Rev. Rul. 69-498

Reconsideration has been given to that part of factual situation (4) of Revenue Ruling 62-197, C.B. 1962-2, 66, which deals with a loss of accounts receivable by a United States citizen whose retail store, located in Cuba, was intervened in during 1959 by the Cuban Government. The assets of the business, including the accounts receivable, were expropriated by Cuban decree in 1960.

It was held, in part, under factual situation (4) of Revenue Ruling 62-197 that the loss of the accounts receivable in question was deductible under section 166(a) of the Internal Revenue Code of 1954 as a wholly worthless debt.

In Emil Stern v. Commissioner, 5 B.T.A. 89 (1926), acquiescence, C.B. VIII-1, 43 (1929), certain debts owing the taxpayer were seized by the German Alien Property Custodian, the effect of which vested possession and title to the property in the Custodian. In concluding that the expropriation entitled the taxpayer to a deduction for a "loss sustained," and not to a deduction for a "debt ascertained to be worthless," the court reasoned that the debtor was solvent, and that while uncollectible by the taxpayer, the debts did possess value and were collectible by the new owner. The court further reasoned, in substance, that since the taxpayer had been entirely divested of his property by the foreign government, he had sustained a loss. See also Hector Fezandie, Executor v. Commissioner, 12 B.T.A. 1325 (1928).

Factual situation (4) of Revenue Ruling 62-197 indicates that the Cuban Government intervened in and expropriated the assets of the taxpayer's business. While such seizure divested the taxpayer of his property and presumably rendered the accounts receivable uncollectible by the taxpayer, nothing in factual situation (4) of Revenue Ruling 62-197 indicates that the debtors were insolvent or that the accounts receivable were without value. In the absence of such evidence, the taxpayer is not entitled to a deduction for a worthless debt under section 166(a) of the Code. However, since he has sustained a loss in respect to the unrealized receivables, taxpayer is entitled to a deduction pursuant to the provisions of section 165(c)(1) of the Code relating to losses incurred by an individual in a trade or business.

Accordingly, the holding with respect to factual situation (4) of Revenue Ruling 62-197, insofar as it relates to accounts receivable, is hereby modified to hold that such loss sustained in respect to the accounts receivable is deductible under section 165(c)(1) of the Code.