Teacup is just a nickname and it use to mean the "toy size" of any breed, for example, poodles have three classifications, which are standard, miniature, and toy, people just called the toy size "teacups." The confusion came along with yorkies as they have only one size, and that is the toy size, so theoretically every yorkie is a teacup, so your neighbor is really correct, because her dog is a yorkie and all yorkies are considered toys, not matter what their size!
The YTCA forbids the use of teacup because there is no real definition of it, if someone were to ask me on advice about choosing a breeder, I would tell them to avoid a breeder who uses the term, but I don't think we need to go around educating the public that it's just a nickname and there is no precise definition of it. So be offended if a breeder uses the term, but pet owners can use the word!
I know what you mean though, after reading Yorkietalk for a while, when Joey was still a puppy everyone was asking me if he was a teacup, I felt like I had to educate them, and they just looked at me like I was the stupidest person in the world! Just explaining that standard size for yorkies is 7 pounds and below is usually enough education. When they tell me that their dog is a teacup, no matter what the size, I just say "how cute."
