expanded to cover "1999 through 2005."           Id.

The audit resulted in a notice of deficiency that adjusted the

deductions Transupport took for compensation paid to Foote's sons

in every year between 1999 and 2008, including adjustments of

$1,375,000 in 2006, $1,862,436 in 2007, and $2,123,804 in 2008.

Id. at *5.    The notice of deficiency also adjusted Transupport's

cost of goods sold "to reflect a 25% cost and a 75% profit on

petitioner's sales of surplus parts" for those years, applied a

fraud penalty, and applied an accuracy-related penalty "to the

extent that the fraud penalty did not apply."      Id.

E.   Tax Court Proceedings

            Transupport timely petitioned the Tax Court for review.

Two proceedings were held.      The Tax Court first heard evidence

pertaining to the Commissioner's fraud claim.             The Tax Court

determined that the Commissioner was unable to prove fraud by its

burden of proof of clear and convincing evidence, given that the

                                 - 6 -
Commissioner   had    not   required    changes    to    Transupport's   tax

reporting following the 1984 and 1992 audits.             As a result, the

Commissioner's assessments for 1999 through 2005 were time-barred

and the fraud penalty was inapplicable.           See Transupport I, 2015

WL 5729787, at *11.    The Commissioner did not appeal.

          The Tax Court, after further fact-finding, then issued

a second, supplemental opinion upholding the notice of deficiency

for 2006, 2007, and 2008 -- the only years still at issue.               See

Transupport II, 2016 WL 6900913, at *5.        Transupport appealed.

                      II. Reasonable Compensation

          A taxpayer may only deduct salaries to the extent they

are reasonable.    See 26 U.S.C. § 162(a)(1).         The Tax Court upheld

the notice of deficiency's adjustment to deductions Transupport

took for compensation paid to Foote's sons.             See Transupport II,

2016 WL 6900913, at *5.       Transupport challenges that decision,

arguing that the Tax Court made errors of law and findings of fact

contrary to the credible evidence in the record.            These arguments

are meritless.

A.   Test for Determining Legal Compensation

          This    circuit   uses   a   multi-factor     test   to   determine

whether compensation is reasonable.        See Haffner's Serv. Stations,

Inc. v. Comm'r, 326 F.3d 1, 4 (1st Cir. 2003).             The goal of the

test is to determine whether the compensation at issue would have

been offered in an arm's-length bargain.          Id.    Transupport argues

                                   - 7 -
that the Tax Court committed reversible error by not considering

the return on equity enjoyed by its shareholders.        This is a

question of law, which we review de novo.    Schussel v. Werfel, 758

F.3d 82, 87 (1st Cir. 2014).

          There was no error in the Tax Court's application of

this circuit's test, because it found that there was "no reliable

evidence of actual return on investment."       See Transupport II,

2016 WL 6900913, at *10.   Transupport's sales materials indicated

it was very profitable, but that does not square with its tax

reporting. The expert witnesses on this issue never even attempted

to reconcile the two.   Id. at *11.    The company's profitability

and value depend heavily on its cost of goods sold but, as

discussed in Section III.B, Transupport presented no credible

evidence of its cost of goods sold.     This makes it exceedingly

difficult to value the company, and "[i]f the company cannot be

valued, neither can the return to shareholders be calculated as a

percentage of that value."   Mulcahy, Pauritsch, Salvador & Co. v.

Comm'r, 680 F.3d 867, 874 (7th Cir. 2012).       The Tax Court was

therefore correct to omit return-on-equity analysis when making

its reasonable compensation determination.

B.   Burden of Proof

          Transupport next argues that the Tax Court erred by not

shifting the burden of proof to the Commissioner on the reasonable

                               - 8 -
compensation    issue.      We    review    this    question      de   novo.      See

Cavallaro v. Comm'r, 842 F.3d 16, 21 (1st Cir. 2016).

            "[T]he taxpayer typically bears the burden of proving by

a   preponderance    of   the    evidence    that    the       Commissioner's     tax

assessment is erroneous."1         Id.; see Tax Ct. R. 142(a)(1).               That

burden can shift to the Commissioner if the taxpayer shows that

the   notice   of   deficiency     is   arbitrary        and    excessive.2       See

Cavallaro, 842 F.3d at 21.

            The Tax Court, in its second opinion, found that the

Commissioner's method of determining reasonable compensation was

"rational and not arbitrary or unreasonable."                     Transupport II,

2016 WL 6900913, at *11. This determination had sufficient support

in the record.       The court heard testimony from Frank J. Wojick,

Jr., the IRS agent who performed the Commissioner's reasonable

compensation    analysis,       describing   his     method,      which   involved

comparing   Foote's    sons'     compensation       to   that     of   officers   at

similarly sized companies in similar lines of business.                    See id.

at *4-5, *11.       As the Tax Court noted, Wojick's method was very

      1   26 U.S.C. § 7491(a) establishes a different burden-
shifting scheme if a taxpayer meets certain criteria.     The Tax
Court determined that § 7491 did not apply, Transupport II, 2016
WL 6900913, at *7, and Transupport does not appeal that finding.
      2   The Commissioner argues that Hanover Insurance Co. v.
Commissioner, 598 F.2d 1211, 1219 (1st Cir. 1979), prevents the
burden from shifting in deduction cases even if the notice of
deficiency is shown to be arbitrary and excessive. We do not reach
this issue.

                                     - 9 -
similar to that of Transupport's expert, except that Transupport's

expert "adopted the maximum compensation shown for the various

categories of officers."    Id. at *11.   While Wojick's analysis was

imperfect, "any identified errors favored [Transupport]."        Id.

Given that the notice was not arbitrary or excessive, the Tax

Court's decision not to shift the burden of proof was correct.

See Cavallaro, 842 F.3d at 21.

     Based on Estate of Mitchell v. Commissioner, 250 F.3d 696

(9th Cir. 2001), Transupport argues that the burden should shift

because the notice of deficiency was based on a valuation disavowed

by the Commissioner.    See 250 F.3d at 702.   This case is unhelpful

for three reasons.     First, the Commissioner here never disavowed

the notice of deficiency; it merely attempted to pursue a larger

deficiency at trial.     Second, there was evidence supporting the

reasonableness of Wojick's method, so the notice of deficiency was

never "utterly without foundation."3      Cavallaro, 842 F.3d at 21.

Third, the court in Estate of Mitchell found that the notice of

deficiency was excessive because the testimony of an IRS witness

and a letter written by the Commissioner's appraiser indicated as

     3    Transupport argues that the Tax Court erred by relying
on Wojick's opinion of the Commissioner's method for determining
reasonable compensation. In Transupport's view, Wojick provided
de facto expert testimony under the guise of layperson testimony,
in violation of the Federal Rules of Evidence.       This argument
founders because the court relied on the reasonableness of Wojick's
methodology,   not   Wojick's   opinion    of   that   methodology.
Transupport II, 2016 WL 6900913, at *11.

                               - 10 -
much.      See 250 F.3d at 702.          Here, the testimony of Wojick and

Gregory Scheig, the Commissioner's expert witness on this point,

indicated      that,     if    anything,         the     notice    of    deficiency

underestimated Transupport's understatement of income tax.                        See

Transupport II, 2016 WL 6900913, at *11.

C.      Tax Court's Evaluation of the Evidence

             Transupport also argues the Tax Court erred by basing

its reasonable compensation determination on the fact that "[n]one

of   the    Foote      sons   had   special       experience      or     educational

background[s]."        Id. at *8.       In Transupport's view, Foote's sons

gained valuable experience by working at the company for many

years, and they were indispensable to its business.

             The Tax Court's findings of fact are reviewed for clear

error, Haffner's Serv. Stations, Inc., 326 F.3d at 3, and this

finding has sufficient support in the record.                     Transupport bore

the burden of proof on this issue and failed to provide sufficient

evidence justifying the deductions.                    Foote's sons lacked basic

knowledge of the managerial roles they purportedly held, and many

of the tasks they performed were menial.                 See Transupport II, 2016

WL 6900913, at *8.       Transupport does not challenge either of these

findings     on   appeal,     instead    attempting       to   gainsay    them   with

testimony from Foote and his sons claiming that Transupport's

success had "been based upon the collective efforts of its officers

and the unique knowledge-base they have established in their

                                        - 11 -
industry."         Given the Tax Court's unrebutted findings of fact,

Transupport's reference to self-interested witness testimony is

insufficient to show that the Tax Court clearly erred in finding

that Transupport had not met its burden.

                             III. Cost of Goods Sold

                 Transupport argues that the Tax Court erred by adopting

the notice of deficiency's 75% gross profit percentage, on the

grounds      that    doing    so   is   inconsistent    with   the   Tax   Court's

rejection of the 75% figure in a prior opinion in this case and

with       the    evidence    presented.4        We   review   the   Tax   Court's

determination of Transupport's gross profit percentage for clear

error.      Estate of Todisco v. Comm'r, 757 F.2d 1, 4 (1st Cir. 1985).

                 Section 446(b) of the Internal Revenue Code provides

that "if the [taxpayer's] method [of accounting] does not clearly

reflect income, the computation of taxable income shall be made

under such method as, in the opinion of the Secretary, does clearly

reflect income."             Further, 26 U.S.C. § 471(a) provides that

"[w]henever in the opinion of the Secretary the use of inventories

is necessary in order clearly to determine the income of any

taxpayer, inventories shall be taken by such taxpayer on such basis

       4  Transupport argues in its reply brief that the burden
should have shifted to the Commissioner on the cost of goods sold
issue because the notice of deficiency was arbitrary and excessive.
That argument is waived. Small Justice LLC v. Xcentric Ventures
LLC, 873 F.3d 313, 323 n.11 (1st Cir. 2017) ("[A]rguments developed
for the first time in a reply brief are waived.").

                                        - 12 -
as the Secretary may prescribe as conforming as nearly as may be

to the best accounting practice in the trade or business and as

most clearly reflecting the income."          Together, these provisions

"vest the Commissioner with wide discretion in determining whether

a particular method of inventory accounting should be disallowed

as not clearly reflective of income."              Thor Power Tool Co. v.

Comm'r, 439 U.S. 522, 532 (1979).

A.   The Tax Court's Finding in its First Opinion

          The   taxpayer    claims   that    the    "Tax   Court      failed    to

recognize that Transupport had, in fact, met the only burden the

law imposes on it: the burden of proving that the IRS's notice of

deficiency was erroneous."      In making this argument, the taxpayer

seems to be saying, albeit inarticulately, that when the Tax Court

found that the 75% gross profit was "improbable," Transupport I,

2015 WL 5729787, at *7, it essentially made a determination that

the deficiency notice was arbitrary.

          If the Tax Court determines that the Commissioner's

assessment was arbitrary, then it must determine the proper amount

of tax liability for itself.          See Cavallaro, 842 F.3d at 26

(discussing   Helvering    v.   Taylor,    293   U.S.   507,    515    (1935)).

However, there was no such finding by the Tax Court here.

          The    Tax   Court      expressed        skepticism      about       the

Commissioner's 75% figure in its first opinion in this case.                   See

Transupport I, 2015 WL 5729787, at *7.             Still, the Tax Court's

                                  - 13 -
determinations in its two opinions are internally consistent given

the different burdens of proof in the two proceedings and the poor

quality of the evidence presented by the taxpayer.                In the first

proceeding, the Commissioner was required to prove by clear and

convincing evidence that the taxpayer had committed fraud.                    See

id. at *1; see also Tax Ct. R. 142(b).          The Commissioner bore the

burden of persuasion, and the court was "not persuaded" by the 75%

figure    for   the   purposes   of    determining      whether     Transupport

committed fraud.      Transupport I,     2015 WL 5729787, at *7.        In the

second    proceeding,   the   taxpayer    had   to    prove   the    notice   of

deficiency was incorrect by a preponderance of the evidence, and

the Tax Court found that the taxpayer had failed to carry its

burden.    Transupport II, 2016 WL 6900913, at *12-13.                The mere

fact that the 75% figure could not survive the clear and convincing

evidence standard does not mean that Transupport had shown the

figure was incorrect.     The Tax Court's determination in the first

proceeding therefore does not support an inference that the court's

determination in the second proceeding was erroneous.

            Furthermore, as discussed below, there was sufficient

evidence in the record by which the Tax Court could conclude that

the deficiency notice was not arbitrary.             See Cavallaro, 842 F.3d

at 21 ("[C]ourts commonly find [that a deficiency lacks a rational

foundation] when the Commissioner makes no evidentiary showing at

all."); see also JP Morgan Chase & Co v. Comm'r, 458 F.3d 564, 571

                                  - 14 -
(7th Cir. 2006) ("In applying the arbitrary or unlawful standard,

the tax court should bear in mind that the taxpayer retains the

burden of proof, and any inadequacies with the Commissioner's

method that are due to the taxpayer's failure to keep or provide

records, to the extent that it affected the Commissioner's choice

of method, may be taken into account.").

B.   The Tax Court's Evaluation of the Evidence

          Transupport argues that the Tax Court clearly erred by

adopting the Commissioner's gross profit percentage.      The Tax

Court's adoption of the 75% figure has sufficient support in the

record.   There was overwhelming evidence that Transupport had

significantly underreported its gross profit percentage, that the

75% figure was based on Foote's admissions in its sales literature

and to the IRS, and that Transupport's own poor recordkeeping

rendered a more accurate determination impossible. On these facts,

the Tax Court did not clearly err by upholding the Commissioner's

adjustment.

          Using the gross profit method, an increase to the value

of the ending inventory would indicate that the reported cost of

goods sold was overstated, see Transupport I, 2015 WL 5729787, at

*7, and the Commissioner presented evidence that Transupport had

massively understated its inventory.    Foote testified at trial

that Transupport's inventory was worth approximately $100 million

at cost, while Transupport claimed to have an ending inventory

                             - 15 -
worth just $1,867,257 in 2007.            Transupport II, 2016 WL 6900913,

at *2.    As the Tax Court recognized in its first opinion in this

case, those two figures "cannot be reconciled."                 Transupport I,

2015 WL 5729787, at *6.           A list of the parts in Transupport's

inventory (the "Honeywell list") that was prepared by W. Foote,

and is "reasonably accurate" according to J. Foote, indicated that

a portion of Transupport's inventory had an original retail value

of   $312,413,889.     Transupport        II,   2016   WL    6900913,    at   *4.

Transupport did not pay the original retail price, but "[t]he lower

of cost or market value of the items on the Honeywell list alone

far exceeded the total inventory values reported on petitioner's

financial statements and tax returns."           Id.

            In   response    to     the     evidence    of    the   taxpayer's

substantial overstatement of the cost of goods sold, Transupport

provided Michael Thompson as an expert witness on this point. But,

the Tax Court supportably found that Thompson presented a flawed

and biased analysis, id. at *12, and Transupport has not even

attempted to rehabilitate Thompson's report or testimony in its

briefing to this court.      Transupport also relied on records of the

cost of goods sold it had claimed in previous years, but the Tax

Court    correctly   found   that    arbitrarily       chosen    gross   profit

percentages from previous years do not justify the cost of goods

sold for the years at issue.         See id.     The only evidence offered

by Transupport to support the records' veracity is the testimony

                                    - 16 -
of its accountant, who conceded that the records were produced by

plugging in the unverified figures that Transupport provided.

            Transupport argues that the Honeywell list and Foote's

admissions are unhelpful because of the great deal of obsolescence

in Transupport's inventory.          But Transupport did not track or

quantify that obsolescence, and the Tax Court is permitted to

"bear[] heavily if it chooses upon the taxpayer whose inexactitude

is of his own making."       United Aniline Co. v. Comm'r, 316 F.2d

701, 703 (1st Cir. 1963) (alteration in original) (quoting Cohan

v. Comm'r, 39 F.2d 540, 544 (2d Cir. 1930) (L. Hand, J.)).                 Given

the lack of evidence on obsolescence, the evidence demonstrating

a large understatement of inventory, Foote's admissions, and that

the burden of proof remained on Transupport at all times, the Tax

Court did not clearly err by upholding the notice's gross profit

percentage.

                  IV. Substantial Understatement Penalty

            The Code generally imposes a mandatory 20% accuracy-

related penalty for "[a]ny substantial understatement of income

tax," 26 U.S.C. § 6662(b)(2), unless the taxpayer can show "that

there     was   a   reasonable     cause     for   such    portion   [of     the

understatement] and that the taxpayer acted in good faith with

respect to such portion."         Id. § 6664(c)(1).       The "most important

factor"    when     determining    whether     the   taxpayer    acted      with

reasonable cause and good faith is usually "the extent of the

                                    - 17 -
taxpayer's effort to assess the taxpayer's proper tax liability."

Treas. Reg. § 1.6664-4(b)(1) (as amended in 2003).                      The charged

understatement    is     "substantial."       26   U.S.C.     §   6662(d)(1)(B).

Transupport argues that it acted with reasonable cause and good

faith, and so the Tax Court's application of the penalty is

erroneous.     The application of an accuracy-related penalty is

reviewed for clear error.       Kaufman v. Comm'r, 784 F.3d 56, 66 (1st

Cir. 2015).

             Transupport argues that the penalty should not apply

because it reported its tax liabilities consistent with the advice

of a tax professional over many decades.             "Reliance on . . . the

advice of a professional tax advisor" can suffice if "under all

the circumstances, such reliance was reasonable and . . . in good

faith."   Treas. Reg. § 1.6664-4(b)(1).            But Transupport presented

no evidence that it relied on the opinion of an expert for its

compensation decisions.       Transupport II, 2016 WL 6900913, at *13.

On the cost of goods sold issue, the taxpayer cannot rely on its

accountant     because     Foote's    admissions      about       the    value   of

Transupport's inventory indicate that the taxpayer knew or should

have known that the figures it was providing to its accountant

were incorrect.        See Treas. Reg. § 1.6664-4(c)(1)(ii) ("[T]he

advice must not be based upon a representation or assumption which

the taxpayer knows, or has reason to know, is unlikely to be true

. . . .").

                                     - 18 -
            Transupport also argues it acted with reasonable cause

and good faith because it was audited twice and was not required

to   change   its      accounting    method    or     compensation   system.

Transupport's prior audit results do not show error by the Tax

Court.    Transupport cites cases indicating that the Tax Court may

find a taxpayer acted with reasonable and good faith where a prior

audit permitted a certain tax treatment, see Tesar v. Comm'r, 73

T.C.M. (CCH) 2709, 1997 WL 220396, at *7 (1997); Bangs v. Comm'r,

91 T.C.M. (CCH) 1063, 2006 WL 1073429, at *9 (2006), but that does

not mean that the Tax Court must make such a finding.           The inquiry

is fact-specific, and no single factor is dispositive.               Treas.

Reg. § 1.6664-4(b). Here, the Tax Court's finding that Transupport

had not acted with reasonable cause and good faith had sufficient

support   from   the    evidence    in   the   record,   including   Foote's

sophistication as a taxpayer -- as evinced by his ability to gift

Transupport stock to his sons while minimizing gift taxes -- and

Foote's admissions in the sales literature, which indicate he knew

that Transupport's inventory was worth more than reported and that

his sons were paid an unreasonable rate.            See Transupport II, 2016

WL 6900913, at *3, *7, *13.

                              V. Conclusion

                 We affirm.

                                    - 19 -