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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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