                       T.C. Memo. 2000-148



                       UNITED STATES TAX COURT



                  R. PAUL KROPP, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                  LORNA B. KROPP, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 10186-98, 10187-98.      Filed April 25, 2000.



     Maris Baltins and Tamara W. Murock, for petitioners.

     Julie L. Payne, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    In these consolidated cases, respondent

determined the following deficiencies in, additions to, and an

accuracy-related penalty on petitioners’ 1994 Federal income tax:
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                                                          Accuracy-Related
                                    Additions to Tax          Penalty
  Petitioner     Deficiency      Sec. 6651(a) Sec. 6654      Sec. 6652

R. Paul Kropp    $36,135         $8,797.50    $1,848.30         –-
Lorna B. Kropp     9,596             –-          –-           $1,919

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions,1 we must decide:         (1) Whether $81,000

withdrawn from a joint checking account (joint account) by one of

the petitioners is considered taxable compensation for services

rendered or a nontaxable gift, (2) whether petitioners are liable

for self-employment tax on account of the $81,000 withdrawal, and

(3) whether the additions to tax and accuracy-related penalty

apply.

                              FINDINGS OF FACT

     The stipulation of facts, the second stipulation of facts,

and the attached exhibits are incorporated herein by reference.

At the time R. Paul Kropp (hereinafter Paul) and Lorna B. Kropp



     1
        The parties stipulate that during 1994, R. Paul Kropp
(hereinafter Paul) received the following income: Capital gains
of $1,369, dividends of $1,646, interest of $214, and rent of
$12,000. The parties also stipulate that during 1994, Lorna B.
Kropp (hereinafter Lorna), Paul’s wife, earned wages of $12,549.
Respondent argues that pursuant to applicable community property
laws, Paul and Lorna must each report one-half of the couple’s
combined income. Petitioners do not contest respondent’s
position. We therefore find that petitioners concede this issue.
See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).
                                - 3 -

(hereinafter Lorna) filed their petitions, they resided in

Spokane, Washington.

     In 1981, Paul, a graduate of Wesleyan University and Yale

University, worked for the New England Nonprofit Housing

Development Corp.   In August 1981, Paul, along with Lorna and

their children, moved to Spokane, Washington, to aid his father

in developing several real estate properties and in handling his

father’s financial matters.   Paul performed those services from

1981 until his father’s death in 1983.2   In 1984, Paul helped

settle his father’s estate.   From 1981 to 1984, on account of the

services performed for his father and the settling of his

father’s estate, Paul withdrew funds from a joint account bearing

his name and the names of his father, his mother (Doris Kropp),

and Lorna.   Paul treated the withdrawn funds as income on his tax

returns for those years.   Paul and Lorna used the withdrawn funds

for their household’s living and medical expenses.

     After the estate was settled, Doris Kropp owned several

tracts of undeveloped land, two health/sports facilities, a

condominium, and a brokerage account consisting mostly of

municipal bonds.    Paul and his sister, Karen Harte (Mrs. Harte),

each received $600,000 from their father’s estate.

     Soon after the death of her husband, Doris Kropp encountered

mental health problems and currently resides in a nursing home.


     2
         Paul’s father died in an automobile accident.
                                - 4 -

Despite her intensifying illness, in 1984, Doris Kropp organized

a corporation to hold certain tracts of the undeveloped land and

gave stock in that corporation (corporate stock) equally to Paul

and Mrs. Harte and their immediate families.

     In 1985 and 1986, Paul rendered some services to Doris Kropp

with regard to her financial affairs.   In 1986, Paul arranged the

sale of one of the tracts of undeveloped land, but the buyer

decided not to purchase the property.   In 1991, Doris Kropp sold

that remaining tract of undeveloped land.   Paul was not involved

in the sale of that property.   Instead, Mrs. Harte’s husband met

with a real estate agent and the buyer for Doris Kropp.    Around

this time, Doris Kropp also sold one of the health/sports

facilities to Paul and the other to Mrs. Harte.   In 1994, Paul

worked extensively, on a volunteer basis, with children.     He

managed two soccer teams and chaired the Spokane Junior Soccer

Committee.

     From 1985 to 1994, Paul continued to withdraw funds from the

joint account, including $81,000 in 1994.   Paul and Lorna

continued to use the withdrawn funds for their household’s living

and medical expenses and in addition used the withdrawn funds for

the education of their children at a private school.   It is

unclear from the record how Paul treated the withdrawn funds on

his 1985 through 1993 tax returns or whether he filed tax returns

at all for those years.   Paul did not file a tax return for
                               - 5 -

1994.3

     From 1981 to 1994, except for the gift of the corporate

stock, Mrs. Harte received annual gifts from Doris Kropp not

exceeding $1,000.

     In the early 1980's, the Helena, Montana, office of the

accounting firm of Galusha, Higgins & Galusha (Galusha)

summarized Doris Kropp’s business transactions (bookkeeping) and

prepared her tax returns.   Sometime after the death of Paul’s

father (post-1983), Thomas J. Shea (Mr. Shea) of Galusha’s

Bozeman, Montana, office (Galusha’s Bozeman office) became

responsible for Doris Kropp’s bookkeeping and tax returns.

Shortly after assuming the bookkeeping responsibilities,

Galusha’s Bozeman office transferred the bookkeeping

responsibilities to another service provider (bookkeeping service

provider).   During the time Mr. Shea was responsible for Doris

Kropp’s bookkeeping, Mr. Shea had limited contact with Paul.

They never discussed the tax treatment of any particular item.

Thereafter, Mr. Shea did not have any further contact with Paul.

     Mr. Shea had no personal knowledge of the services Paul may

have performed for Doris Kropp.   From information provided by the

Helena, Montana, office of Galusha, Mr. Shea understood Paul’s

services to Doris Kropp to include managing her rental



     3
        For 1994, Lorna filed a tax return designated “Married
filing separate”.
                                 - 6 -

properties, land, and brokerage account.      Based upon that

understanding and the issuance of Forms 1099-MISC, Miscellaneous

Income, by the bookkeeping service provider, Mr. Shea deducted

the withdrawn funds on Doris Kropp’s tax returns, including her

1994 tax return.     Beginning with when Mr. Shea first prepared a

tax return for Doris Kropp through the filing of her 1994 tax

return, Mr. Shea has never been directed to treat the withdrawn

funds differently.

     In 1996, Mrs. Harte obtained a power of attorney from Doris

Kropp.     By 1997, Mr. Shea referred only to Mrs. Harte and her

husband with regard to Doris Kropp’s financial affairs.

     In separate notices of deficiency for 1994, respondent

determined, among other items, that the $81,000 was nonemployee

compensation and included the $81,000 in Paul’s and Lorna’s

income.4

                                OPINION

I.   Taxability of the $81,000 Withdrawal

     Gross income encompasses “all income from whatever source

derived, including * * * Compensation for services”.      Sec. 61(a).

The value of property acquired by gift, however, is not included

in gross income.     See sec. 102(a).    In Commissioner v.


     4
        Respondent included the entire $81,000 in Paul’s income.
Respondent also included one-half of the $81,000 in Lorna’s
income. Pursuant to applicable community property laws, Paul and
Lorna must each report one-half of any amount established by the
Court as nonemployee compensation.
                              - 7 -

Duberstein, 363 U.S. 278, 285 (1960), the Supreme Court stated

that a gift arises out of a transfer resulting from a “‘detached

and disinterested generosity,’ * * * ‘out of affection, respect,

admiration, charity or like impulses.’” (Citations omitted.)     We

perform a factual analysis in determining whether a transfer is

to be considered a gift, looking primarily at the intent of the

transferor.   See id.

     Petitioners contend that the $81,000 withdrawn from the

joint account constituted a nontaxable gift.   Respondent contends

that the $81,000 constituted compensation for services rendered

by Paul to Doris Kropp.

     Doris Kropp did not testify at trial.   In support of their

argument, Paul and Lorna testified that during 1994, Paul did not

render any services to Doris Kropp.   Respondent presented two

witnesses, Mr. Shea and Mrs. Harte, in support of his position.

     Although it is without question that Paul performed services

for his father and his father’s estate from 1981 to 1984 and that

he continued to perform some minor services for Doris Kropp in

the years immediately following her husband’s death, the record

does not support respondent’s contention that Paul continued to

perform services for Doris Kropp as late as 1994, the taxable

year at issue.

     Mr. Shea did not have any personal knowledge of the services

Paul may have performed for Doris Kropp in 1994.   Mr. Shea
                               - 8 -

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.
                               - 9 -

II.   Additions to Tax and Accuracy-Related Penalty

      Because we have concluded that the $81,000 did not

constitute taxable compensation and the parties have made various

concessions, they will have to determine in their Rule 155

computations whether Paul or Lorna has an underpayment of tax so

that the additions to tax pursuant to sections 6651(a)(1) and

6654 still apply to Paul and the accuracy-related penalty

pursuant to section 6662 still applies to Lorna.

      For purposes of the section 6651(a)(1) addition to tax

calculation, Paul does not argue that the “reasonable cause and

not due to willful neglect” exception applies, and we conclude

that the exception does not apply in the instant case.     With

regard to the section 6654 addition to tax, Paul argues on brief

that the exception listed in section 6654(e)(1) applies.     The

section 6654(e)(1) exception is computational, and we leave it

for the parties to compute.

      As for the section 6662 accuracy-related penalty, Lorna

argues that she acted in good faith and that she did not engage

in negligence or disregard of rules or regulations.   Because

Lorna has failed to present any evidence with regard to the

underpayment (if any) associated with the items of income

conceded, we conclude that the section 6664(c)(1) exception (for

reasonable cause and good faith) does not apply.

      To the extent not herein discussed, we have considered the
                             - 10 -

parties’ other arguments and found them to be irrelevant or

without merit.

     To reflect the foregoing,

                                        Decisions will be entered

                                   under Rule 155.
