I think maybe we'll never quite understand the underage magic rules, we just don't ahve the xperience in the wizarding world neccesary
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The only thing I can compare it to would be people 2000 years from now looking back and trying to decipher our road rules. Like- In some states in the US you have to be 16 to drive, in some 15, in some 13 and here in Australia where I'm now living you have to be 18. Then, sometimes while driving you can make a turn on red. But only a lefthand turn, and only if its a 3way light, not a four way with an arrow.....anyone see where I'm coming from?
As for Lily's parents being Squibs its an interesting thought and possible I guess but one things about it bugs me. People of pure blood decent marry only other pure bloods and seem to have alot of knowledge about families. Snape is in Slytherin house and we know that Slytherin usually only takes Pure-bloods so it would make sesne that Snape would have a good idea of different wizarding families. When Harry sees the scene with his dad, his mom, and Snape, Snape calls Lily a mudblood. Lily could only be a mudblood if both her parents were muggles. Squibs arn't muggles as Snape would know being from a magical family, because they come from all magic families, so I can't seem him calling Lily a mudblood if she was the product of two squibs, or even one squib. See what I'm saying? This however brings up another question I have. What is James Potter? Is he pure-blood? Sirius never mentions him as being on the tapestry or being related in any way to himself. He mentions the Weasleys and how he is related to them. So does that mean that James was a mudblood as well?