Unreported / Non-Citable
Background
The Treasury Department issued a Final Rule in January 2025 requiring disclosure of certain transactions involving micro-captive insurance companies (MCICs) to the IRS as “transactions of interest” or “listed transactions.” The rule establishes criteria based on loss ratios and owner financing to identify potentially abusive MCIC arrangements. Ryan LLC, a tax consulting firm that advises clients on captive insurance structures, challenged the Final Rule under the Administrative Procedure Act on three grounds: that it exceeded Treasury’s statutory authority, that it is contrary to law, and that it is arbitrary and capricious.
Ryan filed suit in January 2025 and filed an amended complaint in January 2025 after the Final Rule’s publication. The Government moved to dismiss, arguing Ryan lacked standing, the Declaratory Judgment Act barred the suit, and the Final Rule was valid on the merits. The court considered all three threshold issues and the merits of the claims.
The Court’s Holding
The court granted in part and denied in part the Government’s motion to dismiss. On the threshold jurisdictional questions, the court found that Ryan has both constitutional and prudential standing to challenge the Final Rule. The court determined that Ryan, as a “material advisor” that has advised clients on reportable micro-captive transactions, is directly regulated by the disclosure requirements and therefore suffers a concrete injury—increased compliance costs and regulatory obligations imposed by the rule itself. The court further found Ryan’s interests fall within the zone of interests protected by the APA.
Regarding the Declaratory Judgment Act, the court held that the DJA’s exception for suits “with respect to Federal taxes” does not bar this action. Following the Supreme Court’s decision in CIC Services LLC v. IRS, the court distinguished between suits challenging the tax itself versus suits targeting upstream reporting mandates. Here, the Final Rule imposes affirmative disclosure obligations separate and apart from any tax liability, and relief from the rule targets the reporting requirement, not tax collection. The court found the suit is not “with respect to federal taxes” within the meaning of the DJA.
On the merits under the APA, the court held that Ryan’s third cause of action—alleging the Final Rule is arbitrary and capricious—survives dismissal and may proceed. However, the court dismissed Ryan’s first two causes of action (excess of authority and contrary to law) with prejudice for failure to state a claim.
Key Takeaways
- A material advisor directly regulated by a disclosure requirement has standing to challenge the rule as imposing a concrete injury sufficient for Article III jurisdiction.
- The Declaratory Judgment Act’s federal tax exception does not bar APA challenges to Treasury regulations imposing reporting requirements, as distinguished from tax liability itself.
- Arbitrary and capricious claims under the APA can proceed against Treasury regulations affecting tax reporting, even when they involve federal tax law.
- The distinction between “upstream” reporting mandates and “downstream” tax liability is critical in determining whether DJA’s federal tax exception applies.
Why It Matters
This decision is significant for tax practitioners and consulting firms that advise on complex tax structures. It establishes that firms directly regulated by IRS disclosure requirements have standing to challenge those requirements in federal court, and that the Declaratory Judgment Act’s bar on federal tax suits does not prevent such challenges. The ruling allows Ryan to proceed with its argument that the Treasury acted arbitrarily in setting specific loss-ratio thresholds (30% for listed transactions, 60% for transactions of interest) without adequate justification.
The decision may have broader implications for challenges to other Treasury regulations, particularly those imposing reporting and disclosure requirements. By distinguishing the reporting mandate from the tax liability itself, the court preserved judicial review of regulatory provisions that impose compliance burdens on advisors and taxpayers, even in the context of federal taxation. The case will proceed to the merits on whether the micro-captive disclosure rule’s criteria are rationally justified.