Business

Ruling in tax shelter lawsuit could benefit doctors

The court order returns all seized assets of Xelan Inc. and related companies.

By Katherine Vogt — Posted Dec. 27, 2004

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A federal judge has lifted a freeze on the assets of a San Diego-based financial services firm and some related entities that have been accused of peddling fraudulent tax shelters, spelling good news for some of the physicians who participate in their programs.

More than $500 million in bank and investment accounts belonging to Xelan Inc. and its family of companies had been frozen since Nov. 4, when the federal government filed a fraud lawsuit and obtained a temporary restraining order to "preserve" the assets for tax payments or fraud claims.

But at a hearing on Dec. 3 in federal court in San Diego, U.S. District Judge Larry A. Burns denied the government's request for a preliminary injunction to keep the assets frozen through the duration of the lawsuit. Instead, he ordered that all the seized assets should be returned.

Michael C. Durney, a Washington, D.C.-based attorney representing several hundred physicians who have participated in Xelan programs, said the ruling was welcomed by his clients, though many are still weary about the allegations against the company as the lawsuit moves forward.

"It's good news in that the freeze had prevented the Xelan entities from honoring their obligations and people were suffering from that," said Durney.

Some of his clients were on disability and were unable to get their monthly disability checks from a Xelan-related insurance program in November, he said. Others were unable to make the premium payments necessary to keep their supplemental insurance active, and still others were unable to get annuity payments from a Xelan-related foundation, he said.

Steve Gaines, a Seattle-based attorney representing Doctors Benefit Insurance Co., one of the Xelan-related entities in the lawsuit, said the company would work to regain its financial footing quickly and hoped to repay any disability payments that were skipped retroactively.

He said Doctors Benefit stands by its products.

Xelan, a family of companies as well as a membership organization called the Economic Assn. of Health Professionals, was founded by L. Donald Guess, DMD, in 1971 and has catered services primarily to doctors.

In its civil lawsuit, the federal government says that Xelan entities have advised physicians to engage in various fraudulent tax avoidance schemes using dubious supplemental insurance products and improper charitable deductions.

The lawsuit says that the fraudulent schemes may have been sold to as many as 4,000 physicians, who may now owe as much as $420 million in taxes, interest and penalties. Xelan denies the charges. And Durney says those figures are overblown.

He said "several hundred" of his clients are under investigation by the Internal Revenue Service for their involvement with Xelan-related programs. He said those investigations are continuing without resolution while the lawsuit and a handful of other related legal actions drag out.

"We would like to settle the case, and if not, we'll fight it as long as it takes," he added. "We think the government is wrong. We think these products are perfectly legitimate and not a tax shelter. These are honest doctors who needed disability insurance and wanted to make charitable donations, and that's the sum total."

In his oral order, Judge Burns emphasized that he was not making a ruling about the merits of the case. However, he raised concerns about whether prosecutors could prove that the Xelan programs had in fact violated tax code since no final conclusions had been made by IRS investigators.

The IRS would not comment on its investigation. However, Eileen O'Connor, assistant attorney general for the tax division of the U.S. Dept. of Justice, issued a statement saying that federal prosecutors were continuing their work on the case.

"Our request for a permanent injunction appointing a receiver and imposing an asset freeze remains pending," she said.

John Colvin, a Seattle-based attorney representing Dr. Guess, Xelan Investment Services, Xelan Annuity Co. and Xelan Administrative Services, said a grand jury in San Diego has been investigating whether any criminal fraud occurred.

Colvin said the grand jury is likely looking into the legality of the disability insurance offered by Doctors Benefit Insurance Co., which is based in Barbados and is owned by Xelan members, as well as some tax deductions taken on donations to the Xelan Foundation, a charitable organization.

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