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XELAN X-ITS
October 04, 2005
The IRS death match with Xelan, the bankrupt San Diego insurer, appears to be at an end. Xelan had sold "supplemental disability" policies that the IRS said were really just tax dodges. The insureds -- doctors were the target market -- were told that they could buy deductible disability insurance in whatever amount they desired to reduce their taxes; the "premiums" were to be invested and returned to the doctors at retirement.
An IRS press release reproduced by Tax Analysts (no link yet) (now there is) says that the company will have to distribute $500 million to its "policyholders" as a taxable distribution; Xelan's receiver, Doctors Benefit Insurance Company, will have to withhold federal taxes on the distribution.
The Associated Press account reports that the insureds will not have their initial deductions for the "premiums" disturbed. That makes sense, considering that they are taxable now.
Doctors Benefit will also make a $2.34 million payment to IRS, but admits no wrongdoing.
At one point the IRS attempted to freeze the $500 million, but was rebuffed by a federal judge. Aureus Group, a Des Moines insurance company, was dragged into related litigation.
Link: Complete Tax Update Xelan coverage.
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Comments
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Unfortunately, this doesn't surprise me. Many (most?) doc's have NO clue about business matters, and esp insurance and tax issues.
Problem is, same doc's are too arrogant to admit this, and so they fall for "risky schemes" like this.
The truly sad part is that most of those caught up in Xelan won't admit their own culpability(or gullibility) and will no doubt fall for similar dodges in the future.
Posted by: hgstern | October 4, 2005 10:02 PM
You are probably right. Actually, this is a very favorable settlement for the doctors. They got their deduction, and their only cost seems to be an unscheduled early inclusion of the amounts in income, plus whatever Xelan took out of the deal in fees and commissions. Not a complete win, but a net positive result considering the time value of money - deduction early, income later, no penalty.
Certainly there's nothing here that would strike fear in a doctor considering a future deal.
Posted by: Joe Kristan | October 5, 2005 6:20 PM