Two unmarried taxpayers can exclude gain from the sale of their home -- even though they fail the two-year ownership and use tests of the tax code -- because the primary reason for the sale was an unexpected pregnancy.In a Dec. 29 letter responding to a ruling request, the Internal Revenue Service said that a pregnancy meets the “unforeseen circumstances” exclusion outlined in Section 121(a)(c)(2) of the code.

According to the facts outlined in the IRS ruling, the two taxpayers jointly purchased a home as their principal residence. Within seven months of the purchase, the couple was no longer dating and the female taxpayer discovered that she was one-month pregnant. The taxpayers plan to sell the residence because the home is not large enough to accommodate two adults and a child, but neither taxpayer can afford to make the monthly mortgage payments alone.

Both taxpayers may exclude gain up to the reduced maximum exclusion amount outlined under Section 121(c). The full ruling is available at

Separately, the agency also announced that that there will be no extension of the Jan. 2, 2007 federal tax deposit due date, despite the closing of federal offices as part of the national day of mourning for former President Ford.

The Electronic Federal Tax Payment System will conduct normal business operations, though the agency said that it would waive late federal tax deposit penalties for deposits due on Tuesday if the following conditions were met:

  • The employer is not required to use EFTPS;
  • The employer must not have been able to make a federal tax deposit because the bank through which the employer makes its deposits was closed on Jan. 2; and,
  • The employer’s federal tax deposit was posted on, or before Jan. 3.

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