S corporation denied deduction for owner's child-care expenses.

• Author: Settimo, Frank

A started a window-washing business through wholly owned S corporations. A's wife (B) began working in that business two years later. During the relevant years, approximately 24 and 31 individuals worked in the business.

B was employed by the S corporations to wash windows one or two days a week and to provide clerical services for approximately 10 to 15 hours per week. Although the S corporations did not formally pay her any wages during either year, she actually received $4,480 and $5,000 during the respective years. A was employed by the S corporations essentially as their general and operations manager, but also washed windows. The S corporations formally paid A no wages during 2001, but paid him $6,800 in wages during 2002.

When B was working, A and B left their children with either a day-care service or a neighbor. They paid their neighbor in cash and the day-care service with a check drawn on one of the S corporation bank accounts. The S corporations claimed deductions for the children's day-care expenses.

Analysis

The taxpayers assert that the S corporations are entitled to deduct the daycare expenses under Rev. Rul. 73-348, 1973-2 CB 31, which allows a Sec. 162 deduction for the corporation's day-care payments for an employee's preschool children while at work, because B could not have worked unless day care was provided to her preschool children.

We...