DeNaples v. Comm’r of Internal Revenue

Taxpayers (married couples) had an interest in real estate that was condemned by Pennsylvania for construction of a highway. The state agreed to pay $40.9 million, with interest, in five yearly installments. During the first three years of the agreement, the taxpayers excluded the interest from their federal income taxes as exempt under 26 U.S.C. 103, which permits exclusion of interest payments that are obligations of the state. The IRS issued to each couple a deficiency notice for $2.3 million, which was affirmed by the Tax Court. The Third Circuit reversed in part. Negotiations between the parties transformed the state's interest obligation from mandatory to voluntary. The purpose underlying Section 103 was "well served" in this case; the state was able to obtain credit from the taxpayers at a lower rate of interest than it otherwise might have had to if the condemnation proceeding had been completed. View "DeNaples v. Comm'r of Internal Revenue" on Justia Law