Michiko Noguchi v. Commissioner of Internal Revenue Service, Robert R. Midkiff and Evanita S. Midkiff v. Commissioner of Internal Revenue Service

Taxpayers in these consolidated appeals are residents of Hawaii. Their residences are situated on lots which they formerly leased. As lessees of houselots, they acquired rights under the Hawaii Land Reform Act of 1967 (HLRA) to acquire the fee interest in the lots at fair market value. They exercised those rights and acquired the fee interests by paying the lessors fair market value plus “blight of summons” damages. Blight of summons damages are an additional sum owed the lessors under Hawaii eminent domain law for delay of payment. The sole question presented by these consolidated appeals is whether the blight of summons damages are deductible as “interest paid ... on indebtedness” under § 163(a) of the Internal Revenue Code.

The facts of the cases are not; in dispute. They are set out fully in the opinions of the Tax Court. Midkiff v. Commissioner, 96 T.C. 724 , 1991 WL 83269 (1991); Noguchi v. Commissioner, 61 T.C.M. (CCH) 2674 , 1991 WL 83275 (1991). The Tax Court ruled against the taxpayers. We affirm because we agree with the Tax Court that the taxpayers never incurred an obligation to purchase the lots at any time before they paid the purchase price and acquired the fee…