                        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...)
                                 - 2 -

       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.
                               - 3 -

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
                               - 4 -

     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
                                - 5 -

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
                               - 6 -

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
                              - 7 -

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.
