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the court stated that reliance on the compensation practice
previously allowed by the Commissioner may show good faith. Id.
at 1329. The prior audit may, in some circumstances, provide
reasonable cause for an understatement and support a waiver of
an addition to tax. See Matthews v. Commissioner, 92 T.C. 351,
362-363 (1989), affd. 907 F.2d 1173 (D.C. Cir. 1990).
We find that petitioner's reliance on the prior audit in
this case does not provide reasonable cause for its excessive
officer's compensation deduction. Petitioner should have been
aware, especially with the involvement of an accountant, that
the IRS could have decided not to pursue a deficiency for the
prior year for a number of reasons, in addition to the possible
weakness of its case. The prior audit could have served as a
warning to petitioner as to the legality of characterizing the
entire amount of payments to Kleindienst as compensation. See
Burke v. Commissioner, 929 F.2d 110, 113 (2d Cir. 1991), affg.
in part and revg. in part T.C. Memo. 1989-671. In addition,
Kleindienst's compensation increased by 60 percent after the
year audited. This significant change in the amount of
Kleindienst's compensation made it unreasonable for petitioner
to rely on the result of the prior audit. Also, petitioner did
not prove the extent to which it relied on the no-change result
as it considered a number of other factors in determining
Kleindienst's compensation. Thus, petitioner did not prove
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