IRS scrutiny of tax shelter spurs doctor audits

At least 220 physicians and dentists who participated in tax shelters through a San Diego financial services firm catering to doctors are being audited by the Internal Revenue Service, and the agency has gone to court to get the names of nearly 2,000 more.

The IRS is scrutinizing some of the products and services offered through a family of companies run by Xelan Inc. A spokeswoman for the IRS would not confirm or deny an investigation. However, lawyers for Xelan and physicians under audit said the IRS is looking into whether the firm promoted abusive tax shelters.

Physicians "haven't been told they did anything wrong or have to forfeit those [tax] deductions," said Michael C. Durney, a Washington, D.C.-based tax attorney who is representing the physicians and dentists already under audit. "There has been no suggestion anywhere that any of these doctors are under any suspicion in regard to these Xelan programs."

Still, the process is no picnic for Xelan-affiliated investors like Daniel Orr, MD, DDS, a Las Vegas oral surgeon and attorney.

"Nobody likes to get audited, but on the other hand that's what the IRS does," said Dr. Orr, whose audit began last year. "However, I thought it was interesting they chose to audit 200 or so doctors at the same time when they could have just done a few test cases."

There has been no formal criminal filing or legal action to suggest that Xelan broke any laws, nor is there an indication that physicians with similar investments through other companies could face trouble from the IRS.

John M. Colvin, a Seattle-based attorney for Xelan, said the IRS has focused its investigation on donations to a charitable arm of the company called Xelan Foundation Inc., a now-defunct welfare benefit plan, and participation in a supplemental disability insurance program.

On June 30, Xelan and three subsidiaries that offer pension services, financial planning and insurance services filed for Chapter 11 bankruptcy. In court filings, L. Donald Guess, DMD, who founded Xelan in 1971, said the company has suffered financially from defending IRS audits and the related lawsuits. He also said a legal settlement over a former investment deal that went sour had created a financial burden.

Martin Eliopulos, a San Diego-based bankruptcy attorney for Xelan said a newly formed company called Greenbook Financial Corp. has made an offer to buy most of the assets of the bankrupt Xelan entities for $800,000. The company has taken over operations of the bankrupt entities in the meantime.

He said the IRS and others filed objections to the proposed sale, expressing concern about whether the terms of the deal were a good value. A hearing on the proposed sale was slated to begin on Sept. 22, but its outcome was unavailable at AMNews press time.

Also, Colvin said he has seen a subpoena from a grand jury in San Diego that suggests there is a criminal investigation of the company under way. The U.S. Dept. of Justice has denied in legal filings that it is investigating the company. A spokeswoman for the U.S. Attorney's Office in San Diego declined to comment.

Dr. Guess did not return phone messages seeking comment. A woman in his office said no one else from the company could speak to the media.

Seeking more physicians

Meanwhile, Colvin is representing Xelan in its fight to prevent the IRS from getting the names of roughly 2,000 more physicians and dentists who used the company's services and products. It is possible that if the IRS succeeds, these doctors could become targets of tax audits as well.

Colvin said that beginning in April 2003, the IRS embarked on a campaign to get the names of Xelan doctors from third parties that have been involved in the investments. It issued six sets of summonses, which have been fought with six lawsuits.

Two of the lawsuits, filed in Philadelphia, lost at the district court level and are now on appeal in the 3rd U.S. Circuit Court of Appeals, he said. The others have not been decided.

Colvin said the IRS got an initial list of about 200 physicians and dentists who had participated in Xelan programs while it was auditing the charitable arm, Xelan Foundation. In court filings, Xelan accused the IRS of stealing those names, and the IRS said it had launched an internal investigation into the matter.

"I think the IRS had looked at [the company] and seen a couple Xelan programs and said, 'You know, we've got someone who may be selling very aggressive tax programs and we want to catch everybody who is involved,' " Colvin said.

"What's ironic is that the IRS still insists that they have made no determination of the merits of the programs and they just need information," Colvin said.

Durney, the physicians' attorney, said the IRS should first determine whether the Xelan programs ran afoul of the law before setting its sights on the participants in those programs.

Despite its problems, Xelan, which is a family of companies as well as a membership organization called the Economic Assn. of Health Professionals, still has Dr. Orr's support.

"I'm not upset with Xelan at all. I've done a fair amount of due diligence on all the things that I've put money into and I think it's been within the law," said Dr. Orr.

He found out that he was getting audited about a year ago for his contributions to the Xelan Foundation and his use of an equity trust that Xelan had developed for insurance products.

Dr. Orr said he had been putting "six figures" into the foundation for several years as a charitable donation. His contributions went toward the Boy Scouts, universities and other organizations that he said were recognized as charitable entities by the IRS.

He also participated in an equity trust for supplemental insurance that was offered by a Xelan company. He said he could not figure out why the IRS would examine this.