SRA 831(b) Admin and Drake file lawsuit against IRS

SRA 831(b) Admin, Drake Insurance Company, and Drake Plastics have filed a lawsuit against the US Internal Revenue Service (IRS), challenging recent regulations targeting 831(b) captive insurance arrangements.

The case contests the IRS’s final rule issued on 10 January 2025, which classifies most 831(b) structures as “listed transactions” or “transactions of interest”.

The plaintiffs argue that the classifications exceed the IRS’s authority and impose broad reporting requirements on businesses that follow existing rules.

They claim the rule treats all 831(b) captives with suspicion, without considering the nature or compliance record of each arrangement.

The lawsuit follows what the companies describe as years of audits, delays, and limited guidance from the IRS.

In one instance, the IRS launched a promoter audit under IRC § 6700 in 2022, requesting extensive documentation covering SRA’s entire operations. SRA says it spent over US$200,000 and submitted more than 2,500 digital boxes of material before the audit was dropped without explanation in July 2024.

A second example involves a private letter ruling request submitted in 2019, which sought clarity on a client transaction. Despite submitting multiple updates over five years, the IRS declined to issue a ruling, citing ongoing internal work on risk distribution guidance that has yet to be published.

The third case concerns compliance with IRS Notice 2016-66, which led SRA to file thousands of manual Form 8886 disclosures from 2017 onwards.

SRA reports that none of these filings triggered an audit or received any feedback from the IRS.

The plaintiffs argue that the new rule continues this pattern and undermines the use of 831(b) captives for risk management purposes. They are asking the court to overturn the final rule and stop the IRS from enforcing the reporting changes.

They also claim the rulemaking process breached the Administrative Procedure Act and lacks a clear legal basis.

“This lawsuit isn’t just about our company — it’s about standing up for the thousands of business owners who deserve fairness, transparency, and the ability to manage risk without fear of regulatory overreach,” says Dustin Carlson, president of SRA 831(b) Admin.

Steven Quance, president of Drake Plastics, adds: “As a small manufacturing business, our focus is on building products and contributing to the economy.

“What we don’t need is regulation that penalises risk management and makes it harder to protect our employees, customers, and suppliers.”