The appellant ("RCF") was a Caymans limited partnership, with more than 97% of its capital held by a diversified group of US residents, principally funds and institutions. For Australian income tax purposes, it was deemed to be a corporation; whereas for Code purposes, it was a (fiscally transparent) foreign partnership, so that under Code s. 701, any liability for US tax on partnership income was that of its partners (except to the extent they also were fiscally transparent). It was assessed under the Australian equivalent of the Canadian taxable Canadian property rules on its gain from the sale of an Australian company with two underground gold mines in Western Australia.
Article 1 of the Australia-US Convention provided that the Convention applied only to persons (defined to include partnerships) who were residents of one or both of the Contracting States; and Article 4 provided that a person is a US resident if the person is a US corporation "or any other person…resident in the United States for purpose of its tax…." Article 13 provided that gains of a US resident from the disposition of real property situated in Australia (including, in this case, the shares of the Australian company) may be taxed in Australia.
Before finding that the assessment was invalid as it was an assessment of the partnership (RCF) rather than its US-resident partners, Edmonds J referred (at para. 65) with approval to a statement in the OECD Commentary that
…when partners are liable to tax in the country of their residence on their share of partnership income it is expected that the source country (in this case, Australia) will apply the provisions of a convention "…as if the partners had earned the income directly so that the classification of the income for purpose of the allocative rule of Articles 6 to 21 will not be modified by the fact that the income flows through the partnership."