Drake Plastics challenges IRS crackdown on captive insurance
Drake Plastics and its parent company Drake Plastic Products 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 the use of the Section 831(b) election, a provision that allows companies to self-insure.
This comes following a lawsuit filed in the same court by SRA 831(b) Admin and Drake Insurance and Drake Plastics in June against the IRS due to abusive regulatory overreach.
The complaint outlines the formation of Drake Plastics and its evolution to manage most of its risks through its captive insurance company, Drake Insurance Co.
Drake Plastics claimed that despite clear facts and the owners’ intent, the IRS, following its purported ‘Program’ targeting taxpayers utilising the 831(b) election, disallowed Drake’s 2020 captive insurance premium as a business expense. The IRS’s primary claim is the insurance arrangement “lacks economic substance.” The company said that its suit will prove this is clearly in error when considering claim history.
According to Steven Quance, president of Drake Plastics: “The IRS’s Large Business and International Captive Enforcement Team’s actions disregard both the individual facts of the case based on extensive and detailed documentation prepared and presented by Drake, and the legislative intent behind the 831(b)-provision which was enacted by and later reaffirmed by Congress.”
The 831(b) provision allows qualifying companies to use captive insurance to manage unique, often specialised, or difficult-to-insure risks. Left unmitigated, these risks could be devastating to smaller companies.
"As a business owner,” stated Quance, “I established Drake Insurance Co. to responsibly address critical gaps in our coverage and better protect our employees, customers, and suppliers. We engaged trusted professionals to consider and later form a legally-compliant captive insurance company. 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."
According to Drake Plastics the lawsuit follows exhaustive IRS audits of nine Drake-related entities, as well as personal audits of the Quance family. All audits concluded with no changes and no findings of irregularity. Despite these outcomes, the IRS aggressively pursued Drake’s Captive Insurance disallowance—a conclusion Quance intends to prove the IRS had reached before the first audit question was asked.
Quance added, "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. If the government’s actions go unchecked, it will force legitimate businesses out of this option, raising costs and limiting innovation in business and risk management nationwide.
“We are confident 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. Our ability to contribute to economic growth has been underpinned by our ability to manage our risks within the framework that Congress intended.”
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