T.C. Memo. 2010-271
UNITED STATES TAX COURT
LORI A. MALCHOW-BARTLETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15260-07. Filed December 9, 2010.
Lori A. Malchow-Bartlett, pro se.
Julie A. Jebe, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: Respondent determined deficiencies of $10,198
and $6,167 in petitioner’s respective Federal income taxes for
2004 and 2005, plus accuracy-related penalties under section
6662(a).1
1
All section references are to the Internal Revenue Code in
(continued...)
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The issues for decision are whether petitioner is entitled
to business expense deductions relating to use of her home for
child daycare services and whether petitioner is liable for the
accuracy-related penalties. This case is submitted under Rule
122.
Background
The facts have been stipulated by the parties and are so
found. At the time of the filing of the petition, petitioner
resided in Illinois.
During 2004 and 2005 petitioner was self-employed and in
that capacity provided daycare services in her home for five or
six children. Petitioner did not apply for and did not have an
Illinois-issued license for her child daycare services.
Petitioner did not apply for a State-issued license for her child
daycare services because petitioner believed that she was exempt
from any Illinois licensing requirement.
On her 2004 and 2005 Federal income tax returns petitioner
claimed business expense deductions of $20,198 and $22,995,
respectively, relating to the child daycare services she
provided. On audit respondent disallowed these claimed
deductions. Respondent also determined that petitioner had
1
(...continued)
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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omitted from her 2004 Federal income tax return $17,603 in gross
income petitioner received in 2004 apparently from her child
daycare services.
Discussion
Under section 280A(c)(4)(A), a taxpayer may be allowed
business expense deductions relating to use of a residence to
conduct child day care services. However, the deductions are
allowed only where the taxpayer has obtained, or has applied for
and has pending, a license to conduct child daycare services
under applicable State law or is exempt from obtaining a license
therefor under applicable State law. Sec. 280A(c)(4)(B).
Under Illinois law, persons who provide child daycare
services must satisfy State licensing requirements, as follows:
No person, group of persons or corporation may operate
or conduct any facility for child care, as defined in
this Act, without a license or permit issued by the
Department [of Children and Family Services] or without
being approved by the Department as meeting the
standards established for such licensing * * *
225 Ill. Comp. Stat. Ann. 10/3(a) (West 2007); see also id.
10/4(a). Illinois law defines broadly a “Facility for child
care” as–-
any person, group of persons, agency, association,
organization, corporation, institution, center, or
group, whether established for gain or otherwise, who
or which receives or arranges for care or placement of
one or more children, unrelated to the operator of the
facility, apart from the parents, with or without the
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transfer of the right of custody in any facility as
defined in this Act, established and maintained for the
care of children. * * *
Id. 10/2.05. Illinois law defines “Day care homes” as-–
family homes which receive more than 3 up to a maximum
of 12 children for less than 24 hours per day. The
number counted includes the family’s natural or adopted
children and all other persons under the age of 12.
The term does not include facilities which receive only
children from a single household.
Id. 10/2.18.
Under Ill. Admin. Code tit. 89, sec. 377.3(d) (2010), family
homes that provide child daycare services--for less than 24 hours
per day--for no more than three children under the age of 12 or
that care only for children from a single household are exempt
from State licensing requirements as follows:
(d) Family homes that care for no more than 3
children under the age of 12 or that receive only
children from a single household, for less than 24
hours per day, are exempt from licensure as day care
homes. The three children to whom this exemption
applies includes the family’s natural or adopted
children and any other persons under the age of 12
whether related or unrelated to the operator of the day
care home.
Because petitioner has stipulated that she provided child
daycare services for five or six children per day and because
petitioner makes no claim that the children were all from a
single household, petitioner is subject to the licensing
requirement under the above provisions and does not qualify for
an exemption from the licensing requirement. We note that
petitioner’s allegation on brief that the children whom she took
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care of were all cousins does not constitute adequate evidence to
establish that the children were part of a single household.
Contrary to petitioner’s contention, we note that neither
Illinois law nor the Internal Revenue Code requires that a formal
complaint be made against a taxpayer (for providing child daycare
services without a required State license) before claimed
deductions for child daycare expenses may be disallowed by
respondent.
Petitioner also claims that because similar deductions
claimed on her Federal income tax returns for earlier years were
not disallowed, respondent should not be allowed herein to
disallow the claimed child daycare expense deductions for 2004
and 2005. We disagree. Petitioner’s returns for earlier years
apparently were not audited, and tax years generally are
considered separately. Harrah’s Club v. United States, 228 Ct.
Cl. 650, 653, 661 F.2d 203, 205 (1981); Jasienski v.
Commissioner, T.C. Memo. 1992-674.
We sustain respondent’s disallowance of the business expense
deductions petitioner claimed relating to the child daycare
services she provided.
Under section 6662(a) and (b)(2), a 20-percent penalty is
imposed on the portion of an underpayment that relates to a
substantial understatement of income tax, defined in section
6662(d)(1)(A) as a tax understatement that exceeds the greater of
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10 percent of the tax required to be shown on the taxpayer’s tax
return or $5,000.
Because the tax deficiency for each year that we sustain
herein exceeds $5,000, the section 6662(a) and (b)(2) substantial
understatement penalty would appear to be triggered. Under
section 6664(c), however, the above penalty does not apply to any
portion of an underpayment for a year if a taxpayer had
reasonable cause for such portion of the underpayment and if the
taxpayer acted in good faith with regard thereto.
Respondent has stipulated that petitioner did not apply for
a State license for her child daycare services because petitioner
believed that she was exempt from any Illinois licensing
requirement. Although the record is scanty, without more before
us, we regard this stipulation as sufficient to prove that
petitioner had reasonable cause and acted in good faith with
regard to those portions of the underpayments of her taxes for
2004 and 2005 which are attributable to the disallowance of the
$20,198 and $22,995 claimed deductions for child daycare service
expenses.
To the extent that petitioner’s income tax understatements
for 2004 and 2005 which do not relate to the above disallowed
deductions for child daycare service expenses exceed 10 percent
of the taxes required to be shown on petitioner’s tax returns (or
relate to negligence determined by respondent and not contested
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herein by petitioner), petitioner is liable for the section
6662(a) 20-percent penalty for 2004 or 2005.
Decision will be entered
under Rule 155.