IRS, physician investment firm reach settlement

An insurance company that catered to physicians has agreed to shut down and return $500 million to its customers under an agreement with the Internal Revenue Service.

Doctors Benefit Insurance Co. Ltd. also agreed to pay $2.3 million to the IRS to resolve issues stemming from its sale of supplemental policies, the federal agency said. Under the terms of the agreement, the company did not admit any wrongdoing.

The settlement helps resolve some of the claims stemming from an IRS investigation of Doctors Benefit and several other entities all related to a San Diego-based financial services firm for physicians called Xelan Inc.

In November 2004, the federal government filed a fraud lawsuit alleging that Xelan entities advised physicians to engage in various fraudulent tax-avoidance schemes using dubious supplemental insurance products and improper charitable deductions. The lawsuit said as many as 4,000 physicians may have been affected. Xelan denied the charges.

Steve Gaines, a Seattle attorney who represented Doctors Benefit after the lawsuit was filed, did not return a phone message seeking comment.

A Washington, D.C.-based lawyer representing about 600 physicians affected by the case, Michael C. Durney, said his clients were expecting to get back all of the money they invested.

"Under the circumstances, this was the best resolution my clients could expect. ...With the IRS examining everybody, it was felt that the insurance company, under those conditions, could not continue," he said.

A detailed explanation of how distributions would be calculated for policyholders is posted on the Doctors Benefit Web site (link).

Durney said work was ongoing to resolve other parts of the lawsuit involving a charitable entity called the Xelan Foundation and a welfare benefit trust.

The Xelan family of companies, and a membership organization called the Economic Assn. of Health Professionals, was founded by L. Donald Guess, DMD, in 1971. In June 2004, Xelan Inc. and three other entities filed for Chapter 11 bankruptcy, saying the company had suffered financially from defending IRS audits and related lawsuits.

A Seattle-based lawyer for Dr. Guess, John M. Colvin, said Xelan Inc. was not actively engaging in business operations in the wake of the bankruptcy. The Xelan membership association was recently planning a symposium, and an employee said in a phone message that the association was still actively conducting its business.