Starker v. United States

In 1967, T.J. Starker (plaintiff), Bruce Starker, and Elizabeth Starker signed a land-exchange agreement with Crown Zellerbach Corporation (Crown). The agreement required the Starkers to convey their interest in 1,843 acres of Oregon timberland to Crown in return for Crown’s agreement to transfer suitable property in Washington and Oregon to the Starkers within five years or pay any outstanding balance in cash, plus an annual growth factor of 6 percent of the outstanding balance. Within four months of transferring the timberland to Crown, Bruce and Elizabeth Starker found suitable property, which Crown purchased and conveyed without needing to add a credit for growth factor. As for T.J. Starker, Crown purchased and transferred 10 parcels to T.J. Starker, plus two parcels to his daughter, over a two-year period. The total value of these parcels was $1,577,387.91, including a growth factor. The Starkers reported no gain from any of these sales on their 1967 federal income-tax returns, treating the sales as part of a like-kind exchange. The Internal Revenue Service (IRS) disagreed with this characterization and assessed deficiencies. The Starkers paid the deficiencies and then filed claims for refunds, which the IRS denied. The Starkers then sued the IRS for refunds in district court. The district court ruled in favor of Bruce and Elizabeth Starker. The IRS appealed that decision but then voluntarily dismissed the appeal. As for T.J. Starker, however, the IRS claimed that T.J. Starker was liable for capital-gains taxes on profits from his sales as well as income tax on the 6 percent growth factor he received from the sales. The district court ruled in favor of the IRS with respect to T.J. Starker’s claim and dismissed the case. T.J. Starker appealed.