## Facts

- Chang Hsiao Liang was a nonresident alien individual who was not present in the United States at any time during 1946.
- Liang’s full-time occupation from 1928 through 1946 was military service abroad; he had no other occupation.
- In 1932, Liang entered a written agreement with a U.S.-resident commission agent, Lamont M. Cochran, under which Cochran would supervise and care for Liang’s investments; Cochran received a monthly payment plus a profit-based commission.
- Liang placed substantial funds in the United States, and Cochran exercised sole discretion over the account’s securities purchases and sales through a New York financial institution.
- During 1946, Cochran directed significant securities transactions, producing capital gains; holdings reflected varying holding periods rather than uniform rapid turnover.
- Liang filed a nonresident alien return reporting dividends and interest but did not report the capital gains later asserted by the Commissioner.
- The Commissioner determined a deficiency for 1946 (later increased by amended answer), asserting Liang was engaged in a U.S. trade or business through Cochran and that the extended limitations period could apply if the gains were taxable and omitted.

## Issues

1. Whether a nonresident alien, absent from the United States, was “engaged in a trade or business within the United States” under I.R.C. § 211(b) (1939) because a resident commission agent conducted securities transactions with discretionary authority.
2. If the capital gains were taxable on that theory, whether the Commissioner could rely on the extended assessment period for substantial omission of gross income under I.R.C. § 275(c) (1939).

## Decision

- The Tax Court held that Liang was not engaged in a trade or business within the United States within the meaning of I.R.C. § 211(b) (1939).
- The court treated the securities activity as management of an investment account aimed at appreciation and income, not a short-term trading business.
- Because Liang was not engaged in a U.S. trade or business, the asserted capital gains were not taxable to him for 1946 on the Commissioner’s theory.
- Decision was entered for the petitioner; the deficiency determination (and the limitations issue dependent on taxability of the gains) did not succeed.

## Legal Principles

- For nonresident aliens under I.R.C. § 211(b) (1939), U.S. tax on certain income depends on whether the taxpayer is engaged in a U.S. trade or business.
- A nonresident may be treated as engaged in a U.S. trade or business through an agent, but the characterization turns on the overall nature of the agent’s activities.
- Securities transactions conducted by a resident agent can constitute a U.S. trade or business when they reflect extensive, frequent, short-term, business-like trading for trading profits.
- Securities activity consistent with ordinary investment management—holding assets for appreciation and income, even if substantial and professionally managed—does not, on the facts, constitute carrying on a U.S. trade or business for the nonresident principal.
- Where the substantive basis for taxing the unreported item fails, a limitations argument dependent on that taxability does not provide an independent ground for assessment.

## Conclusion

The Tax Court concluded that a nonresident alien’s capital gains from U.S.-executed securities sales were not taxable under I.R.C. § 211(b) (1939) where a resident commission agent’s discretionary management reflected investment activity rather than operation of a U.S. securities trading business, and entered decision for the petitioner.


Chang Hsiao Liang v. Commissioner of Internal Revenue, 23 T.C. 1040 (1955)