I could argue as follows --- (a) the father's property was condemned/sold to the city for a sum plus some work on the part of the city to make the remainder property useful ( via an access corridor). His sales price and therefore the tax of gain included recognition of this contractual performance. Thus the transaction inits entirety was taxed. (b) the father died and the beneficiary ( mother ) got a step-down to FMV; (c) the children took over the property through gift but could not use the property because city did not allow access -- thus their property essentially was not available to them i.e the whole property was un-useable -- their right to enjoy the property was constrained. Now when the city pays them for non-use of their property in-lieu of rectifying the defect, ( for the harm they caused for years ), this is not income -- it is payback for sufferance. No ? Perhaps you need to see a lawyer . To me treating me this compensation ( for damage ) as income would be harm on top of harm -- No ?
