The taxpayer, which acted as agent for underwriting members of Lloyd's of London in the writing of workman's compensation, employer's liability and occupational disease insurance, was entitled to receive, at the time each contract took effect, an "advance fee" based on the estimated amount of the payroll of the employer for a specified period (generally six months or a year), and at the end of the specified period was entitled to an "additional fee" computed on the actual remuneration earned by the employees during that period. The binder which initially was issued specified that "the advance fee shall be held as a deposit by the Underwriters" (to whom the taxpayer had remitted a portion of the advance fees received by it) to be retained if the total earned fee was higher, and to be returned to the extent that the total earned fee was less than the advance fee. The binder also fixed a "minimum fee" which was to be retained in any event.
Thorson J. held that the advance fees were not income to the taxpayer to the extent the right of retention of such advance fees had not accrued to the underwriters during each taxation year in question:
"Where an amount is paid as a deposit by way of security for the performance of a contract and held as such, it cannot be regarded as profit or gain to the holder until the circumstances under which it may be retained by him to his own use have arisen and, until such time, is not taxable income in his hands, for it lacks the essential quality of income, namely, that the recipient should have an absolute right to it and be under no restriction, contractual or otherwise, as to its disposition, use or enjoyment." (p. 661)
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