Drake Plastic Products Inc. has taken a stand against new IRS regulations that target certain microcaptive insurance arrangements, claiming these rules unfairly impact legitimate business practices. The company, along with its affiliate Drake Insurance Company and captive management firm Strategic Risk Alternatives LLC, filed a lawsuit in August 2025 to challenge a rule finalized earlier this year. This rule designates specific microcaptives as transactions of interest, subjecting them to heightened scrutiny.
The heart of the dispute lies in Section 831(b) of the tax code, which offers favorable tax treatment for small captive insurers. Under the new IRS guidelines, microcaptives will face additional oversight if the company owning them has at least a 20% stake and either maintains a loss ratio below 60% or has not generated taxable income for five years.
Steven Quance, president of Drake Plastic, established Drake Insurance in North Carolina to fill coverage gaps for his business. Despite undergoing nine IRS audits without any findings of wrongdoing, the IRS disallowed the company’s 2020 captive insurance premium deduction, arguing that the arrangement lacked economic substance.
Quance expressed his determination to fight back against what he sees as IRS overreach. “Drake Insurance is a cornerstone of our risk management strategy,” he stated. “Despite extreme pressure and coercion by the IRS to close our captive, we saw no choice but to fight a tyrannical Goliath for justice.”
The implications of this lawsuit extend beyond Drake Plastic. It highlights the growing conflict between the IRS’s efforts to curb tax avoidance and the legitimate needs of businesses for effective risk management. Captive insurance has gained popularity among small businesses as a way to insure hard-to-cover risks.
The new regulations impose significant burdens on companies, requiring detailed transaction reviews that demand time and resources. Firms could face fines and even criminal liability for non-compliance, along with increased scrutiny from state regulators. As a result, Drake Plastic revoked its captive’s Section 831(b) election in April, which removed its federal tax advantages. The company plans to reinstate this election only if the courts rule against the new IRS regulations.
Quance views this legal battle as a defense of small businesses. He argues that the IRS’s approach could undermine valuable risk management tools for companies facing unique challenges. “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,” he said.
The outcome of this case could have significant repercussions for the captive insurance industry and how the IRS regulates these arrangements in the future.