Bernardus A. P. Dobbe and Klazina W. Dobbe - Page 11




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          America during FYE 1993 and prior periods.  Petitioners offered             
          testimony from Mr. and Mrs. Dobbe and from their accountant to              
          prove that (1) the written leases in effect during FYE 1993 and             
          prior years included the Dobbe residence, and (2) even if the               
          written leases did not include the residence, there was an oral             
          lease covering the residence during FYE 1993 and prior years.               
          Respondent objected to the testimony, citing Washington State’s             
          parol evidence rule.  We conditionally admitted the testimony               
          over respondent’s objection but reserved final ruling and                   
          directed the parties to brief the issue.  Upon consideration of             
          the applicable law and the evidence in the record, we conclude              
          that the testimony is admissible solely on the question of                  
          whether petitioners entered into an oral lease covering the                 
          residence.                                                                  
               A.  The Parol Evidence Rule                                            
               It is well settled that the State law applicable to the                
          contract at issue governs whether parol evidence is admissible.             
          See Estate of Craft v. Commissioner, 68 T.C. 249, 262 (1977),               
          affd. per curiam 608 F.2d 240 (5th Cir. 1979).  The parties agree           
          that Washington State law applies to the leases at issue in this            
          case.  Under Washington State law, the general rule is that                 
          “parol evidence is not admissible for the purpose of adding to,             
          modifying, or contradicting the terms of a written contract, in             
          the absence of fraud, accident, or mistake.”  Berg v. Hudesman,             






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