Rev. Rul. 64-149

Advice has been requested whether a Cuban national, who entered the United States under the circumstances described below and later participated in the action at the Bay of Pigs, Cuba, became a resident alien, for Federal income tax purposes, upon his entry into the United States. If so, advice is also requested concerning the Federal income tax consequences of the intervention by the Cuban Government in certain properties owned by the Cuban national.

Prior to 1960, the taxpayer, a Cuban national, lived in Cuba. In 1956 he acquired two apartment buildings in that country, which he personally managed and from which he received rental income. In April 1960, the taxpayer entered the United States on a visitor's visa. This was the only type of visa which he could obtain due to the political circumstances prevailing at that time.

On October 15, 1960, by virtue of a decree, the Cuban Government intervened all rental real estate in that country and gave the ownership thereof to the tenants then occupying it. At that time, promise of future indemnification was made to the owners. However, on December 5, 1961, the Cuban Government enacted a law which provided for the total confiscation of all Cuban properties owned by Cuban nationals who had left Cuba. This law provided that no indemnification was to be made to the legal owners of such property and, in effect, extinguished any right which the taxpayer may have had to indemnification under the decree of October 15, 1960. The taxpayer was never compensated, by insurance or otherwise, for the confiscation of his interest in the apartment buildings, and since his departure from Cuba, he has received no rental income from them.

During 1960, the taxpayer made three trips between the United States and another country. The purpose of these trips was to ascertain whether the taxpayer could develop a business relationship in that country on behalf of private United States interests. The trips were unsuccessful and the taxpayer received no fee or other compensation for his efforts.

In April 196-1, the taxpayer took part in the action at the Bay of Pigs, Cuba. As a consequence, he was imprisoned by the Cuban Government. However, he was released from prison in December 1962 and returned to the United States as a parolee under section 212(d)(5) of the Immigration and Nationality Act, 8 U.S.C. 1182(d)(5).

During his calendar taxable years 1960 and 1961, the taxpayer derived no gross income from sources within the United States and he has derived no gross income from sources without the United States since his departure from Cuba in April 1960. His only income during the year 1960 consisted of rental income and fees earned in practicing his profession before he left Cuba.

For Federal income tax purposes, alien individuals are divided generally into two classes, resident aliens and nonresident aliens. Resident aliens are, in general, taxable in the same manner as citizens of the United States. See section 1.871-1 of the Income Tax Regulations.

Section 1.871-2(b) of the regulations provides, in part, that an alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States. Whether he is a transient is determined by his intentions with regard to the nature and length of his stay. If he lives in the United States and has no definite intention as to his stay, he is a resident. Where an alien comes to the United States for a definite purpose which is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

The fact that the taxpayer entered the United States on a visitor's visa is not indicative of his intention at that time since he was then unable to obtain any other type of visa.

Accordingly, it is held that the taxpayer became a resident of the United States when he first entered this country in April 1960. His temporary absences, caused by his trips to the other country in 1960, did not affect his status as a resident since his departures from the United States were not coupled with an intention to abandon his United States residence. See I.T. 4057, C.B. 1951-2, 93, as modified by Revenue Ruling 60-129, C.B. 1960-1, 272. Further, his absence during the period he was imprisoned in Cuba under the circumstances here involved did not affect his status as a resident of the United States.

Section 165(a) of the Internal Revenue Code of 1954 provides the general rule that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. However, section 165(c) of the Code limits the deduction allowed to individuals under section 165(a) of the Code to (1) losses incurred in a trade or business, (2) losses incurred in any transaction entered into for profit, and (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

Section 1231 of the Code provides, in part, that if the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion of property used in the trade or business and capital assets held for more than 6 months, do not exceed the recognized losses from such sales, exchanges or conversions, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets.

Section 172(c) of the Code defines the term net operating loss to mean the excess of the deductions allowed by chapter 1 of subtitle A of the Code over the gross income. The excess shall be computed with the modifications specified in section 172(d) of the Code.

Section 1.172-1(a) of the regulations provides, in part, that the net operating loss is the basis for the computation of the net operating loss carryovers and net operating loss carrybacks and ultimately for the net operating loss deduction itself. The net operating loss deduction shall not be disallowed for any taxable year merely because the taxpayer has no income from a trade or business for the taxable year.

Revenue Ruling 62-197, C.B. 1962-2, 66, illustrates some of the problems encountered in determining the deductibility of losses sustained by reason of the confiscation by the Cuban Government of property owned in Cuba by United States citizens and domestic corporations. That ruling indicates, insofar as here pertinent, that such losses are deductible by an individual where they are incurred in the conduct of a trade or business or in a transaction entered into for profit. Although that ruling mentioned only United States citizens and domestic corporations, the failure to discuss the deductibility of losses incurred by resident aliens occurred because none of the specific factual situations upon which the ruling was based involved losses incurred by resident aliens. In view of the foregoing, Revenue Ruling 62-197 is hereby clarified to indicate that that ruling is applicable to losses incurred by resident aliens as well as losses incurred by citizens of the United States.

It is concluded, on the basis of the facts stated and on the principles enunciated in Revenue Ruling 62-197, that the taxpayer's two apartment buildings in Cuba constituted property used in a trade or business and that the intervention in those buildings by the Cuban Government resulted in a loss to the taxpayer in the taxable year 1960.

Since the taxpayer's gains did not exceed his losses (including the instant loss) from the type of transaction described in section 1231(a) of the Code in the year in which the loss occurred, it is further held that an ordinary loss deduction is allowable as a result of the intervention in the apartment buildings. This deduction may be used by the taxpayer in computing his net operating loss for the taxable year 1960. The net operating loss so computed is allowable as a carryback or carryover under the provisions of section 172 of the Code, subject to the modifications required by section 172(d) of the Code.

Revenue Ruling 62-197, C.B. 1962-2, 66, clarified.