The U.S. Supreme Court has revived a decades-old legal battle over property seized in Cuba during Fidel Castro’s 1959 revolution, clearing the way for new claims under the Helms-Burton Act. In a ruling handed down this month, the court revived a lawsuit by Havana Docks Corp., a U.S. company that once operated docks in Havana, against four cruise lines that used the confiscated property during a brief thaw in U.S.-Cuba relations under President Obama.
The case hinges on Title III of the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, commonly known as Helms-Burton. The law allows victims of Cuba’s property expropriations—or their heirs—to sue private entities that profit from using confiscated assets. The Supreme Court’s decision overturns a lower court ruling that had dismissed the case, instead finding that the cruise lines’ use of the docks was sufficient to establish liability under the law.
For years, Title III remained dormant due to presidential suspensions, enforced by both Republican and Democratic administrations, over concerns about international backlash. But in 2019, the Trump administration lifted the suspension, reactivating the law. The move coincided with travel restrictions that blocked the cruise ships central to the Havana Docks case. A trial court had initially awarded the plaintiff over $400 million in damages, though an appeals court later reversed that decision. The Supreme Court’s ruling sends the case back for further proceedings.
Helms-Burton lawsuits spark tax battles
The revival of Helms-Burton claims has already triggered a wave of lawsuits, with many plaintiffs now receiving cash settlements for property lost more than six decades ago. But while the legal victories may feel like restitution, the IRS treats these payouts as taxable income, just like any other lawsuit settlement.
However, some settlements can be positioned as capital gain. A suit about damage to or conversion of property is a prime example. Most settlements are taxed as ordinary income, subject to rates up to 37%. But in some cases, plaintiffs can argue that the funds qualify as capital gains, taxed at lower rates-sometimes as low as 0%-or even deferred through reinvestment.
Tax law distinguishes between two types of property-related damages. If the confiscation is treated as an involuntary conversion—such as theft or condemnation, the proceeds may qualify for capital gains treatment under Section 1033 of the tax code. This allows taxpayers to defer taxes by reinvesting the settlement into similar property, much like a Section 1031 exchange for real estate. However, the rules are complex, with strict timing and eligibility requirements.
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The IRS generally assumes lawsuit settlements are ordinary income, but Helms-Burton plaintiffs may have stronger arguments. Since the confiscations were government seizures, akin to eminent domain, the settlements could be framed as compensation for lost property rather than lost earnings. The wording of the settlement agreement plays a key role here. If it explicitly ties the payout to the value of the confiscated property (rather than lost profits or punitive damages), the IRS is more likely to accept capital gains treatment.
Capital gains vs. ordinary income rules
For individuals, the tax benefits can be significant. Capital gains rates are lower than ordinary income rates, and taxpayers can also recoup their tax basis—meaning any unrecovered legal fees or other costs can offset the gain before taxes apply. However, corporate plaintiffs face different rules. C corporations pay a flat 21% rate regardless of how the recovery is classified, while S corporations, partnerships, and LLCs pass through capital gains to their owners, who then report them on their personal tax returns.
One complicating factor is the role of contingency fees. Most Helms-Burton plaintiffs work with lawyers who take a cut of the settlement, and the IRS treats those fees as part of the taxpayer’s total recovery. If the recovery is taxed as capital gain, the taxpayer can deduct legal fees against the gain, reducing the taxable amount further. But if the IRS classifies the recovery as ordinary income, those fees become miscellaneous deductions, which are less favorable.
The distinction matters most for plaintiffs with little remaining tax basis. Many Helms-Burton claims involve property seized in 1959, leaving little room for recouping original costs. Yet even in these cases, the potential to defer taxes through Section 1033 reinvestment remains. While individuals may not reinvest their lump-sum payouts, corporate plaintiffs could explore this option to delay tax liability, though the practicality depends on whether they have suitable replacement assets.
The Supreme Court‘s ruling in Havana Docks Corp. v. Royal Caribbean Cruises, Ltd. clarifies that the cruise lines’ use of the confiscated docks-even without direct ownership-constitutes “trafficking” under Title III of the Helms-Burton Act. Under the Helms-Burton Act, trafficking includes anyone who “purchases, leases, receives, possesses, obtains control of, manages, uses, or otherwise acquires or holds an interest in confiscated property,” or who “causes, directs, participates in, or profits from, trafficking… by another person, or otherwise engages in trafficking… through another person, or who holds an interest in or profits from confiscated property.” 22 U.S.C. § 6023(13). This provision extends liability to entities that indirectly benefit from expropriated assets, including cruise lines that relied on the docks during the Obama-era travel thaw.
Supreme Court expands liability for seized assets
Damages under the act are calculated based on the value of the confiscated property, with heightened penalties for defendants who traffic in assets already certified under the International Claims Settlement Act of 1949. The rationale is that prior certification serves as constructive notice that the property was wrongfully taken from a U.S. person. While the exact damage amounts remain unresolved in the Havana Docks case, the Supreme Court’s decision ensures that plaintiffs can pursue claims against any entity that derived economic benefit from the seized property, regardless of whether the defendant held legal title.
