The hotel is indeed an old palace. It is, in fact, a historical palace smack in the center of Taormina, with great views of both Vesuvio and the sea, and directly accessing the pedestrian-only area of the town.
Also, it is indeed old... with wooden floors, classic decor, vintage furniture, etc. Our room (a junior suite) was spacios and well appointed, with a great view, and a very comfortable bed.
The real star of the show, however, is the staff. They went out of their way to make our stay comfortable, and one could really tell that they cared--what a difference from the faceless, by-the-book staff of major chains.
Also worthy of note is the restaurant. We visited off-season, so some of the more famous restaurants were closed, but the hotel restaurant was a gem, both in terms of cuisine and service.
All in all, highly recommended.