                  T.C. Summary Opinion 2010-149



                     UNITED STATES TAX COURT



 GERALD W. CHIARITO, JR., AND DARLA K. CHIARITO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12127-09S.              Filed October 6, 2010.



     Gerald W. Chiarito, Jr. and Darla K. Chiarito, pro sese.

     Nicholas Doukas, for respondent.



     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1    Pursuant to section

7463(b), the decision to be entered is not reviewable by any




     1
        Unless otherwise indicated, all subsequent 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.
                                - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined a deficiency in petitioners’ 2005

Federal income tax of $14,205 and an accuracy-related penalty of

$2,841 under section 6662(a).

     After a concession by respondent,2 the sole issue for

decision is whether petitioners are entitled to exclude from

gross income a gain from the sale of a residence pursuant to

section 121.   We hold that petitioners are not entitled to such

exclusion.

                            Background

     Some of the facts have been stipulated, and they are so

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     Petitioners resided in the State of California when the

petition was filed.

     In January 2002, petitioners started a catering business

called “Goodfellas Catering”.   Because the health department

required all catering businesses to have an industrial kitchen,

petitioners opened a lunch restaurant called “Goodfellas at The

Galleria” in June 2002.   During the years 2002, 2003, and 2004,




     2
        Respondent concedes that petitioners are not liable for
the accuracy-related penalty under sec. 6662(a).
                                - 3 -

Goodfellas at The Galleria reported net losses of approximately,

$13,566, $29,572, and $21,121, respectively.

     In August 2003, petitioners purchased a home on Ryan Avenue

in Clovis, California (the Ryan home).     Petitioners’ basis in the

home, including the purchase price and applicable closing costs,

was $259,729.15.   Petitioners lived in the Ryan home as their

primary residence.

     In February 2005, petitioners purchased a home on East

Browning Avenue, also in Clovis, California (the Browning home),

which home sits on a 5-acre lot.   Petitioners purchased the

Browning home with the intent to build a second residence on the

property in which Mr. Chiarito’s parents would live and which

second residence would include an industrial kitchen for the

catering business as required by the health department.     The

Browning home was purchased subject to Covenants, Conditions and

Restrictions (CC&Rs), prohibiting the building of a second

residence; however, petitioners were unaware of such CC&Rs at the

time they purchased the home.

     In April 2005, petitioners sold the Ryan home for $379,950.

     In March 2006, the County of Fresno sent petitioners a

letter regarding the process for filing an application to build a

second residence on their property.     In June 2006, the Fresno

County Department of Public Works and Planning received six

letters from petitioners’ neighbors opposing the construction of
                               - 4 -

a second residence on petitioners’ property.    Because of the

CC&Rs and their neighbors’ opposition, petitioners were never

able to build the hoped-for second residence.

     Petitioners timely filed their 2005 Federal income tax

return, which return was prepared by a certified public

accountant.   Petitioners excluded the gain from the sale of the

Ryan home from their gross income pursuant to section 121.

     In a notice of deficiency respondent disallowed the

exclusion claimed by petitioners for gain on the sale of the Ryan

home residence.

                            Discussion3

     Gross income means all income from whatever source derived,

including a gain realized from the sale of property.    Sec.

61(a)(3); Commissioner v. Glenshaw Glass Co., 348 U.S. 426

(1955); secs. 1.61-1(a), 1.61-6(a), Income Tax Regs.    Section

121(a), however, allows a taxpayer to exclude from income gain on

the sale or exchange of property if the taxpayer has owned and

used such property as his principal residence for at least 2 of

the 5 years immediately preceding the sale.

     A taxpayer who fails to satisfy the ownership and use

requirements under section 121(a) may still qualify for a

prorated exclusion if “such sale or exchange is by reason of a


     3
         We decide this case without regard to the burden of
proof.
                              - 5 -

change in place of employment, health, or, to the extent provided

in regulations, unforeseen circumstances.”   Sec. 121(c).   In this

regard, section 1.121-3(b), Income Tax Regs., states as follows:

          (b) Primary reason for sale or exchange.–-* * *
     Factors that may be relevant in determining the
     taxpayer’s primary reason for the sale or exchange
     include * * * the extent to which–-

               (1) The sale or exchange and the
          circumstances giving rise to the sale or exchange
          are proximate in time;

               (2) the suitability of the property as the
          taxpayer’s principal residence materially changes;

               (3) the taxpayer’s financial ability to
          maintain the property is materially impaired;

               (4) the taxpayer uses the property as the
          taxpayer’s residence during the period of the
          taxpayer’s ownership of the property;

               (5) the circumstances giving rise to the sale
          or exchange are not reasonably foreseeable when
          the taxpayer begins using the property as the
          taxpayer’s principal residence; and

               (6) the circumstances giving rise to the sale
          or exchange occur during the period of the
          taxpayer’s ownership and use of the property as
          the taxpayer’s principal residence.

     “A sale or exchange is by reason of unforeseen circumstances

if the primary reason for the sale or exchange is the occurrence

of an event that the taxpayer could not reasonably have

anticipated before purchasing and occupying the residence.”    Sec.

1.121-3(e)(1), Income Tax Regs.   A sale or exchange by reason of

unforeseen circumstances does not qualify for the prorated

exclusion if the primary reason for the sale or exchange is a
                               - 6 -

preference for a different residence.     Id.   Events that qualify

as unforeseen circumstances include an involuntary conversion or

casualty loss of the residence, death, unemployment and changes

in employment, divorce or legal separation, or multiple births

resulting from the same pregnancy.     Sec. 1.121-3(e)(2), Income

Tax Regs.

     Petitioners purchased the Ryan home in August 2003 and sold

it in April 2005.   Although petitioners lived in the Ryan home as

their primary residence, they did not reside in the home for at

least 2 years before selling it.   Thus, petitioners do not

qualify for the exclusion from income under section 121(a).

     Petitioners may qualify for a prorated exclusion under

section 121(c) if the sale of the Ryan home was by reason of a

change in place of employment, health, or a result of unforeseen

circumstances.

     Before the sale of the Ryan home, neither petitioner had a

change in place of employment or a change in health status.

Petitioners contend that the sale of the Ryan home was a result

of unforeseen circumstances, including the need for an industrial

kitchen and therefore the purchase of the Browning home, the

eventual inability to build a second residence on the Browning

home property due to the CC&Rs, and the financial strain of the

losses sustained by Goodfellas at The Galleria.     Respondent
                                   - 7 -

contends that petitioners do not qualify for the prorated

exclusion for unforeseen circumstances under section 121(c).

        Although the circumstances in which petitioners found

themselves were unfortunate, none rises to the level of an

“unforeseen circumstance” within the meaning of section 121(c) or

its implementing regulation, section 1.121-3(b), Income Tax Regs.

Petitioners knew they had a need for an industrial kitchen as

early as the spring of 2002, which was the reason they also

started the lunch restaurant Goodfellas at The Galleria, over 1

year before the purchase of the Ryan home.       See sec. 1.121-

3(b)(5), (e)(1), Income Tax Regs.       Petitioners were also well

aware of the losses incurred by Goodfellas at The Galleria, as

the restaurant had sustained losses in 2002, 2003, and 2004.         See

id.

        In addition, petitioners only learned of their inability to

build a second residence and therefore an industrial kitchen on

the Browning home property at some point in 2006, well after they

had sold the Ryan home.4      See sec. 1.121-3(b)(6), Income Tax

Regs.       Furthermore, the sale of the Ryan home may be attributed

to petitioners’ preference for the Browning home, thereby

precluding petitioners from excluding the gain from the sale of

the residence from their gross income.       See sec. 1.121-3(e)(1),


        4
        Petitioners did not adequately explain why constructing
the industrial kitchen in either the Ryan home or the existing
Browning home was not an option.
                               - 8 -

Income Tax Regs.   Finally, the sale of the Ryan home was not the

result of an involuntary conversion or casualty loss of the

residence, or, with respect to either or both petitioners, death,

unemployment or a change in employment, divorce or legal

separation, or a multiple-birth pregnancy.     See sec. 1.121-

3(e)(2), Income Tax Regs.   Therefore, petitioners do not qualify

for the prorated exclusion for unforeseen circumstances under

section 121(c).

     In view of the foregoing, petitioners are not entitled to

exclude the gain from the sale of the Ryan home from gross income

pursuant to section 121.

                            Conclusion

     We have considered all of the other arguments made by

petitioners, and, to the extent that we have not specifically

addressed them, we conclude that they do not support a result

contrary to that reached herein.

     To reflect our disposition of the disputed issue, as well as

respondent’s concession,


                                            Decision will be entered

                                       under Rule 155.
