Besicorp, an Overview
In Besicorp Group, Inc., at al. v. Commissioner, No. 23-296, slip op. (2d Cir. Jun. 29, 2026), the Second Circuit overturned the Tax Court, holding that the collection due process (CDP) verification requirement under IRC § 6330(c)(1) applied to the penalty approval requirement under IRC § 6751(b)(1) even if the penalties were assessed based on a Tax Court decision.
In Besicorp and its companion cases, the taxpayers owed taxes and penalties that had been assessed based on decisions in prior Tax Court deficiency cases. In the current CDP cases, the Tax Court determined that because the penalties were assessed based on a prior Tax Court decision, the verification requirement imposed by § 6330(c)(1) didn’t require the Appeals settlement officer (SO) to separately verify whether the IRS complied with § 6751(b)(1) as part of their review.
Overruling the Tax Court, the Second Circuit held that § 6330(c)(1) required an SO to verify whether the IRS complied with § 6751(b)(1) even if the penalty was assessed based on a Tax Court decision and that failure to do so constituted an abuse of discretion.
The Second Circuit’s holding means Besicorp and the related cases will be remanded to Tax Court and then to Appeals with a directive that supplemental CDP hearings be held to cure the defect.
What’s unclear is what happens if, during the supplemental CDP hearings, Appeals determines that the IRS didn’t comply with § 6751(b)(1). In its opinion, the Second Circuit speculates on this, implying that the IRS may forever be precluded from collecting the penalty amounts through administrative means (lien or levy). It was careful, though, to reiterate that the liability remained intact and the Tax Court’s decision was still valid. The Second Circuit’s statements are perplexing, especially when viewed against the broader framework of CDP and the scope of Appeals and the Tax Court’s jurisdiction.
CDP and the Verification Requirement
Section 6330(c)(1) requires Appeals verify the IRS has followed the requirements of any law or administrative procedure. As such, an SO must conduct this verification in every CDP hearing even if the taxpayer doesn’t raise it. Failure to do it constitutes an abuse of discretion and will result in a CDP case being remanded back to Appeals.
Despite multiple cases challenging the steps an SO took to do the verification, the Tax Court has consistently declined to second-guess the approach taken by SOs as long as the verification happened. Practically speaking, most SOs review account transcripts to meet this requirement. In cases where there is a debate over the issuance of a notice of deficiency or penalty review, the SO must look at more than transcripts and verify the proper issuance of the notice or proper penalty approval.
Besicorp raised a novel question about what needed to be verified where the relevant penalty assessments were based on a final Tax Court decision.
Penalty Approval under Section 6751(b)(1)
Despite its creation in 1998, § 6751(b) was largely ignored in the context of deficiency until the early-2010’s. In 2017, the Second Circuit issued its opinion in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), holding the IRS must comply with § 6751(b)(1) in cases subject to deficiency proceedings. In Graev v. Commissioner, 149 T.C. 485 (2017) (Graev III), the Tax Court subsequently adopted the Second Circuit’s reasoning for all cases.
In Graev III, Judge Holmes wrote a lengthy concurrence acknowledging the outcome was dictated by Chai (because the case was appealable to the Second Circuit) but disagreeing with Second Circuit’s reasoning and the Tax Court’s decision to follow it. Quoting Justice Scalia, he analogized the court’s reading of § 6751(b)(1) to a ghoul from a late-night horror movie that repeatedly shows up unexpectedly causing fear and distress.
As Judge Holmes predicted, Chai and Graev III have resulted in vast amounts of litigation as taxpayers, practitioners, and the IRS continue to try to figure out what penalties it applies to, when the approval must occur, who can make the approval, what it needs to consist of. The Second Circuit’s opinion in Besicorp may add fuel to the fire.
Impact of Besicorp, What’s Next?
The Commissioner will likely seek an en banc rehearing but it’s not clear whether it will be granted. Because the issue is novel there is no conflicting circuit court precedent consider. But the issue is arguably significant enough to warrant review, so we will see what happens.
Outside of the Second Circuit, the Commissioner will ignore the opinion and hope the Tax Court doesn’t rethink its own views as it did with Chai in Graev III.
Notwithstanding a rehearing, the Besicorp cases will be remanded by the Tax Court back to Appeals for supplemental CDP hearings where Appeals will be required to verify whether § 6751(b)(1) had been followed.
If it was, and the parties can’t otherwise reach some sort of agreement, Appeals will issue supplemental determinations that the Tax Court will likely uphold.
If it wasn’t, it’s unclear what happens next, which is where things get messy and the ghouls come out.
Normally, if a taxpayer and Appeals reach an agreement in a CDP hearing, the parties execute a Form 12257 relating to the agreed upon resolution. For a CDP case in Tax Court, the case is dismissed as moot because the proposed collection action is no longer being pursued. See Commissioner v. Zuch, 605 U.S. 422 (2025).
In these cases, even if Appeals doesn’t sustain the proposed collection action because of an issue with penalty approval, it’s unclear whether an agreement would be reached between the parties as to a collection alternative. The taxpayers in Besicorp were seeking an offer-in-compromise (OIC) but Appeals wasn’t inclined (and isn’t required) to agree to one, meaning the parties may reach an impasse.
If the parties can’t agree, it is unlikely a Form 12257 will be executed. This puts the case in a procedural no-man’s land.
In theory, Appeals may issue a supplemental determination stating it’s not sustaining the proposed collection action while also indicating that no collection alternative was reached. Under the Supreme Court’s holding in Zuch, that may be all that is needed to get the case dismissed from Tax Court. But it’s unclear if that result would preclude the IRS from future administrative collection actions as speculated by the Second Circuit.
Under IRC §§ 6320 (liens) and 6330 (levies), a taxpayer is entitled to only one CDP hearing per tax type and tax period. After that, future collection actions by the IRS fall outside of CDP and are not subject to judicial review. Appeals retains jurisdiction over prior CDP determinations, but the scope of that jurisdiction is generally limited to enforcing IRS compliance with agreed upon collection alternatives or reconsidering its determination based on changed circumstances.
Because collection actions are generally discrete events, a levy on specific property or a lien notice filed in a particular place, it’s unlikely the Appeals CDP determination would preclude future administrative collection in the way the Second Circuit proposed. More importantly, there doesn’t seem to be any procedural mechanism to administratively or judicially enjoin such collection actions without triggering Anti-Injunction Act concerns or turning the matter into a collateral attack on a final Tax Court decision. I can envision some creative arguments here but I am not sure they would stick.
Beyond these cases, the IRS has updated its procedures to ensure § 6751(b)(1) compliance, likely limiting the instances where an SO uncovers non-compliance after a Tax Court decision. But the Second Circuit’s holding may still cause some administrative upheaval. Going forward, SOs won’t be able to rely on transcripts when verifying certain penalty assessments arising from Tax Court. They will need to review specific evidence of compliance which takes more time.
As with Chai, the Second Circuit has put its own spin on tax administration. While the outcome may help the current petitioners in the near term, it is not clear how useful it will be in the long run.