Ryan, LLC v. Internal Revenue Service[1] is the latest example of success in overcoming procedural hurdles to challenge the validity of a US Department of the Treasury (Treasury) regulation. In a recent opinion, the US District Court for the Northern District of Texas held that:
- Ryan has standing to challenge the validity of the Treasury’s final regulations[2] that require disclosure of certain transactions engaged in by businesses and their “micro-captive insurance companies” (MCICs).
- Ryan sufficiently pleaded its claim that the final regulations under challenge were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” and must be set aside under the Administrative Procedure Act (APA).[3]
- The court’s opinion confirms that nontaxpayer actors may have standing to challenge Treasury regulations. The case is also another example of a plaintiff reaching the merits stage of a challenge to a Treasury regulation in the aftermath of Loper Bright v. Raimondo.[4]
Background
Ryan is an advisor to businesses seeking to establish and maintain MCICs. “Captive” insurance companies are specialized insurance companies that exist to insure the entities that own them. When the owning entities make premium payments to the captive, the premiums do not need to include commissions or other fees associated with traditional insurers, making captives an attractive option especially when coverage is unavailable or costly through traditional insurers. Certain small captive insurance companies, commonly called MCICs, qualify for favorable tax treatment. Under section 831(b), MCICs are not taxed on the first $2.2 million in premiums paid by their owner-insured. The Internal Revenue Service (IRS) has increased its scrutiny of the captive insurance industry because of concerns that these arrangements may be exploited for fraud and abuse.
The Treasury’s new regulations
Section 6707A requires the disclosure of certain “reportable transactions,” defined as transactions that, in the IRS’s determination, have a “potential for tax avoidance or evasion.” A “listed transaction” is a type of reportable transaction in which the taxpayer is presumed to have engaged in the transaction for the purpose of tax avoidance or evasion.[5] A “transaction of interest” is a reportable transaction designated by the IRS as having a potential for abuse but is not presumed abusive.[6] These designations create heavy reporting requirements by taxpayers and their advisors (e.g., Ryan).
Under the Treasury’s new regulations, a micro-captive insurance transaction is defined based on a loss ratio factor and a financing factor. The loss ratio factor is the ratio of the captive insurance company’s cumulative insured losses to the cumulative premiums earned over a specified period, typically the most recent 10 taxable years (or all years if less than 10). The financing factor refers to whether the captive insurance company participated in certain related-party financing arrangements within the most recent five taxable years, such as making loans or other transfers of funds to insureds, owners, or related parties. A transaction is classified as a “listed transaction” if the MCIC’s loss ratio is below 30% for the previous 10 taxable years and it provided related-party financing during the previous five taxable years. A transaction is classified as a “transaction of interest” if the MCIC’s loss ratio is below 60% for the previous 10 taxable years or it provided related-party financing during the previous five taxable years.
A review of the Ryan, LLC v. IRS timeline
Ryan filed its complaint in January 2025, seeking to have the final regulations set aside on the grounds that they are substantively and procedurally invalid. On April 28, 2025, the government filed a motion to dismiss the complaint, contending that Ryan lacked standing to challenge the regulations’ validity and had otherwise failed to state a claim upon which relief could be granted.
On November 5, 2025, the district court denied in part the government’s motion to dismiss and issued an opinion. Therein, the court ruled that Ryan did have standing to challenge the regulations. The court rejected the government’s contention that Ryan lacked the “zone of interests” required to state a claim under the APA, in part because it found that the final regulations would discourage potential clients from engaging Ryan, thus hampering its profitability.
Following its ruling on standing, the court rejected the government’s contention that Ryan had failed to state a claim under section 706 of the APA. The crux of Ryan’s allegation was that the final regulations are arbitrary and capricious because the Treasury issued the rules without justifying to the interested public how the relevant facts and data supported its view that MCICs pose a heightened risk of tax avoidance or evasion. In Ryan’s view, the Treasury also neglected to explain why the criteria used for making its determinations that particular transactions should be “listed transactions” or “transactions of interest” (i.e., loss ratios and related-party financing) are effective in distinguishing abusive transactions from legitimate ones. Ryan will now have the opportunity to litigate its contention on the merits in the next phase of the litigation.
Practice point: In 2024, the Supreme Court of the United States overruled the doctrine of regulatory deference set forth in Chevron. Ryan is now the latest case since Loper Bright in which a federal court has permitted a regulatory challenge to proceed on its merits. The Northern District of Texas, like several other courts before it, has recognized the responsibility federal courts have under Loper Bright to exercise their independent judgment when deciding statutory meaning. Ryan also underscores how taxpayers and their allies who are negatively affected by a regulation should carefully consider whether the Treasury engaged in due reasoning and consideration, as such regulations may be susceptible to invalidation on the ground that they were issued without adherence to the procedural safeguards provided under the APA.
Suzanne Golshanara, a law clerk in the Washington, DC, office, also contributed to this post.
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[1] No. 3:25-CV-0078-B, 2025 BL 396822 (N.D. Tex. Nov. 5, 2025).
[2] Treas. Reg. §§ 1.6011-10 and -11.
[3] 5 U.S.C. § 706(2)(A).
[4] 603 U.S. 369 (2024).
[5] See Treas. Reg. §§ 1.6011-4(b)(2).
[6] See Treas. Reg. §§ 1.6011-4(b)(6).
