Rendall v. Commissioner

John Rendall (plaintiff) was a founding shareholder and CEO of Solv-Ex Corporation (Solv-Ex) from its inception until November 2000. Solv-Ex was extracting bitumen from oil sands to convert the bitumen to synthetic crude oil, a lucrative and speculative business. Rendall bought 2.7 million shares of Solv-Ex common stock for $0.01 per share in 1980 and purchased another 677,860 shares between 1981 and 1996 at prices ranging from $0.01 to $19 per share. In the late 1990s, Solv-Ex built an oil-extraction and upgrading plant in Alberta, Canada. To facilitate that project, Rendall loaned Solv-Ex $2 million from funds obtained from his margin account with Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch). To obtain the $2 million line of credit, Rendall pledged 2.66 million shares of Solv-Ex common stock as security. The loans between Rendall and Merrill Lynch were payable on demand. The company made a demand on May 2, 1997, and Rendall did not pay. Rendall disputed Merrill Lynch’s ability to sell the stock, but Solv-Ex had transferred 1.1 million shares of Solv-Ex stock to Merrill Lynch as Merrill Lynch had requested. Merrill Lynch then liquidated 634,100 shares of the Solv-Ex stock, which raised proceeds of $4,229,479. The Rendalls did not claim those proceeds as income on their tax returns, a characterization that the Commissioner of Internal Revenue (the commissioner) (defendant) disputed. The commissioner found a deficiency on the Rendalls’ tax return for the amount of any gain from the sale of the Solv-Ex stock. The Rendalls ultimately filed suit, and the tax court ruled for the commissioner. The Rendalls argued on appeal that the Merrill Lynch sale of stock was an unlawful conversion and that Merrill Lynch must be taxed due to its theft of the stock.