Chang Hsiao Liang v. Commissioner of Internal Revenue

Chang Hsiao Liang (plaintiff) was a nonresident alien, not present in the United States at any relevant time. In 1928, Liang became friends with Lamont M. Cochran, an American citizen then managing the Mukden, Manchuria branch of the National City Bank of New York. Cochran left the East in 1932 after first entering into an agreement with Liang under which Cochran would return to America and supervise Liang’s securities holdings. Liang and Cochran signed a contract under which Cochran would be paid $1,500 monthly and 1 percent of the profits earned as commission, which was Cochran’s sole employment after his return. Liang initially deposited $3,000,000 with Cochran’s bank, with the last deposit in 1932. In the tax year of 1946, Cochran managed Liang’s investments by an account at the Guaranty Trust Company of New York City (Guaranty). Guaranty bought and sold securities under the direction of Cochran, who exercised sole discretion as to the management of the account. In 1946, Cochran consummated sales of $442,886.83, with the gains mixed among securities held more than two, three, or five years. Liang had capital gain income. Liang reported gross income on his 1946 United States tax return of $68,050.59 in dividends and interest. The Commissioner of Internal Revenue (the commissioner) (defendant) found a deficiency, arguing that Liang had underpaid $41,267.73. The basis of the argument was that Cochran’s activities on Liang’s behalf constituted carrying on a trade or business in the United States. Although Liang was clearly not in the country, the government argued that as Liang’s agent, Cochran’s ongoing activities were so substantial that Liang was carrying on a trade or business in the United States. Liang argued that he left the management of the account entirely to Cochran and that Cochran was merely acting to maintain Liang’s investment account.