Steele v. Comm'r , 2009 Tax Ct. Summary LEXIS 43 ( 2009 )

T.C. Summary Opinion 2009-45
UNITED STATES TAX COURT
DERROLYN STEELE AND TERRY STEELE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29279-07S. Filed March 30, 2009.
Derrolyn Steele and Terry Steele, pro sese.
Angela B. Friedman, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2005,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 2005 of $4,769. After
concessions, the central issue for decision is whether the
$16,974 received by petitioners from the State of Illinois to
care for their granddaughter is subject to self-employment tax
under section 1401. For the reasons discussed below, we hold
that it is not.
Background
At the time the petition was filed, petitioners resided in
the State of Illinois.
During the taxable year at issue, petitioners cared for
their young granddaughter. Petitioners received $16,974 from the
State of Illinois for providing that care. Petitioners do not
contend, and there is nothing in the record to suggest, that the
payments were qualified foster care payments.2
Because the record indicates only that petitioners were
caring for their granddaughter under a State-sponsored childcare
program, we take judicial notice of the fact that, in addition to
its Foster Care Program, the State of Illinois offers a Child
2
Qualified foster care payments are excludable from gross
income pursuant to sec. 131(a). See also sec. 7491; Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162
F.2d 513 (10th Cir. 1947).
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Care Assistance Program (CCAP) to low-income, working families to
provide them access to affordable childcare so they might
continue working or participating in eligible education programs.
See http://www.dhs.state.il.us/page.aspx?item=30355; see also
Fed. R. Evid. 201. According to the mechanics of the program,
the State of Illinois makes payments directly to a childcare
provider chosen by the parents or legal guardian of the child.
The childcare provider receives a Form 1099-MISC, Miscellaneous
Income, from the State of Illinois at the end of the year
reflecting the CCAP payments.
Both petitioners received Forms 1099 from the State of
Illinois for payments made during the year at issue, and the
income reflected therein is includable in petitioners’ gross
income. See sec. 61. As petitioners have conceded that they
received $16,974 in income from the State of Illinois in 2005 for
the care of their granddaughter, the only issue that remains is
whether that income is also subject to self-employment tax
pursuant to section 1401.
Discussion3
Section 1401 imposes a tax on the self-employment income of
individuals. Section 1402(a) provides that the income subject to
the self-employment tax is derived from a taxpayer’s
3
We decide the disputed issue without regard to the burden
of proof.
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participation in a “trade or business” carried on by the
taxpayer. Section 1402(c) explains that the term “trade or
business” in the self-employment context has the same meaning as
when used to apply the expense provisions of section 162. See
Bot v. Commissioner, 118 T.C. 138, 146 (2002), affd. 353 F.3d 595
(8th Cir. 2003); see also sec. 1.1402(c)-1, Income Tax Regs.
“Trade or business” under section 162 has been interpreted
to mean an activity conducted “with continuity and regularity”
and with the primary purpose of making income or a profit.4
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); Bot v.
Commissioner, supra at 146. Whether a taxpayer is engaged in a
trade or business is a question of fact. Higgins v.
Commissioner, 312 U.S. 212, 217 (1941).
There is no question that petitioners regularly provided
care for their granddaughter and that they were compensated for
doing so. But they were not carrying on a “trade or business”.
As Groetzinger explains, “not every income-producing and profit-
making endeavor constitutes a trade or business.” 480 U.S. at
35. The “primary purpose for engaging in the activity must be
for income or profit.” Id.
4
The carrying on of a trade or business for purposes of
self-employment tax generally does not include the performance of
services as an employee. Sec. 1402(c)(2); Robinson v.
Commissioner, 117 T.C. 308, 320 (2001).
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Petitioners were providing care for their granddaughter
because their daughter was unable to do so; there has been no
allegation that they were running a daycare center and their
granddaughter was one of the children being cared for. The money
they received from caring for their granddaughter was not their
main source of income,5 nor did petitioners seek to deduct
expenses against the money they received from the State of
Illinois. Although the record is sparse, it is clear that
petitioners’ primary purpose in caring for their granddaughter
was not profit such that they were engaged in a “trade or
business”. Accordingly, petitioners are subject to income tax on
the amounts received from the State of Illinois, yet those
amounts are not subject to self-employment tax under section
1401.
Accordingly and to reflect the foregoing,
Decision will be entered
under Rule 155.
5
Petitioners reported $78,557 in wages on line 7 of their
2005 Form 1040, U.S. Individual Income Tax Return.