Rev. Rul. 79-142

ISSUE

What are the federal income tax consequences to family and group day care home operators who participate in the Child Care Food Program (CCF program) authorized by the National School Lunch Act and Child Nutrition Act of 1966 Amendments of 1975, Pub. L. No. 94-105, 94th Cong., 1st Sess. (October 7, 1975), 42 U.S.C. section 1766 (Supp. V 1976)?

FACTS

Situation 1.--Under the auspices of a sponsoring charitable organization described in section 170(c) of the Code, which was formed to provide day care and nutritional meals to needy children, an individual operates a non-profit licensed day care service in the individual's home and provides meals at lunchtime to the children cared for. Pursuant to the CCF program administered by the Department of Agriculture, the sponsoring organization has entered into an agreement with the State Department of Education whereby the organization has agreed to accept final financial and administrative responsibility for the conduct of the food service provided in the day care home under its authority. In the agreement the sponsoring organization ensures the state agency that meals served in the individual's day care home meet specified requirements, and that meals are served free or at a reduced price to all children eligible for free and reduced price meals under the CCF program. The sponsoring organization is also required (1) to provide consultative and technical assistance to ensure that meals meet prescribed standards, that adequate records are maintained, and that other CCF program requirements are met, (2) to train day care personnel responsible for the food service, and (3) to make periodic visits to the day care home to monitor compliance.

In exchange, the state agency reimburses the sponsoring organization for the expenses incurred by the day care home operator in providing free and reduced price lunches to eligible children. The amount of the reimbursement payments is determined by the number and types of meals served and the need of the children enrolled in the CCF program. In no event may reimbursement payments to the sponsoring organization exceed the operating costs of the day care food service.

After receiving reimbursement payments from the state agency the sponsoring organization distributes the funds to the individual operating the day care food service. In the taxable year in question the payments made to the day care home operator are equal to the operating costs of the CCF program. No payments are made to the operator to compensate the operator for the value of services rendered in preparing and dispensing the lunches.

Situation 2.--An individual operates a day care service in the individual's home and provides lunches to needy children under the same facts as in Situation 1, except that in the taxable year in question the individual receives payments from the sponsoring organization that include not only reimbursements for operating expenses, but also payments for the value of the individual's services.

LAW AND ANALYSIS

Section 61(a) of the Internal Revenue Code of 1954 provides that, except as otherwise provided by law, gross income means all income from whatever source derived. Section 162(a) provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Section 170 provides that subject to certain limitations a deduction shall be allowed for any charitable contribution (as defined in section 170(c)) payment of which is made within the taxable year. Section 1.170A-1(g) of the Income Tax Regulations provides, in part, that unreimbursed out-of-pocket expenditures made incident to the rendition of services to a charitable organization may constitute a deductible contribution.

Section 9(d) of the National School Lunch Act and Child Nutrition Act of 1966 Amendments of 1975 provides that "[t]he value of assistance to children under this Act shall not be considered to be income or resources for any purpose under any Federal or State laws, including laws relating to taxation and welfare and public assistance." Pursuant to section 9(d) of the Amendments of 1975, the value of free and reduced meals served to needy children under the CCF program is not includible in the gross incomes of the children or of their parents. However, reimbursements and payments received by operators of family and group day care homes under the CCF program are not excludable from their gross incomes for federal income tax purposes by reason of section 9(d) of the Amendments of 1975, but they may be otherwise excludable from the day care home operator's gross incomes depending on the particular facts.

The individual operating the day care home in Situation 1 does not have a profit making motive in operating the day care facility and is not, in fact, making a profit. The expenses incurred by the individual in Situation 1 in gratuitous services to the sponsoring organization. See Rev. Rul. 77-279 furtherance of the CCF program are incurred on behalf of the sponsoring charitable organization and are directly connected with the rendition of (Situation 1), 1977-2 C.B. 12.

In contrast, the individual operating the day care home in Situation 2 does have a profit motive and, in fact, received compensation for services rendered in connection with the lunches provided under the CCF program. Nevertheless, as in Situation 1, the food service expenditures subject to reimbursement were incurred by the individual in Situation 2 on behalf of the sponsoring organization. See Rev. Rul. 77-280 (Situations 3 and 4), 1977-2 C.B. 14.

HOLDINGS

The payments received from the sponsoring organization in Situation 1 are not includible in the gross income of the individual as long as the payments do not exceed the expenses incurred by the individual in feeding the children eligible for assistance under the program.

The portion of each payment received by the individual in Situation 2 from the sponsoring organization that represents reimbursement of actual expenditures incurred on behalf of the sponsoring organization is not includible in the gross income of the individual. The portion of the payment attributable to compensation for the value of the individual's services is includible in the individual's gross income.

In both Situations 1 and 2, the individual's reimbursed expenditures are not the individual's own expenses, but are incurred on behalf of the sponsoring organization. Therefore, the reimbursed expenses are not deductible by the individual in either Situation 1 under section 170 of the Code or Situation 2 under section 162.

If in Situation 1 the operating costs of the CCF program had been greater than the reimbursement payments, the excess of the out-of-pocket expenses over the reimbursement would have been deductible by the individual within the limitations of section 170 of the Code as contributions for the use of the sponsoring organization, because the individual would be rendering gratuitous services to the sponsoring organization by feeding the children. See Rev. Rul. 77-280 (Situations 1 and 2).

If in Situation 2 the operating costs of the CCF program had been greater than the reimbursement payments, the excess of the out-of-pocket expenses over the reimbursement would have been deductible as a trade or business expense under section 162 of the Code. See Rev. Rul. 77-280 (Situations 3 and 4).