On March 5, 2026, the U.S. District Court for the Eastern District of Tennessee issued a memorandum opinion in CIC Services, LLC v. Internal Revenue Service, upholding the IRS Final Regulations requiring certain disclosures by Section 831(b) captives.
The ruling maintains a high‑stakes disclosure regime that can trigger significant penalties and expanded IRS scrutiny if qualifying micro‑captive arrangements are not properly identified, documented and reported.
2025 IRS Final Regulations on Micro-captive Insurance
The IRS issued Notice 2016‑66, identifying certain micro‑captive arrangements as “transactions of interest,” with potential penalties for non-disclosure. In 2022, the court held the Notice invalid under the Administrative Procedures Act (APA) for failure to follow required procedures, and as a result, the Notice was vacated.
The IRS subsequently conducted notice-and-comment rulemaking and later issued Final Regulations in January 2025 to objectively identify certain “listed transactions” or “transactions of interest.” The Regulations impose other disclosure obligations, most notably:
- “Listed Transactions” and “Transactions of Interest”: Participants generally must disclose via Form 8886
- 20% Relationship Threshold: Ownership linkage between insureds and the captive
- Loss Ratio Factor: Final rules use lower loss thresholds, which can trigger classification
- Financing Factor: Premium funds “cycled back” to insureds via loans, guarantees, investments or similar non‑taxable mechanisms
CIC filed suit a second time in April 2025, seeking to set aside the Final Regulations, alleging the regulations imposed burdensome recordkeeping and reporting obligations and created associated financial and reputational risks. The court granted summary judgment to the Government, finding the IRS cured the defects identified in 2022 and supported the Final Rule with an adequate administrative record.
As a result, the reporting and material advisor disclosure regime created by the Final Regulations for § 831(b) micro-captive transactions remains in effect and enforceable.
How the Final Regulations Impact Insurance Entities
As this micro‑captive insurance news continues to unfold, insurance entities should expect heightened scrutiny tied to disclosure, documentation and program design.
Increased “Compliance Hygiene” Demands for Captives and Managers
Reporting triggers can bring faster IRS visibility. Captives, captive managers, fronting carriers and advisors should anticipate heightened demand for documented underwriting discipline, credible actuarial support and clear evidence that the program is operated as insurance in the commonly accepted sense.
Greater Disclosure-driven Audit Velocity and Penalty Risk
Failures to identify “listed transactions” and “transactions of interest” can create penalty exposure and extend scrutiny, especially considering factors like low loss ratios or related‑party financing.
More Pressure on Program Design
The rule’s objective factors, especially loss ratio and financing features, will influence program structuring, surplus management, and engagement in related‑party investments.
Let Us Guide You Forward
If you operate, manage, advise or insure using a micro‑captive structure, proactive action is essential. Cherry Bekaert’s Insurance practice stays ahead of the latest regulatory updates to stay up to date on the latest industry intricacies and provide the most relevant insights to clients.
Reach out to your advisor today to learn more about the impact of the micro-captive ruling and how it may impact your insurance entity.
