In Notice 2008-19, issued as a companion to Rev. Rul. 2008-8, the IRS stated that it intends to treat each cell with policies qualifying as insurance as a separate insurance company for all purposes and elections.

The IRS is once again seeking comments from the industry as to whether this is the best approach. This portion of the proposal, in fact, would not go into effect until more than a year after it is finalized

Last month's actions have both positive and negative implications for cell captive owners, according to Mr. Lavelle.

To have insurance, there must be risk shifting and risk distribution (sufficient sharing of the risks of other insureds). The negative implications here are that the IRS has determined "risk shifting and risk distribution will be done on a cell-by-cell basis."

This means that only those risks within the individual cell may be used to determine the presence of risk distribution, which could impact some tax advantages. Those affected may include off-shore captives with numerous cells, he noted.

While some may be disappointed, the IRS position is no surprise, according to Mr. Lavelle. He pointed out that given its historical position on the issue, the notice is positive, "because the IRS is taking a stand that each individual cell captive will be taxed on its own merits and treated as a separate insurance company."

He said that treating each cell as a separate insurer will make the tax treatment more certain for most insureds that are considering entering into cell arrangements.

The new IRS stand removes existing ambiguity and creates more certainty that a single cell will not be penalized for the performance of other cells, he said, meaning that "cells become a safer bet."

He added, however, that "even when all the rules are finished, it will still likely be more complicated than a single-parent captive. Between now and when all the rules go into effect, there still will be a lot of questions."