Besicorp Group, Inc. v. Commissioner of Internal Revenue, Docket Nos. 23-296(L), 23-299 (Con), 23-302 (Con), 23-321 (Con), 23-353 (Con), 23-359 (Con), _ F.4th _ (2d Cir. June 29, 2026)

The United States Court of Appeals for the Second Circuit has ruled that an Internal Revenue Service Appeals Officer's failure to verify written supervisory approval for tax penalties during a Collection Due Process (CDP) hearing invalidates the collection of those penalties via federal tax liens and levies, even if the underlying liabilities were previously adjudicated. In Besicorp Group, Inc. v. Commissioner of Internal Revenue, the Second Circuit reversed a series of Tax Court orders that had sustained IRS liens and proposed levies for millions of dollars in outstanding penalty liabilities. The court's decision establishes a critical boundary between the administrative determination of tax liability and the statutory due process required during the collection phase, reminding tax practitioners that the procedural protections enacted under the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act") are absolute and must be enforced according to their literal text.

This ruling represents a significant victory for taxpayers contesting IRS collections, clarifying that the government's failure to obtain and verify supervisory approval under Internal Revenue Code (I.R.C.) § 6751(b)(1) is a fatal defect that permanently bars the IRS from using its expedited collection tools—namely, liens and levies—to collect the penalty portion of a tax debt.

Factual Background and the Intermediary Tax Shelter Adjudications

The case arose from transactions entered into between 1999 and 2003 by six corporate taxpayers: Besicorp Group, Inc., Day Stores, Inc., Humboldt Shelby Holding Corporation, The Markell Company, Inc., Vance Finance and Holding Corporation, and Seashore Broadcasting Corporation. The IRS concluded that these entities had participated in "intermediary tax shelter transactions designed to avoid the payment of taxes". Following audits, the Service determined substantial tax deficiencies, accrued interest, and severe accuracy-related penalties against the taxpayers. For example, the IRS assessed a $20 million penalty against Besicorp on a $50 million tax deficiency for accuracy-related "gross valuation misstatements" under I.R.C. § 6662(h).

The taxpayers filed petitions for redetermination in the United States Tax Court. In those prior liability proceedings, the Tax Court sustained the deficiencies and the penalties in full. The decisions became final; one taxpayer, Humboldt Shelby Holding Corporation, appealed the liability ruling to the Second Circuit, which affirmed in Humboldt Shelby Holding Corp. & Subs. v. Commissioner, 606 F. App’x 20 (2d Cir. 2015), while four others entered into stipulated decisions, and the final taxpayer did not appeal. Critically, none of the taxpayers litigated any issue related to the written supervisory approval requirement of I.R.C. § 6751(b)(1) during those initial liability proceedings.

Collection Due Process and the Offers in Compromise

Following the final determination of the liabilities, the IRS formally recorded the assessments under I.R.C. § 6215(a) and demanded payment. The taxpayers, asserting they were "inactive corporation[s]" with "insufficient assets and income to pay the full amount," failed to pay. In response, the IRS filed Notices of Federal Tax Liens (NFTLs) and issued Notices of Intent to Levy. By the time these collection notices were sent, the accumulated liabilities (comprising deficiencies, interest, and penalties) ranged from approximately $13 million for Day Stores to nearly $200 million for Besicorp.

The collection notices triggered the taxpayers' rights under I.R.C. §§ 6320 and 6330 to request a Collection Due Process hearing. During the CDP proceedings, which were conducted by a single Appeals Officer, each taxpayer submitted a token "offer in compromise" of $1,000, checking the box for "doubt as to collectibility". The Appeals Officer rejected the offers in compromise on the ground that acceptance "would be detrimental to the interests of fair tax administration" and sustained the IRS's liens and proposed levies.

In the concluding Notices of Determination, the Appeals Officer stated: "I . . . verified the requirements of any applicable law or administrative procedure were met" and noted that his review of the collection file "confirmed that the IRS followed all legal and procedural requirements". Crucially, however, the Appeals Officer failed to obtain any actual verification from the Secretary that the underlying penalties had received the written supervisory approval mandated by I.R.C. § 6751(b)(1), and the Notices of Determination made no express mention of this statutory requirement.

The taxpayers subsequently filed petitions in the Tax Court to challenge the Notices of Determination. During discovery, the taxpayers requested "all documents on which the Appeals officer based his conclusion that ‘the requirements of any applicable law or administrative procedure were met,’ including but not limited to the requirements of section 6751(b)". The IRS produced no documents, taking the position that because the penalties had been conclusively determined in prior, final Tax Court proceedings, those decisions carried res judicata effect, and "no further verification of compliance with the requirements of [Section] 6751(b) was required".

Statutory Interplay: The Verification Mandate versus Prior Adjudication Preclusion

Initially, the Special Trial Judge assigned by the Tax Court denied the Commissioner's motion for summary judgment in part, ruling that the Appeals Officer’s "failure to verify [the] IRS’[s] compliance with section 6751(b) was a failure to meet the verification requirement of section [6330(c)(1)] and therefore was an abuse of discretion". While this ruling did not impact the taxpayers' underlying liability, its practical effect was that the IRS's liens and levies could not be enforced to collect the penalties.

However, weeks later, the Tax Court published Warner Enterprises, Inc. v. Commissioner, 124 T.C.M. (CCH) 98, 2022 WL 3584090 (T.C. 2022). In Warner Enterprises, the Tax Court held that "where the Court previously adjudicated and entered a decision determining the applicability of penalties," a CDP Appeals Officer is not required to verify compliance with the supervisory approval requirement of § 6751(b)(1). The Warner court reasoned that to require verification at the collection stage "would place the administrative agency in review of the Court" and would "serve no purpose" because the court could not set aside its prior, now-final liability decision. Relying on this new precedent, the Special Trial Judge vacated her prior decisions and granted summary judgment to the Commissioner in full, prompting the taxpayers' appeal to the Second Circuit.

The core issue before the Second Circuit was whether the mandatory verification obligation under I.R.C. § 6330(c)(1) is wiped away when the underlying penalty has been previously litigated.

The Independent Scope of Section 6330(c)(1) and the Fall of the Warner Rule

The Second Circuit began its analysis by examining the literal text of the statute, noting that "our constitutional structure does not permit this Court to rewrite the statute that Congress has enacted," citing Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, 579 U.S. 115, 130 (2016).

Under I.R.C. § 6330(c)(1), the statutory instruction is clear:

"The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met."

The court emphasized that the use of "shall" makes this command "unmistakably mandatory," while the term "any" has an "expansive meaning," citing Republic of Iraq v. Beaty, 556 U.S. 848, 856 (2009). Because I.R.C. § 6751(b)(1) dictates that "no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate," it represents an "applicable law" within the literal scope of § 6330(c)(1).

To counter this literal reading, the Commissioner asserted that the supervisory approval requirement was no longer "applicable" under I.R.C. § 6330(c)(1) because the taxpayers' liability had been "conclusively determined". The Commissioner pointed to I.R.C. § 6330(c)(2)(B), which incorporates claim preclusion principles by permitting a taxpayer to challenge the "existence or amount of the underlying tax liability" only if they did not receive a notice of deficiency or otherwise have an opportunity to dispute the liability, citing Iames v. Commissioner, 850 F.3d 160, 167 (4th Cir. 2017).

The Second Circuit rejected the Commissioner's preclusion argument on two key grounds:

First, a verification challenge is fundamentally distinct from a liability challenge. The court pointed out that "a challenge on verification grounds is not a 'challenge[] to the existence or amount of the underlying tax liability.'". Instead, it is a procedural checkpoint. The court cited with approval the Tax Court's decision in Pfetzer v. Commissioner, 122 T.C.M. (CCH) 395, 2021 WL 6143712, at *4 (2021):

"[P]roper verification is not a challenge to the underlying liability; it is a stand-alone requirement in section 6330(c)(1) and is independent of the issues that may be considered under section 6330(c)(2) (such as the taxpayer's underlying tax liability)."

Because this verification obligation does not attach until the collection phase begins, "proper verification" is not an issue that the taxpayers could have raised in the earlier liability litigation. Therefore, res judicata does not bar a taxpayer from raising the Appeals Officer's failure to verify at the CDP hearing stage.

Second, the verification duty under I.R.C. § 6330(c)(1) is a freestanding, administrative obligation. The statutory language mandates that the Appeals Officer shall obtain verification. "The verification obligation thus exists whether or not a taxpayer raises the issue.". Even if I.R.C. § 6330(c)(2)(B) had precluded the taxpayers from raising the issue, the Appeals Officer maintained an independent statutory duty to check the administrative record for compliance.

Substantive versus Procedural Consequences and Alternate Collection Remedies

The court carefully distinguished between the substantive requirement to obtain supervisory approval and the procedural requirement to verify that approval. The initial failure of the IRS to obtain supervisory approval under I.R.C. § 6751(b)(1) "precludes it altogether from imposing penalties". By contrast, the Appeals Officer's failure to verify that approval "does no more than limit the methods available to the IRS for collecting the Taxpayers’ liabilities.".

Crucially, the Second Circuit noted that this holding "does not affect the Taxpayers’ liabilities for either the deficiencies in payment of taxes due or the penalties imposed". The underlying debts remain validly assessed, and the taxpayers still owe those amounts to the federal government. What the IRS loses is its "ability to enforce its liens against the Taxpayers’ property and to use its expedited levy process," specifically with respect to the penalty portions of the debt.

If the IRS wishes to collect the penalty amounts, it must resort to more traditional, non-expedited legal channels. The government's counsel conceded at oral argument that the IRS can "file a complaint in U.S. District Court, reduce to judgment the amounts owed, and then use state remedies to collect on that judgment," pursuant to I.R.C. §§ 7401 et seq..

Furthermore, the Second Circuit left open a potential "cure" mechanism for the IRS in future cases. Under Tax Court precedent such as Hoyle v. Commissioner, 136 T.C. 463 (2011) (Hoyle II), the Appeals Office may supplement the administrative record on remand to show that proper written approval was actually obtained prior to assessment. However, in Besicorp, there was a dual failure: (i) the Appeals Officer failed to verify compliance, and (ii) the IRS failed to show that the initial IRS employees had actually obtained the written supervisor approval before issuing the notices of deficiency. Under Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), supervisory approval cannot be obtained retroactively; it must be executed "no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.". Because there was no evidence that the initial approvals were ever obtained, there was no verification error that could be cured on remand.

Conclusion and Professional Practice Takeaways

The Second Circuit's ruling in Besicorp reinforces that the procedural protections in the Internal Revenue Code are not mere technicalities that the IRS can bypass in the name of administrative efficiency. The dual, layered statutory requirements of I.R.C. §§ 6751(b)(1) and 6330(c)(1) serve distinct functions. Section 6751(b)(1) protects taxpayers at the determination phase to ensure that penalties are "only be imposed where appropriate and not as a bargaining chip," citing S. Rep. No. 105-174, at 65 (1998). Section 6330(c)(1) protects taxpayers at the collections phase by requiring an independent check before the IRS unleashes its intrusive, expedited collection powers.

For CPAs and EAs representing clients in collection matters, Besicorp provides several key practice takeaways:

First, always demand proof of verification during a Collection Due Process hearing. An Appeals Officer cannot simply rely on the existence of a prior Tax Court decision to satisfy their verification duty under I.R.C. § 6330(c)(1). They must obtain actual documentation showing that written supervisory approval was obtained prior to the initial penalty determination.
Second, the defense of res judicata does not apply to verification challenges. Even if a client has fully litigated and lost a penalty challenge in Tax Court (or signed a stipulated decision), their representative can still defeat subsequent lien and levy actions on the penalty portion if the IRS failed to verify I.R.C. § 6751(b)(1) compliance during the CDP hearing.

Finally, keep in mind that defeating a lien or levy does not extinguish the underlying penalty debt. While forcing the IRS to reduce the debt to a district court judgment creates a significant hurdle for the government and buys the taxpayer substantial time, the substantive liability remains. Practitioners must weigh the tactical benefits of blocking expedited collection tools against the reality that the client's underlying liability remains legally binding.

Prepared with assistance from NotebookLM.

Besicorp Group, Inc. v. Commissioner of Internal Revenue, Docket Nos. 23-296(L), 23-299 (Con), 23-302 (Con), 23-321 (Con), 23-353 (Con), 23-359 (Con), ___ F.4th ___ (2d Cir. June 29, 2026)