Physician sues accounting firm over life insurance policy

A Lafayette oncologist is seeking damages from an Indianapolis accounting firm that could reach hundreds of thousands of dollars for income taxes the physician owes on an insurance plan.

Nancy A. DiMartino, on behalf of herself and her medical practice, Lafayette Cancer Care PC, alleges in a

DiMartino is the sole shareholder of the cancer center.

The plaintiff says Somerset misled her about the uses of a Voluntary Employees' Beneficiary Association. Small employers, such as medical partnerships, often join the insurer-sponsored umbrella groups, called VEBAs. A business can buy term life policies for its employees at group rates, deducting the premiums as a legitimate expense.

In DiMartino's case, her lawyers contend Somerset told DiMartino her employer's payment for a variable life insurance policy through the VEBA would enable her to put more money away for retirement, because the premium amount exceeded the cost of providing death benefits under the policy.

The cancer center began using the VEBA in early 2001 and purchased a $3 million variable life insurance policy for DiMartino, paying an annual premium of $50,000 in both 2001 and 2002.

Lawyer Mike McMains, who is representing DiMartino and the cancer center, said his client was told the $50,000 premium was tax-deductible. DiMartino later learned the premium was not legal, he said.

"My law firm represents about 500 physicians in the state, and I have never seen this done before," said McMains, the senior partner of local firm McMains Foster & Morse PC. "This was a red flag when it popped up. This is a very unusual device and not one intended to be used as a retirement plan."

The lawyers further allege Somerset told the doctor all excess premium amounts would accrue in the VEBA taxfree, and after years of building cash value, the cancer center could terminate the VEBA, allowing DiMartino to withdraw the funds while being taxed on the increase only. In the meantime, the cancer center could deduct as legitimate business expenses the full amount of the premiums paid to DiMartino's policy, according to the lawsuit.

McMains contends an annual premium for a normal $3 million life insurance policy costs about $3,000. He further alleges Somerset pocketed 20 percent to 30 percent of the $50,000 annual premium as commission.

McMains said he discovered the insurance policy in February while revising his client's estate plan. He is working with new accountants and the Internal Revenue Service to calculate how much is owed in back taxes, he said.

Somerset Managing Partner Patrick Early and Mike McCaslin, director of the firm's health care group, both were unaware of the suit.

"Officially, I have no comment since I don't know what it's about," McCaslin said. "We've had no communication from the client about dissatisfaction."

Proposed rules published by the IRS in July reiterate language in a 1995 IRS notice and in court decisions, holding that VEBAs similar to the one used by the cancer center to benefit DiMartino do not qualify for the favor able tax treatment sought and claimed by Somerset, the suit said.

"Because life insurance allows you to defer gain, the IRS doesn't want people to be able to put an excess amount into these VEBAs and not pay taxes on them," said Rodney Retzner, a lawyer at the local Krieg DeVault LLP firm who practices estate and business succession planning.

DiMartino seeks unspecified punitive compensation, treble damages and attorney's fees. No court dates have been set.