                        T.C. Memo. 2006-261



                      UNITED STATES TAX COURT



     FRANK M. SETTIMO AND SALLYN M. SETTIMO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5153-05.           Filed December 7, 2006.



     Joseph Falcone, for petitioners.

     Laurie B. Schmidt and John W. Stevens, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioners petitioned the Court to

redetermine respondent’s determination of deficiencies of $18,243

and $19,917 in their 2001 and 2002 Federal income taxes,

respectively, and section 6662 accuracy-related penalties of

$3,648.60 and $3,983.40, respectively.   Following the parties’

concessions, we are left to decide whether two S corporations
                                  -2-

(collectively, S corporations) wholly owned by Frank Settimo

(petitioner) may deduct child care expenses incurred with respect

to petitioners’ children.    We hold they may not.   Section

references are to the Internal Revenue Code applicable to the

subject years.   Rule references are to the Tax Court Rules of

Practice and Procedure.

                           FINDINGS OF FACT

     Some facts are stipulated.    We incorporate herein by this

reference the parties’ stipulations of fact and the exhibits

submitted therewith.    We find the stipulated facts accordingly.

Petitioners are husband and wife, and they filed joint 2001 and

2002 Federal income tax returns.    They resided in Linden,

Michigan, at all relevant times.

     Petitioner started a window washing business (business) in

March 1994.   His wife began working in that business 2 years

later.   In June 1997, petitioner began hiring other individuals

to work in the business.    In 2001, petitioner conducted the

business through his wholly owned S corporation, Professional

Window Cleaning, Inc. (PWC).    Petitioner terminated PWC as of the

start of 2002 and began conducting the business through a second

wholly owned S corporation, Algimarso Glass Cleaners, Inc. (AGC).

For Federal income tax purposes, petitioner reported the income

and expenses of the S corporations using the cash receipts and

disbursements method.
                                 -3-

     During the respective subject years, approximately 24 and 31

individuals worked in the business.    Petitioner’s wife was

employed by the S corporations to wash windows one or two days a

week and to provide clerical services to the S corporations for

approximately 10 to 15 hours per week.    The S corporations did

not formally pay her any wages during either year; she actually

received wages from the S corporations of $4,480 and $5,000

during the respective years.   Petitioner was employed by the S

corporations essentially as their general and operations manager.

As to the business, petitioner solicited professional advice and

new customers; established a sales division; recruited, hired,

evaluated, and dealt with each of the other workers in the

business; assigned specific jobs to the window washers and

monitored customer satisfaction as to those jobs; negotiated each

window washer’s compensation; and made daily business decisions,

handled the business’s finances, and assisted in clerical work.

He also washed windows for the S corporations 5 or 6 days a week.

PWC formally paid petitioner no wages during 2001, and AGC

formally paid petitioner $6,800 in wages during 2002.

     Petitioners had four children the ages of whom in 2001 were

10, 8, 4, and 2.   When petitioner wife was washing windows for

the S corporations, petitioners left their children with either a

daycare service or a neighbor.   Petitioners paid their neighbor

in cash to watch their children, and petitioners paid the daycare
                                -4-

service with a check drawn on the bank account of PWC or AGC.

For the subject years, PWC and AGC claimed deductions of $1,288

and $4,800, respectively, for the daycare expense of petitioners’

children.

                              OPINION

     We decide the single issue mentioned above.     In that we find

that the facts underlying our decision of that issue are not in

dispute, we decide that issue without regard to which party bears

the burden of proof.   The parties dispute two other issues in

addition to the one that we decide.     The first other issue

concerns the amount of wages that petitioner failed to report for

2001 and 2002.   The second other issue concerns whether all of

the S corporations’ workers are their employees.     We do not

decide either of those two other issues in that our decision of

those issues is unnecessary to our redetermination of

petitioners’ Federal income tax deficiencies for the subject

years.   As to the first other issue, petitioner is the sole

shareholder of the S corporations, and any amount of wages that

he failed to report on his 2001 and 2002 Federal income tax

returns will be offset entirely by the corresponding increase in

the deduction that passes through to him from the S corporations.

See Griffin v. Commissioner, T.C. Memo. 1995-246.     As to the

second other issue, that issue also does not affect our

redetermination of petitioners’ deficiencies.
                                -5-

     As to the issue that we do decide, petitioners assert that

the S corporations are entitled to deduct the daycare expenses of

petitioners’ children.   Petitioners’ entire argument in brief is

as follows:

          Pursuant to Rev. Rul. 73-348, 1973-2 C.B. 31, the
     Respondent permits a corporation’s payments to a day
     care center to provide care for the preschool children
     of its employees while they are at work to be deducted
     under IRC 162. Petitioner Sallyn Settimo could not
     have worked unless day care was provided to her
     preschool children. The Subchapter S Corporations paid
     for that day care.

We are unpersuaded by this argument.   While section 162 allows a

corporate taxpayer to deduct the ordinary and necessary expenses

of its business, the mere fact that petitioner’s wife may have

been unable to work for the S corporations unless daycare was

provided to her children does not necessarily mean that the

payment of petitioners’ daycare expenses is an ordinary and

necessary expense of the S corporations.   While respondent ruled

in Rev. Rul. 73-348, supra, that a taxpayer was able to deduct

the daycare expenses related to the children of its employees,

the ruling notes that the expenses were “directly related” to the

taxpayer’s business.   On the basis of the record at hand, we are

unable to find that petitioners’ daycare expenses were directly

related to the business of the S corporations or, in other words,

that those expenses are an ordinary and necessary expense of the
                                  -6-

S corporations.1    Indeed, the only individuals whose children’s

daycare expenses were paid by the S corporations were the sole

owner of the S corporations and his wife.

     We hold for respondent.     We have considered all arguments in

this case and consider those arguments not discussed above to be

without merit.     To reflect issues settled by the parties,



                                            Decision will be entered

                                        under Rule 155.




     1
       Nor have petitioners shown that the primary beneficiary of
the payments was either S corporation. See Hood v. Commissioner,
115 T.C. 172, 179 (2000).
