Xelan: A Bitter Pill for Doctors

By: Bill E. Branscum
Copyright 2004 and 2011 Update

The IRS is in the process of shutting down Xelan, yet another firm specializing in tax strategies that the government deems to be abusive. In this case, the victims of this bogus program are primarily doctors and dentists - not that they can expect to be treated like victims.

According to the Complaint filed by the government on October 29, 2004, Xelan, whose full name is, "Xelan, the Economic Association of Healthcare Professionals," was founded by Dr. L. Donald Guess, who is, and has been, acting in concert with Monte T. Mellon of California, Leslie S. Buck of Maryland, David Jacquot now living in Idaho, G. Thomas Roberts of Pennsylvania, along with Chris G. Evans and Nigel Bailey of Barbados in perpetrating a massive fraud upon the medical community.

Guess and his cohorts are alleged to have marketed their concept of tax protection to 70,000 physicians, and actually enrolled approximately 4,000 of them, promising these trusting medical professionals tax savings through investment into specially managed funds. Guess/Xelan reportedly assured them that they were promoting government approved tax deferments and they would reap legitimate tax savings benefits consequent to the special administration and use of these funds. They further promised that, in addition to the tax savings and deferments, the invested funds would be recovered with interest.

By all appearances, the Xelots who bought into this buffoonery will be lucky to escape with their skins.

There was nothing unique about the Guess/Xelan program - it sounds remarkably like the Aegis/Heritage trust system's "have your cake and eat it too" concept (that put a lot of otherwise innocent professional people in jail). Guess is alleged to have persuaded medical professionals to believe that they could "donate" money to their own special charitable foundation, write it off their taxes, and dictate how the money was spent - like paying for their children's college expenses.

Guess, by and thru Xelan, also propounded a "disability insurance" scheme where medical professionals bought special insurance, that the IRS alleges was not actually insurance at all - especially since the scheme was to write off the premiums as a business expense and then recover them later on. Explain it to your Clients like this - it is only "insurance" if the program involves shared risk and distribution.

When you entrust vast sums of money to a third party, with the understanding that it will be used to keep you afloat if you become disabled, or returned to you with interest if you do not, that's not disability insurance - the rest of us call it a savings account. When you get confused and try to write off your savings account deposits, the IRS calls it conspiracy to defraud the revenue of the United States of America.

In addition to the above referenced tomfoolery, the IRS alleges that Guess/Xelan failed to comply with the Internal Revenue Code provisions that relate to the registration, disclosure and reporting requirements applicable to "tax shelters" (IRC §§ 6677, 6701, 6707 & 6708). It looks as if they expected this to remain "their little secret," but how smart do you need to be to know better than that?

Exposure is inevitable, all it takes is one random audit. When Dr. Smith shows up at the IRS office to have a little chat with IRS Friendly Field Agent Jones about his tax filings, he is going to explain the Guru Guess tax strategy and turn over all the documents . . . when the laughter subsides, Friendly Field Agent Jones is going to start the IRS in motion to find out how many other people are doing the same thing - and Good 'Ole Dr. Guess is ultimately going to turn over his Client list.

It's a 500 million dollar tragedy. Medical practitioners have enough trouble in this litigious society without being preyed upon by tax scam artists. If you have a Client involved in this financial fiasco, do not let them believe that Xelan has things under control, and do not let them believe that everything is going to be OK - they don't and it won't.

On November 4, 2004, the government persuaded US District Court Judge Thomas Whelan that the interests of justice demanded immediate intervention, and obtained a Temporary Restraining Order that froze over $500 million in assets, and persuaded the Court to appoint a Temporary Receiver to preserve assets for the payment of taxes or other claims by defrauded parties. The Court also entered a Ne Exeat Republica (don't leave town) order directing Guess, Mellon, Buck, Jacquot and Roberts to surrender their passports to the United States Marshal, and not to leave the United States.

It is remarkable that government was successful in persuading Judge Whelan to endorse such drastic (some might say draconian) measures, especially in light of the fact that Judge Whelan is no "rubber stamp" governmental lackey.

Editorial note: Last year, Interior Secretary Gale Norton reduced Imperial County's allocation from the Colorado River, and Imperial County officials sought an injunction offering evidence that the Bush administration had conspired with a huge Los Angeles-based water wholesaler to take away the Imperial Valley's water. US District Court Judge Thomas J. Whelan granted a Preliminary Injunction preventing the Bush administration from taking water away from the California farmers.

At this point, I think it appropriate to interject some explanatory information about the process, to better enable those who may not be familiar with ex parte petitions, and temporary injunctive orders, to understand this situation and follow the subsequent developments.

Generally speaking, our system of justice provides for a fair hearing of all sides of an issue before decisions are made, and actions are taken, but there are times, and fact situations, that demand extreme measures. For example, it would be useless to file a motion to freeze an incorrigible con artist's bank account if you knew for certain that rather than litigate the issue, he would empty that account as soon as the motion was filed announcing the movant's intent.

Rule 65, of the Federal Rules of Civil Procedure, defines the procedures for obtaining injunctive relief, whether in the form of a temporary restraining order, preliminary injunction or permanent injunction. Sometimes, under very narrowly defined circumstances, a party may be allowed to privately petition the Court to take an action without noticing the other party or giving them an opportunity to respond. This is referred to as an ex parte proceeding, and due to its inherent potential to be unjust, it is rarely permissible.

If you read the ex parte Complaint filed by the government in this case, I believe that you will agree that Judge Whelan did the right thing in response to the government's representation that Xelan was actively promoting various schemes that served to defraud doctors, and the government, of hundreds of millions of dollars that were at risk to disappear. Extreme though it was, taking the Complaint at face value, it was the only thing he could do.

In an effort to put this thing in perspective, imagine, for the moment, that the government accused you of violating the law and secretly moved the Court to allow them to seize control of your office, your assets, and your physical person, claiming that the emergency nature of the situation justified the action without giving you any opportunity to respond. Further suppose that absent any showing of prior criminal activity in your past, before any jury has rendered judgment of wrong doing on your part, and while you have never been convicted, or even indicted, for any crime whatsoever, the Court authorized the government to swoop down upon you, seize all your records and dispossess you of your property, assigning someone else to handle your finances without notice, warning, or an opportunity to prepare.

In order that you might have the benefit of both sides, consider the statements proffered by Washington Attorney Michael C. Durney in his memo to Xelan Clients following the issuance and execution of the temporary order. In this document, available in its entirety via the links below, Attorney Durney said:

On November 4, 2004, the government initiated an unprecedented receivership proceeding against DBIC, the xélan Foundation, the xélan companies in bankruptcy reorganization proceedings, and various other parties. All of the records of the xélan entities in San Diego were seized. A temporary restraining order appointing a receiver was obtained from the court, based solely upon allegations by the government. The affected parties were not given notice, or an opportunity to respond.

Attorney Michael C. Durney, former Deputy Asst. Attorney General, Department of Justice Tax Division, went on to say:

We firmly believe that there is no legitimate basis for the receivership. In my 36 years of practice (including six years in the Tax Division of the Justice Department), I have never seen the government request the extraordinary relief of having assets sequestered months or years before a determination of whether any taxes are even due.

Again, by way of explanation, once the temporary order is issued and executed, the ambush and surprise aspect of these cases is concluded - the one-sided secrecy evaporates and the other side will be heard. Xelan has been heard, and Judge Whelan's Temporary Restraining Order has since been set aside.

On December 4, 2004, US District Court Judge Larry Burns released the government's hold on Xelan's assets saying, "I'm just concerned that this sweep is just far too broad at this point."

I can imagine the blow that his decision must have been for the government. Considering that they had successfully persuaded Judge Whelan to see things their way, and in light of the fact that Judge Burns is a former California Prosecutor recently appointed to the federal bench, the government must have been shocked indeed.

Perhaps it will serve as a wake up call.

Considering the outrageous incursions on civil liberties that are being promoted by our government in the interest of "Homeland Security" these days, I am gratified to see that the federal bench is willing to exercise objective oversight. "What," you may ask - "Why bring up the Department of Homeland Security? Why use a tax case as a forum to express concerns about the way the federal government's anti-terrorism agency is operating?"

Why indeed? In referring to the testimony of IRS witness, Postal Inspector Timothy D. France, the Court quotes France as saying:

"He describes the investigation as jointly conducted by the Department of Homeland Security, Bureau of Immigration and Customs Enforcement, the California Department of Insurance, and the IRS Criminal Investigation Division." [See Order Denying Preliminary Injunction linked below, P5, L 28 - P6, L 2]

In setting aside the temporary injunction, the Honorable Larry Alan Burns, United States District Court Judge, Southern District of California, handed the government their head on a plate - after first baring their buns, and paddling them unmercifully. The Order is available in its entirety via the links below.

In reviewing this Order, you will find that Judge Burns was as clear as he was unequivocal.

    • The purpose of a Preliminary Injunction is to preserve the status quo . . . prior to judgment. [P4, L8]

    • A party seeking Federal Rule of Civil Procedure ("Rule") 65 injunctive relief in the Ninth Circuit must make a "clear showing" of either (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardships tips sharply in the moving party's favor. [P4, L18]

    • The Court finds the government's evidence is insufficient to carry its burden [P5, L21]

    • The United States relies on the declarations of Postal Inspector Timothy D. France and of Revenue Agent John L. Marien to support its application [P5, L 22]

    • After all that investigation, France's strongest characterizations in support of the government's request for extraordinary and urgent injunctive relief is that he believes it is "more likely than not that Guess, Buck, Jacquot, Roberts, and others, through the Xelan affiliated entities, have violated and are now violating federal law [P6, L 7]

    • He declares defendants "might" be in possession of documents that show allegedly fraudulent schemes [P6, L 14].

    • France alludes to no present or imminent dissipation of particular assets by any named defendant . . ., yet the government seeks a preliminary injunction placing all personal and business assets . . . under the control of a Receiver for the duration of this litigation. [P6, L 15]

    • Revenue Agent Marien states in his October 27,2004 Declaration he is a National Technical Advisor assigned "to help Revenue Agents around the United States when they are dealing with issues involving the proper tax treatment of contributions to employee welfare benefit funds," including "examinations to determine the correct federal income tax liabilities of doctors [P6, L 20]

    • Marien has only "preliminary results" from his "work thus far" [P7 L10]

    • Marien is unable to "draw final conclusions about whether Xelan doctors are entitled to the tax benefits Guess and xelan have touted to them." [P7, L14]

    • [T]he powers conferred through 26 U.S.C. 8 7402(a), based on the authority presented by the United States, do not appear to include the appointment of a Receiver to take possession of all the assets of a party against whom there has been no finding of a tax law violation and who, even assuming a tax liability were eventually determined, is not clearly responsible for paying such liability. [P8, L 16]

    • Even had the government made a clear showing of probable success on the merits, the Court finds the balance of hardships tips decidedly in defendants' favor. The TRO effectively closed down the entities and profoundly intruded on the personal and professional interests of the individual defendants. The extraordinary breadth of that injunction swept much broader than was reasonable and necessary, even if portions of the Xelan arrangements are ultimately recharacterized as taxable. [P10, L 3]

    • The government conceded it can produce no evidence at this time that the IRS has ruled any particular Xelan program violates internal revenue statutes or regulations. [P10, L 10]

    • The government produced no evidence that any of the defendants are dissipating their assets or that any of the assets seized under the TRO are traceable to criminal activity [P10, L 15]

    • The Temporary Receiver's own Initial Preliminary Report identified either no discrepancies, or only immaterial discrepancies, between the available reserves and what would be needed to cover Xelan entity obligations to participants, defeating the asset dissipation claim. [P10, L 23]

    • The findings regarding the Xelan entities' actual financial holdings demonstrate the government's allegations of a "Ponzi scheme" are without merit. [P10, L 26]

    • The government has not shown that the tax implications of any particular Xelan product were mischaracterized [P11, L 3]

    • Even if the government had shown a clear possibility of success on the merits, the scope of the remedy far exceeds defendants' tax liability exposure should the government prevail on the merits. That disproportionality, coupled with the extreme hardship on the Xelan entities, the individual defendants, and innocent third parties, weighs against a grant of preliminary injunctive relief. [P11, L 14]

This was no "toss up" judgment call. This was a poorly conceived "end run" effort by our government to avoid dealing with Xelan issues on a case by case basis that completely failed to impress the Honorable Larry Alan Burns, United States District Court Judge, Southern District of California.

In saying that, I want to be clear that I do see what Stuart Gibson accomplished, and as far as that goes, I understand that Xelan's obfuscatory nonsense precipitated, and perhaps justified, the strategy involved. There are two schools of thought regarding the posture the government should adopt in prosecution, and I hold the minority opinion.

I also want to address the "disappointing" testimony by the government's agents - mostly because I haven't seen anyone else comment and somebody should.

Postal Inspector Timothy D. France and of Revenue Agent John L. Marien did not say the things that they needed to say to get the job done. Instead, they told the truth, letting the chips fall exactly where they had to know they would. In a high profile case, when your chain-of-command is watching you, and it seems like the whole world is watching them, it takes a special kind of integrity to say that you cannot say what they want to hear.

I'm not sure that's cause for Xelan celebration. Those self-same honest, meticulous investigators will reappear once they have had the opportunity to sort thru and evaluate all the evidence, and make a determination as to what has happened here. Character, integrity, conviction and professionalism are a bright shining light on the witness stand that serves to illuminate the truth, which is only a good thing when the truth will set you free.

On December 17, 2004, The United States of America filed a Notice of Dismissal, a copy of which is available via the links below. In the grand scheme of things, I think this defeat for the government will be an issue of little consequence. The release of the TRO has no effect upon the ongoing Grand Jury inquiries into allegations of criminal activity, the ongoing tax cases will go forward, and the bankruptcy cases will move on.

Personally, I am inclined to believe that Xelan is a "done deal" - a sinking ship spared the torpedoes amid ship that would surely have sunk her, by the curious rules of this particular war. This is a war that hasn't even been openly declared yet.

It is common knowledge that the government is in the process of presenting their case to a Federal Grand Jury - another ex parte proceeding where the government presents their case to a body of average citizens who must decide whether or not a crime has occured and, if so, authorize the arrest and prosecution of the parties they deem to be involved. As was the case with Judge Whelan, the Grand Jury will make their decisions based solely upon the government's side of the story, but unlike a US District Court Judge, these people will be entirely dependent upon the prosecutor to explain the law, and the alleged violations of the tax code. As is often wryly observed, "The government could indict a ham sandwich."

It is my understanding and belief that, as it exists on paper, the Xelan program is a compendium of professionally structured, highly aggressive, tax strategies that may very well be, or at least have been, compliant with the tax code. If the Xelan program, as presented in the Xelan plan documents, represented the government's case, and the issues were limited thereto, the defendants might very well have legitimate, and perhaps viable, arguments. After all, Xelan's tax avoidance guidance and arguments (as they exist on paper) cannot be compared to the blatant tax evasion nitwiticisms proffered and promoted by the Schiffs, Bensons, and Meridiths of the world.

Unfortunately for Xelan, the government case is also likely to rely upon these self-same documents; however, the government's case will hinge upon the dramatic difference between the plan as represented on paper, and the way it has been represented to the medical community - and in fact used by the participants in the plan thus far.

I hope you understand the ramifications of this dynamic.

This is not going to be a "paper case." The government is not going to lay out Xelan's plan documents and reveal the tax evasion therein. The "make or break" for the government is largely going to depend upon their undercover tapes of promotional spiels, and the testimony of Xelan plan participant witnesses, in support of the government's position that what Xelan and the Xelots were actually doing was tax fraud.

At this particular point in time, the government needs medical professionals willing to step forward and say, "That may be what the documents say, but this is what I was actually counseled to do." In other words, there's no time like the present for, "Let's make a deal," especially considering the effect that Judge Burns' woodshed shellacking will have had upon the buttocks and egos of the government participants involved.

There are thousands of medical professionals out there who will be desperate to believe what they want/need to believe, and there is going to be a lot of money involved. These people need competent help from those who specialize in the resolution of tax issues; they do not need to be sold down the river by "captured counsel" attorneys, or preyed upon by the blooming crop of "ambulance chasing" Internet nit wits masquerading as tax experts.

The bottom line is, the government overstepped - they got way out of line in their efforts to deal with this abusive tax shelter system. Their efforts to circumvent the "from the bottom up" process by means of a poorly conceived, and sparsely supported bid at a "top down" short cut, was met with a resounding and humiliating defeat - the yin to Pyrrhus' yang. I think the Xelan Chronicles will ultimately portray Stuart Gibson as the clever general and devious tactitian who picked a fight he couldn't win to lose the battle necessary to win the war.

The chuckleheads who have circle jerked themselves into seeing this as some sort of victory for Xelan need to climb back on the porch with the banjo.

Gibson's spanking has no impact whatsoever on the ultimate merits of this case -- whatever they turn out to be. At the end of the day, he got to waltz in to the Xelan offices, put the Habeus Grabbus on everything that was not nailed down and assume control of the organization for a while. I suspect that Attorney Gibson would cheerfully give Xelan as many of those victories as they can stand.

In the meantime, the US Postal Service isn't sitting around licking their wounds - if you look a little closer, you'll see that they are licking their stamps. A copy of the letter they are sending to Xelan's client list is available thru the links below - can't you just hear Bob Barker, "Come on Down."

Attorney Michael Durney get's to keep his war chest, and he can probably count on more to come, but it's going to be tough keeping everyone together with Monte passing out tickets to "Let's Make a Deal."

So, where does that leave us? What do we tell Clients and potential Clients?

I would suggest that we look closely at the specifics of our Clients' individual situations rather than concern ourselves with the big picture case that the government proposes to make. No matter what Xelan did, offered to do, or endeavored to do, our Clients' issues will be confined to the four corners of their tax filings. In the event that they have bought into abusive tax razzle dazzle chicanery, the best that we can do is be honest with them, refer them to competent counsel, and tax professionals who can assist them in evaluating their individual tax situations, and reconciling any issues that arise.

Clients who may have bought into some of the more questionable Xelan programs should be made to understand that, if they act quickly, they may be one of the lucky ones who will have the opportunity to clamber aboard the "A Train," get right with Tax Jesus, minimize damages, and get on with life. The rest, primarily the obtuse and hard headed, are likely to be run over by 130 tons of government locomotive.

Related Reading

UPDATE: 2011

I had not read this article in several years but, since my web stats reflect that it continues to receive a lot of attention, I revisited it and noted that in 2004 I ridiculed those who thought Xelan won the war, and closed the article with a prediction that, ". . . the obtuse and hard headed, are likely to be run over by 130 tons of government locomotive."

As was obvious, Xelan was finished - they have long been defunct.

On October 3, 2005, the IRS announced that the surviving Xelan subsidiary, Doctors Benefit Insurance Co. Ltd., reached a $2.34 million settlement with the U.S. Internal Revenue Service as part of liquidation proceedings and agreed to cease operations and return roughly $500 million in premiums to participants in its program.

Xelan associate Michael R. Suverkrubbe was an attorney licensed to practice law in California who had a law firm in San Diego. He was a former IRS Special Agent. Wendy L. Hixson was the Chief Financial Officer of Suverkrubbe's law firm and an employee of Xelan.

On June 8, 2006, Suverkrubbe and Hixson were indicted. Among other things, they were charged with; Conspiracy, Mail Fraud, Wire Fraud, Credit Card Fraud and Money Laundering. The Indictment (available below) makes an interesting read.

On March 12, 2007, Suverkrubbe and Hixson were sentenced to serve 24 months and 18 months in custody, respectively, and three years of supervised release after each entered a guilty plea pursuant to a plea agreement. Suverkrubbe and Hixson also were ordered to pay $390,000 in restitution to the victims of their crimes. In connection with their guilty pleas, Suverkrubbe and Hixson admitted they defrauded former Xelan clients and financial institutions through a series of misrepresentations and misuse of access to their financial accounts.

Whereas Suverkrubbe was an attorney associated with Xelan, he was not their lawyer.

Attorney David C. Jacquot was the Vice President and General Counsel of Xelan, Inc., and its affiliated entities. On April 15, 2008, a federal grand jury sitting in San Diego handed up an indictment charging Jacquot with two counts of filing false income tax returns.

That case continues - it certainly isn't his biggest problem.

On March 11, 2010, Jacquot's house burned.

On March 16, 2010, the government moved to have Jacquot's bond revoked, citing as grounds:

The defendant is currently under investigation for arson and/or attempted murder and/or insurance fraud by the Bonner County Sheriffs Department. On March 18, 2010, the
Assistant U. S. Attorney advised the Court a grenade launcher was found at the defendant's residence during this investigation. Pretrial Services has looked into these allegations and found the defendant to be in violation of his conditions of release.

Shortly thereafter, Bonner County Prosecutor Louis Marshall announced that Jacquot was also suspected of sexually molesting his adopted daughter from Kazakhstan. “Mr. Jacquot is a suspect in the child molestation,” said Marshall.

On August 13, 2010, a federal grand jury sitting in San Diego handed up an indictment charging Jacquot with three counts of transporting his adopted daughter from Washington to California with the intent that they engage in sexual activity in violation of Title 18, United States Code, Section 2423(a).

That case is also ongoing; Jacquot is currently arguing that he is incompetent to stand trial in both cases.

Lewis Donald Guess was the President of Xelan, the Director of the Xelan Foundation and the 100% owner of Pyramidal Funding Systems, d.b.a. Xelan Insurance Services. On December 16, 2008, United States Attorney Karen P. Hewitt announced that a federal grand jury sitting in San Diego handed up an indictment charging Guess with two counts of filing false income tax returns. On June 24, 2010, after a week long trial, Guess was found guilty on both felony counts of filing false income tax returns, and on November 18, 2010, United States District Court Judge Jeffrey T. Miller sentenced Guess to serve 18 months in federal prison.

Related Reading

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.