T.C. Summary Opinion 2008-63



                      UNITED STATES TAX COURT



               JONELLE MARIE BROADY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14675-06S.              Filed June 5, 2008.



     Jonelle M. Broady, pro se.

     Veena Luthra, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Respondent determined a $3,579 deficiency in petitioner’s

income tax for 2003.   The issues for decision are:   (1) Whether

petitioner operated a daycare business out of her home during the

year in issue, and if so, whether she is entitled to claim

certain business-related expenses, and (2) whether petitioner is

entitled to claim certain tax credits (a child tax credit, an

additional child tax credit, and the earned income credit (EIC))

for the year in issue.

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in

Maryland when she filed her petition.

     In 1992 petitioner and her boyfriend (the couple) moved into

a rented home in Bowie, Maryland.   The house was a Cape Cod-style

house situated on approximately one-third acre.    The house had

five bedrooms, 2-1/2 bathrooms, a large living room, and a large

backyard.   Petitioner has four children.   The couple never

married.

     Petitioner did not work outside of the couple’s home.

Petitioner’s sister and her boyfriend’s sister asked petitioner

to provide daycare services for their children in the couple’s
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home.   Although petitioner did not envision starting a daycare

business per se, she soon found herself the recipient of multiple

inquiries for her services from neighboring parents, parents at

her children’s daycare and school, and parents she met while

shopping in the supermarket.    On the basis of this response, and

her desire to make money, petitioner decided to operate a daycare

business in the couple’s home.

     In 2003 petitioner had at least eight children enrolled in

her daycare, not including her own four children, two of whom

stayed home with her during the day.     Three of the children

belonged to her neighbors.   Four of the children belonged to

either her sister or her boyfriend’s sister.     At least one other

child belonged to a parent she met while shopping.

     Petitioner’s daycare service operated 5 days per week, from

early morning through the early evening.     Petitioner provided

breakfast, lunch, and two snacks to the children in her care.

The daycare activity occupied the family room, dining room, and

kitchen of the couple’s home.    Petitioner would sometimes take

the children in her care on field trips to places such as the

National Zoo in Washington, D.C.    When making such field trips,

petitioner would use her vehicle, a 1985 Chevrolet Cavalier

station wagon, to transport herself and the children.

     Petitioner charged for her services according to the length

of time that the child was in her care each day.     If the child
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was in petitioner’s care for the full day, the charge was $80 per

week.   If the child was in petitioner’s care only after school,

then the charge was $60 per week.    On occasion, petitioner would

negotiate a lower fee for parents whom she knew to be single

parents with one income.   Petitioner accepted only cash.   The

parents would pay either at the end of the week or at the end of

every other week, pursuant to their pay cycle.   At the end of

each calendar year, including the year in issue, petitioner would

provide the parents with a dated receipt showing the total number

of weeks of childcare she provided for their child(ren) and the

total cost.   Petitioner included her name and full address of the

child(ren) on the receipt, as well as her “Tax ID” number.    The

“Tax ID” number provided on these receipts was actually

petitioner’s Social Security number.

     Although she had taken a childcare course years before she

started her service, petitioner did not have a daycare license

and did not have either a business phone line or a business

checking account.   When petitioner was paid in cash, she usually

used the bulk of the money to purchase items for the daycare, her

household, or for herself and her children.   Petitioner would

deposit whatever cash was remaining after these purchases into

her personal checking account.
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     Petitioner had a set of business cards made which advertised

her daycare service, and she placed advertisements for her

service in the local “Pennysaver” gazette.

     Petitioner ceased her daycare service in November of 2003.

Petitioner moved out of the couple’s home sometime in 2004.

     Petitioner prepared her timely filed 2003 Federal income tax

return using TurboTax.   Petitioner reported $22,070 of wage

income and $7 interest and claimed the following tax credits:

(1) A $593 child tax credit; (2) an additional $1,157 child tax

credit; and (3) a $2,422 earned income credit.

     On May 2, 2006, respondent sent petitioner a notice of

deficiency wherein respondent determined a deficiency of $3,579,

resulting from the disallowance of the additional child tax

credit and the earned income credit on the ground that petitioner

did not have income for 2003 that would entitle her to claim

those credits.1   Respondent also determined that petitioner had

nonemployee compensation of $325 for 2003.   Petitioner concedes

that she did receive this income but failed to report it on her

return.




     1
       Form 4549, Income Tax Examination Changes, does not
include the $593 child tax credit taken on petitioner’s income
tax return but rather lists “0.00” for the credit. As the
examination determined that petitioner had adjusted gross income
of $325 for the year in issue, and, accordingly, a corrected tax
liability of zero for 2003, petitioner would not have been
entitled to a child tax credit for that year under sec. 24(b)(3).
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     Petitioner timely filed her petition.    Subsequently,

petitioner submitted a Form 1040X, Amended U.S. Individual Income

Tax Return, for 2003 to respondent.    Petitioner attached a

Schedule C, Profit or Loss From Business, to her amended return

and reported on that schedule gross income of $27,395 for 2003.

Petitioner also reported on that schedule expenses related to

advertising, car and truck expenses, office expenses, repairs and

maintenance, supplies, utilities, and other expenses.    These

expenses totaled $12,445.

     Petitioner deducted:   (1) Advertising expenses of $200,

which included the cost of business cards that she had printed

and advertisements placed in the “Pennysaver” gazette; (2) car

and truck expenses of $1,295 related to mileage, insurance, and

repairs for the 1985 Chevrolet Cavalier; (3) $6,500, which

included the cost of office supplies such as pens and paper which

she used in her daycare service; (4) repairs and maintenance

expenses of $220; (5) supply expenses of $630, which included

expenses related to arts and crafts supplies; (6) utility

expenses of $1,780; and (7) other expenses of $1,820, which

related to food costs associated with her feeding the children in

her care.

                            Discussion

     In general, the Commissioner’s determination as set forth in

a notice of deficiency is presumed correct and the burden of
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proof is on the taxpayer to prove otherwise.    Rule 142(a)(1);

Welch v. Helvering, 

, 115 (1933).    Tax deductions are

a matter of legislative grace, and the taxpayer bears the burden

of proving entitlement to deductions claimed on a return.      Rule

142(a)(1); INDOPCO, Inc. v. Commissioner, 

, 84 (1992).

     Under certain circumstances the burden of proof with respect

to relevant factual issues may shift to the Commissioner under

section 7491(a).   The burden of proof may shift to the

Commissioner under section 7491(a) if the taxpayer establishes

compliance with the requirements of section 7491(a)(2)(A) and (B)

by substantiating items, maintaining required records, and fully

cooperating with the Secretary’s reasonable requests.     As

discussed below, we find that petitioner has failed to

substantiate her claimed expenses and maintain required records.

The outcome of this case, however, will be based on the

preponderance of the evidence standard and thus is unaffected by

section 7491.   See Estate of Bongard v. Commissioner, 

, 111 (2005).

     Although respondent had not accepted petitioner’s amended

tax return as of the date of the trial, respondent’s litigating

position is that petitioner’s daycare was not a business operated

for profit in 2003; and that even if the Court determined that it

was, petitioner has failed to substantiate both her income from

that activity and the aforementioned expenses.
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     Section 162(a) allows deductions for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     To be engaged in a trade or

business within the meaning of section 162(a), an individual

taxpayer must be involved in the activity with continuity,

regularity, and with the primary purpose of deriving a profit.

Commissioner v. Groetzinger, 

, 35 (1987).     Deciding

whether the taxpayer is carrying on a trade or business requires

an examination of all of the facts in each case.

     Although a reasonable expectation of a profit is not

required, the taxpayer’s profit objective must be actual and

honest.   Dreicer v. Commissioner, 

, 644-645 (1982),

affd. without published opinion 

(D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs.    Whether a taxpayer has an

actual and honest profit objective is a question of fact to be

answered from all of the relevant facts and circumstances.

Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a),

Income Tax Regs.

     On our review of the record, we conclude that petitioner

operated a daycare business in the couple’s home during 2003 with

continuity, regularity, and with the primary purpose of making a

profit.   Petitioner watched at least eight children each weekday

in her home from January through November of 2003.    Although she

did not hold a license or have a separate phone line for her
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business, we are convinced that she operated her daycare service

in a reasonable manner as compared to other similar home-based

daycare services.    That is, while we do not condone petitioner’s

lack of a license, we are convinced from her testimony that she

did in fact provide daycare services each weekday for 11 months

of 2003 and that her stated goal (“to make money for [the

couple’s] household”) adequately satisfies the profit motive

requirement.   In fact, petitioner’s amended return shows a

$14,950 profit for 2003.   Therefore, we are satisfied that

petitioner operated a business within the meaning of section

162(a) for the year in issue.

     We are further convinced that petitioner received $17,950 in

income from her business for 2003 as evidenced by an adding

machine tape received into evidence by the Court and her credible

testimony that the tape reflected amounts she received.   On the

basis of the entire record, we believe that the figures on the

adding machine tape represent the most accurate record of the

amounts that petitioner actually received for her daycare

services for 2003.

     Petitioner did provide copies of receipts akin to those that

she provided to parents at the end of 2003 for daycare services

rendered in that year.   These were not, however, actual copies of

those receipts.   Petitioner compiled these receipts for trial

from her recollection of records she maintained at the couple’s
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home, which she no longer had access to.     Each one of these

receipts notes the name(s) and addresses of the child(ren) during

2003 as well as the addresses of the child(ren) as of the date of

trial.   While we view these receipts as support for petitioner’s

testimony that she did, in fact, have at least eight children

enrolled in her daycare for 2003, we are not confident that the

total charges reflected after adding up these receipts ($22,190)

represent petitioner’s income from her daycare for 2003.

     Petitioner has failed to substantiate any of the Schedule C

expenses for her daycare for 2003.     The scant evidence she

provided consisted only of copies of her checking account

statements for 2003 and canceled checks made payable to Baltimore

Gas & Electric.   The only testimony offered was with respect to

petitioner’s advertising costs, car and truck expenses, supplies,

and other expenses.   Petitioner testified as to having printed

business cards and placing advertisements in the “Pennysaver”

gazette, using her car for occasional field trips with the

children, buying arts and crafts supplies, and feeding the

children at least two meals and two snacks each day.     Petitioner

did not, however, provide any records or receipts to substantiate

any of these expenses, copies of her business cards, or copies of

the advertisements, and she did not introduce any evidence on

which we may estimate the amounts that she paid for such expenses

during 2003.   On the record before us, we conclude that it would
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be inappropriate for us to estimate that amount.    Cf. Cohan v.

Commissioner, 

(2d Cir. 1930).

     Finally, and with respect to petitioner’s entitlement to

certain tax credits (a child tax credit, an additional child tax

credit, and the EIC), respondent disallowed these credits on the

basis of his determination that petitioner had adjusted gross

income of $325, and no tax liability, for 2003.    An eligible

individual is entitled to an EIC against the individual’s income

tax liability, subject to certain requirements.    Sec. 32(a)(1).

Different percentages and amounts are used to calculate the

credit depending on whether the eligible individual has no

qualifying children, one qualifying child, or two or more

qualifying children.   Sec. 32(b).   To be eligible to claim an EIC

with respect to a “qualifying child”, a taxpayer must establish,

inter alia, that the child bears one of the defined relationships

to the taxpayer specified in section 32(c)(3)(B).    Under section

24(a) and (c) a taxpayer may be entitled to a child tax credit

with respect to each qualifying child under the age of 17 as

described in section 32(c)(3)(B).

     Respondent does not dispute that petitioner had two

qualifying children for which she would be entitled to an EIC

and/or a child tax credit.   Respondent’s disallowance is based

solely on petitioner’s income for 2003.   Respondent determined

that petitioner had only $325 in income for the year in issue.
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We have concluded that petitioner had $17,950 in gross receipts

for 2003 from her daycare business, but she is not entitled to

claim expense deductions for any of the amounts reported on

Schedule C of the amended income tax return as they have not been

substantiated.   Accordingly, and to whatever extent therefore

allowable under sections 24 and 32, respectively, petitioner is

entitled to an EIC, a child tax credit, and an additional child

tax credit for 2003.

     In the light of our conclusion that petitioner had $17,950

in income from her daycare business for 2003 (in addition to the

$325 in nonemployee compensation that she received for that

year), petitioner’s correct tax liability must be computed so as

to determine whether petitioner is entitled to a child tax

credit, an additional child tax credit, and an EIC for the year

in issue.

     To take account of the necessary recomputation of

petitioner’s correct tax liability for 2003,


                                          Decision will be entered

                                       under Rule 155.