Drake Plastics Sues IRS over Captive Insurance Premium Dispute

Drake Plastics Ltd. Co. and its parent company, Drake Plastic Products Inc., have filed a lawsuit in the US District Court for the Southern District of Texas, challenging the Internal Revenue Service's (IRS's) disallowance of captive insurance premium deductions under Section 831(b). 

The case follows a separate suit in June brought by SRA 831(b) Admin, Drake Insurance Co., and Drake Plastics against the IRS, alleging regulatory overreach. The new complaint details the company's risk management strategy through its captive, Drake Insurance Co., and accuses the IRS of wrongly applying its enforcement program to deny Drake's 2020 captive premium deduction on the grounds that the arrangement "lacks economic substance."

"The IRS's Large Business and International Captive Enforcement Team's actions disregard both the individual facts of the case based on extensive and detailed documentation prepared and presented by Drake and the legislative intent behind the 831(b)-provision which was enacted by and later reaffirmed by Congress," Steven Quance, president of Drake Plastics, said. 

Section 831(b) allows qualifying companies to use captive insurance for specialized risks that may not be covered by traditional insurers. The election enables small insurance companies with annual written premiums below a statutory threshold to be taxed only on investment income rather than underwriting income. This design lowers the barrier for closely held businesses to form and operate their own insurance companies as a means of managing hard-to-insure exposures. 

Mr. Quance said he formed Drake Insurance Co. to close coverage gaps and provide stronger protection for employees, customers, and suppliers. 

"This lawsuit is not just about correcting an unfair assessment against our company—it's about defending the rights of honest businesses to use lawful risk management strategies without fear of arbitrary IRS action," Mr. Quance said. 

The company said the lawsuit comes after extensive audits of nine Drake-related entities and personal audits of the Quance family, all of which concluded without findings of irregularity. Despite these outcomes, the IRS pursued disallowance of Drake's captive insurance premiums, a decision the company claims was predetermined. 

"The IRS's current enforcement approach threatens to undermine a valuable tool for many small and mid-sized companies who rely on 831(b) captives to manage unique risks that traditional insurers won't cover," Mr. Quance said. "If the government's actions go unchecked, it will force legitimate businesses out of this option, raising costs and limiting innovation in business and risk management nationwide." 

Drake Plastics, founded in 1996 and headquartered in Cypress, Texas, manufactures machinable stock shapes, molded parts, and precision components from ultra-high-performance polymers. The company supplies industries including aerospace, medical, energy, defense, and semiconductors, and is certified to AS9100D and ISO 9001:2015 standards. Its captive insurance company, Drake Insurance Co., provides coverage for Drake Plastics and more than 30 affiliated entities.