On June 29, 2026, the United States Court of Appeals for the Second Circuit issued a landmark ruling in Besicorp Group, Inc. v. Commissioner of Internal Revenue that every tax practitioner and every taxpayer fighting an IRS penalty assessment needs to understand. The court held — in plain, mandatory terms — that an IRS Appeals Officer conducting a Collection Due Process hearing is required to verify that the IRS obtained written supervisory approval for its penalties under I.R.C. § 6751(b)(1), even if those penalties were previously litigated and affirmed in a prior Tax Court proceeding. Failure to complete that verification is an abuse of discretion that permanently strips the IRS of its ability to enforce those penalties via federal tax liens and levies.
This is a significant taxpayer win — and a significant check on IRS collection authority. You can read more about the broader collection process in our overview of U.S. Tax Court procedures and how IRS enforcement works when assessments go unresolved.
The Background: Intermediary Tax Shelters and a Decade-Long Collection Fight
The case involves 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 — that the IRS determined had participated in "intermediary tax shelter transactions designed to avoid the payment of taxes" during the period 1999 through 2003.
Following its audits, the IRS assessed substantial tax deficiencies, accrued interest, and heavy accuracy-related penalties against all six entities. The numbers were staggering: for Besicorp alone, the IRS assessed a $20 million penalty on a $50 million tax deficiency under I.R.C. § 6662(h) for gross valuation misstatements. The combined liabilities across all six taxpayers ranged from approximately $13 million for Day Stores to nearly $200 million for Besicorp.
The taxpayers petitioned the Tax Court. The Tax Court sustained the deficiencies and the penalties in full. Some taxpayers appealed — Humboldt Shelby went to the Second Circuit, which affirmed in 2015. Others entered stipulated decisions. By the time the cases reached the collection phase, the liabilities were final and the amounts enormous.
The Collection Phase: CDP Hearings and the Token OIC
With final judgments in hand, the IRS recorded its assessments and demanded payment. The corporate taxpayers, describing themselves as "inactive corporations" with insufficient assets to satisfy the debts, failed to pay. The IRS responded by filing Notices of Federal Tax Liens (NFTLs) and issuing Notices of Intent to Levy.
Those collection notices triggered the taxpayers' statutory right under I.R.C. §§ 6320 and 6330 to request a Collection Due Process (CDP) hearing before an independent IRS Appeals Officer. At the CDP hearings, each taxpayer submitted an offer in compromise of exactly $1,000, checking the "doubt as to collectibility" box. The same Appeals Officer handled all six cases and rejected all six offers as contrary to "the interests of fair tax administration," sustaining the IRS's liens and proposed levies.
In his concluding Notices of Determination, the Appeals Officer stated that he had "verified the requirements of any applicable law or administrative procedure were met." But there was a critical problem: the Appeals Officer had never actually verified whether the IRS obtained the written supervisory approval required by I.R.C. § 6751(b)(1) before assessing the penalties. The Notices of Determination made no express mention of § 6751(b) at all.
The Legal Battle: What Is § 6751(b)(1) and Why Does It Matter?
I.R.C. § 6751(b)(1) is one of the most taxpayer-protective provisions in the Internal Revenue Code, enacted as part of the IRS Restructuring and Reform Act of 1998. It provides:
"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."
The statute exists to prevent front-line IRS examiners from using penalty assessments as a tactical bargaining chip — to discourage the agency from threatening penalties as leverage and then dropping them when a taxpayer pushes back. The written supervisory approval requirement creates a documented chain of accountability before any penalty is formally assessed.
The complementary provision, I.R.C. § 6330(c)(1), mandates that at any CDP hearing, 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 use of "shall" is mandatory; the word "any" is expansive.
The IRS argued before the Tax Court — and initially won on this point — that because the penalties had been previously adjudicated in the Tax Court liability proceedings, the res judicata doctrine barred the taxpayers from challenging whether supervisory approval was obtained. The Tax Court relied on its own prior decision in Warner Enterprises, Inc. v. Commissioner (2022) to hold that once a liability had been litigated to finality, no further verification of § 6751(b) compliance was required at the collection stage.
The Second Circuit's Ruling: The Warner Rule Falls
The Second Circuit rejected the Tax Court's position in full, reversing all of the summary judgment orders and remanding for further proceedings. The court's analysis rested on two independent grounds, each of which standing alone would have been decisive.
First: Verification is not a liability challenge. The court drew a sharp distinction between challenging "the existence or amount of the underlying tax liability" — which is subject to res judicata and preclusion under I.R.C. § 6330(c)(2)(B) — and challenging whether the IRS properly verified its own compliance with applicable law. A verification challenge is not a challenge to liability. It is a standalone procedural requirement that does not arise until the collection phase begins. Because the issue did not and could not have been litigated in the earlier Tax Court liability proceedings (there were no liens or levies at that point), res judicata does not apply. The court cited with approval the Tax Court's own prior reasoning in Pfetzer v. Commissioner (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)."
Second: The verification obligation is freestanding and independent of what the taxpayer raises. Even if the taxpayers themselves had been precluded from raising the issue, the Appeals Officer's obligation under § 6330(c)(1) exists whether or not the taxpayer puts it in issue. The statute makes verification mandatory — the Appeals Officer "shall" obtain it. That duty is not waivable, cannot be assumed away, and is not satisfied by a boilerplate recitation that "requirements were met" without actually confirming the § 6751(b)(1) approval chain.
The court also addressed a critical scoping question: what does the Appeals Officer's failure to verify actually cost the IRS? The answer is precise and consequential. The failure does not erase the tax liability, does not undo the deficiency, and does not give the taxpayer a pass on what they owe. What it does is remove the IRS's access to expedited collection tools — specifically, federal tax liens and levies — as the mechanism to collect the penalty portion of the debt. The IRS retains all other remedies (e.g., suit in federal district court), but loses the streamlined enforcement path that makes IRS collection so fast and powerful.
What This Means For You: Five Takeaways
1. The IRS cannot shortcut the supervisory approval requirement, even years after the fact. The § 6751(b)(1) approval chain must exist and must be verifiable. A CDP Appeals Officer who cannot produce documentation of that approval — or who simply checks a box saying "requirements met" without confirming it — has failed to meet the statutory mandate. Besicorp makes clear the Second Circuit will enforce this with real consequences.
2. Prior Tax Court adjudication of a penalty does not automatically satisfy § 6751(b)(1). The Tax Court's Warner Enterprises rule — which held that prior liability adjudication excused the verification requirement — is now dead in the Second Circuit (New York, Connecticut, Vermont). If you are in a CDP proceeding in those states with previously-litigated penalties, you now have a direct argument that the Appeals Officer must independently verify supervisory approval regardless of the prior proceeding's outcome.
3. This ruling applies at the collection stage, not the deficiency stage. If you have already received a Notice of Federal Tax Lien or a Notice of Intent to Levy, a CDP request (Form 12153) is your vehicle to demand verification under § 6330(c)(1). A timely-filed CDP request has the effect of suspending collection while the hearing proceeds. This is one of the most powerful — and underutilized — rights taxpayers have when facing IRS collection action.
4. The IRS's loss here is narrow but real. The Second Circuit was careful to limit the consequence of verification failure to the collection method — liens and levies — rather than the underlying liability itself. The taxpayers in Besicorp still owe everything adjudicated against them. But they cannot be seized via lien or levy for the penalty portion until the IRS corrects the defect. That distinction matters enormously in practice: liens cloud credit and title; levies seize bank accounts and wages. Blocking those tools buys time and leverage.
5. § 6751(b)(1) is a viable defense line in any IRS penalty challenge. Whether you are dealing with a civil fraud penalty under § 6663, a substantial understatement penalty under § 6662, or any other assessable penalty, the supervisory approval requirement must be part of your audit response and Tax Court litigation strategy. If the IRS cannot produce the signed approval document showing that a supervisor personally reviewed and approved the penalty determination in writing before it was assessed, you have a potentially fatal procedural challenge.
Practical Implications: CDP Hearings and Penalty Defense Strategy
The Besicorp decision should prompt immediate attention from any taxpayer who:
- Has received a Notice of Federal Tax Lien or Notice of Intent to Levy with a penalty component
- Requested a CDP hearing and received a Notice of Determination that does not explicitly confirm § 6751(b)(1) supervisory approval
- Had Tax Court decisions sustained penalties in prior liability proceedings but has not yet resolved the collection phase
- Is currently in a CDP hearing and has not yet raised the verification issue
The window for raising verification challenges in a CDP proceeding is limited. Once the Notice of Determination is issued and the CDP process closes, your opportunity to raise this issue in Tax Court under § 6330 may be exhausted. If you are in any of the above situations, the time to act is now — before collection action finalizes.
At Brightside Tax Relief, our criminal tax defense and civil tax controversy team is experienced in IRS collection procedures, CDP hearings, and the intersection of penalty challenges and enforcement strategy. If you have received collection notices with substantial penalty components, or if you have prior Tax Court-adjudicated liabilities now moving to collection, contact us to discuss how Besicorp may apply to your situation. You can also learn more about our general approach to Tax Court matters and IRS enforcement.
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