The Starker Story

T.J. Starker

In 1967 T.J. Starker and his son Bruce sold timberland to Crown Zellerbach, Inc. after all parties involved signing a contract stipulating that properties designated by Starker and his son could be acquired within a span of five years. Their contention was that this was a tax deferred exchange, even though they had not received any property in exchange at the time their property was deeded to Crown. Bruce found three properties within a year, which Crown purchased and deeded over to  him.  His portion was rather small compared to the portion the T.J. Starker owned.  It took T.J. almost two years to identify properties for Crown to purchase and deliver to him.  They both claimed the transactions as non-recognized gains based on IRC §1031.

Believe it or not, the Internal Revenue Service (IRS) didn’t agree, and stepped in and put a halt to this arrangement, citing numerous reasons including the fact that non-recognition treatment was not warranted by a delay in the exchange of properties. The IRS view was that an exchange had to take place simultaneously, and that what the Starker’s originally received was not like-kind property, but a promise from Crown to deliver to them like-kind property at a later date.

The Starker’s paid the assessment issued by IRS, and then filed a claim for refund, which IRS denied. They then filed suit in federal court, and the legal proceedings that sprang forth from this incident and their subsequent court verdicts shaped the real estate landscape into its current form in many ways, giving birth to non-simultaneous, delayed tax-deferred like-kind exchange transactions. These transactions qualify for non-recognition treatment and provide sellers with more flexibility overall when arranging tax-deferred like-kind exchange transactions.

The outcome of the Starker Family case created the need for regulations in the industry over future delayed tax-deferred like-kind exchanges. It was the outcome of this case that forced Congress to create the rules that we have today regarding delayed exchanges and reverse exchanges.