Besicorp: Penalty Approval, Tax Court decisions, and CDP Verification

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.

The taxpayers owed taxes and penalties that were assessed based on decisions entered in prior Tax Court deficiency cases. The Tax Court held in the current CDP cases that because the penalties were assessed based on its prior decisions, the verification imposed by § 6330(c)(1) didn’t require the Appeals settlement office (SO) to check whether the IRS complied with § 6751(b)(1).

Overruling the Tax Court, the Second Circuit held the opposite—that even if the penalty assessment was the result of a Tax Court decision, § 6330(c)(1) still required verification of § 6751(b)(1) compliance. 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 for supplemental CDP hearings.

What’s uncertain is what the taxpayers’ remedy might be if Appeals determines the IRS failed to comply with § 6751(b)(1). The Second Circuit speculates the IRS may be precluded from ever collecting the penalties through administrative means (lien or levy), but it also confirmed that Tax Court decision remained valid with the penalty liabilities intact.

While Appeals can deny sustaining the current collection actions, it’s not clear whether it can preclude future administrative collection. CDP only provides Appeals (and the Tax Court) with limited authority.

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 CDP hearings even if the taxpayer doesn’t raise it. Failure to do so is an abuse of discretion, resulting in a case being remanded back to Appeals.

Besicorp raised a novel question about the scope of the verification where the relevant penalty assessments were based on a final Tax Court decision. Because § 6751(b)(1) would have been at issue in the prior deficiency case, compliance with that issue was theoretically addressed then and baked into the Tax Court’s decision. This was the Commissioners argument and seems to be the basis of the Tax Court’s conclusion.

Penalty Approval under Section 6751(b)(1)

Despite its creation in 1998, § 6751(b) was largely irrelevant in the context of deficiency cases until the Second Circuit issued its opinion in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). Chai overruled the Tax Court, holding that 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 in Chai.

Since Chai and Graev III, there has been extensive 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, and numerous other things. Besicorp likely will add a new layer of uncertainty.

Impact of Besicorp, What’s Next?

The Commissioner will likely seek an en banc rehearing but it’s not clear if it will be granted. En banc rehearings are not typical and usually reserved for issues of special importance or where a panel’s decision conflicts with prior circuit precedent. The specific issue here is novel so there is no conflict unless the Commissioner can articulate an argument as to how the opinion conflicts with the circuit’s jurisprudence around res judicata and finality of Tax Court decisions. Alternatively, the Commissioner may argue the significance of the opinion on future CDP cases.

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. The Tax Court is unlikely to do so given friction it might create with respect to the finality of Tax Court deficiency decisions.

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 an agreement, Appeals will issue supplemental determinations that the Tax Court will likely uphold.

If it wasn’t, it’s unclear what fall out might be, which is where things get messy.

Normally, if a taxpayer and Appeals reach an agreement in a CDP hearing, the parties execute a Form 12257 reflecting 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 doubtful an agreement will 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 grant 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 an odd procedural spot.

In theory, Appeals can 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 render the Tax Court case moot. But it’s unclear if that result will 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 aren’t subject to CDP and lack judicial review. While Appeals retains jurisdiction over its prior CDP determinations, 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 seems unlikely that a prior Appeals CDP determination would preclude future administrative collection in the way the Second Circuit proposed. Future collection actions would be considered by Appeals as part of its Collection Appeals Program which operates differently from CDP and doesn’t lead to any judicial review.

There doesn’t seem to be any procedural mechanism to administratively or judicially enjoin such collection actions in the way the Second Circuit contemplated 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, but I am not sure they would stick unless the scope of Appeals’ retained jurisdiction in CDP can be extended to subsequent collection actions.

Of course, as the Second Circuit noted, the IRS would always be able to use judicial collection measures but that doesn’t solve the administrative collection question.

Regardless, the opinion will have a lasting administrative impact on the IRS. Although it has updated its procedures to ensure § 6751(b)(1) compliance, likely limiting instances where an SO uncovers non-compliance after a Tax Court decision, SOs won’t be able to rely solely on transcripts when verifying certain penalty assessments arising from Tax Court. They will need to review specific evidence. This will slow down the process and increase the burden on the IRS.

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 with delayed outcomes resulting in higher balances.