## Facts

- T.J. Starker conveyed 1,843 acres of Oregon timberland to Crown Zellerbach Corp. under a 1967 “land exchange agreement.”
- Crown credited Starker with $1,502,500 in “exchange value credits” and agreed to acquire and convey “suitable real property” to him within five years, with a 6% annual “growth factor” added to any outstanding balance; Crown could pay any remaining balance in cash.
- From 1967 to 1969, Crown acquired 12 parcels selected by Starker and conveyed them either to Starker or, at his direction, to his daughter, Jean Roth; one parcel was obtained by Crown via assignment of a purchase contract (the Booth property).
- By May 1969, the credit balance increased to $1,577,387.91 from the 6% growth factor; properties conveyed to Starker and Roth were valued at that amount, eliminating any remaining balance without a cash payment.
- Starker reported no gain on his 1967 return, claiming nonrecognition under I.R.C. § 1031; the IRS assessed a deficiency.
- In a related refund suit, Starker’s son and daughter-in-law obtained a final judgment recognizing § 1031 treatment on similar transactions after the government dismissed its appeal; Starker separately sued for a refund and lost in the district court on stipulated facts.

## Issues

1. Whether the government was collaterally estopped by the final judgment in the related refund litigation from contesting § 1031 treatment for parcels transferred directly to Starker.
2. Whether the deferred, multiparty arrangement—using credits and third-party acquisitions—could qualify as a like-kind “exchange” under I.R.C. § 1031 rather than a taxable sale.
3. Whether the 6% annual “growth factor” on the exchange credits was part of nonrecognition exchange consideration or taxable ordinary income as interest.
4. Whether § 1031 nonrecognition applied to (a) parcels conveyed to Starker, (b) parcels conveyed to his daughter at his direction, and (c) the Booth property transferred through assignment of contract rights.

## Decision

- The court affirmed in part, reversed in part, and remanded with instructions to modify the judgment.
- The government was collaterally estopped from relitigating § 1031 qualification as to parcels conveyed directly to Starker because the same issue had been fully litigated and finally decided on materially similar facts in the related case.
- Collateral estoppel did not apply to parcels conveyed to Starker’s daughter or to the Booth transaction because they raised distinct factual and legal questions.
- The court construed § 1031 broadly enough to permit nonrecognition for a deferred, multiparty like-kind exchange when structured as an integrated exchange plan rather than a cash sale.
- The 6% “growth factor” was taxable as ordinary income (interest), not protected by § 1031 nonrecognition.

## Legal Principles

- Issue preclusion can bar the government from relitigating a § 1031 issue previously finally decided against it when the later case presents the same issue on materially similar facts and the government had a full and fair opportunity to litigate.
- For § 1031 purposes, an “exchange” is not limited to a simultaneous two-party deed swap; a deferred, multiparty transaction may qualify when the taxpayer transfers qualifying property and receives like-kind replacement property pursuant to an integrated arrangement.
- Transfers directed to a third party rather than to the taxpayer, and transactions involving different legal mechanisms (such as assignment of contract rights), may present separate § 1031 questions not resolved by prior litigation involving different transfer patterns.
- Amounts functioning as compensation for the use or forbearance of money are interest and are taxable as ordinary income even if the principal transaction otherwise qualifies for nonrecognition under § 1031.

## Conclusion

The Ninth Circuit recognized that a deferred, intermediary-facilitated real estate transaction could qualify as a like-kind exchange under § 1031, applied issue preclusion to prevent the government from contesting § 1031 treatment for parcels directly received by the taxpayer, but held that a 6% credit “growth factor” was taxable interest and that transfers involving the taxpayer’s daughter and a contract-assignment parcel required separate treatment on remand.


Starker v. United States, 602 F.2d 1341 (9th Cir. 1979)