                          T.C. Memo. 2011-46



                        UNITED STATES TAX COURT



     DOMINICK DENAPLES AND MARY ANN DENAPLES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

         LOUIS DENAPLES AND BETTY A. DENAPLES, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket Nos. 14357-08, 14359-08.      Filed February 24, 2011.



          Ps filed a motion for reconsideration of our opinion in
     DeNaples v. Commissioner, T.C. Memo. 2010-171, and a motion
     to vacate or revise the decisions entered thereunder,
     arguing that our disposition of these cases constitutes
     substantial error.

            Held:   Ps’ motions will be denied.




     *
      This opinion supplements our previously filed Memorandum
Opinion in DeNaples v. Commissioner, T.C. Memo. 2010-171.
                                  -2-

     David B. Blair, Joel C. Weiss, Layla J. Aksakal, and Barry

H. Frank, for petitioners.

     Peter James Gavagan, for respondent.



                    SUPPLEMENTAL MEMORANDUM OPINION


     NIMS, Judge:     These cases remain before the Court on

petitioners’ Motion for Reconsideration of Memorandum Opinion

Pursuant to Tax Court Rule 161 (Motion for Reconsideration) and

Motion to Vacate or Revise Decisions Pursuant to Tax Court Rule

162 (Motion to Vacate).    Since the Motion for Reconsideration and

Motion to Vacate (collectively, the Motions) are interconnected,

we deal with them together.    The Motions relate to our Memorandum

Opinion DeNaples v. Commissioner, T.C. Memo. 2010-171, filed

August 3, 2010, which we incorporate herein, and the decisions

entered thereunder.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                              Background

     We adopt the findings of fact in our prior Memorandum

Opinion, DeNaples v. Commissioner, supra.     For convenience and

clarity, we will repeat the facts necessary to understand the

discussion that follows.
                                -3-

     The Pennsylvania Department of Transportation

(PENNDOT) took property, owned by Dominick and Louis DeNaples

(petitioners) through three passthrough entities (condemnees), by

eminent domain by filing a series of declarations of taking from

1993 to 1998.   The condemnees ultimately settled with PENNDOT

(the Settlement Agreement), agreeing to a $40,900,000 payment

(the Settlement Amount) which was allocated $24,638,555 to

principal and $16,261,445 to interest (Settlement Interest).

Payment was to be made in installments, with interest accruing

annually on the unpaid Settlement Amount (Installment Payment

Interest) at the rate set by rule 238 of the Pennsylvania Rules

of Civil Procedure.

     PENNDOT accordingly paid petitioners (who were responsible

for distributing the installment payments to the condemnees) each

$10,111,193 in 2003, $9,289,353 in 2004, and $17,739,276 in 2005.

On their 2003 through 2005 Forms 1040, U.S. Individual Income Tax

Return, each petitioner reported as taxable interest income only

the portion of the Settlement Interest representing interest on

the principal at the 6-percent rate of interest for delay damages

provided under 26 Pa. Stat. Ann. sec. 1-611 (West 2006) because

petitioners believed that PENNDOT was legally required to pay

only this amount.   Petitioners believed that the remainder of the

Settlement Interest and all of the Installment Payment Interest

were instead paid pursuant to PENNDOT’s voluntary exercise of its
                                -4-

borrowing power.   Petitioners thus excluded those amounts from

gross income as tax-exempt interest under section 103.

     Respondent issued notices of deficiency to each petitioner

determining that the excluded interest was not tax exempt.    The

notices did not, however, dispute petitioners’ allocation of the

Settlement Amount between principal and interest.

     In our Memorandum Opinion in DeNaples v. Commissioner,

supra, we found the rate at which the Settlement Interest had

accrued could not be determined because the settlement allocation

appeared to be the product of an arbitrary assignment by

petitioners and PENNDOT rather than a mathematical computation of

interest.   We also held that the constitutional requirement of

just compensation obligated PENNDOT to pay interest at the

prevailing commercial loan rate of interest from the date of the

taking until the date of payment.     Because petitioners submitted

no evidence of the commercial loan rates during that period, we

held that they had failed to carry their burden of proving that

PENNDOT paid any interest in excess of the legally required

amount.   We therefore did not reach the issue of whether

petitioners could exclude any such excess interest.    Thereafter,

we entered decisions in favor of respondent for the amounts set

forth in the notices of deficiency.
                                  -5-

                            Discussion

I.   Motion for Reconsideration

      Reconsideration under Rule 161 serves the limited purpose of

correcting manifest errors of fact or law or allowing for the

introduction of newly discovered evidence that could not have

been introduced before the filing of an opinion even if the

moving party had exercised due diligence.     Estate of Quick v.

Commissioner, 110 T.C. 440, 441 (1998).     The granting of a motion

for reconsideration rests within the discretion of the Court, and

taxpayers must show unusual circumstances or substantial error

for their motion to be granted.     Id.

      Petitioners argue that our Memorandum Opinion contains

substantial errors of fact and law regarding PENNDOT’s legal

obligation to pay the Installment Payment Interest because they

claim it ignores the Court of Appeals for the Ninth Circuit’s

instruction that “In * * * [cases involving an agreement entered

in connection with a condemnation proceeding], courts must

determine whether the agency’s obligation to pay interest arises

by operation of law, rather than as the result of voluntary

bargaining.”   See Stewart v. Commissioner, 714 F.2d 977, 983 (9th

Cir. 1983) (Stewart I), affg. T.C. Memo. 1982-209.    Petitioners

contend that PENNDOT lacked the necessary funds to immediately

pay the Settlement Amount and requested that payments be made on

an installment basis because it needed credit.    Petitioners claim
                                -6-

that the obligation to pay interest under an installment

agreement has been held in similar circumstances to be the

product of voluntary bargaining.   See Stewart v. United States,

739 F.2d 411 (9th Cir. 1984) (Stewart II); Stewart v. United

States, 57 AFTR 2d 86-1093, 86-1 USTC par. 9372 (D. Ariz. 1986)

(Stewart III).

     In Stewart II, the taxpayers sold their land to the city of

Phoenix under threat of condemnation.   The city agreed to pay for

the property in installments with 6-percent interest accruing on

the unpaid balance.   The Court of Appeals for the Ninth Circuit

remanded because the joint factual stipulation of the parties did

not address whether the taxpayers and the city had agreed to the

installment payments because the taxpayers wanted the benefit of

installment reporting or because the city wanted credit.

     On remand, the District Court found in Stewart III that the

city did not have the cash necessary to purchase the taxpayers’

property and agreed to the installment agreement because it

wanted credit.   The District Court therefore entered judgment

that the interest was excludable from the taxpayers’ gross income

by reason of section 103.

     In Holley v. United States, 124 F.2d 909 (6th Cir. 1942),

the city of Detroit was in financial difficulty and entered into

an installment agreement with the taxpayer in contemplation of

the completion of condemnation proceedings.   In holding that the
                                -7-

interest on the installment payments was not exempt, the Court of

Appeals for the Sixth Circuit stated:

     While the contract to defer payment was voluntary, the
     taking was not, all the proceedings being under the power of
     eminent domain and necessarily compulsory upon the
     appellant. The compensation therefore had to be that
     required in condemnation proceedings, namely, the full
     equivalent of the value of the land at the time of the
     taking. Under such circumstances, the interest is
     considered to be a part of the award itself, and essential
     to just compensation for the land where it is taken before
     full payment is made. * * * [Id. at 910.]

     In Drew v. United States, 551 F.2d 85 (5th Cir. 1977), and

King v. Commissioner, 77 T.C. 1113 (1981), the taxpayers sold

their property to the Trinity River Authority (TRA) under threat

of condemnation.   The taxpayers elected to receive part of their

compensation in the form of interest-bearing warrants.   In Drew

v. United States, supra at 89, the Court of Appeals for the Fifth

Circuit stated that “The fact that TRA allowed them and other

landowners to elect to receive compensation on a deferred basis,

and thereby to obtain the additional tax advantage of installment

reporting, did not convert the transaction to a voluntary one.”

In King v. Commissioner, supra, our Court adopted the reasoning

in Drew in also holding that the interest on the warrants was not

excludable.

     Petitioners argue that their cases are distinguishable from

Drew in that PENNDOT did not have the funds necessary to pay the

Settlement Amount and that PENNDOT approached petitioners

regarding the installment payments.
                                -8-

     Petitioners contend that if we follow the Court of Appeals

for the Ninth Circuit’s approach in considering the Settlement

Agreement independently, we should treat PENNDOT’s obligation to

pay the Installment Payment Interest as having arisen under

PENNDOT’s exercise of its borrowing power because PENNDOT lacked

the money to pay the Settlement Amount.    Petitioners rely on

Stewart II, where the court remanded to determine whether the

City needed credit because it lacked the money to purchase the

taxpayers’ property.

     Our cases, however, are distinguishable from Stewart II in

that it involves a different type of transaction.    Whereas

Stewart II dealt with a sale made under threat of condemnation,

PENNDOT acquired petitioners’ property by exercising its power of

eminent domain.   The difference between these two types of

transactions is explained in Stewart II, 739 F.2d at 413:      “This

case is different from Stewart [I] because here no condemnation

proceedings were ever instituted.     Therefore, the City was under

no legal obligation to pay interest as it was in Stewart [I].”

     In contrast, where condemnation proceedings have been

instituted, the government does have a legal obligation to pay

some amount of interest.   In Stewart I, that amount of legally

required interest exactly equaled the amount of interest under

the financing agreement.   As a result, the court held that the

city’s obligation to pay interest arose by operation of law.
                                 -9-

     Here, it is unclear whether the Installment Payment Interest

exceeded the legally required amount because petitioners did not

submit any evidence of the legal rate of interest (i.e., the

commercial loan rate) during the relevant years.   Therefore,

petitioners may not exclude any of the Installment Payment

Interest because they failed to satisfy their burden of proving

that PENNDOT paid any interest in excess of the legally required

amount.   See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Because petitioners have not shown any payment of excess

interest, we need not reach the question of whether a payment of

excess interest would be sufficient to entitle them to an

exclusion under section 103.

     Although petitioners submitted an allocation of the

Settlement Amount between principal and interest, we rejected

that allocation as inaccurate.   Since petitioners offered no

other evidence from which we can determine the correct

allocation, the record provides no basis for determining how much

of the Settlement Amount would represent interest.

     Petitioners wish to perform alchemy by using the Settlement

Agreement to transmute legally required interest into tax-exempt

interest.   The Court of Appeals for the Ninth Circuit did not

permit the taxpayers in Stewart I to do so by entering into a

financing agreement which called for the same amount of interest

as that which the City was required to pay by operation of law.
                               -10-

Since petitioners have not proven that PENNDOT paid any amount in

excess of the legally required amount, they likewise cannot

convert the Installment Payment Interest into tax-exempt

interest.

      Furthermore, because the Court of Appeals for the Third

Circuit has not examined the issue of interest under a financing

agreement entered into in connection with the condemnation of

property, our decision in King v. Commissioner, supra, remains

binding precedent.   Our prior Memorandum Opinion is consistent

with the holding of King v. Commissioner, supra, and thus

contains no substantial error of fact or law.

      For these reasons, we will deny petitioners’ Motion for

Reconsideration.

II.   Motion to Vacate

      Rule 162 allows a party to file a motion to vacate or revise

a decision within 30 days after the decision has been entered,

unless the Court permits that 30-day period to be extended.     The

disposition of a motion to vacate or revise a decision lies

within the sound discretion of the Court.    Vaughn v.

Commissioner, 87 T.C. 164, 166-167 (1986).   Although Rule 162

does not provide any standard for evaluating such a motion, Rule

1(b) provides that we may give weight to the Federal Rules of

Civil Procedure (FRCP) “to the extent that they are suitably

adaptable to govern the matter at hand.”
                                -11-

     We have often referred to FRCP 60 and cases applying FRCP 60

to assist us in resolving issues raised in a motion to vacate

decision under Rule 162.    See Cinema ’84 v. Commissioner, 122

T.C. 264, 267-268 (2004), affd. 412 F.3d 366 (2d Cir. 2005);

Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C. 999, 1001

(1978); Kun v. Commissioner, T.C. Memo. 2004-273.    Grounds for

relief under FRCP 60 include mistake, newly discovered evidence

that could not have been discovered with reasonable diligence,

and “any other reason that justifies relief.”    FRCP 60(b)(1),

(2), and (6).    In the Court of Appeals for the Third Circuit,

relief under FRCP 60(b)(6) requires a showing of extraordinary

circumstances.    Coltec Indus., Inc. v. Hobgood, 280 F.3d 262, 273

(3d Cir. 2002).

     Petitioners claim that “Given the Court’s findings that the

allocation of $16,261,445 of the Settlement Amount to interest

did not reflect a genuine interest charge, it follows that

petitioners’ returns * * * overstated the portion * * * that

represented interest income, and understated * * * principal.”

Because the notices of deficiency are premised on the theory that

the amounts petitioners reported as tax-exempt interest are not

exempt but do not challenge the characterization of the reported

amounts, petitioners contend that the deficiencies determined by

respondent are excessive because they understate petitioners’

capital gains and overstate their ordinary income as a result of
                                -12-

that understatement of principal.      Petitioners contend that we

should have ordered the parties to recompute petitioners’

deficiencies under Rule 155.    Petitioners ask us to vacate the

decisions because they argue that failure to do so will affect

the substantial rights of the parties and would be inconsistent

with substantial justice.

     Petitioners misstate our findings regarding the allocation

of the Settlement Amount.   We found only that the allocation was

inaccurate and that petitioners had therefore failed to meet

their burden of proof.   That finding does not establish that

interest had been overstated.

     In addition, directing the parties to recompute petitioners’

deficiencies under Rule 155 would have been inappropriate because

the Rule 155 computation process is not intended to provide

either party an opportunity to raise or relitigate issues.     See

Cloes v. Commissioner, 79 T.C. 933, 935 (1982); Estate of Papson

v. Commissioner, 74 T.C. 1338, 1340 (1980).     Petitioners already

had an opportunity to litigate the issue of the correct amount of

Settlement Interest.   Petitioners chose to submit these cases

fully stipulated.   Recomputation of petitioners’ deficiencies

would require relitigation of the issue because contrary to

petitioners’ contention, determining the correct amount of

Settlement Interest is not simply “a computational matter of

applying the appropriate discount rate to the known Settlement
                               -13-

Amount over the known periods of delay.”   The appropriate

discount rates are not part of the record, and establishing those

rates (which would be based on the prevailing commercial loan

rates of interest) would require the introduction of additional

evidence.   Thus, we did not err in entering decisions based on

the deficiencies determined in the notices of deficiency rather

than directing the parties to recompute the deficiencies under

Rule 155.   Petitioners are not entitled to relief because they

have not shown any error in our decisions.

     Nor are petitioners entitled to relief under FRCP 60(b)(2)

because proof of the commercial loan rates would not be newly

discovered evidence.

     We are not swayed by petitioners’ appeal to justice because

the deficiencies determined by respondent are based on the

figures that petitioners themselves reported on their returns.

Thus, if the notices of deficiency overstate the amounts of

interest and understate the amounts of principal, they do so

because petitioners misreported these amounts.   Petitioners had

access to the information necessary to determine the correct

allocation of interest and principal in the Settlement Amount.

Yet from the time petitioners completed their returns until the

time we issued our Memorandum Opinion, petitioners claimed an

amount of interest which they now contend to be excessive when it

was presumptively to their advantage to allocate as much of the
                                 -14-

Settlement Amount to interest as possible.      Since we held the

Settlement Interest is not excludable, petitioners would benefit

from allocating a greater portion of the Settlement Amount to

principal and now seek to do so.    Allowing petitioners to game

the tax system in this manner would hardly serve the interests of

justice.

     For these reasons, we will deny petitioners’ Motion to

Vacate.

     To reflect the foregoing,


                                        Appropriate orders will be

                                 issued denying petitioners’

                                 Motion for Reconsideration and

                                 Motion to Vacate.
