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Microcaptive ruling gives partial win to 831(b) owner - Business Insurance Skip to content Register for free Search Search Log In Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Risk Management Cyber Risks Pricing Trends Mergers & Acquisitions Technology Sponsored Content WSIA RISKWORLD Workers Comp & Safety Workers Comp Cost Control Pain Management Workplace Safety International EMEA Asia-Pacific Latin America People Events BI Intelligence Top 100 Agents & Brokers Best Places to Work 2025 Lists Directories Insurance Pricing BI Stock Index Magazine Current Issue Past Issues Subscribe Women to Watch ALL INsurance Resources Risk Perspectives Sponsored Content Webinars White Papers Microcaptive ruling gives partial win to 831(b) owner by Gavin Souter Alternative Risk Transfer/Captives FM Global Apr 17, 2026 A federal court has partially blocked an Internal Revenue Service rule requiring disclosures for certain microcaptive insurance arrangements, while allowing other portions to stand. In a mixed ruling, the U.S. District Court for the Southern District of Texas held that the IRS properly designated some microcaptive insurance transactions as reportable “transactions of interest,” but failed to justify classifying them as more severe “listed transactions,” which carry higher disclosure penalties and compliance burdens. The case, Drake Plastics Ltd. Co. et al. v. Internal Revenue Service et al. , challenged a 2025 Treasury Department rule targeting microcaptives, which are small, closely held entities that often elect favorable tax treatment under Section 831(b) of the Internal Revenue Code. The court granted in part the company’s motion for summary judgment and issued a permanent injunction vacating the listed-transaction designation, finding that the IRS failed to show that the covered transactions are predominantly tax-avoidance schemes. However, the court upheld the agency’s authority to require disclosures for “transactions of interest” under a separate provision, concluding that such arrangements have at least the potential to result in tax avoidance or evasion. Drake Plastics Ltd. Co., a Houston-based manufacturer specializing in extruding, injection molding and machining ultra-high-performance polymers, brought the suit along with its affiliated captive insurer and captive management firm, Strategic Risk Alternatives in Eagle, Idaho. The ruling focuses on how the IRS classified microcaptive arrangements. The agency’s rule established two tiers: transactions of interest, which may pose tax risks, and listed transactions, which are presumed abusive and subject to stricter reporting requirements and higher penalties. Drake argued the rule was arbitrary, exceeded statutory authority, and imposed costly compliance burdens that could deter legitimate use of captives. The court said the IRS met the lower threshold for transactions of interest, citing evidence that some microcaptive structures can be used to improperly shift income and reduce taxes. But it found the agency did not demonstrate that most transactions meet the listed-transaction criteria. Microcaptive insurance arrangements allow businesses to deduct premium payments while affiliated insurers elect to exclude certain income from taxation, creating potential tax advantages. The IRS has long argued that they are susceptible to abuse. The decision follows similar challenges in other courts, including rulings in Tennessee and Texas that have produced mixed outcomes on the validity of the IRS rule. The IRS has won multiple lawsuits against 831(b) captive owners dating back to the Avrahami case in 2017. 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