Ryan LLC Challenges IRS Micro-Captive Insurance Rule in Federal Court

Ryan LLC, a global tax consulting firm, has filed a lawsuit against the Internal Revenue Service (IRS) in the United States District Court for the Northern District of Texas. The case, Ryan LLC v. IRS, challenges the agency's newly issued rule, titled "Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest," claiming it exceeds statutory authority and violates the Administrative Procedure Act. 

The IRS rule, finalized on January 10, 2025, designates certain micro-captive insurance transactions under 26 USC. §831(b) as "listed transactions" or "transactions of interest," requiring heightened reporting due to their perceived potential for tax abuse. Ryan LLC contends the rule imposes arbitrary loss ratio thresholds—30 percent for listed transactions and 60 percent for transactions of interest—that fail to account for the legitimate business purposes and unique characteristics of micro-captives. 

In its complaint, Ryan asserts that the rule undermines Congress's intent to support the use of micro-captive insurance for managing low-frequency, high-severity risks. The firm argues the thresholds are unsupported by evidence and inconsistent with industry practices, citing the IRS's failure to consider relevant data or alternatives proposed during the rule's public comment period. 

Ryan seeks to have the rule vacated and its enforcement enjoined, stating that it harms businesses relying on micro-captives for risk management while creating undue burdens for tax advisers. The complaint also claims the rule could destabilize micro-captives by impairing their ability to meet state-mandated surplus requirements, ultimately jeopardizing their capacity to pay claims. 

This legal challenge follows similar disputes over IRS guidance on micro-captive transactions, including a 2022 court ruling invalidating an IRS notice for being arbitrary and capricious.