David A. Gates and Christine A. Gates, Petitioners v. Commissioner of Internal Revenue, Respondent, 135 T.C. 1

OPINION Marvel, Judge: Respondent determined a deficiency in petitioners’ Federal income tax of $112,553 and an addition to tax under

section 6651(a)(1) of $11,211 for 2000. Petitioners filed a timely petition contesting respondent’s determination. After concessions, the issues for decision are:

(1) Whether petitioners may exclude from gross income $500,000 of capital gain from the sale in 2000 of property on Summit Road in Santa Barbara, California (Summit Road property), under

section 121(a); and (2) whether petitioners are liable for the

section 6651(a)(1) addition to tax. Background The parties submitted this case fully stipulated pursuant to Rule 122. We incorporate the stipulation of facts into our findings by this reference. Petitioners resided in California when the petition was filed. On December 14, 1984, petitioner David A. Gates (Mr. Gates) purchased the Summit Road property for $150,000. The Summit Road property included an 880-square-foot two-story building with a studio on the second level and living quarters on the first level (original house). On August 12, 1989, Mr. Gates married petitioner Christine A. Gates.

Petitioners resided in the original house for a period of at least 2 years from August 1996 to August 1998. In 1996 petitioners decided to enlarge and remodel the original house, and they hired an architect. The architect advised petitioners that more stringent building and permit restrictions had been enacted since the original house was built. Subsequently, petitioners demolished the original house and constructed a new three-bedroom house (new house) on the Summit Road property. The new house complied with the building and permit requirements existing in 1999.

During 1999 petitioners had outstanding mortgage loans, but the record does not disclose the identity of the property or properties that secured the mortgage loans or the dates, amounts, or purposes of the loans. Petitioners never resided in the new house. On April 7, 2000, petitioners sold the new house for $1,100,000. The sale resulted in a $591,406 gain to petitioners. On April 15, 2001, petitioners applied for an automatic extension of time for filing their 2000 Form 1040, U.S. Individual Income Tax Return (2000 return). However, petitioners failed to file their 2000 return by the August 15, 2001, due date.

On September 17, 2001, petitioners filed their 2000 return. On their 2000 return, petitioners did not report as income any of the $591,406 capital gain generated from the sale of the Summit Road property. Petitioners subsequently agreed that $91,406 of the gain should have been included in their gross income for 2000, but they asserted that the remaining gain of $500,000 was excludable from their income under

section 121. On September 9, 2005, respondent mailed petitioners a notice of deficiency for 2000 that increased petitioners’ income by $500,000 and explained that petitioners had failed to establish that any of the gain on the sale of the Summit Road property was excludable under

section 121. Respondent also determined an addition to tax under

section 6651(a)(1) for petitioners’ failure to timely file their 2000 return. Petitioners timely petitioned this Court seeking a redeter-mination of the deficiency and addition to tax. Petitioners assert that respondent erred in determining that they were not entitled to exclude $500,000 of the gain under

section 121. Petitioners also argue that because they are not liable for a deficiency, respondent erred in determining that they were liable for the

section 6651(a)(1) addition to tax. Discussion I. Burden of Proof Ordinarily, the Commissioner’s determination is entitled to a presumption of correctness, Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985), and the burden of proving error in the determination generally rests with the taxpayer, Rule 142(a). Petitioners argue that because respondent’s determination in the notice of deficiency is arbitrary, excessive, and without foundation, respondent’s determination is not entitled to any presumption of correctness and that respondent bears the burden of proof.

Petitioners also contend that respondent has failed to meet his burden of producing evidence in support of his determination that petitioners have unreported income. Petitioners do not dispute that they received proceeds from the sale of the Summit Road property or that the sale resulted in gain that is taxable to them unless some part of the gain is excluded under

section 121(a). Accordingly, we hold that respondent’s determination is entitled to the presumption of correctness and that petitioners have the burden of proof. We note, however, that this case is fully stipulated and that there is no disputed issue of fact that might be affected by our assignment of the burden of proof. II. Sale of the Summit Road Property Gross income means all income from whatever source derived, unless excluded by law. See sec. 61(a); sec. 1.61 — 1(a), Income Tax Regs. Generally, gain realized on the sale of property is included in a taxpayer’s income. Sec. 61(a)(3).

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 or her principal residence for at least 2 of the 5 years immediately preceding the sale.

Section 121(

a) specifically provides: SEC. 121(a). Exclusion. — Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. [Emphasis added.] The maximum exclusion is $500,000 for a husband and wife who file a joint return for the year of the sale or exchange. Sec. 121(b)(2).

A married couple may claim the $500,000 • exclusion on the sale or exchange of property they owned and used as their principal residence if either spouse meets the ownership requirement, both spouses meet the use requirement, and neither spouse claimed an exclusion under

section 121(

a) during the 2-year period before the sale or exchange. Sec. 121(b)(2)(A). The issue presented arises from the fact that

section 121(

a) does not define two critical terms — “property” and “principal residence”.

Section 121(

a) simply provides that gross income does not include gain from the sale or exchange of property if “such property” has been owned and used by the taxpayer “as the taxpayer’s principal residence” for the required statutory period. Respondent contends that petitioners did not sell property they had owned and used as their principal residence for the required statutory period because they never occupied the new house as their principal residence before they sold it.

Respondent’s argument interprets the term “property” to mean, or at least include, a dwelling that was owned and occupied by the taxpayer as his “principal residence” for at least 2 of the 5 years immediately preceding the sale. Respondent urges this Court to conclude that a qualifying sale under

section 121(

a) is one that includes the sale of a dwelling used by the taxpayer as his principal residence. Because petitioners never resided in the new house before its sale in 2000, respondent maintains that the new house was never petitioners’ principal residence. Predictably, petitioners disagree. Petitioners argue that any analysis of

section 121(

a) must recognize that the exclusion thereunder applies to the gain on the sale of property that was used as the taxpayer’s principal residence. Petitioners’ argument focuses on two facts — petitioners used the original house as their principal residence for the period required by

section 121(

a) and they sold the land on which the original house had been situated. Petitioners contend that the term “property” includes not only the dwelling but also the land on which the dwelling is situated. Petitioners seem to argue that the requirements of

section 121(

a) are satisfied if a taxpayer lived in any dwelling on the property for the required 2-year period even if that dwelling is not the dwelling that is sold. Petitioners contend that because they used the original house and the land on which it was situated as their principal residence for the required term, the Summit Road property qualifies as their principal residence and $500,000 of the gain generated by the sale of the property is excluded under

section 121. Because

section 121 does not define the terms “property” and “principal residence”, we must apply accepted principles of statutory construction to ascertain Congress’ intent. It is a well-established rule of construction that if a statute does not define a term, the term is given its ordinary meaning. See Perrin v. United States, 444 U.S. 37, 42 (1979); Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 833 (9th Cir. 1996); Keene v. Commissioner, 121 T.C. 8, 14 (2003). It is also well established that a court may look to sources such as dictionaries for assistance in determining the ordinary meaning of a term.

See Muscarello v. United States, 524 U.S. 125, 127-132 (1998). We look to the legislative history to ascertain Congress’ intent if the statute is ambiguous. See Burlington N. R.R. v. Okla. Tax Commn., 481 U.S. 454, 461 (1987). Exclusions from income must be construed narrowly, and taxpayers must bring themselves within the clear scope of the exclusion. See Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998) (citing Graves v. Commissioner, 89 T.C. 49, 51 (1987), supplementing 88 T.C. 28 (1987)).

The American Heritage Dictionary of the English Language 1405 (4th ed. 2000) defines “property” as “Something owned; a possession”, “A piece of real estate”, and “The right of ownership; title.” Merriam-Webster’s Collegiate Dictionary 935 (10th ed. 1997) defines “property” as “a quality or trait belonging and esp. peculiar to an individual or thing” and “something owned or possessed; specif: a piece of real estate”.

Black’s Law Dictionary 1335-1336 (9th ed. 2009) defines “property” as “The right to possess, use, and enjoy a determinate thing (either a tract of land or a chattel)” and “Any external thing over which the rights of possession, use, and enjoyment are exercised”. The American Heritage Dictionary of the English Language 1395 (4th ed. 2000) defines “principal” in its first definition as “First, highest, or foremost in importance, rank, worth, or degree; chief.” Similar

definitions appear in other dictionaries. See, e.g., Merriam-Webster’s Collegiate Dictionary 926 (10th ed. 1997); Black’s Law Dictionary 1312 (9th ed. 2009).

The American Heritage Dictionary of the English Language 1483 (4th ed. 2000) defines “residence” as “The place in which one lives; a dwelling” and “The act or a period of residing in a place.” Merriam-Webster’s Collegiate Dictionary 996 (10th ed. 1997) defines “residence” as “1 a: the act or fact of dwelling in a place for some time b: the act or fact of living or regularly staying at or in some place for the discharge of a duty or the enjoyment of a benefit” and “3 a: building used as a home: DWELLING [synonym]”. See also Black’s Law Dictionary 1423 (9th ed. 2009). When the dictionary

definitions of “principal” and “residence” are combined, we conclude that “principal residence” may have two possible meanings. It can either mean the chief or primary place where a person lives or the chief or primary dwelling in which a person resides. Likewise, the term “property” as used in

section 121(

a) can refer more broadly to a parcel of real estate, or it can refer to the dwelling (and related curtilage) used as a taxpayer’s principal residence. Because there is more than one possible meaning for both the term “property” and the term “principal residence”, we cannot conclude that the meaning of

section 121(

a) is clear and unambiguous.

Section 121(

a) is not explicit as to whether Congress intended

section 121 to apply to a sale of property when the property sold does not include the dwelling that the taxpayer used as a principal residence for the period that

section 121(

a) requires. Because

section 121(

a) is ambiguous, we may examine the legislative history of

section 121 and its predecessor provisions to ascertain Congress’ intent regarding the proper tax treatment of principal residence sales. Until 1951 any gain realized on the sale of a principal residence was taxed as capital gain. S. Rept. 781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 458, 482. In 1951 Congress recognized that many taxpayers faced hardship as a result of tax on gain realized on the sale of their principal residences— especially where a taxpayer was compelled to sell his principal residence and move to a new one because of a change in circumstances such as an increase in family size or relocation for employment — and granted relief by enacting

section 112(n)(1) (former

section 112(n)(1)). Revenue Act of 1951, ch. 521, sec. 318, 65 Stat. 494; S. Rept. 781, supra, 1951-2 C.B. at 482. Former

section 112(n)(1) provided that no gain on the sale of a principal residence was recognized if a taxpayer purchased a new residence for a price at least equal to the selling price of the old residence within the period specified therein. Unlike

section 121(a), which excludes gain from the sale of property used as a principal residence, former

section 112(n)(1) provided for a deferral of gain from the sale of a principal residence. In the Internal Revenue Code of 1954, ch. 736, 68A Stat. 306, former

section 112(n)(1) was recodified as

section 1034 (former

section 1034). In 1964 Congress enacted

section 121 (former

section 121) as part of the Revenue Act of 1964, Pub. L. 88-272, sec. 206, 78 Stat. 38, to provide older taxpayers tax relief on the sale of their principal residences. Former

section 121 was subsequently amended, see Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 6011(a), 102 Stat. 3691; Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 123(a), 95 Stat. 197; Revenue Act of 1978, Pub. L. 95-600, sec. 404(a), 92 Stat. 2869; Tax Reform Act of 1976, Pub.

L. 94-455, sec. 1404(a), 90 Stat. 1733, and as amended, permitted an individual, on a one-time basis, to elect to exclude from gross income up to $125,000 of gain from the sale or exchange of a principal residence if the taxpayer (1) had attained age 55 before the sale and (2) had owned the property and used it as a principal residence for 3 or more of the 5 years immediately preceding the sale. In the Taxpayer Relief Act of 1997 (tra 1997), Pub. L. 105-34, sec. 312(

a) and (b), 111 Stat. 836, 839, Congress again amended former

section 121 and repealed former

section

Section 121 as amended by TRA 1997 (section 121) provides that a taxpayer generally may exclude up to $250,000 of gain realized on the sale or exchange of a principal residence occurring after May 6, 1997, each time the taxpayer sells or exchanges a principal residence and meets the eligibility requirements under

section

Section 121 applies to petitioners’ sale of the Summit Road property. The legislative history of

section 121 supports a conclusion that Congress intended the terms “property” and “principal residence” to mean a house or other dwelling unit in which the taxpayer actually resided. In explaining the 1997 amendment to

section 121, the House Committee on the Budget used the terms “home” and “house” and their derivations interchangeably with the term “principal residence”: Calculating capital gain from the sale of a principal residence is among the most complex tasks faced by a typical taxpayer. Many taxpayers buy and sell a number of homes over the course of a lifetime, and are generally not certain of how much housing appreciation they can expect.

Thus, even though most homeowners never pay any income tax on the capital gain on their principal residences, as a result of the rollover provisions and the $125,000 one-time exclusion, detailed records of transactions and expenditures on home improvements must be kept, in most cases, for many decades. To claim the exclusion, many taxpayers must determine the basis of each home they have owned, and appropriately adjust the basis of their current home to reflect any untaxed gains from previous housing transactions.

This determination may involve augmenting the original cost basis of each home by expenditures on improvements. In addition to the record-keeping burden this creates, taxpayers face the difficult task of drawing a distinction between improvements that add to basis, and repairs that do not. The failure to account accurately for all improvements leads to errors in the calculation of capital gains, and hence to an under- or overpayment of the capital gains on principal residences.

By excluding from taxation capital gains on principal residences below a relatively high threshold, few taxpayers would have to refer to records in determining income tax consequences of transactions related to their house. * * * * * * * Present law also may discourage some older taxpayers from selling their homes. Taxpayers who would realize a capital gain in excess of $125,000 if they sold their home and taxpayers who have already used the exclusion may choose to stay in their homes even though the home no longer suits their needs. * * * [H.

Rept. 105-148, at 347 (1997), 1997-4 C.B. (Vol. 1) 319, 669; emphasis added.] The legislative history demonstrates that Congress intended the term “principal residence” to mean the primary dwelling or house that a taxpayer occupied as his principal residence. Nothing in the legislative history indicates that Congress intended

section 121 to exclude gain on the sale of property that does not include a house or other structure used by the taxpayer as his principal place of abode. Although a principal residence may include land surrounding the dwelling, the legislative history supports a conclusion that Congress intended the

section 121 exclusion to apply only if the dwelling the taxpayer sells was actually used as his principal residence for the period required by

section 121(a). The conclusion that we reach from an examination of the legislative history surrounding the enactment of

section 121 is bolstered by and is consistent with regulations promulgated under the predecessor provisions of

section

Section 1.121-3(a), Income Tax Regs., under former

section 121, provided that the term “principal residence” has the same meaning as in

section 1034 and the regulations thereunder.

Section 1.1034-1(c)(3)(i), Income Tax Regs., under former

section 1034 (section 1034 regulations), provided that whether property was used by the taxpayer as his principal residence depended on all the facts and circumstances in each case, including the good faith of the taxpayer. The

section 1034 regulations further provided that property used by the taxpayer as his principal residence may include a houseboat, a house trailer, or stock held by a tenant-stockholder in a cooperative housing corporation, if the dwelling which the taxpayer is entitled to occupy as such stockholder is used by him as his principal residence. The focal point of the

section 1034 regulations was the dwelling unit a taxpayer uses as his principal residence. The

section 1034 regulations reinforce our conclusion that to obtain the benefits of former

section 1034, a taxpayer who sells a dwelling must have actually used it as his principal residence. Our conclusion regarding the meaning that Congress attaches to the terms “property” and “principal residence” in

section 121(

a) is also consistent with caselaw interpreting former

section 1034, as in effect before its repeal. This Court held that in order to qualify under former

section 1034, a taxpayer had to sell a dwelling that he used as his principal residence. In Hughes v. Commissioner, 54 T.C. 1049, 1050 (1970), affd. per curiam 450 F.2d 980 (4th Cir. 1971), the taxpayers agreed to exchange premises A, on which the dwelling that served as their principal residence was situated, for cash and the right to occupy premises B as their new principal residence. Before the exchange, the taxpayers moved the dwelling from premises A to premises C and began using the dwelling on premises C as income-producing property. Id. at 1053. Relying on former

section 1034, the taxpayers excluded gain realized on the exchange of premises A (without the dwelling) for premises B and cash. Id. at 1053. They argued that premises A without the dwelling was as much a part of their principal residence as the dwelling and that the land should be treated as their old residence for purposes of

section 1034. Id. at 1054. This Court disagreed with the taxpayers and held that they were not entitled to the exclusion because the dwelling that was used as their principal residence was never sold or disposed of as required by former

section 1034. Id. In O’Barr v. Commissioner, 44 T.C. 501 (1965), the taxpayers sold a portion of a tract of land on which their principal residence was situated. However, the portion of land sold did not include the residence. Id. Relying on former

section 1034, the taxpayers excluded gain from the sale of the land. Id. at 502. The taxpayers argued that the controlling fact was how the land had been used before the sale and not whether the land included a dwelling when it was sold. According to the taxpayers, the land that was sold had been part of the property used as their principal residence and that use entitled them to claim the benefit of former

section 1034. Id. In its analysis of former

section 1034, this Court stated that “The only logical

interpretation of

section 1034 is that it will only apply in situations where a taxpayer has disposed of his old dwelling.” Id. at 503. Because the taxpayers did not dispose of their dwelling, the Court concluded that former

section 1034 was inapplicable. Id. Other cases have followed Hughes and O’Barr. See, e.g., Boesel v. Commissioner, 65 T.C. 378, 390 (1975) (essential element of a residence is the dwelling, not the land on which it is situated); Hale v. Commissioner, T.C. Memo. 1982-527 (“The sale of a taxpayer’s residence requires the sale of a structure which is used as a principal place of abode, and we have held that the sale of land without the structure does not constitute a sale of a residence within the meaning of

section 1034.”). Former

section 1034 required that a taxpayer sell “property * * * used by the taxpayer as his principal residence” in order to qualify for deferral. In 1997, when Congress amended

section 121 and repealed

section 1034, tra 1997 sec. 312(

a) and (b), Congress continued to use the wording of former

section 1034 to describe the type of property that qualified for exclusion treatment under

section 121(

a) if sold — “property * * * used by the taxpayer as the taxpayer’s principal residence”. Congress did not give any indication in the legislative history of

section 121 that it intended that wording to have a meaning for the purpose of

section 121 different from the meaning it had been accorded under former

section 1034; nor did Congress state that it disagreed with the

interpretation of that wording in cases that had interpreted former

section 1034. We infer from the consistent use of the phrase “property * * * used by the taxpayer as his principal residence” in former

section 1034 and in

section 121 as amended by Congress in 1997 that Congress intended the comparable wording in the two sections to be interpreted comparably. Although we recognize that petitioners would have satisfied the requirements under

section 121 had they sold or exchanged the original house instead of tearing it down, we must apply the statute as written by Congress. Rules of statutory construction require that we narrowly construe exclusions from income. Commissioner v. Schleier, 515 U.S. at 328. Under

section 121(

a) and its legislative history, we cannot conclude on the facts of this case that petitioners sold their principal residence. Accordingly, we hold that petitioners may not exclude from income under

section 121(

a) the gain realized on the sale of the Summit Road property. III. Addition to Tax Under

Section 6651(a)

(1) Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return, unless it is shown that such a failure is due to reasonable cause and not due to willful neglect. United States v. Boyle, 469 U.S. 241, 245 (1985); United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994); Harris v. Commissioner, T.C. Memo. 1998-332. A failure to file a timely Federal income tax return is due to reasonable cause if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time.

See sec. 301.6651-l(c)(l), Proced. & Admin. Regs. Willful neglect means a conscious, intentional failure to file or reckless indifference toward filing. See United States v. Boyle, supra at 245. If a taxpayer assigns error to the Commissioner’s determination that the taxpayer is liable for the addition to tax, the Commissioner has the burden, under

section 7491(c), of producing evidence to show that the

section 6651(

a) addition to tax applies. See Swain v. Commissioner, 118 T.C. 358, 364-365 (2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). To meet his burden of production, the Commissioner must come forward with sufficient evidence to show that it is appropriate to impose the relevant penalty or addition to tax. Higbee v. Commissioner, supra at 446. However, the Commissioner is not required to introduce evidence regarding reasonable cause, substantial authority, or similar defenses. Id. Petitioners admit that they did not file a timely Federal income tax return for 2000. This is sufficient to satisfy respondent’s burden of producing evidence that the

section 6651(a)(1) addition to tax applies. Petitioners did not introduce any evidence to prove that they had reasonable cause for their failure to file their 2000 return timely. Consequently, we sustain respondent’s determination. We have considered all the other arguments made by the parties, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit. To reflect the foregoing, Decision will be entered for respondent. Reviewed by the Court. Colvin, Cohen, Gale, Thornton, Wherry, GustaFson, Paris, and Morrison, JJ., agree with this majority opinion. Unless otherwise indicated, 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. Petitioners concede that the destruction of the original house does not qualify as an involuntary conversion under sec. 1033. Petitioners further concede a $12,010 operating loss adjustment. The previous owner of the house had converted the first level from a two-car garage to living quarters in 1972. The record does not establish whether the new building and permit restrictions prevented petitioners from remodeling and expanding the original house.

The footprint of the new house has a very different shape from that of the original house, and it appears to be two to three times larger than the footprint of the original house. Only about one-half of the land area of the original house overlaps with the land area covered by the new house, and no part of the original foundation perimeter corresponds to the foundation perimeter of the new house.

Although petitioners suggest in their posttrial brief that the loans were related to the demolition of the old house and the construction of the new house, there is no credible evidence in the record that permits us to make any finding about the nature and use of the loans. During the demolition and construction period, petitioners resided at a location that does not appear in the record. The record does not contain any information regarding whether or when petitioners purchased and moved into a new principal residence. Petitioners’ 2000 return was postmarked on Sept. 5, 2001.

In the notice of deficiency respondent determined a $500,000 adjustment because petitioners had conceded a $91,406 capital gain adjustment. Petitioners do not contend that sec. 7491(

a) shifts the burden of proof to respondent, and petitioners have not established that the requirements of sec. 7491(

a) have been met. Moreover, because there are no factual issues in dispute, sec. 7491(

a) does not apply. Black's Law Dictionary 441 (9th ed. 2009) defines “curtilage” as “The land or yard adjoining a house, usu. within an enclosure ” As enacted in 1951, former sec. 112(n)(

l) provided as follows: SEC. 112(n). Gain From Sale or Exchange of Residence.—

(1) Nonrecognition OF gain. — If property (hereinafter in this subsection called “old residence”) used by the taxpayer as his principal residence is sold by him and, within a period beginning one year prior to the date of such sale and ending one year after such date, property (hereinafter in this subsection called “new residence”) is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer’s selling price of the old residence exceeds the taxpayer’s cost of purchasing the new residence.

The taxpayer had to reduce the basis in the new residence by the amount of gain excluded under former sec. 112(n)(l). S. Rept. 781, 82d Cong., 1st Sess. (1951), 1951 — 2 C.B. 458, 483. In 1954 sec. 1034(

a) read as follows: SEC. 1034. SALE OR EXCHANGE OF RESIDENCE (

a) Nonrecognition of Gain. — If property (in this

section called “old residence”) used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property (in this

section called “new residence”) is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer’s adjusted sales price * * * of the old residence exceeds the taxpayer’s cost of purchasing the new residence. In 1964 sec. 121 read as follows: SEC. 121. GAIN FROM SALE OR EXCHANGE OF RESIDENCE OF INDIVIDUAL WHO HAS ATTAINED AGE 65. (

a) General Rule. — At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if— (1) the taxpayer has attained the age of 65 before the date of such sale or exchange, and (2) during the 8-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregating 5 years or more. We have found only one case where the taxpayers were permitted to exclude gain on a sale of land that did not occur simultaneously with the sale of the taxpayers’ principal residence. See Bogley v.

Commissioner, 263 F.2d 746 (4th Cir. 1959), revg. 30 T.C. 452 (1958). In Bogley v. Commissioner, supra at 747, the taxpayers attempted to sell the entire 13-acre parcel on which their principal residence was situated, but they were able to sell only the dwelling and 3 acres surrounding the dwelling. Less than 1 year later, the taxpayers sold the remaining 10 acres. Id. The Court of Appeals for the Fourth Circuit concluded that the character of the 10 acres never changed and held that the sale of the 10 acres qualified as a sale of the taxpayers’ principal residence. Id. at 748.

Courts have distinguished Bogley on the grounds that in Bogley the sale of the 10 acres was not a sale of land alone as the dwelling was also sold albeit in a transaction separate from the sale of the 10 acres. See Hughes v. Commissioner, 54 T.C. 1049, 1055 (1970), affd. per curiam 450 F.2d 980 (4th Cir. 1971); O’Barr v. Commissioner, 44 T.C. 501, 503 (1965). This Court has stated that Bogley does not support the position that a sale of land alone without a sale of the dwelling qualifies for the sec. 1034 exclusion. See Hughes v. Commissioner, supra at 1054-1056.

Bogley is distinguishable from this case because petitioners did not sell the original house and the land in separate but related transactions as the taxpayers did in Bogley. Regulations under amended sec. 121, as currently in effect, provide that if a taxpayer meets certain requirements, gain from the sale of land alone may qualify for the sec. 121 exclusion. Sec. 1.121 — 1(b)(3), Income Tax Regs. However, to qualify under this provision of the regulations, the taxpayer must still sell a “dwelling unit” that meets the requirements under sec. 121 within 2 years before or after the sale of the land.

Sec. 1.121-1(b)(3)(i)(C), Income Tax Regs. The regulations under amended sec. 121 are effective for sales on or after Dec. 24, 2002. Sec. 1.121-1(f), Income Tax Regs. Sec. 121(

c) provides that a taxpayer who fails to meet the ownership or use requirements under sec. 121(

a) because of “a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances” is entitled to a prorated exclusion under sec. 121(a). The prorated exclusion is based on the period of a taxpayer’s ownership and use of the principal residence. See sec. 121(c)(1). Because petitioners never used the new house as their principal residence, they would not qualify for proration in any event. Even if they did, however, petitioners did not introduce any credible evidence to support their claim to a prorated exclusion.

Petitioners argue that the unsustainable debt they incurred in constructing the new house is an unforeseen circumstance that justifies an exclusion under sec. 121(a). However, petitioners did not introduce any credible evidence regarding the debt they allegedly incurred or that the debt was “unsustainable”, or that unsustainable debt qualified as “unforeseen circumstances” within the meaning of sec. 121(c). Petitioners do not contend or provide any authority for the proposition that we should allocate the gain between gain on the land and gain on the residence, or offer any evidence to support such an allocation.