KREBIOZEN
BY
Sheldon Chertow
Presented on February 16, 1998
The Chicago Literary Club


Copyright 1998 by Sheldon Chertow

INTRODUCTION

Nearly 47 years ago, on March 26, 1951, a stunning announcement is made at a meeting called at the Drake Hotel in Chicago concerning the discovery of an agent for the treatment of cancer called Krebiozen, developed by Dr. Steven Durovic, a medical doctor licensed in Yugoslavia, who left Argentina for the United States two years earlier on March 25, 1949.

At the meeting, Dr. Andrew C. Ivy, world renowned in scientific circles, famed for the Nuremberg trials, and head of the Department of Clinical Sciences, and Vice President in charge of the Chicago professional colleges of the University of Illinois, presents research results on 22 patients. Chicago newspapers are present at the meeting, and carry the news to the world. The swirl of publicity emanating from the meeting set in motion a raging controversy regarding the efficacy of Krebiozen, which results in the resignation of George D. Stoddard, president of the University of Illinois and the professional downfall of Dr. Ivy two years later in 1953.

The American Medical Association, the Chicago Medical Society and two investigative committees appointed by Dr. Stoddard at the University of Illinois raise serious questions concerning the secret contents, the manufacturing process, the testing methodology, and the efficacy of Krebiozen. A joint commission of the House of Representatives and the Senate of Illinois holds hearings for the purpose of ascertaining the facts of the controversy that had arisen at the University of Illinois between Dr. Ivy and President Stoddard concerning research on Krebiozen.

Ultimately, the Food and Drug Administration, the U.S. Attorney's Office in Chicago, the Internal Revenue Service, and the United States Department of Justice enter the picture. The first trial, involving criminal charges of introducing mislabeled drugs in the interstate commerce, ends in a hung jury and acquittal. The Internal Revenue Service asserts tax claims in excess of $3.5 million dollars in two United States Tax Court proceedings. Finally, Dr. Durovic is indicted for willfully attempting to evade income taxes for 1960, 1961 and 1962. He leaves the United States without return to face trial.

Much has been documented about the Krebiozen controversy, the proponents and detractors, the cancer patients, and the pain suffered by many individuals engulfed in the debate. Except for the Internal Revenue Service, no one has focused on the financial aspects and underlying tax implications of marketing Krebiozen in the United States. An examination of this area provides insight into the objectives of the promoters of Krebiozen and helps shed light on the current issue of medical researchers reaping financial benefits from the drugs they evaluate.

1941-1948

We begin with Germany's attack on the northern sector of Yugoslavia on April 16, 1941. Mr. Marko Durovic, age 41, a brother of Dr. Steven Durovic, age 36, flees with his new wife, Olga Wickerhauser Durovic, to the southern sector of Yugoslavia, occupied by Italy. Both receive permission to travel to Rome. Mr. Durovic received his law degree in 1923 from the University of Belgrade, and reportedly is a co-owner of the third largest manufacturer in Europe of munitions, which is destroyed by the Nazis early in the war.

Dr. Durovic is imprisoned in a concentration camp, but released through Mr. Durovic's efforts. They reunite in Rome. During the later half of 1942, while Europe is engulfed in war and the Atlantic Ocean dangerous to cross, all three obtain Vatican visas permitting them to emigrate to Argentina, where they establish residence. Between November 1942 and sometime in 1944, Dr. Durovic purportedly is engaged in research on cattle and horses to develop a stimulant to control malignant growth. In 1944, Dr. Durovic, while working in cancer research, claims to unexpectedly discover a substance active against hypertension, which he names Kositerin. Dr. Durovic receives financial backing to set up facilities for the production of Kositerin and on August 15, 1947, the Argentine Government issues a license to sell the product by prescription. On August 25, 1947, Dr. Durovic purportedly enters an agreement to receive financial backing for the production of Drug X. Two years later, the license to sell Kositerin is revoked in August 1949, but reinstated in December 1949. As of January 21, 1950, 72,200 ampules of Kositerin have been produced at a cost of 1,268,193 pesos and held in storage in Argentina.

1949-1953

Dr. Durovic, however, on March 25, 1949, travels to the United States on a temporary visa, apparently with the intention of finding a market for Kositerin. In May 1949, Olga Durovic enters the United States to assist him. Dr. Durovic, who never acquired a license to practice medicine in the United States, is introduced to Dr. Roscoe Miller, Dean of the Medical School of Northwestern University. It is not clear who made the introduction, but it may have been two businessmen interested in promoting the drug. Sometime between March 1949 and July 1949, a study of Kositerin is conducted at Northwestern, which yields uncertain results. In July 1949, Northwestern ends the relationship and either Dr. Miller or the two businessmen introduce Dr. Durovic to Dr. Ivy. Although Kositerin is the intended topic, Dr. Ivy becomes interested in Dr. Durovic's disclosure of his work in Argentina on "Drug X," which is purportedly active against malignant tumors.

On February 7, 1950, seven months after the Ivy-Durovic introduction, Mr. Durovic leaves Argentina for the United States allegedly with $200,000 and 2 grams, 35 centigrams of Drug X, enough to produce 200,00 ampules. Drug X, unlike Kositerin, is never licensed to sell in Argentina. Apparently Mr. Durovic declares the substance to U.S. customs but pays no duty.

Dr. Ivy becomes actively involved in researching Krebiozen after testing the substance on himself and others and determining that it is non-toxic. Tax planning starts early. In April 1951, shortly after the meeting at the Drake Hotel, the Durovics form a non-profit organization called the Krebiozen Research Foundation and request tax exemption from the Internal Revenue Service. Dr. Ivy is named president of the Foundation, whose purpose is to conduct experiments on Krebiozen and to authorize, oversee and coordinate experimentation by other physicians who request its use.

At the same time, the Foundation, through Dr. Ivy and with the assistance of a Houston, Texas lawyer, requests the Internal Revenue Service to rule that the cost of 200,000 ampules of Krebiozen is $1,326,000, and that no taxable income will be realized on sale by the Durovics of 200,000 ampules to the Foundation. The Internal Revenue Service responds by requesting the details of costs incurred. No cost data is furnished and the Foundation withdraws the request purportedly because passport restrictions prevent the Durovics from returning to Argentina to obtain the details requested. Instead, the Internal Revenue Service is requested to rule that any profit on sale would be taxed at long-term capital gain rates. Apparently, the Durovics were willing to compromise by paying less capital gain tax than no tax on the sale of the 200,000 ampules of Krebiozen. This second ruling request is later withdrawn, setting the stage for subsequent tax controversies between Mr. Durovic, Dr. Durovic, and the Internal Revenue Service.

The public interest in Krebiozen as a potential cancer cure probably prompts Senator Paul Douglas to introduce legislation in the U.S. Congress enacted on June 16, 1952 granting the Durovics permanent residence.

Between April 1951 and April 1954, 63,903 ampules of Krebiozen, about one-third of the original supply, are freely distributed on an experimental basis to requesting physicians without charge. Sometime during this period, the American Medical Association conducts independent studies of reported cases of patients treated with Krebiozen. The University of Illinois is drawn into the fray because of Dr. Ivy's work on Krebiozen and status with the University. As a result, Dr. Stoddard appoints two committees, the first to determine the value of Krebiozen under research and clinical conditions by evaluating the cases reported by Dr. Ivy and the second committee to investigate Krebiozen itself. The results of all studies raise serious doubt over the research methodology and the effectiveness of Krebiozen. The content of Krebiozen and the manufacturing process remain a mystery. Dr. Ivy, however, continues to support his research. He also has many other proponents.

As a result of a complaint by Dr. Ivy to the Illinois Legislative Committee to Visit Educational Institutions concerning criticism of his work, the General Assembly of Illinois on January 12, 1953, adopts a joint resolution appointing seven members each from the Senate and the House of Representatives to ascertain the facts of a controversy that has arisen at the University of Illinois concerning research on Krebiozen. The joint commission holds hearings, and after 7,000 pages of transcript of testimony, concludes in a preliminary report dated March 24, 1954 that there is no conspiracy by the University of Illinois, the American Medical Association and the Chicago Medical Society against Dr. Ivy and Krebiozen; praises the integrity of Dr. Ivy; finds no evidence on the record that the Durovics are not men of good character; ascertains that Dr. Stoddard is not a party to a conspiracy against Dr. Ivy or Krebiozen but that his untactful handling contributed to the controversy; and concludes by expressing the hope that a method could be found to conduct a controlled study of Krebiozen until the merits of the substance can be finally determined.

At the time of the preliminary report, Dr. Stoddard is no longer President of the University of Illinois. By mid-1953, the confrontation between Dr. Ivy and Dr. Stoddard reaches a boiling point. At an unprecedented midnight meeting on July 24, 1953, without prior notice, a divided Board of Trustees of the University of Illinois votes "no confidence in Dr. Stoddard as President of the University," and requests his immediate resignation. Dr. Stoddard terminates his relationship with the University.

1954-1964

By April 1954, Dr. Durovic and Mr. Durovic claim to have exhausted their resources in financing the operations of the Krebiozen Research Foundation. Accordingly, they form an equal partnership registered in Illinois as Duga Laboratories, which is responsible for the distribution and sale of the remaining 136,097 ampules of Krebiozen recommended for distribution by the Foundation.

The concept is to distribute Krebiozen as an experimental drug to requesting physicians for clinical investigation at a price equal to the per ampule cost of production in order to recoup the claimed cost of producing Krebiozen totaling $1,326,000, originally alleged in the request for a ruling in 1951. In other words, sale price would equal the cost of production, leaving no profit to tax. In early 1954, the Durovics fail to obtain a license to sell Krebiozen as a prescription drug in the United States.

The per ampule cost of Krebiozen computed by the Durovics based on professional advice is the sum of the cost, in pesos, of producing Kositerin and Krebiozen in Argentina plus a minor amount of expenses incurred in the United States in 1954 and 1955 divided by the remaining 136,097 ampules of Krebiozen on hand in 1954 converted to U.S. dollars by using an official rate of exchange of 3.36 pesos to $1. Accordingly, Durovics compute the per ampule cost at $9.74 for 1954 and $10.32 for 1955 and thereafter. The number of ampules of Krebiozen sold per year multiplied by the per ampule cost equals the cost of sales reported by Duga. Subsequently, the Internal Revenue Service disallows all costs associated with Krebiozen, challenges the inclusion of Kositerin in the computation, determines that the per ampule costs should be spread over the original supply of 200,000 ampules and that pesos must be converted to U.S. dollars at the commercial rate of exchange, not the official rate.

Between 1954 and 1959, Duga files annual U.S. partnership tax returns reporting gross receipts of $1.3 million from the sale of 136,097 ampules of Krebiozen, related costs of Krebiozen sold of $1.4 million, expenses of $188,000 and net losses totaling $271,000. The losses are divided equally between the Durovic brothers. Since the Duga partnership reports losses in each of the years 1954 through 1958, the Durovics do not file personal federal income tax returns based on professional advice.

The partnership between Dr. Durovic and Mr. Durovic ends in December 1959, the year in which the last of the original ampules of Krebiozen is sold. Thereafter, Dr. Durovic continues operating and selling new supplies of Krebiozen as a sole proprietorship under the name of Promak Laboratories. Between 1960 and 1964, Dr. Durovic reports gross receipts from the sale of Krebiozen of $2,245,600, costs of goods sold of $77,900, expenses of $2,000,000 and net income of $153,000. Beginning with the year 1960, gross receipts no longer equal production costs, which drop from nearly 100% to 3% of sales. For the first time, Dr. Durovic claims substantial deductions for development and representation expenses, which absorb most of Promak's profit.

In all, the gross receipts from the sale of Krebiozen over the eleven-year period beginning 1954 and ending 1964 amount to $3.6 million offset by claimed costs and expenses of $3.7 million, for an aggregate loss of $100,000. Under such circumstances, one could reasonably conclude that the Durovics were not enriched from marketing Krebiozen and suffered financially. The Internal Revenue Service, however, would question the deductions claimed and discover substantial fund transfers from the United States to Canada and Switzerland between 1959 and 1964.

The first official income tax examination by the Internal Revenue Service begins in 1959 and relates to the 1957 partnership tax return of Duga. The purpose of the audit is the propriety of the change in the claimed cost per ampule from $9.74 in 1954 to $10.32 in 1955 and thereafter. The Internal Revenue Service concludes the investigation in 1959 by notifying the taxpayer that "no change" is necessary to the 1957 partnership return.

In September 1963, the Internal Revenue Service commences a joint civil and criminal income tax examination of Dr. Durovic, Mr. Durovic, Duga, and Promak Laboratories. An Internal Revenue agent and a special agent of the Intelligence Division inquire into Dr. Durovic's share of partnership losses of Duga carried forward as deductions on his 1961 personal income tax return. The tax law permits a partner's share of business losses of a partnership to be carried forward to the individual income tax return of the partner in a subsequent year. The tax examination covers the losses reported by Duga in 1956 and 1957 and the operations of Promak for 1961. Because of the presence of the special agent, the taxpayers refuse to turn over records.

In 1964, both agents obtain a complete set of accountant's work papers used in the preparation of Duga's partnership tax returns and are informed that neither Dr. Durovic nor Mr. Durovic filed individual income tax returns for 1954 through 1958. Under federal tax law, accountant's work papers are not privileged and must be turned over to investigators. The tax examination of Dr. Durovic broadens to include the taxable years 1954 through 1964.

On another front, in 1963, the Federal Government completes a comprehensive evaluation of Krebiozen. According to the National Cancer Institute, the study includes a review of the records of more than 500 patients, who reportedly benefited from this treatment. After evaluating the cases submitted by the Krebiozen Research Foundation, an expert committee concludes that there is no evidence of Krebiozen-induced therapeutic effects in cancer patients. Analysis of samples of Krebiozen indicates that they are either pure mineral oil or creatine dissolved in mineral oil.

On October 28, 1964, Mr. Durovic, Dr. Durovic and the Krebiozen Research Foundation are indicted for introducing mislabeled drugs into interstate commerce in violation of the Food, Drug and Cosmetic Act. After fifteen months and a nine-month trial, the case ends with a hung jury. On the same day, October 28, 1964, the Internal Revenue Service makes a jeopardy assessment of tax against Mr. Durovic in the amount of $519,000 and levies on all real estate and other assets owned by him and his wife. Normally, in case of a tax dispute, the Internal Revenue Service does not assess income tax deficiencies until the taxpayer has exhausted his remedies in court. However, if the Internal Revenue Service believes delay will jeopardize assessment and collection of a deficiency in income tax, it can immediately assess the tax, interest and penalty and demand payment.

In case of a jeopardy assessment, the Internal Revenue Service must send the taxpayer a notice of deficiency within 60 days after the assessment. The notice of deficiency gives the taxpayer 90 days to file a petition with the United States Tax Court disputing the assessment. On December 28, 1964, sixty days after the jeopardy assessment, the Internal Revenue Service sends a notice of deficiency to Mr. Durovic, asserting income tax liabilities of $264,000, 50% civil fraud penalties of $132,000, and other miscellaneous penalties of $9,000, for a total tax liability of $405,000, plus interest for the taxable years 1954 to 1958, inclusive. Mr. Durovic files a petition with the United States Tax Court contesting the tax liabilities and penalties assessed against him.

In May 1965, the Internal Revenue Service notifies Dr. Durovic's lawyers that it is referring a criminal case against Dr. Durovic to the Department of Justice for prosecution. In February 1966, Dr. Durovic leaves the United States, never to return. One month later, he is indicted for willfully attempting to evade his income taxes for the years 1960-1962. Subsequently, the Internal Revenue Service issues notices of income tax deficiencies and fraud penalties to Dr. Durovic totaling $2.9 million, plus interest for the years 1954 through 1964.

A jeopardy assessment is not made against Dr. Durovic at the time one is authorized against Mr. Durovic in October 1964, perhaps because the Internal Revenue Service was building a criminal tax case against him and did not want a civil tax proceeding to impair the prosecution of the criminal case. As previously noted, since a jeopardy assessment triggers the issuance of a notice of deficiency, Dr. Durovic's civil tax case could have ended in the United States Tax Court while his criminal tax case was pending.

Mr. Durovic could not easily leave the United States because of the jeopardy assessment of over $500,000 and seizure of his assets. The Tax Court trial of Mr. Durovic commences in the late 1960's and is decided in 1970. The Tax Court functions out of Washington, D.C. and holds trials in selected cities throughout the United States involving federal tax matters disputed by taxpayers. Except for civil tax fraud, the burden of proof is on the taxpayer. This means that the taxpayer must prove payment and deductibility under the tax law. A Tax Court proceeding is civil in nature, where a monetary liability is determined and does not involve criminal offenses.

The principal issue in Mr. Durovic's case relates to the disallowance by the Internal Revenue Service of the cost of producing Krebiozen in Argentina claimed by Duga in the amount of $1.3 million on the sale of 130,182 ampules of Krebiozen between 1954 and 1958. The controversy with Mr. Durovic centers on the lack of evidence to establish developmental and production costs in Argentina such as invoices concerning the number of animals acquired and destroyed, labor and related expenditures, canceled checks, and bank statements.

With regard to establishing the cost of producing Krebiozen, during preparation for trial of the case, Mr. Durovic alleges that all business records were lost in transit from Argentina to the United States in 1956. Mr. Durovic, however, produces a written agreement dated January 26, 1950, allegedly signed just prior to the time he left Argentina for the United States, whereby he agrees to pay 3,005,000 pesos to Mr. Juan Tanoira, an individual who purportedly financed the production of Drug X for the treatment of malignant tumors under an agreement dated August 25, 1947. Pursuant to the January 26, 1950 agreement, Mr. Durovic acquires 2 grams, 35 centigrams of powder, and all of Mr. Tanoira's rights to participate in the profits of marketing Drug X. Since the written agreement dated January 26, 1950 was never previously disclosed to the Internal Revenue Service, the government attempts to ascertain the age of the document through analysis of the paper and ink by an expert without conclusive result.

The Tax Court decides that the per ampule cost of producing Krebiozen in Argentina must be reduced from $9.74 and $10.32, claimed by Duga for 1954 and 1955 and thereafter, respectively, to $1.82, resulting in a disallowance of deductions claimed for cost of goods sold of $1,000,000 and an increase in Duga's net income in the same amount. One half of the increase, $500,000, is taxed to Mr. Durovic. The Tax Court reaches this result by accepting Mr. Durovic's argument that he paid Mr. Tanoira 3,005,000 pesos for Drug X, but agrees with the government that the proper conversion rate is the commercial rate of exchange of 9.66 pesos to $1, that the cost of Kositerin must be eliminated from the computation, and that the per ampule cost of sales must be based on 200,000 ampules produced. The Tax Court also rejects the government's assertion of a civil fraud penalty against Mr. Durovic.

Displeased, Mr. Durovic appeals to the Seventh Circuit Court of Appeals. The case is returned to the Tax Court and appealed again by him until final decision by the Seventh Circuit in 1976, which sustains a conversion rate of 9 pesos to $1 and denies a deduction of production costs associated with the free distribution of 63,903 ampules between 1951 and 1954. The court holds costs relating to the free distribution of Krebiozen are in the nature of a capital expenditure. A capital expenditure is amortizable over its useful life. Mr. Durovic fails to prove the useful life of Krebiozen and is denied the deduction for expenditures allocable to the cost of ampules freely distributed.

Sometime in April 1983, Dr. Durovic's civil tax case proceeds to trial before the United States Tax Court without his physical presence. He may have been living in Switzerland at the time. In addition to the issue decided by the Tax Court in Mr. Durovic's case concerning the cost of Krebiozen sold by Duga during 1954 through 1958, Dr. Durovic is faced with the disallowance by the Internal Revenue Service of deductions of close to $2,000,000 of which $1.7 million are claimed for representational and development expenses allegedly paid during the years 1960 through 1964 to Mr. Armando Ferrari pursuant to a written agreement with Mr. Durovic purportedly executed December 31, 1951.

In the course of Dr. Durovic's investigation, the Internal Revenue Service discovers that close to $2,000,000 in cash is transferred out of the United States to banks in Canada and Switzerland between 1959 and 1964, the conversion of cash to gold bars in 1959, and the transfer of funds from Mr. Ferrari back to Dr. Durovic. Since Switzerland had secrecy laws concerning disclosure of bank accounts, in accordance with court rules concerning discovery of facts, the Tax Court orders Dr. Durovic to agree to give the Swiss bank permission to disclose bank records from 1959 through 1965. Dr. Durovic refuses to comply.

On April 4, 1983, pursuant to the Government's oral motion for sanctions, in probably one of the largest monetary sanctions imposed on a taxpayer, the Tax Court deems established that development and representation expenses on Dr. Durovic's tax returns for 1960 though 1964 are not deductible, and that he fraudulently, with intent to evade tax, claimed the expenses on his returns. Taxes and fraud penalties for 1960 through 1964 amount to $2.3 million plus interest.

Dr. Durovic did not appeal the Tax Court decision and remained in Europe.

CONCLUSION

Krebiozen is only a historical medical footnote. Meanwhile, the treatment of cancer remains the subject of intense research throughout the world. Surely, obvious lessons gained from the Krebiozen experience are the disconnection of the profit maker from the research establishment and the further development of research standards applicable to all clinical treatments.

The facts described herein are derived from the facts determined by the Tax Court judges deciding the Durovic cases based on the record before them, and the book Krebiozen: The Great Cancer Mystery by George D. Stoddard published by The Beacon Press, Inc. in 1951. I was the government trial attorney in the Tax Court involving Mr. Durovic.

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