PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

ROBERT D. GROSSMAN, JR.,
Petitioner-Appellant,

v.                                                                No. 98-1043

COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. Nos. 90-20526, 91-14364)

Argued: May 7, 1999

Decided: June 28, 1999

Before WIDENER, MOTZ, and TRAXLER, Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Motz wrote the opinion, in
which Judge Widener and Judge Traxler joined.

_________________________________________________________________

COUNSEL

ARGUED: Libero Marinelli, Jr., AMARI & THERIAC, P.A., Cocoa,
Florida, for Appellant. Kenneth L. Greene, Tax Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. ON BRIEF: Loretta C. Argrett, Assistant Attorney Gen-
eral, Janet A. Bradley, Tax Division, UNITED STATES DEPART-
MENT OF JUSTICE, Washington, D.C., for Appellee.

_________________________________________________________________
OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

Robert D. Grossman, Jr., appeals the tax court's finding that he
committed civil tax fraud in connection with his 1985 and 1986
income tax returns. Grossman contends that the Commissioner failed
to produce sufficient evidence to prove tax fraud, that the Internal
Revenue Code's innocent spouse provision should relieve him of lia-
bility, and that tax credits arising in 1983, 1984, and 1985 eliminate
any underpayment of taxes for the 1985 and 1986 tax years. Finding
these arguments without merit, we affirm.

I.

The tax court carefully sorted through the voluminous record in
this case and made numerous and detailed factual findings. See
Grossman v. Commissioner, 72 T.C.M. (CCH) 845 (T.C. 1996). We
need only briefly summarize those facts. Grossman, a practicing tax
attorney with an L.L.M. in taxation from New York University, who
at one time worked for the Internal Revenue Service as a senior trial
attorney, has specialized in tax law for over twenty years. During the
years at issue here, 1983 through 1986, Grossman filed joint tax
returns with his then-wife Betsy.

Betsy, her mother Beatrice, and her brother Ben owned the Sley
corporations, which operated primarily as holding companies. By
1980, Grossman ran the operations of all of the Sley corporations
from an office in the Washington, D.C. office space where his private
law firm was located. The Sley corporations employed a single person
in its office: Tanja Baybrook, a bookkeeper.

From 1983 to 1986 Grossman and his family took numerous vaca-
tions; they used a credit card issued to one of the Sley corporations,
the Markette Corporation, to pay for these trips. Grossman instructed
Baybrook that the charges on the credit card should be paid with Mar-
kette Corporation funds. He never informed Baybrook that the
expenses were personal and therefore not properly payable with cor-
porate funds. In fact, Grossman himself signed the vast majority of

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the Markette Corporation checks that Baybrook had prepared to pay
the credit card charges.

The Grossmans separated in September 1986 and divorced in 1991.

Upon auditing the Grossmans' income tax returns, the Internal
Revenue Service determined that the Grossmans had failed to report
as income over $40,000 of constructive dividend income that they had
received from 1983 to 1986 through the Sley corporations' payments
for their personal vacations. The Commissioner sought to impose civil
tax fraud penalties for these years on Grossman, but not Betsy. The
tax court found that the Commissioner had "failed to carry the heavy
burden of proof" of tax fraud for the 1983 and 1984 tax years. For
1985 and 1986, however, the court held that Grossman fraudulently
failed to report $9,996.71 and $5,963.43, respectively, in constructive
dividend income. Based on these deficiencies, the court imposed civil
fraud penalties.

II.

Initially, Grossman contends that the Commissioner presented
insufficient evidence of his intent to defraud to support the tax court's
finding of tax fraud. A finding of fraud requires that the Commis-
sioner "prove affirmatively by clear and convincing evidence actual
and intentional wrongdoing on the part of the [taxpayer] with a spe-
cific intent to evade the tax." Webb v. Commissioner, 394 F.2d 366,
378 (5th Cir. 1968) (internal quotation marks omitted). Tax fraud
implies "bad faith, intentional wrongdoing and a sinister motive."
Davis v. Commissioner, 184 F.2d 86, 87 (10th Cir. 1950). A taxpayer
cannot be held to have committed civil tax fraud when the understate-
ment of tax results from "inadvertence, negligence, or honest errors."
Moore v. United States, 360 F.2d 353, 355 (4th Cir. 1966) (internal
quotation marks omitted); Webb, 394 F.2d at 377. Intent to defraud,
however, may be proven by circumstantial evidence. See United
States v. Bales, 813 F.2d 1289, 1294 (4th Cir. 1987); Powell v.
Grandquist, 252 F.2d 56, 61 (9th Cir. 1958); Stone v. Commissioner,
56 T.C. 213, 223-24 (1971).

In the present case, both documentary evidence and the testimony
of several witnesses amply support the tax court's detailed findings

                     3
of fact as to Grossman's intent to defraud. The record contains evi-
dence that Grossman was running the Sley corporations' operations
during the relevant years and that he well knew that personal trips
were being charged to a Markette Corporation credit card because he
charged many of these expenses himself. The Sley corporations'
bookkeeper testified that Grossman directed her to pay the charges on
the Markette credit card with Markette Corporation's funds and never
informed her that any of these charges were for personal expenses.
The evidence also demonstrates that Grossman signed most of the
company checks to pay for these personal charges.

Moreover, the tax court carefully considered Grossman's argu-
ments that he lacked the requisite intent to defraud. Indeed, the care
of the court's analysis is reflected in the fact that it refused to find that
the Commissioner had met the requisite "heavy burden" for the 1983
and 1984 tax years.

On appeal, Grossman reiterates his arguments as to evidentiary
insufficiency that were presented to and rejected by the tax court. For
example, he contends that the relatively small amount of his under-
payments demonstrates a lack of intent to defraud. The tax court,
however, considered this and determined that Grossman's familiarity
with the tax laws outweighed the fact that the constructive dividends
constituted only a small percentage of Grossman's income.

Grossman also claims that he justifiably relied on the accountant
that prepared his income tax returns. A taxpayer's reliance on his or
her accountant to prepare accurate returns may indicate an absence of
fraudulent intent. See Marinzulich v. Commissioner, 31 T.C. 487, 492
(1958). However, as the tax court noted, a taxpayer can only rely on
an accountant when that "accountant has been supplied with all the
information necessary to prepare the returns accurately." Foster v.
Commissioner, 391 F.2d 727, 732 (4th Cir. 1968). Grossman did not
supply his accountant with such information. Rather the accountant
was hired only to prepare tax returns and not to audit the corporate
books or otherwise analyze Grossman's travel expenses.

After careful review of the record, we can only conclude that over-
whelming evidence supported the tax court's finding that Grossman

                      4
engaged in civil tax fraud in connection with his 1985 and 1986
income tax returns.

III.

Grossman next contends that he qualifies as an "innocent spouse"
under the Internal Revenue Code. See I.R.C.§ 6015 (West Supp.
1998). Generally, when taxpayers file a joint income tax return, they
are jointly and severally liable for the amount of tax or any deficiency
due. See Shea v. Commissioner, 780 F.2d 561, 564 (6th Cir. 1986).
The innocent spouse provision constitutes an exception to that general
rule. Congress enacted this provision to prevent hardships that
resulted when one spouse did not report income, thereby leaving the
"innocent spouse" to pay the deficiency. Id. If a spouse succeeds in
proving his or her eligibility for treatment under the innocent spouse
provision, that spouse is liable for a deficiency on the joint return only
to the extent that items giving rise to the deficiency are allocable to
that spouse. See I.R.C. § 6015(d); S. Rep. No. 105-174, at 56 (1998).
Items are then allocated between the spouses, typically in the same
manner as if the spouses had filed separate returns. See id.

Before the tax court, Grossman asserted that he was eligible for
relief with respect to his and Betsy's 1986 joint tax return under the
innocent spouse provision in § 6013(e). See I.R.C. § 6013(e) (West
1989) (repealed 1998). In 1998, Congress passed the Internal Reve-
nue Restructuring and Reform Act (IRRRA) of 1998, Pub. L. No.
105-206, 112 Stat. 685 (1998). That legislation repealed § 6013(e),
see IRRRA § 3201(e)(1), and enacted a new, and in some respects
more generous, innocent spouse provision, which is now codified at
§ 6015 of the Code. See IRRRA § 3201(a); I.R.C. § 6015. For exam-
ple, while the old law only provided innocent spouses relief from
understatements stemming from "grossly erroneous items," the new
provision extends this relief to liability for understatements stemming
from merely "erroneous" items. See I.R.C. § 6015(b)(1)(B). On
appeal, Grossman contends that he is eligible for innocent spouse
relief under this new law.

Initially, we note that whether the new statute controls here is by
no means clear. The 1998 legislation applies to tax liability unpaid as
of July 22, 1998. See IRRRA § 3201(g). The taxpayer, of course, car-

                     5
ries the burden of proving that he falls within the terms of any inno-
cent spouse provision. See Ratana v. Commissioner, 662 F.2d 220,
224 (4th Cir. 1981). At oral argument, Grossman's counsel equivo-
cally stated that "[t]here are small balances left outstanding, I believe,
on all of the years at issue and, I believe, that these balances were
kept unpaid in order not to moot any of the issues in the case." No
other evidence in the record establishes that any tax liability remained
as of July 22, 1998. Thus, it is questionable whether Grossman has
carried his burden of demonstrating that the new innocent spouse pro-
visions govern his case. Assuming, however, that the new provisions
do apply, Grossman can obtain no more benefit from them then he
could under the prior law.

In order to qualify for relief under the old law, a putative innocent
spouse had to demonstrate inter alia that when he signed the tax
return he "did not know, and had no reason to know" of the tax under-
statement. I.R.C. § 6013(e)(1)(C). The tax court found that Grossman
had not met this requirement because when he signed the 1986 return,
he "knew and intended that Betsy had constructive dividend income
that was omitted from [his] and Betsy's 1986 joint tax return." Pursu-
ant to § 6015(b) of the new statute (the general provision applicable
to all joint filers), the person claiming to be an innocent spouse must
still demonstrate that he or she "did not know, and had no reason to
know" of an understatement. Id. § 6015(b)(1)(C). The tax court's spe-
cific finding interpreting precisely the same language under the old
statute precludes Grossman from gaining any relief under the new
§ 6015(b) for the 1986 tax year.

Grossman concedes as much, but nonetheless claims entitlement to
innocent spouse relief for the 1986 and 1985 tax years under another
provision of the new law, which establishes a special rule for taxpay-
ers not married at the time they elected innocent spouse treatment. See
id. § 6015(c).

In order to obtain the benefit of that provision,§ 6015(c), an indi-
vidual must demonstrate inter alia that he had no "actual knowledge,
at the time such individual signed the return, of any item giving rise
to a deficiency." Id. § 6015(c)(3)(C). As Grossman notes, unlike prior
law, this new provision only excludes from innocent spouse protec-
tion taxpayers who have "actual knowledge" of underpayments. See

                     6
S. Rep. No. 105-174, at 59 (liability may not be"inferred based on
indications that the electing spouse had a reason to know"). Conse-
quently, Grossman argues that the tax court's conclusion that he was
ineligible for relief under the old law does not preclude him from eli-
gibility under the newly enacted § 6015(c).

The tax court, however, did not hold Grossman ineligible for inno-
cent spouse relief under the prior law because he had "reason to
know" of the fraud. Rather the court held that the prior law did not
provide Grossman with any innocent spouse relief because he "knew
and intended that Betsy had constructive dividend income that was
omitted from petitioner's and Betsy's 1986 joint tax return." (empha-
sis added). Thus the court plainly did find that Grossman had actual
knowledge of the underpayments. In making this finding, the tax
court explicitly referred to its determination with respect to fraudulent
intent, that Grossman "intended to evade his income taxes for each of
the years 1985 and 1986, which taxes petitioner knew or believed he
owed." As we noted in Part II of this opinion, a finding of tax fraud
requires intentional and knowing conduct by the taxpayer. Thus, a
taxpayer found liable for tax fraud by definition has actual knowledge
of the underpayments. Accordingly, the tax court's amply supported
finding that Grossman intended to defraud necessarily also constitutes
a finding that Grossman had actual knowledge of the underpayment.
For this reason, Grossman is ineligible for relief under § 6015(c).

With respect to the 1985 tax year, Grossman argues that since the
tax court did not directly decide whether innocent spouse relief could
apply for that year, he is entitled to such relief. Why the tax court did
not address this question in its otherwise long and extremely thorough
opinion is unclear. It may be because Grossman did not assert any
right to innocent spouse relief for the 1985 tax year before the tax
court. The Commissioner, however, does not so contend and, in the
absence of any evidence in the record on this question (the briefs in
the tax court are not contained in the record), we will assume Gross-
man did preserve this argument for appellate review. The argument,
in any event, is foreclosed for the same reason that Grossman is ineli-
gible for innocent spouse relief in connection with the 1986 return.
Because the tax court found, on the basis of clearly sufficient evi-
dence, that the Commissioner proved Grossman to be liable for tax
fraud on his 1985 (as well as his 1986) return, we can only conclude

                     7
that Grossman had actual knowledge of underpayments for that year
and, therefore, that he is ineligible for relief under § 6015(c).

We note that another provision of the new statute could also pre-
vent Grossman from obtaining innocent spouse relief for either 1985
or 1986. That provision states that the Secretary of the Treasury "may
provide for an allocation of any item" between spouses "if the Secre-
tary establishes that such allocation is appropriate due to fraud of one
or both individuals." I.R.C. § 6015(d)(3)(C). Thus, if the Secretary
establishes that it is appropriate, due to Grossman's fraud, to allocate
the entire deficiency to Grossman, the Secretary would have the
power to make such an allocation and to thereby prevent Grossman
from taking advantage of the innocent spouse provision. Notwith-
standing Grossman's contentions to the contrary, nothing in the stat-
ute's legislative history suggests that § 6015(d)(3)(C) could not be
applied here. See S. Rep. No. 105-174, at 55-56 (expressing concern
that "taxpayers not be allowed to abuse these rules by knowingly
signing false returns" and noting that "[i]n cases where the IRS proves
fraud, the IRS may distribute, apportion, or allocate any item between
spouses").

For all of these reasons, Grossman is ineligible for innocent spouse
relief under the new statute, just as he was under prior law.

IV.

Finally, Grossman argues for the first time on appeal that certain
tax credits owed to him negate any underpayment for the 1985 and
1986 tax years. There is nothing in the Code, see generally I.R.C.
§§ 6663, 6211, and Grossman cites no authority supporting the propo-
sition that credits from one year may be used to offset underpayments
in a subsequent year. Cf. Trompeter v. Commissioner, 111 T.C. No.
2 (1998) (holding that credits for net operating losses may not reduce
an underpayment in a previous year). However, we need not reach
this question because Grossman failed to preserve it for appellate
review. Generally, we will not consider an issue raised for the first
time on appeal, see Muth v. United States, 1 F.3d 246 (4th Cir. 1993),
and Grossman has not suggested any reason why we should depart
from our ordinary rule in this case. We therefore decline to do so.

                    8
V.

For the foregoing reasons, the judgment of the tax court is

AFFIRMED.

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