*980 1. A limited dividend housing corporation, organized under the New York Housing Law, which chose to have all of its common stock owned by tenants and had preferred stock outstanding in the hands of nontenants, does not escape income tax either as an instrumentality of the State of New York engaged in an essential governmental function or as "a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare." Sec. 103(8), Revenue Acts of 1928 and 1932.
2. The accrual method does not permit the deduction of amounts in anticipation of the cost of renovating rooms at regular intervals before any renovating is done on the rooms.
*817 The Commissioner determined a deficiency of $800.29 in the income tax of the Amalgamated Housing Corporation, hereinafter referred to as Housing, for the fiscal year ended November 30, 1931, and he determined a deficiency of $1,587.18 in the income tax of Amalgamated Dwellings, Inc., hereinafter referred to as Dwellings, for the fiscal year ended November 30, 1932. The cases*981 were consolidated because of the similarity of the issues and of the facts. Each petitioner contends, first, that it is not subject to tax and, second, that if it is subject to tax, the Commissioner erred in disallowing a deduction of the addition during the taxable year to a reserve for renovating apartments.
FINDINGS OF FACT.
Housing is a private limited dividend housing corporation organized under the New York State Housing Law in the year 1927. Dwellings is a private limited dividend housing organization organized under the New York State Housing Law in the year 1929. The New York State Housing Law was enacted in May 1926. It was preceded by a number of investigations of housing conditions, principally in the city of New York. These disclosed that a large part of the population of the city, included in the low income group, was forced to live in congested and unsanitary dwellings, under conditions which were a great menace to the health, safety, morals, welfare, and reasonable *818 comfort of the citizens. A great majority of these people lived in tenements. The owners of the tenements were interested primarily in the profitable use of their property. Rents*982 for the miserable accommodations were about twice the amount which the tenants could afford to pay. It was apparent that better housing at lower rentals would never be provided by private enterprise because profits would be impossible. Government aid of some kind would have to be provided if conditions were to be improved.
The following is from article 1, section 2, of the New York housing Law:
Legislative finding. It is hereby declared that congested and unsanitary housing conditions which exist in certain areas of the state in low priced dwellings are a menace to the health, safety, morals, welfare and reasonable comfort of the citizens of the state. The correction of these conditions in such areas being now otherwise impossible, it is essential that provision be made for the investment of private funds at low interest rates, the acquisition at fair prices of adequate parcels of land, the gradual demolition of existing unsanitary and unsafe housing and the construction of new housing facilities under public supervision in accord with proper standards of sanitation and safety and at a cost which will permit monthly rentals which wage earners can afford to to pay and not*983 in excess of the rates hereinafter provided. Therefore, there are created and authorized the agencies and instrumentalities hereinafter prescribed, which are declared to be the agencies and instrumentalities of the state for the purpose of attaining the ends herein recited, and their necessity in the public interest is hereby declared as a matter of legislative determination.
The housing law created the State Board of Housing and defined its duties. It was to determine whether there existed in any particular locality conditions described in section 2, quoted above, which could not be remedied through the ordinary operation of private enterprise. If it found such conditions, it was authorized to select and approve an area for the construction of buildings by limited dividend corporations formed under the act. No project was to be approved proved unless it appeared practicable to rent the accommodations at a monthly rental not to exceed $12.50 per room in the county of New York, or $11 per room in the county of the Bronx. The housing board was to supervise and control the operations of limited dividend housing companies. The act authorized the formation of public and private*984 limited dividend housing companies for the purpose of carrying out projects authorized by the housing board. The two petitioners were organized as private limited dividend housing companies under this act as amended.
The principal difference between the public and private limited dividend companies was that the former could exercise the power of eminent domain and were prohibited from selling or otherwise disposing of their property other than to a limited dividend housing company, whereas the latter had no power of eminent domain, but *819 could dispose of their property with the consent of the housing board. All limited dividend housing companies were required to raise at least one-third of the cost of their project by the issue of stock or income debentures, and could not raise more than two-thirds by mortgage bonds. The companies were permitted to accumulate a surplus not to exceed 12 percent of the outstanding stock. They could not pay more than 6 percent for money raised on mortgages. In case the gross receipts of the company exceed its interest, dividend, and authorized expense requirements and permissible transfers to surplus, the balance must be applied to the*985 reduction of rentals. The stockholders, upon dissolution, may not receive more than the par value of their stock plus unpaid dividends accrued, and the excess must be paid into the general fund of the State of New York. The act exempts all limited dividend companies from the payment of taxes and fees to the State of New York or its officers, and the bonds, mortgages, interest, and dividends of the companies are likewise exempt from state taxation. Municipalities were authorized to exempt the buildings and improvements of each project from local taxation. The city of New York in 1927 enacted a law exempting, for a period of 20 years after the completion of the building, any building or improvement erected in the city before January 1, 1937, by any limited dividend housing company operated under the state law. Thus the only taxes within the state were local taxes on the land. The housing board has exercised close supervision over all of the activities of the limited dividend housing companies.
Some members of the Amalgamated Clothing Workers of America, a trade union, hereinafter called Union, had discussed, prior to the enactment of the housing law, the possibility of uniting*986 and pooling their resources in some way to provide better dwelling places for themselves and others similarly situated. As a result of these discussions, Union organized Housing shortly after the enactment of the new law. It was the first limited dividend company to operate under the housing law. Its charter originally authorized the issuance of 10,000 shares of capital stock, each share of the par value of $100, 1,000 being preferred and 9,000 being common. The authorized capital was doubled in 1929. The stock could not be sold in excess of par plus accrued dividends. Both the preferred and the common stock had voting privileges. Dividends could not exceed 6 percent on either class of stock. Preferred had a preference as to dividends and its dividends became cumulative if and when declared. Dividends on the common stock were cumulative to the extent of 3 percent if and when declared.
Union had a subsidiary, hereinafter called Credit, which loaned money to members. Credit invited subscriptions from members of *820 Union. At first the plan was advertised only by one person telling another, but later it was given further publicity in a newspaper of Union, in a prominent*987 Jewish newspaper of New York City, and in other daily papers of the city. Small pamphlets were also distributed describing the project after the first unit was completed. When the subscriptions exceeded $100,000, Credit contracted for the purchase of a little more than a city block in the northerly part of the Bronx, between Jerome Park Reservoir and Van Cortland Park. The approval of the housing board was obtained for the purchase and for the plans for erecting on the property 6 apartment houses, to contain 1,185 rooms and to house 303 families. The total cost was to be $1,825,000, one-third of which was to be obtained by selling to tenants $500 par value of common stock for each room to be rented by that tenant; $1,200,000 was to be obtained on a 20-year first mortgage to the Metropolitan Life Insurance Co. at annual interest of 5 percent. All of the various steps were approved by the housing board. The approval of the board was obtained only after an investigation which showed that the prospective tenants were for the most part members of Union then housed in congested sections of New York City and belonging to the low income group which the law was designed to aid. The requirement*988 that stock of $500 par value be purchased for each room to be occupied was the result of an estimate that $1,500 was the minimum allowable cost per room, exclusive of land and building, for projects under the law. The actual cost of the improvements exceeded the estimated cost and the additional funds were raised by the issuance of preferred stock of the par value of $73,400. The apartments were opened for occupancy on December 25, 1927. The officers of Housing endeavored to select as tenants persons coming within the low income group.
Most of the tenants did not have sufficient funds to pay for the stock which they were required to purchase, but each was required to pay as much as he could. Union then made arrangements for temporary loans for the balance on notes maturing serially over a period of five years, with interest at 4 1/2 percent a year. Loans were made to the tenants by the Amalgamated Bank of New York and by Credit. The Jewish Daily Forward, a daily newspaper in New York City, aided by depositing $100,000 in the Amalgamated Bank as collateral for the loans made by the bank. The tenants were never required to pay and never paid anything to Union or the Daily Forward*989 for guaranteeing the loans. The stock was retained as collateral for the loan and was voted by the pledgee.
Housing had issued and outstanding during the taxable year $73,400 par value of preferred and $970,000 par value of common stock. Mortgages on its property amounted to $1,959,000 at the beginning of the year and were reduced in the amount of $35,330 *821 during the year. Bonds and notes outstanding at the beginning of the year amounted to $86,600 and at the end of the year amounted to $32,100. At no time material hereto did anyone who was not a tenant own any of the common stock. Before any stock could be transferred, a period of 60 days had to elapse within which A.C.W. Service, Inc., hereinafter referred to as Service, had a right to purchase the stock at par. Service was a corporation organized by the tenants for the purpose of conducting various activities within the building. Its stockholders were the same as the stockholders of Housing. When one tenant of the building replaced another, the old tenant surrendered his common stock and received in cash whatever equity he had in it, while the new tenant was required to purchase $500 par value of common stock*990 for every room rented by him. Credit carried the stock during the interval until the new tenant purchased it.
Dividends on the preferred stock were paid regularly at the rate of 6 percent up to the year 1935. On March 30, 1931, $27,000 par value of the preferred stock was owned by the Paramount Holding Corporation, a subsidiary of Union, $12,165 par value was owned by Service, $1,550 par value was owned by A. H. Education, an organization of the tenants for the purpose of conducting educational and community activities within the development, and the remainder of the preferred stock was owned by tenants. Prior to that time there had been some transfers of the preferred stock from one tenant to another.
The stockholders, upon dissolution of the corporation, could receive no more than $100 per share and accrued dividends. Any excess was to go to the State of New York. The book surplus at the beginning and end of the taxable year was $1,669.94 and $1,152.88. The petitioner's income for the year consisted of $273,113.37 from rent and $1,203.12 from interest. Its expenses included $10,027.30 paid as tax on its land.
Tenants were never permitted to sublet. The fixed rents*991 charged by Housing have never been changed, but after the close of each year any net earnings in excess of a small amount left as a reserve for contingencies have been distributed to the tenants in proportion to the rents paid by each.
Housing was encouraged by the success of its first six buildings to construct two additional units. These contained about 822 rooms in 208 apartments. They were opened at the end of 1929.
The first six buildings were each five stories in height. They contained no elevators. The two buildings opened in 1929 were six stories in height and were equipped with automatic elevators. A ninth unit was completed after the taxable year. The average *822 size of the rooms is about 180 square feet. All are well lighted and properly ventilated. The average rental of rooms in Housing's project has been $11 per room per month at all times material hereto. There is a bath for every apartment. There is a clute in each hallway which carries refuse to an incinerator. Housing furnishes hot and cold water and steam heat, and also, at its own expense, renovates and repaints each room every 30 months. The buildings are well constructed, have large open*992 courts, and are attractively landscaped. The project includes playgrounds and a large auditorium for the entertainment and education of the tenants.
Abraham Kazan is the executive officer of Housing, and is in complete charge of the management and supervision of the property. He has occupied that position since the organization of the corporation. He is the only salaried officer. His salary was $5,000 a year before the organization of Dwellings. Since the organization of Dwellings he had been in charge of the affairs of that corporation also, and his combined salary from the two corporations has been $6,000 per year. The only other persons who have received salaries from these corporations are clerks and other full time employees of the corporations. The directors received no compensation. Kazan was formerly in charge of Credit.
The housing board has at all times exercised close supervision over the limited dividend housing companies. They were incorporated in accordance with a form prepared by the board and each was required to adopt certain bylaws. The board carefully checks and approves all contracts and purchases pertaining to the projects. It makes studies and*993 investigations from time to time of conditions. The following tables are from a report of the board relating to the tenants of Housing during the year 1930:
| Number and Per Cent Distribution of Chief Breadwinners Classified by Size of Yearly Income | ||||
| Yearly Income | Number | Per cent of Total | Number Cumulated | Percentages Cumulated |
| Under $1,000 | 23 | 5.9 | 23 | 5.9 |
| $1,000-1,499 | 58 | 14.8 | 81 | 20.7 |
| 1,500-1,999 | 73 | 18.6 | 154 | 39.3 |
| 2,000-2,499 | 97 | 24.8 | 251 | 64.1 |
| 2,500-2,999 | 58 | 14.8 | 309 | 78.9 |
| 3,000-3,499 | 42 | 10.7 | 351 | 89.6 |
| 3,500-3,999 | 20 | 5.1 | 371 | 94.7 |
| 4,000-4,499 | 13 | 3.3 | 384 | 98.0 |
| 4,500-4,999 | ||||
| 5,000 and over | 8 | 2.0 | 392 | 100.0 |
| Total | 392 | 100.0 |
| Number and Per Cent Distribution of Families Classified by Size of Family Income | ||||
| Yearly Income | Number | Per cent of Total | Number Cumulated | Percentages Cumulated |
| Under $1,000 | 11 | 2.8 | 11 | 2.8 |
| $1,000-1,499 | 30 | 7.7 | 41 | 10.5 |
| 1,500-1,999 | 63 | 16.1 | 104 | 26.6 |
| 2,000-2,499 | 95 | 24.4 | 199 | 51.0 |
| 2,500-2,999 | 71 | 18.2 | 270 | 69.2 |
| 3,000-3,499 | 58 | 14.9 | 328 | 84.1 |
| 3,500-3,999 | 28 | 7.2 | 356 | 91.3 |
| 4,000-4,499 | 17 | 4.4 | 373 | 95.7 |
| 4,500-4,999 | 4 | 1.0 | 377 | 96.7 |
| 5,000 and over | 13 | 3.3 | 390 | 100.0 |
| Total | 390 | 100.0 |
*994 *823 Tenants in the buildings were not restricted to members of Union nor were they restricted by race or color. They were engaged in many different occupations and trades. Most of them were wage earners and salaried employees. There were a few independent shopkeepers who operated on a small scale. About 30 percent were employed in the ladies' and men's clothing trades. Engineers, accountants, journalists, teachers, artists, and some professional men comprise about 10 percent. Only about two-fifths of the tenant wage earners were employed constantly throughout 1930. The average income of the chief breadwinners for 1930 was $2,275.28 and the average income per family was $2,621.31.
The housing board in later reports had to emphasize the necessity of renting only to those having the lowest combined family income. It directed the corporations to favor such families and not to approve, as tenants, families having a maximum annual household income in excess of five times the annual rental. It also required a review of the income of an applicant on renewal of the existing leases.
Housing leased a few apartments during several years subsequent to the period here involved*995 to tenants who were not stockholders. This expediency was found necessary in order to reduce vacancies during the depression. Such tenants did not receive any division of the surplus earnings. They were gradually eliminated by being required either to purchase stock or to vacate.
There was no requirement in the state housing law that the common stock of a corporation should be owned by the tenants, and the stock of some of the other corporations organized under the law was not owned by tenants. Some municipalities did not enact laws exempting the limited dividend housing companies from taxes imposed by those municipalities.
Housing was required to renovate each room at least every 30 months and was required to set aside a reserve for that purpose. *824 When a new tenant came into an apartment, all of the rooms in that apartment had to be renovated at that time. Housing had a contract for the repainting of rooms for a fixed amount. It kept its books of account on an accrual basis. It kept accurate records for each tenant with respect to renovating and set up reserves for that purpose quarterly. It claimed on its return for the taxable year a deduction of $15,926.40, *996 representing the additions during that year to its reserve for renovating. It actually spent $9,257.40 during the year for renovating rooms. The Commissioner disallowed the larger amount and allowed the smaller amount, with the explanation that Housing was not entitled to deduct an addition to a reserve to cover future expenses at a time when there was no liability to pay any particular expenses and prior to the time that the decorator had actually performed some service under his contract, but was entitled to deduct the amount actually charged against the reserve during the year.
The facts relating to Dwellings are, for present purposes, substantially the same as those relating to Housing, with the exceptions mentioned in this paragraph. It had outstanding at the beginning of the taxable year $1,500 par value of preferred stock. That stock was retired six months after it was issued. Dwellings then took advantage of a new provision of the housing law and issued some of its debenture bonds. The holders of the debentures were entitled to interest not to exceed 6 percent, payable only out of income. They had no voting privileges. It obtained a mortgage at the Bowery Savings*997 Bank at 5 percent for about two-thirds of the cost of its property. The remainder of its capital was raised by the sale of common stock to tenants as in the case of Housing. The amount of its first mortgage, debentures, and common stock, as of the beginning and end of the taxable year, is shown below:
| Beginning of year | End of year | |
| Mortgage | $960,000 | $950,000 |
| Debentures | 81,200 | 26,500 |
| Common stock | 408,000 | 411,700 |
Dwellings' income consisted of interest in the amount of $604.63 and rents in the amount of $138,364.50. It paid taxes on its land during the year in the amount of $8,875. Dwellings, in its return for the taxable year, deducted $9,428.17 representing the addition to its reserve for renovating. The Commissioner allowed $6,047.46, the amount actually expended during the year and charged from the reserve. The petitioner also deducted $9,538.59 representing a net loss for the preceding year. The Commissioner allowed only $1,168.59. The difference was the difference between $8,912, the addition *825 to the reserve for that year deducted by Dwellings, and $542, the amount allowed by the Commissioner.
The facts contained in the stipulation*998 of the parties, and in the exhibits not specifically set forth herein, are made a part hereof by this reference.
OPINION.
MURDOCK: These petitioners claim that they are instrumentalities of the State of New York, performing an essential governmental function, and, therefore, are not subject to Federal income tax. They cite authorities to show that the housing board was an instrumentality of the state. They were private corporations conducting their own separate businesses and paying taxes to a political subdivision of the State of New York on the land which they owned. They were no part of the government of the State of New York and they may not escape Federal income tax upon the theory that they are instrumentalities of a state performing essential governmental functions.
They also contend that they are exempt from tax under the provisions of section 103(8) of the Revenue Acts of 1928 and 1932, because they are "civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare." The statute does not define the term "civic league." A league ordinarily implies an unincorporated association of persons who have associated*999 themselves together for some common purpose, a covenant between two or more parties for the accomplishment of some purpose by their cooperation. ; . "League" is defined in Funk & Wagnalls New Standard Dictionary, 1935, as "an alliance of persons, parties, states, etc., voluntarily maintained, for mutual support in the attainment of a common end." The same authority defines "civic" as "of or pertaining to a city, a citizen, or citizenship." A civic enterprise is a project in which citizens cooperate to promote in some way the common good and general welfare of the people of the community. It may be doubtful whether either of these corporations would come within the ordinarily understood meaning of the term "civic league." See, however, , reversing . But decision of that question is unnecessary because in any event each was an "organization."
The case turns upon whether or not these corporations were "not organized for profit but operated exclusively for the promotion*1000 of social welfare." They call attention to the fact that in section 103 various organizations are exempt from income tax, provided they are not organized and operated for profit, and provided further that no *826 part of their net earnings "inures to the benefit of any private shareholder or individual", while in the case of civic leagues, the last condition is omitted. Therefore, they argue that Congress intended to exempt civic organizations which are not organized for profit and are operated exclusively for the promotion of social welfare, even if a part of their earnings inures to the benefit of private shareholders or individuals. The petitioners discuss two cases in their brief after making the above contention. Neither case supports the contention made. They are cases like the case of , also cited by the petitioners. The Court in the latter case held that a religious organization was not subject to tax where, as a mere incident to its religious work, it carried on a profitable business, but used the gain derived therefrom entirely to further the religious work that it was doing. The other*1001 cases cited by the petitioner, including , and , are similar cases. But in the present case the profits of these corporations did not have to be used to further the work which they were doing. Instead, those profits were used, at least in part, to compensate the private capital which the corporations needed and had to have in order to begin their operations.
The case of , is probably more like the present case than any of the others cited. The mayor of Milwaukee, believing that a shortage of housing facilities existed in the city, appointed a housing commission in 1918. That commission, in November of the same year, reported that wage earners should be aided in acquiring homes, and suggested legislation to stimulate the erection of homes for them. A law was enacted in 1918 which granted to housing corporations the general powers of other corporations. They were also given the power to erect dwellings and lease them exclusively to stockholders of the corporation. The tenants were*1002 not permitted to hold stock in excess of the value of the premises occupied. No dividends were to be declared upon the stock of the corporation to anyone not a tenant in excess of 5 percent of the par value of the stock. Ten percent of the profits had to be set aside to retire the preferred stock. Both common and preferred stock had voting powers. The mayor had the Garden Homes Co. organized under that law. It issued over 2,700 shares of preferred stock, a number of which were purchased by the city and county. The remainder was purchased by numerous firms and individuals who were appealed to on the ground that the project was a civic enterprise and not a money making scheme. Dividends were paid on the preferred stock. The corporation secured substantial loans from banks, on which it paid 6 percent. It constructed 105 houses. Much of the work necessary for the accomplishment of the project was contributed by various city employees, *827 without compensation. The corporation had only three salaried employees, whose total salaries were small. The occupants of the houses were required to pay rent. Later, pursuant to an amendment to the law, houses were sold to certain*1003 of the tenant stockholders. The directors passed resolutions providing that any excess amounts held by the corporation should be refunded to the property owners at the time of final dissolution. The court held that the owners of preferred stock certificates were in fact creditors and not stockholders. It further held that the monthly payments were not rentals, and, since the excess of those payments over the amount necessary to pay expenses and fixed charges, including dividends on and retirement of the preferred stock, had to be applied in payment for tenant stockholders' common stock, it constituted capital contributions and was not profit to the petitioner. The following quotations are from the opinion of the court:
In the instant case, however, there was no return whatever to petitioner in excess of the expenses, except the amounts which it was bound to apply upon the common and preferred stock, and in this respect it was acting as a mere conduit, without remuneration except its expenses, in performing the promise it had made to the tenant stockholders.
* * *
If the so-called dividends upon the preferred stock and the payments upon the common stock are to be considered*1004 as profits to the taxpayer, then the intention of the parties and the object of the organization will be defeated. We are convinced that under the facts here presented petitioner was not organized for profit and that none accrued to it.
It might be said with equal force in the present proceedings that the petitioners were mere conduits which could not retain any of the income as their own. But with all due respect to the Seventh Circuit, we do not think that the conduit theory is a sound one upon which to hold that the present petitioners were not organized for profit. This question is not entirely dependent upon whether they were engaged in social service. Suppose that a corporation existed which was like this one except that its tenant stockholders were in higher income groups, so that the social welfare feature would be eliminated. Would anyone contend that the corporation was not organized for profit or that it did not have any income merely because that income had to be used to pay off a mortgage, to retire the preferred stock, to pay dividends on preferred stock, to pay expenses of the corporation, or to make a refund to the tenants? Most corporations exist only to earn*1005 profits and to distribute those profits to their stockholders. These two petitioners earned profits and those profits can not be distinguished from the profits earned by any other corporation. The statute contains no provision that all corporations which return their earnings to their stockholders are exempt from tax. Unless there is some specific exemption *828 in the statute, they must pay taxes on their earnings even though they exist only to immediately turn those earnings over to their stockholders. Since it can not be said that these petitioners were "not organized for profit", they must be treated like any other corporation for the purpose of computing their income tax liability. , affirming on this point ; certiorari denied, . Cf. ; .
We are mindful of the fact that these corporations were organized under a special law of the State of New York, which was enacted for the purpose of relieving unsatisfactory housing conditions for residents*1006 of the state whose earnings were small, that their surplus could not exceed 12 percent of their capital stock and any excess earnings would either have to be distributed to tenants or turned over to the State of New York upon final dissolution. The state, in limiting the dividends to 6 percent, and in otherwise restricting the projects, did not intend or desire to discourage entirely the use of private capital, which could be interested only by prospects of a profit. The framers of the act sought merely to eliminate the speculative features of a purely commercial enterprise, but they intended to have the projects present a sound investment. The provision for 6 percent on the stock was deliverately designed to encourage the use of private capital in projects which might develop under the act. The private limited dividend corporations organized under the act were permitted to sell their common and preferred stock to any investor who would buy. The purchasers did not have to be tenants. Some of the companies organized under the law were financed by private capital through the sale of common and preferred stock to any investor who would buy. It seems clear that those corporations*1007 were organized for profit and were not operated exclusively for the promotion of social welfare. Housing chose to sell its common stock to tenants only, but that was not true of its preferred stock. Although the preferred was rather closely held, the record does not indicate that the purchasers were not prompted to make their investments because of the prospects of financial profits. Each corporation was in position to permit the sale of its common stock to outsiders. The corporations during the taxable years here in question were operated in such a way as to permit the payment of dividends on the preferred shares. Those preferred stockholders were just as much stockholders as are preferred stockholders of any other corporation. Neither of these organizations comes within the provisions of section 103(8). Each was organized in part for profit, even though the profit was limited, and neither was operated exclusively for the promotion of social welfare.
*829 In , the Court said that the departmental regulation permitting returns to be made in accordance with books kept on an accrual system of accounting was*1008 to permit expenses which are incurred in and properly attributable to the process of earning income to be charged against the income thus earned. It permitted a tax to be accrued in advance of the assessment of the tax where all of the events had occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay it. These taxpayers were required to renovate their apartments as least every so many months. The need for the renovating was obviously occasioned by the occupancy and use of the apartments during the preceding period of months, and the petitioners set up a reserve from the rent received during that period sufficient to pay for the renovating at the end of the period. Although that method may have been good accounting, nevertheless, until the end of the period the events had not occurred which determined the liability of the taxpayers to pay for the renovating represented by the additions to their reserves. They did not have to wait until they had actually paid for the renovating before they could accrue their liabilities to pay for that renovating, but, on the other hand, they could not properly accrue as an expense the estimated cost of the*1009 renovating prior to the end of the period of months, and prior to the time that the painter rendered some services. ; ; ; ; ; . Although the petitioners were obligated to renovate, they had no liability to pay anyone anything until someone had performed some services. The accrual is for services in renovating, not of the duty to renovate. The accrual method does not permit the anticipation of future expenses prior to the rendition of the services for which the payment is due.
Reviewed by the Board.
Decision will be entered for the respondent.
OPPER, dissenting: We are with deference compelled to depart from the majority opinion, since it seems to us this proceeding should have been decided in favor of petitioners on the authority of Garden Homes Co. v. Commissioner, 64 Fed.(2d) 593, which we are unable to distinguish. *1010 Discussion of the first point decided by the majority would then have been unnecessary. In view of the explicit legislative findings not only of the State of New York, but more recently of the United States (U.S. Housing Act of 1937, sec. 1, 50 Stat. 888), and of the underlying factual basis which is a matter of public record, *830 we prefer not to treat the first part of the majority opinion as concluding that the construction and operation of housing for families of low income is not a governmental function. There may well be grounds for disposing of the constitutional issue not apparent in the majority opinion, and proceedings arising in the future will perhaps require their consideration. But, in view of our belief that the proceeding before us should have been determined as a matter of statutory construction, we are of the opinion that discussion of the constitutional question was superfluous.
KERN agrees with this dissent.