Starker sold some land to a
company called Crown. In exchange, Crown agreed to give similar property
to Starker within five years.
Crown assessed Starker's
property to be worth about $1.50M, and agreed to buy Starker $1.50M worth
or property (plus 6% interest).
Over the next two years, Crown
transferred 12 smaller pieces of property to Starker worth about $1.58M
(which included the 6% interest).
When Starker filed his taxes,
he did not report any capital gains
from the sale of his property to Crown. The IRS disagreed.
Starker argued that he had
made a like-kind exchange of
property, and therefore any gain he made was not recognized by 26 U.S.C. §1031.
§1031 says that when two persons exchange
properties, any capital gains or losses from the exchange will not be recognized.
The IRS argued that §1031 only applies when there is a direct exchange
of property. In this case, Starker didn't get property (at least not
right away), what he got was contract with Crown to acquire property
later.
Therefore the $1.5M Starker
got from Crown should be taxed as a capital gain, and the 6% interest was taxable as ordinary
income.
The Trial Court found for the
IRS. Starker appealed.
The Appellate Court reversed
in part.
The Appellate Court found
that §1031 was applicable and
that simultaneous transfers were not required.
The Court found that
contractual rights to assume the right of ownership should not be treated
any differently that the ownership rights themselves.
After this case, Congress
limited the use of non-simultaneous exchanges like this one.
Now, under $1031(a)(3), the receiver only has 180 days to take
possession of the new property, and only 45 days to identify the new
property.
Now, a non-simultaneous
exchange is sometimes known as a Starker
exchange.
