A convertible hedging strategy involving the taxpayer and his corporation ("RIW"), which previous jurisprudence entailing similar arrangements characterized as being a partnership, entailed the taxpayer shorting shares in corporations and RIW going long convertible preferred shares of those corporations. The taxpayer and RIW agreed that profit or loss from the hedge transactions ("hedge pool transactions") would be divided equally; whereas "cash flow pool" payments such as dividends or interest, made or received by a partner would be for that partner's account alone. As a result of one of the subject corporations ("TWC") announcing a spin-off of a subsidiary ("TWA"), the taxpayer sold short further shares of TWC (in order to bring the hedging arrangements back into balance to reflect the fact that the conversion ratio for the convertible preferred shares held by RIW was increased in order to take into account the diluted effect of the distribution of the TWA shares); and the proceeds of these additional short sales were used to purchase shares of TWA to cover the short position in the TWA common shares of the taxpayer. Bowie J. found that the outlay to purchase the TWA shares was made in order to keep the hedge in balance rather than to pass on income through to the lender of the TWC shares, so that such amount should be taken into account in computing the hedge pool profit or loss rather than the cash flow pool.
Bowie J. also stated (at para. 4):
"Partners are, of course, free to agree to divide the fruits of their endeavours in any way that commends itself to them. In this case there was no written partnership agreement, and no evidence of an oral agreement that would conflict with this additional fact."