The question is: do we need a business license,
There is no need for business license, however - as a retailer you might be required to charge sales tax from buyers, and might need a registration in your state's Department of Revenue.
& must the small profits/expenses be reportable?
Yes - the activity - as you described it should be classified as your business - gross proceeds and expenses should be reported on your tax return.
Can he or I be reported to the IRS for unreported income?
Yes - please see the IRS article How Do You Report Suspected Tax Fraud Activity?
Let me know if you need any help.
According to publication 1595 - Occasional Sales - Sale of a Business - Business Reorganization,
If, in any 12 month period, the operator of the service enterprise makes more than two sales in substantial amounts of tangible personal property used in the service enterprise, the first two sales are exempt occasional sales,
Please see California Seller's Permit Application for Individuals/Partnerships/Corporations/Organizations (Regular or Temporary)
See also
Sales and Use Tax Questions for the Business Person Pub 53-B
Tax Preparer
Taxes, Immigration, Labor Relations
Because that is temporary sale - not a permanent retail location - you most likely do not need any other permit and zoning restriction would not apply.
However if neighbors would start complaining - you might have an issue and would be requited to shut down the activity.
You also may contact your county or city and verify if you need a special permit for such activity.