Drake Plastic Products and its captive, Drake Plastics, have filed suit in the United States District Court for the Southern District of Texas, challenging “egregiously aggressive and wrongful enforcement actions by the IRS related to Section 831(b)”. In 2020, the IRS, utilising the 831(b) election, disallowed Drake Plastics’s captive insurance premium as a business expense. The primary reason for this conclusion, according to the agency, is that the insurance arrangement “lacks economic substance”. Steven Quance, president of Drake Plastics, says: “The IRS’s Large Business and International captive enforcement team’s actions disregard both the individual facts of the case based on extensive documentation prepared and presented by Drake, and the legislative intent behind the 831(b)-provision which was enacted by and later reaffirmed by Congress.” He claims to have established Drake Insurance to “responsibly address critical gaps in our coverage,” viewing the lawsuit as not just a means to correct a verdict he would consider “unfair”, but as a vessel to defend the rights of “businesses to use lawful risk management strategies without any fear of arbitrary IRS action.” The lawsuit follows IRS audits of nine Drake-related entities, in conjunction with personal audits of the Quance family. All audits concluded with no charges and no findings of irregularity. Despite such outcomes, Drake argues, the agency pursued the firm’s captive insurance disallowance — something the firm says the IRS had intended before the first audit. He also adds: “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.” Quance feels the agency poses a risk to captives, continuing by saying: “If the government’s actions go unchecked, it will force legitimate business out of this option, raising costs and limiting innovation in business and risk management nationwide.” He finishes by assuring: “[We are] confident that the court will recognise that Drake Plastics and Drake Insurance have acted in good faith, legitimately managing real risks while complying with federal and state regulations.”
