T. J. Starker v. United States
1979 U.S. App. LEXIS 12252, 602 F.2d 1341, 44 A.F.T.R.2d (RIA) 5525 (1979)
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Rule of Law:
A deferred exchange of like-kind property qualifies for nonrecognition of gain under I.R.C. § 1031, even if the receipt of the replacement property occurs significantly after the relinquishment of the original property, provided the taxpayer intends to complete an exchange and ultimately receives only like-kind property. However, property received by a third party, property used as a personal residence, or a 'growth factor' on the outstanding balance does not qualify as like-kind property or tax-deferred.
Facts:
- On April 1, 1967, T. J. Starker and his son and daughter-in-law, Bruce and Elizabeth Starker, entered into a "land exchange agreement" with Crown Zellerbach Corporation (Crown).
- The agreement stipulated that the three Starkers would convey their interests in 1,843 acres of timberland in Columbia County, Oregon, to Crown.
- In consideration for this transfer, Crown agreed to acquire and deed other real property in Washington and Oregon to the Starkers within five years, or pay any outstanding balance in cash, and would add a "growth factor" equal to six percent of the outstanding balance to their credit each year.
- On May 31, 1967, the Starkers deeded their timberland to Crown, and Crown recorded "exchange value credits" of $1,502,500 for T. J. Starker and $73,000 for Bruce and Elizabeth Starker.
- Bruce and Elizabeth Starker quickly found three suitable parcels, which Crown purchased and conveyed to them within four months, closing their part of the transaction without a "growth factor" or cash.
- From July 1967 to May 1969, T. J. Starker selected 12 parcels; Crown purchased 9 of these from third parties and conveyed them to T. J. Starker.
- Two additional parcels, the Timian residence and Bi-Mart commercial building, were transferred by third parties to Crown and then conveyed by Crown at T. J. Starker's direction to his daughter, Jean Roth; T. J. Starker lives in the Timian residence and paid rent to his daughter, and also expended time and money improving the Bi-Mart property.
- The twelfth parcel, the Booth property, involved Crown purchasing a third party's contract right to buy the land and then reassigning that right to T. J. Starker, where legal title would not pass until a life interest expired.
- By 1969, T. J. Starker's credit balance had increased to $1,577,387.91 due to the 6% "growth factor," and the value of the land transferred to him and Roth exactly matched this balance, so no cash was paid.
Procedural Posture:
- T. J. Starker and his family reported no gain on their 1967 income tax returns, claiming nonrecognition under I.R.C. § 1031 for their timberland transfer.
- The Internal Revenue Service (IRS) disagreed and assessed tax deficiencies against Bruce and Elizabeth Starker, and T. J. Starker.
- The Starkers paid the deficiencies and filed claims for refunds, which were denied.
- Bruce and Elizabeth Starker filed a refund action, Bruce Starker v. United States (Starker I), in the United States District Court in Oregon.
- The district court in Starker I held that the transactions qualified for nonrecognition under § 1031, ruling in favor of Bruce and Elizabeth Starker.
- The government appealed the Starker I decision but voluntarily dismissed the appeal, making the judgment for Bruce and Elizabeth Starker final.
- The government continued to assert that T. J. Starker was not entitled to § 1031 nonrecognition and that the 6% "growth factor" was ordinary income.
- T. J. Starker filed a separate refund action, T. J. Starker v. United States (Starker II), in the United States District Court in Oregon, with the same trial judge presiding.
- The district court in Starker II rejected T. J. Starker's collateral estoppel argument and, reconsidering its Starker I opinion, found for the government on both the nonrecognition and ordinary income issues.
- T. J. Starker appealed the district court's judgment to the Ninth Circuit.
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Issue:
1. Does I.R.C. § 1031 permit nonrecognition of gain for a deferred exchange where the taxpayer transfers property and receives replacement like-kind property at a later date, even if there was a contractual possibility of receiving cash? 2. Does collateral estoppel apply to prevent the government from relitigating the application of § 1031 to T. J. Starker's transactions, given a prior favorable judgment for his son involving the same contract? 3. Does a "growth factor" added to a taxpayer's credit balance in a deferred exchange constitute ordinary income (interest) or capital gain? 4. Do properties conveyed directly to the taxpayer's daughter or used as a personal residence qualify as "like-kind" property received by the taxpayer for nonrecognition under § 1031?
Opinions:
Majority - GOODWIN, Circuit Judge
Yes, the government is collaterally estopped from relitigating the application of I.R.C. § 1031 for nine of the parcels T. J. Starker received because the legal questions and facts are substantially similar to Bruce Starker v. United States (Starker I), where the government lost and voluntarily dismissed its appeal. The court, applying Montana v. United States, found that the length of time between transfers was inconsequential for these parcels. Offensive collateral estoppel was permissible under Parklane Hosiery Co. v. Shore, as T. J. Starker did not adopt a "wait-and-see" attitude, the government had sufficient incentive to litigate Starker I, and no unfairness would result. However, collateral estoppel does not apply to the Bi-Mart, Timian, and Booth properties because the facts (conveyance to a daughter, or reassignment of a contract right) presented new issues not litigated in Starker I. No, the Timian residence and Bi-Mart commercial property do not qualify for nonrecognition under § 1031. The Timian property was used as T. J. Starker's personal residence, which is antithetical to being "held for investment" under § 1031. For both properties, title was transferred directly to T. J. Starker's daughter, Jean Roth, not to T. J. Starker himself. Nonrecognition under § 1031 requires the taxpayer to receive property ownership, and the court found that the unity of economic interest between father and daughter is not sufficient to equate a transfer to one with a transfer to the other. Yes, the Booth property, which T. J. Starker received as an assigned contract right to purchase, does qualify for nonrecognition under § 1031. The court holds that a contract right to purchase property, particularly one for a long term and providing equitable interest, is the equivalent of a fee interest for § 1031 purposes, especially considering the liberal construction of the statute. The mere possibility of receiving cash at the time of the agreement or the time gap between transfers does not prevent § 1031 application, so long as the taxpayer intends to acquire and ultimately receives like-kind property, citing Alderson v. Commissioner and Coastal Terminals, Inc. v. United States. The underlying purpose of § 1031 is to avoid taxing those who do not "cash in" their investments but rather continue to hold property of the same sort. No, the 6% "growth factor" constitutes ordinary income, not capital gain, because it was "compensation for the use or forbearance of money" (disguised interest). T. J. Starker retained no ownership rights in the timber, bore no risk of loss after conveyance, and was entitled to the factor regardless of actual timber growth. Therefore, it is taxable as ordinary income. The Timian and Bi-Mart properties are treated as "boot" received in 1967, and gain on them should be recognized in that year, to the extent of their fair market values as of the dates title passed to his daughter. The "growth factor" interest, for a cash-method taxpayer, is includable in income in the years it was actually received, not in 1967, because Crown's liability for it did not commence until after 1967.
Analysis:
This landmark case dramatically expanded the interpretation of "exchange" under I.R.C. § 1031 to include deferred, non-simultaneous transactions, leading to the widespread adoption of what are now known as "Starker exchanges" or "deferred like-kind exchanges." The decision clarified that a taxpayer's consistent intent to receive like-kind property, rather than cash, is paramount, even if the agreement initially allows for cash. However, it also set clear boundaries, affirming that property not held for investment (like a personal residence) or received by a third party (like a child) does not qualify, and any implicit interest payments are taxable as ordinary income. This ruling provided significant flexibility for real estate investors seeking to defer capital gains while navigating practical transaction delays, but also underscored the strict compliance required regarding beneficial ownership and property use.
