R. Paul Kropp - Page 8

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          explained that relying on previous practice and the issuance of               
          Forms 1099-MISC, Miscellaneous Income, to Paul by the bookkeeping             
          service provider, he deducted the $81,000 on Doris Kropp’s 1994               
          tax return.  Mrs. Harte testified that she considered the $81,000             
          to be Paul’s wages although she had no personal knowledge of any              
          services actually performed by Paul in 1994.                                  
               As a trier of fact, it is our duty to listen to the                      
          testimony, observe the demeanor of the witnesses, weigh the                   
          evidence, and determine what we believe.  See Christensen v.                  
          Commissioner, 786 F.2d 1382, 1383-1384 (9th Cir. 1986), affg. in              
          part and remanding on another issue T.C. Memo. 1984-197; Nell v.              
          Commissioner, T.C. Memo. 1986-246.  At trial, we had the                      
          opportunity to evaluate Paul’s and Lorna’s veracity and to                    
          observe their demeanor.  We found Paul and Lorna to be credible               
          witnesses and accept their testimony that Paul did not perform                
          any services for Doris Kropp in 1994.  We believe that after her              
          husband’s death, Doris Kropp continued to provide for Paul and                
          his immediate family out of love and affection for them.  We                  
          therefore conclude that the $81,000 withdrawal was not on account             
          of services rendered by Paul to Doris Kropp but was instead a                 
          gift.  Accordingly, we hold that Paul and Lorna are not liable                
          for the deficiencies (including self-employment taxes) determined             
          by respondent with regard to the $81,000 withdrawal.                          

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