IRS Win in Micro-Captive Insurance Case Not End of Legal Road

Although the IRS scored a court win allowing it to require reporting by micro-captive insurance arrangements it deems potentially tax abusive, it’s not the end of the story for the final captive regulations.

In fact, at least one other court has hinted at a willingness to strike down the regulations. In the meantime, captives need to comply with their reporting requirements under the regulations.

In CIC Services v. IRS, the US District Court for the Eastern District of Tennessee upheld the regulations mirroring Notice 2016-66, four years after it vacated that same notice as a violation of the Administrative Procedure Act in another case.

This time, the court didn’t buy CIC Services’ argument that the regulations were beyond the IRS’s authority and were arbitrary and capricious. It agreed that that the final regulations on micro-captives went beyond the scope of Section 831(b), which governs the tax treatment of micro-captives.

But because the regulations alone didn’t threaten tax benefits available under Section 831(b), it held the IRS didn’t exceed its statutory authority—no significant harm, no foul. And according to the court, the IRS sufficiently justified its need for the regulations.

Additional Challenges Appear

In general, business owners can form captive insurance companies to guard against risks such as casualty or property losses, so as to not have to purchase expensive coverage in the commercial market.

The March 5 ruling from the Tennessee district court isn’t the end for the final captive regulations. Challenges can and will appear in other courts. For example, in the Northern District of Texas, Ryan LLC is similarly arguing that the regulations exceed the IRS’s statutory authority and are arbitrary and capricious.

The Texas court may agree. While it granted the government’s motion for summary judgment that Ryan failed to show that the regulations exceed IRS’s statutory authority, it held that Ryan sufficiently pleaded that the IRS only summarily addressed the basis for scrutiny of micro-captives and “did not articulate a ‘satisfactory explanation for its actions.’”

Because the court was simply ruling on the government’s motion for summary judgment, the case will proceed on the issue of whether the final regs are in fact arbitrary and capricious. The case keeps open the possibility that the final regulations may not survive judicial scrutiny.

Ultimately, it will depend on how the court rules and whether we have a judicial split at the district court level or two district court wins for the IRS. With so much uncertainty about the extent of Chevron deference’s demise and the resulting factual analysis of courts, we could see conflicting rulings.

Certain courts may not be persuaded that the IRS’s reliance on recent case law is sufficient for the regulations to not be arbitrary and capricious, or that the IRS exceeded its statutory authority in promulgating regulations on anything beyond the diversification requirements of Section 831(b). These questions will continue, along with others—for example, are the regulations the best meaning of Section 6707A and Section 831(b)?

Short-Term Actions

In light of these questions, captives, captive managers, and tax practitioners need to consider their reporting obligations under the regulations.

The recent CIC Services decision bolsters the current validity of the regulations and thus reporting requirements for captives. Even if the court in Ryan finds that the regulations are invalid, only captives in the Northern District of Texas would be on firm grounds to argue that they don’t have reporting requirements.

Affirmative Tax Court or appellate court guidance will be needed before most captives can reasonably argue that the regulations are invalid. Such guidance won’t come for some time—if it comes at all.

The complexity of the regulations should prompt captives to consider whether they truly are covered by the regulations or if alternatively they have no filing obligations. One important question is how far does the “consumer coverage arrangement” extend, and when would a common Section 831(b) fall under this exception?

While waiting on regulation challenge case law to unfold, captives should focus on the nuanced provisions of the regulations.

The case is CIC Servs., LLC v. IRS, E.D. Tenn., No. 3:25-cv-146, opinion 3/5/26.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Meeren Amin is a partner with Fox Rothschild, focusing on assisting businesses and individuals in finding solutions to complex tax controversies.

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