Supreme Court Revives Havana Docks Lawsuit Over Confiscated Cuban Property

U.S. Supreme Court revived a lawsuit filed by Havana Docks against four cruise lines that used docks in Havana confiscated after 1959. U.S. nationals to sue companies that profit from property seized by the Cuban government. The law remained suspended by presidents from 1996 until 2019, when President Trump allowed lawsuits to proceed.

A trial court awarded Havana Docks more than $400 million, but a federal appeals court reversed the judgment before the Supreme Court returned the matter for additional proceedings.

Plaintiffs who receive cash settlements under the law face IRS taxation on the proceeds. The IRS generally treats lawsuit recoveries as ordinary income taxed at rates up to 37 percent, though some recoveries may qualify as capital gain. Capital-gain treatment can allow plaintiffs to offset legal fees against the recovery and may permit deferral of tax under Section 1033 if the proceeds are reinvested in replacement property.

Settlement agreement language that allocates the payment to the return of confiscated property can strengthen a capital-gain position, though the IRS is not bound by such wording. A Tax Court case involving a $23 million settlement showed that explicit allocation language in an agreement can influence whether proceeds are treated as capital gain or ordinary income.

Plaintiffs using contingent-fee counsel must include the attorneys' share in gross income and then seek an offsetting deduction or capitalization.

Tax advisers recommend addressing the character of any recovery before a settlement agreement is signed. Proper structuring can reduce later disputes with the IRS over ordinary-income versus capital-gain treatment.