THE STARKER DECISION, FOUNDATION FOR DELAYED ExchangeS

The landmark Starker decision attracted the attention of real estate investors, when a taxpayer by the name of T.J. Starker and his family challenged the necessity for a simultaneous Exchangeunder Section "1031" of the Internal

Revenue Code.

T. J. Starker, his son Bruce, and daughter-in-law Elizabeth owned 1,843 acres of timberland in Columbia County, Oregon. In 1967, two companies, by the name of Crown Zellerbach and Longview Fibre, offered to purchase the acreage. The timber companies were anxious to harvest the timber; however, the Starkers had not located a suitable replacement property to complete their Exchangetransaction. The Starkers were willing to dispose but wanted to defer their capital gains tax on the acreage. To solve their problem, the Starkers entered into a contractual agreement to transfer the acreage to Zellerbach and Longview in Exchangefor a promise to deliver acceptable replacement properties to the Starkers in the future.

It was April 1, 1967, when Bruce and Elizabeth entered into a "Real Property ExchangeAgreement" with Longview Fibre and conveyed property to them. Longview set up "accounting credits" of $105,811.00 in favor of the Starkers, which they referred to as the "ExchangeValue" for the timberland. Each year until the credits were spent, the remaining ExchangeCredits would be increased by a 6% "growth factor" to reflect the growing timber. Under the contract, the Starkers did not have control of any cash. At the same time, T.J., Bruce and Elizabeth entered into a "Land ExchangeAgreement" with Zellerbach and conveyed their timberland. T.J. Starkers' Exchangecredits with Zellerbach were $1,502,000.00 and Bruce and Elizabeth's were $73,000.00. The 6% growth factor applied and there was no control of the cash.

When a suitable replacement property was found by the Starkers, Crown Zellerbach and Longview Fibre purchased the property, deeding it to them and reducing the Starkers' "Exchangecredits". Fibre conveyed eight parcels to Bruce and Elizabeth between 1968 and 1972, reducing their credit to zero. T.J., having more credits to spend, did not receive all of his property for almost two years. He received twelve parcels, two of which were actually an assignment of a purchase contract. No cash was paid to the Starkers. The Starkers filed their tax return for 1967 treating these transactions as tax-deferred transfers. The framework was set for a challenge of a “delayed” Exchangeby the Internal Revenue Service.

The I.R.S. disallowed all of the Exchanges. The Starkers paid their taxes and filed suits in the U.S. District Court in Portland, Oregon. Three court cases ensued, tried by district Judge Gus Solomon.

Starker I 

The first involved Bruce and Elizabeth Starker (Starker I-1975). The I.R.S. first filed a deficiency notice against Bruce and Elizabeth Starker. The Starkers paid the tax and sued for a refund. In a very short opinion, the court decided in favor of Bruce and Elizabeth Starker while making no mention of the fact that the Exchanges were not simultaneous.

Starker II

In 1977, the government filed against T.J. Starker; with the same court that had heard Starker I rule that a sale and purchase had taken place essentially reversing the first decision. (T.J. Starker v. U.S., 432 F. Supp. 864 D.C. Ore. 1977). Judge Solomon wrote he was mistaken in Starker I and stated "My opinion in Starker I has been given wide publicity. I believe that it is desirable that my opinion in this case be published to prevent the mischief that I believe Starker I has caused". He further wrote that T.J. Starker had Exchanged real property for a promise that was not like-kind under the statute. He ruled that the growth factor was taxable as interest.

Starker III

The third and final case was T.J. Starker's appeal. (T. J. v. U.S., 602 f. 2d 1341 9th Cir. 1979). The Ninth Court ruled that the government was collaterally estopped by Starker I from relitigating nine of the transfers overturned in Starker II.

The court found the contract to purchase investment property to be equivalent of a fee interest, therefore qualifying for an Exchange. Finally, and most importantly for investors, the Court could not find any requirement for simultaneity in Section "1031" of the Internal Revenue Code. The court ruled in favor of Starker. The Starker (delayed) Exchange was born!

The landmark decision enabled investors in the Ninth circuit's eleven Western states to perform delayed Exchanges. No longer did the investor need to struggle to force the simultaneous closing of both their sale and purchase properties for fear of not having a valid Exchange. The Ninth Circuit court is an appellate court that establishes legal precedent for Federal District Courts; therefore, the Starker decision attracted national attention. It was not until 1984 that the Internal Revenue Code was amended to make the Starker (delayed) Exchangea part of the federal tax code affecting investors on a national basis. However, in 1991, the Treasury Department gave the investor of business or investment held property an over all acceptance of the Starker (delayed) Exchangethrough Regulations creating a boom in the exchanging arena today.