SRA 831(b) Admin and Affiliates Sue IRS over Final Micro-Captive Regulations

SRA 831(b) Admin, along with Drake Insurance Co. and Drake Plastics Ltd. Co., has filed a federal lawsuit against the Internal Revenue Service (IRS), challenging the agency's January 2025 final regulations concerning micro-captive insurance arrangements under Section 831(b) of the Internal Revenue Code.

Filed in the US District Court for the District of Idaho, the lawsuit seeks to vacate the IRS's final rule and block enforcement of new requirements that classify many 831(b) arrangements as "transactions of interest" or "listed transactions." The plaintiffs allege the regulations exceed the IRS's statutory authority, violate the Administrative Procedure Act, and improperly burden small businesses using captives for legitimate risk management.

Dustin Carlson, president of SRA 831(b) Admin, said, "When a government agency exercises its power without accountability or clarity, businesses have not only the right but the responsibility to push back."

Steven Quance, president of Drake Plastics, said, "As a small manufacturing business, our focus is on building high-quality products, creating good jobs, and contributing to the real economy. What we don't need is overreaching regulation that penalizes legitimate risk management."

The complaint cites multiple examples of what the plaintiffs describe as regulatory overreach by the IRS over the past decade. These include a 2022 promoter audit under IRC § 6700 that was closed in 2024 without explanation after SRA submitted over 2,500 file boxes worth of digital records and incurred more than $200,000 in legal costs. Another cited instance is a 2019 private letter ruling request that remained unresolved for 5 years before the IRS declined to issue a ruling, citing "pending guidance" that has yet to materialize.

SRA also reports that, since 2017, it has manually submitted thousands of Form 8886 disclosures on behalf of its clients in response to IRS Notice 2016–66. That notice designated certain micro-captive insurance arrangements as "transactions of interest," triggering enhanced disclosure requirements under federal tax shelter rules. Unlike many other IRS forms, Form 8886 cannot be filed electronically and must be submitted separately to both the IRS and its Office of Tax Shelter Analysis. SRA says it has done so annually for more than 1,000 insureds and 2,000 participants but has received no formal feedback or audit activity in response.

The final rule, published in the Federal Register on January 10, 2025, codifies earlier guidance from IRS Notices 2016–66 and 2017–10. It formally classifies many 831(b) transactions as either "listed transactions" or "transactions of interest." The rule extends the scope of reporting obligations and imposes more structured compliance requirements. While the IRS had long enforced similar standards through subregulatory guidance, the final rule gives those requirements formal regulatory status under the Administrative Procedure Act, making them more enforceable and broadly applicable.

Prior to the rule's adoption, industry groups voiced concern during the public comment period. In a formal comment letter submitted in June 2023, the Captive Insurance Companies Association (CICA) wrote that the proposed regulations "fail to differentiate between abusive arrangements and legitimate risk financing structures" and warned that they would "deter the use of captives for legitimate business purposes." The full letter is available at CICA Comment Letter (PDF).

The Self-Insurance Institute of America (SIIA) also submitted a formal comment to the IRS in 2023. In a March 2025 article, the association explained that its letter described the proposed rule as an "overreach" and argued the requirements would "significantly restrict access to captive insurance arrangements for small and medium-sized businesses." The full comment letter has not been made public, but SIIA Commentary by Anthony Murrello (PDF) can be found at the link.

The lawsuit argues that the new regulations impose a chilling effect on small businesses that rely on 831(b) captives to manage risk, particularly amid instability in the commercial insurance market. Mr. Carlson said the rules "don't differentiate between honest companies protecting themselves from real-world risks and bad actors looking for tax avoidance schemes."