IRS, Insurance Firm Reach Agreement

An insurance firm that sold disability insurance to doctors and drew scrutiny from federal tax auditors has agreed to cease operation and return $500 million to participants, the Internal Revenue Service announced Monday.

Doctors Benefit Insurance Co. of Barbados agreed to pay $2.34 million to the IRS but did not admit wrongdoing, according to a statement by the IRS.

Doctors Benefit sold supplemental disability insurance policies to 2,800 U.S. doctors through Xelan Inc., a now-bankrupt San Diego firm.

Xelan and Doctors Benefit told doctors who purchased the policies that their premiums were fully tax-deductible, but the IRS disagreed and accused Doctors Benefit of operating a Ponzi scheme in a civil lawsuit in San Diego in October 2004.

The case made national headlines, but the IRS withdrew the lawsuit a month later when a federal judge in San Diego denied the government’s request for a preliminary injunction freezing $600 million controlled by Doctors Benefit.

Under the agreement announced Monday, Doctors Benefit’s supplemental insurance policies will be treated as tax-deductible, said Michael C. Durney, who represented about 600 physicians who purchased the policies. It also brings an end to years of scrutiny by the IRS.

“For the purposes of my clients, it’s the best they could hope for,” Durney said.

The IRS said federal tax rules on disclosure prohibited further comment.

Doctors Benefit was created in the 1990s, when major insurers cut back on disability insurance for doctors after suffering big financial losses, according to court documents. Xelan and its associated companies filed for bankruptcy protection in federal court in San Diego in June 2004.