dissenting: The majority opinion neatly solves the very complex problems presented in this case by (1) holding that the obligation of petitioner to repay to its tenant the deposit of $250,000 without interest in 19821 became an obligation presently due at the time of its cancellation by virtue of the agreement of September 14, 1949, terminating the lease in 1950, which was the same agreement under which petitioner was released from the obligation to repay $185,000 in 1982, and by (2) refusing to follow the case of Warren Service Corporation v. Commissioner, 110 F. 2d 723, in which the Court of Appeals for the Second Circuit reached a contrary result on practically the same state of facts, its refusal being justified on the ground that the Court of Appeals had in that case “failed to take into consideration the fundamental rule of landlord and tenant law that the landlord’s duty to repay the deposit upon mutual cancellation of the lease is a present obligation.” Since I am in disagreement with this solution, neat though it be, and the reasoning by which it is reached, I feel constrained to file this dissent.
Before setting forth my views which are in conflict with the reasoning in the majority opinion, it may be proper to state that in my judgment the value on September 14, 1949, as of January 3, 1950, of the obligation of petitioner to return $185,000 of the security deposit upon the expiration of the lease subject to the possible termination of the lease earlier than January 1,1982, by fire, condemnation, or otherwise, can and should be determined, that on the entire record this value was $75,000, and this amount was properly includible in petitioner’s income for the taxable year.
The fundamental fallacy in the majority opinion lies in its disregard of the fact that the cancellation of petitioner’s obligation to repay without interest $185,000 of the deposit in 1982 was accomplished simultaneously with the acceleration of the termination of the lease and by the same agreement of September 14,1949. We are not aware of the motives or background leading to the agreement by which the lease was to be terminated in 1950. Prior to the execution of this agreement, petitioner (the lessor), in addition to having the right under the lease to receive the rents provided for therein, had the right to use without interest during the term of the lease2 the sum of $250,000 deposited with it as security. In bargaining for the cancellation of the lease it would be unlikely that the lessor would agree to any cancellation without first reaching an agreement with regard to its then future (and far distant future) obligation to repay this deposit to the lessee. In the instant case it is apparent that before the lease was canceled and as a condition to the agreement of termination the parties bad also reached an agreement on the equally important question of the amount of petitioner’s future obligation to repay to the lessee the security deposit which should also be canceled. The agreement of September 14, 1949 (executed prior to the effective date for the termination of the lease in 1950), expressly provided for the cancellation of petitioner’s obligation to repay to the lessee $185,000 of the deposit and was executed at a time when this obligation was a future obligation.3 The majority opinion on this crucial point would have validity if there had been no agreement between the parties relating to the cancellation of the obligation to repay the security deposit prior to or contemporaneously with the agreement of September 14, 1949, and later, after the termination of the lease, there had been a cancellation of the obligation. At that time and under those conditions the cancellation of the obligation would be the cancellation of a present obligation. However, those are not the facts of the instant case. Here, unlike the cases cited in the majority opinion, the landlord did not stand by and permit his future obligation to repay the deposit to be tacitly converted into a present obligation by the termination of the lease before its expiration without reference to the repayment of the deposit. In the negotiations leading up to the agreement of September 14,1949, and in the agreement itself, the parties to the lease were concerned not only with the termination of the relation of landlord and tenant but also with the extent of the cancellation, if any, of the landlord’s obligation to repay the deposit to the tenant. It should be emphasized again that prior to the agreement of September 14, 1949, petitioner had the valuable right to use without interest the deposit of $250,000 until 1982 (subject to being curtailed by conditions subsequent), and that petitioner would naturally be concerned with the settlement of his rights and/or obligations with regard to this deposit prior to or contemporaneously with a termination of the lease before its expiration, since the termination, as the majority opinion holds, standing alone would result in the entire amount of the deposit being immediately repayable to the lessee. Therefore, it was carefully provided in the same instrument which provided for the termination of the lease in 1950 that the tenant released and discharged the landlord from the obligation to repay or return to the tenant $185,000 of the deposit, which, at the time the agreement was executed, was an obligation to repay in 1982. Therefore, at the time of the cancellation of petitioner’s obligation this obligation was a future obligation to repay a sum of money without interest.
In all essential respects the case of Warren Service Corporation v. Commissioner, supra, unlike the cases cited in the'majority opinion, is identical with the instant case. In both cases the termination of the lease before its expiration and the cancellation of the landlord’s obligation to repay without interest part of a deposit to the lessee on the expiration of the lease were accomplished simultaneously and by the same instrument.
In the Warren Service case, the taxpayer was the lessor of business property under a lease executed in August 1926, which required the lessee to deposit $125,000 with the lessor as security for the performance by the lessee of its obligations thereunder. The lease provided that the lessor was to have the unrestricted use, interest free, of the $125,000 which was to be repaid on August 1, 1941, when the lease expired if the lessee had faithfully performed its obligations, or if it had defaulted, if such default had been cured. The lease was canceled by agreement on May 1, 1933, and by the same agreement the lessee released its interest in the $125,000 deposit. The taxpayer-lessor included in its 1933 income only $85,000, the present worth on December 31,1933, of an obligation to pay $125,000 on August 1,1941. The Commissioner determined that the entire $125,000 was income in 1933. This Court sustained the Commissioner’s determination but the decision was reversed by the Court of Appeals for the Second Circuit. That court stated in its opinion, at page 725:
The value of a release of an obligation to pay $125,000 in 1941, without interest, is obviously less than the value of the release of a debt for like amount presently due, or of an obligation to pay the sum in 1941 with interest. See Chesapeake & Ohio R. Co. v. Kelly, 241 U. S. 485, 489, 36 S. Ct. 630, 632, 60 L. Ed. 1117, L. R. A. 1917F, 367, where it is said: “It is self-evident that a given sum of money in hand is worth more than the like sum of money payable in the future.” See also Hollwedel v. Duffy, Mott Co., 263 N. Y. 95, 188 N. E. 266, 90 A. L. R. 1312. The present case is to be distinguished from a situation where the deposit of money as collateral security is held in trust by the lessor without the privilege of using it. It must also be differentiated from a situation where the lessor is to pay the lessee interest on the deposited sum, as in the case relied upon by the Board. Commissioner v. Langwell Real Estate Corp., 7 Cir., 47 F. 2d 841. In such a case the present worth of a release from an obligation to pay $125,000 in eight years is presumably the face amount of the obligation; the value to the lessor of the use of the money in the interim is offset by the obligation to pay interest during the same period. But in the case at bar the lessor was to have the free use of the money until 1941. * * *
The case was remanded to this Court to determine the value in 1933 of an obligation to pay $125,000 on August 1, 1941, without interest. It is obvious, and the majority opinion so recognizes, that the Court of Appeals in this case considered the release of the obligation to repay the deposit to the lessee as a release of a future obligation to repay money without interest which was to be valued as such. For the reasons above stated, it is my opinion that the Court of Appeals was correct in this holding and did not ignore any “fundamental rule of landlord and tenant law” in holding that the release to a landlord of an obligation to repay a deposit without interest to a lessee on the expiration of a lease was the release of a future obligation if the release was expressly accomplished simultaneously with and as a part of the agreement by which the lease was terminated prior to its expiration.
In F. W. Kellogg, 42 B. T. A. 64, we held in an Opinion reviewed by the Board and without dissent that “the value * * * of the cancellation of a debt not yet due is less than the value of a cancellation of a debt presently payable, if no interest is charged on the obligation to pay.” As authority for this proposition we cited and relied upon the “recent case,” Warren Service Corporation v. Commissioner, supra. and quoted with approval a part of the opinion of the Court of Appeals already quoted herein. We algo held that if the present value to the payee of an account receivable payable in the future was less than its face amount, “then it would follow that the present value * * * to [the obligor] of the cancellation of the same obligation would be the same amount,” and again cited the Warren Service Corporation case.
Thus, the Court of Appeals for the Second Circuit has held that, under facts similar to those of the instant case, the release of the obligation to repay the deposit was the release of a future obligation, no opinion of a Court of Appeals or opinion of this Court since the Warren Service Corporation opinion has held to the contrary, and in the Kellogg case we held without dissent in an Opinion reviewed by the Board that the present value of the cancellation of an obligation to pay in the future a sum of money without interest would be less than the face amount of that obligation and in that Opinion we twice cited the opinion of the Court of Appeals in the Warren Service Corporation case as authority for our holding.
In this dissent I have confined myself to an explication of my difference of opinion with the reasoning of the majority opinion, considering it unnecessary to take up in detail the contentions of the parties on questions which arise if the proposition upon which the majority base their opinion is rejected, i. e., that the cancellation by the agreement of September 14, 1949, of petitioner’s obligation to repay a part of the deposit, repayable prior to the execution of that agreement, in 1982, was the cancellation of a present obligation. However, as I have already indicated, it would be my judgment that these troublesome questions should be decided in favor of the petitioner, except that the valuation of the canceled obligation should be increased to $75,000.
Subject to some acceleration upon the occurrence of certain contingencies — a consideration which Is not pertinent to the reasoning of the majority opinion.
Subject to being curtailed by conditions subsequent having to do with eminent domain and fire.
It is significant that the amount of the deposit which should be repaid to the lessee in 1950 ($65,000) does not differ greatly from the present value in that year of an obligation to repay $250,000 in 1982.