In DeNaples v. Commissioner , 109 AFTR 2d 2012-1419 (March 19, 2012), the U.S. Court of Appeals for the Third Circuit, in partially reversing the U.S. Tax Court, held that taxpayers were in receipt of tax-exempt interest income under Section 103 of the Internal Revenue Code with respect to installment payments made pursuant to a settlement agreement with the commonwealth of Pennsylvania that arose out of an eminent domain proceeding. The Third Circuit affirmed the holding of the Tax Court that the stated interest component of the settlement was not excludable under Section 103 because of the taxpayers’ failure to meet its required burden of proof.
Members of the DeNaples family, through their control of various entities, owned several parcels of real property in Pennsylvania that were condemned by the Pennsylvania Department of Transportation (PennDOT) to facilitate the construction of the Lackawanna Valley Industrial Highway. In 1998, PennDOT initiated condemnation proceedings against the properties by filing a declaration of taking. The DeNapleses objected to the taking and litigation ensued, according to the opinion.
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