In a letter sent shortly after the government froze $500 million in Xelan assets, Michael C. Durney, a former Justice Department Deputy Assistant Attorney General for the Tax Division and current litigant in the Xelan matter, wrote Eileen O'Connor, Assistant Attorney General for the Tax Division, that the action was unprecedented and unwarranted.

Full Text:

Citations: Case No. 04-CV-2184W(AJB)

v.

L. DONALD GUESS, ET AL.

The Honorable Eileen J. O'Connor
Assistant Attorney General
Tax Division
Department of Justice
9^th and Constitution Avenue
Washington, D.C. 20530

Dear Mrs. O'Connor:

I am writing you on behalf of several hundred of my clients that have either made contributions to the xxc3©lan Foundation, Inc. ("Foundation") or purchased supplemental insurance, principally disability, from Doctors Benefit Insurance Company ("DBIC").

As you know, the Department of Justice Tax Division, in connection with the United States Attorney's Office in San Diego, California, sought and obtained a temporary restraining order ("TRO") against the Foundation and DBIC, as well as a number of individuals and other entities. This TRO shut down the operations of all organizations and persons subject to the TRO. At the same time, a search warrant was executed against the San Diego premises of the Foundation, several xxc3©lan entities, and the independent operator of xxc3©lan entities in Chapter 11 proceedings, resulting in a seizure of all of its records.

These actions have produced the following results, among others:

This TRO was obtained ex parte without one of the underlying charges, questions, or complaints, ever being reviewed or substantiated or in court. No assessment of tax has been made, no jeopardy assessment asserted, no criminal charge brought, or any other action taken whatsoever that would warrant this freeze of approximately $560 million dollars in tax-exempt organization and insurance company assets.

xxc3©lan was created over thirty years ago by a dentist, L. Donald Guess, who wanted to bring financial assistance and order to the medical profession. Medical professionals, by nature, are excellent at medical care, but often struggle with the financial side of running a medical practice. The core of xxc3©lan is a membership organization that provides financial and estate planning, retirement plan and insurance advice, and the opportunity to pursue charitable endeavors by means of a publicly supported charitable foundation. It is not a mob-controlled organization or a sponsor of terrorist activities. While the government asserts that three of its programs constitute abusive tax shelters, which is vigorously being disputed, xxc3©lan has and continues to provide insurance, pension, and investment services to doctors. These programs constitute a substantial part of xxc3©lan's business and any tax benefits are not being disputed by the government. In addition, one of the three programs that is disputed, the Welfare Benefit Trust, was voluntarily terminated by xxc3©lan after the issuance of final Treasury Regulations in 2001.

The government's attack on xxc3©lan began with a routine IRS examination of Dr. David M. Cohen, a dentist living in Hawthorne, Florida, in 2001. Dr. Cohen had made contributions to the xxc3©lan Foundation, Inc. -- a donor-advised organization that was and still is tax-exempt under Section 501(a) as a Section 501(c)(3) organization and listed in Treasury Publication 78, entitling Dr. Cohen to a deduction under Section 170 of the Code. Dr. Cohen's professional corporation had also purchased supplemental disability from a predecessor entity of DBIC the cost of which qualified as a Section 162 business expense deduction.

This examination of Dr. Cohen spawned numerous summons actions by the IRS seeking the names of all contributors to the Foundation and purchasers of supplemental insurance from DBIC or its predecessors. This was done before there had been any fair evaluation of the Foundation or the DBIC insurance.

Additionally, the IRS examined the operations of the Foundation and obtained, under disputed circumstances, a list of donors to the Foundation. This list was turned over to the IRS Abusive Trust Coordinator in Florida, and became the source of the hundreds of IRS examinations of donors to the Foundation, several hundred of which are my clients. The status of the Foundation is presently under consideration by the Appeals Division of the IRS. To date, its tax- exempt status has not been revoked.

As a side note, a lawsuit was filed against the IRS based on the claim that IRS agents improperly obtained this list of the Foundation's donors. I mention this only because this suit has been cited by the government as an example of improper efforts to impede the IRS in its examinations.. The suit was dropped following receipt by the attorneys involved in the suit of an anonymous death threat against them and their families stating, "Stop representing xxc3©lan against the IRS before you and your family get hurt." The threats were promptly reported to the U.S. Attorney's Office, and we understand are currently under investigation by the FBI.

This brings us to the current receivership proceeding. We understand that the TRO was sought because of the belief by government agents and attorneys that unspecified amounts of money had been improperly spent or secreted by the Foundation and DBIC. In fact, none of this occurred, as a telephone call to any one of several attorneys involved in this case could have readily demonstrated.

The only payments that have been made since at least April of this year, the first time that I became personally aware of the operations of these entities, have been for regular business operations and reasonable legal fees. Moreover, I might add, the legal fees have been paid to lawyers whose principal goal has been to satisfactorily answer any and all legitimate claims or questions of the government relating to the operations and correct tax consequences of the operations of the Foundation and DBIC. All of this is being exhaustively documented and will be submitted to the district court in the receivership proceeding.

In the government's receivership Complaint, a charge was made that legal fees were being paid to lawyers, who were obstructing these IRS examinations. Much to xxc3©lan's credit, I was retained because it was believed that the prior attorney representing the donors had not been timely responding to the IRS. My representation of these medical professionals began in April of this year. It has been my uniform practice to advise every one of my clients to fully cooperate with the examining agent, to turn over all documents they have relating to xxc3©lan, to answer all questions of the IRS relating to xxc3©lan, and to extend the statute of limitations with respect to these examinations. There has been no obstruction of these IRS examinations of any kind under my representation.

Many of the questions raised by the IRS in these examinations can only be answered by me obtaining that information from either the Foundation or DBIC. The seizure of the Foundation's records and the freezing of DBIC's operations has brought this to a halt. My clients are now facing possible tax adjustments that they cannot defend against by reason of this receivership.

None of the "irreparable harm" asserted in the government's complaint exists as required by Rule 65(b). In fact, irreparable harm is being sustained by the defendant entities and the affected medical professionals by reason of this action you have taken. I have been involved in civil and criminal tax controversies both in behalf of the Department of Justice and of taxpayers for 36 years. This action you have taken against the xxc3©lan organization is extraordinary and unprecedented. It is also unwarranted.

The reason I am writing you at this point is to request in the strongest terms that you personally reconsider the propriety of the action you have taken. I have discussed the matter with Stuart Gibson and have been advised that the matter is out of his hands and in those of the temporary receiver and the judge. I believe you have a personal responsibility as head of the Tax Division to see that justice is done on an immediate basis, and not at some point down the road when a court ultimately determines whether the various charges that are the subject of this receivership action are accurate.

As you must know, this action filed by the government is unprecedented. I am personally amazed that a TRO freezing the assets and operations of a charitable organization and insurance company was issued on an ex parte basis. However, having sat in your chair, albeit on an acting basis, I know the power of a filing by the Department of Justice. It is this power, and the responsibility that comes with the exercise of that power, that makes it incumbent upon you to make certain that you have a proper basis for what you are doing.

The irony of all this is that the basic operations of the Foundation and DBIC, and their tax consequences, are all supported by substantial authority. If the government has questions about these operations, or disputes the authority underlying the tax consequences of such operations, these questions and disputes can be sorted out in customary fashion. The Pettinger case is pending in the district court in Wyoming that will test the bona fides of the supplemental insurance. The Viralam case is docketed in the Tax Court with a March 2005 trial date that will review the tax deductibility of a contribution to the Foundation. The bankruptcy adversary proceeding to determine the validity of tax benefits was expected to proceed expeditiously through discovery and trial. Hundreds of cases that are in the IRS examination pipeline, my clients, raise identical issues.

In light of this pending judicial review of the basic programs of the Foundation and DBIC, and absolutely no evidence whatsoever of any "wasting" of assets, how can you possibly justify the seizure of records and freeze placed on these organizations? In addition to preventing my clients from getting periodic disability payments, or medical payments, or meeting malpractice claims from DBIC, or allowing my clients to receive periodic annuity payments from the Foundation, you have cut off the ability of both organizations to defend themselves through legal representation, and have cut off the legal representation afforded the doctors in defending their actions before the IRS. I do not think this constitutes due process by any stretch of the imagination.

At present, in order to adequately respond to your filing, the matter will not be heard until December 1^st or 2^nd. The court will obviously need adequate time to review the matter. Without your intervention, this deprivation of due process will continue and all concerned will suffer unnecessary, if not irreparable harm.

Despite what you may have been told, xxc3©lan is not promoting abusive tax shelters such as has been charged of KPMG or Ernst & Young. In those instances, the organizations made no effort to defend the propriety of the products they offered. By contrast, the Foundation and DBIC strenuously defend their programs, to the extent of defending at their cost the tax treatment claimed by their program participants. We should be allowed to fairly and adequately continue this defense without an unwarranted seizure of records or freeze of operations. Due process requires nothing less.

My request to you is this: Please immediately re-evaluate the propriety of the government's actions. We can demonstrate that the concerns that led to this receivership filing were baseless. The lawyers involved in representing xxc3©lan are reputable members of the bar and most have extensive prior government experience. There is no unnecessary or obstructive legal action being taken by reason of legal fees paid by either the Foundation or DBIC. I know this request is unusual, but the actions taken are extraordinary and unprecedented. I also request the opportunity of meeting with you as soon as possible to discuss this and answer any questions you may have.