Starker v. U.S.

• Citation: 602 F.2d 1341
• Decision Date: 24 August 1979
• Docket Number: No. 77-2826,77-2826
• Parties: 79-2 USTC P 9541 T. J. STARKER, Appellant, v. UNITED STATES of America, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1341

602 F.2d 1341

79-2 USTC P 9541

T. J. STARKER, Appellant, v. UNITED STATES of America, Appellee.

No. 77-2826.

United States Court of Appeals Ninth Circuit.

Aug. 24, 1979.

Charles P. Duffy, Duffy, Georgeson, Kelel & Benner, Portland, Ore., on brief for appellant.

Francis J. Gould, Atty., Dept. of Justice, Washington, D. C., for appellee; M. Carr Ferguson, Asst. Atty. Gen., Washington, D. C., on brief.

Appeal from the United States District Court for the District of Oregon.

Before GOODWIN and ANDERSON, Circuit Judges, and JAMESON ^*, District Judge.

GOODWIN, Circuit Judge:

T. J. Starker appeals from the dismissal, on stipulated facts, of his tax refund action. We affirm in part and reverse in part.

I. FACTS

On April 1, 1967, T. J. Starker and his son and daughter-in-law, Bruce and Elizabeth Starker, entered into a "land exchange agreement" with Crown Zellerbach Corporation (Crown). The agreement provided that the three Starkers would convey to Crown all their interests in 1,843 acres of timberland in Columbia County, Oregon. In consideration for this transfer, Crown agreed to acquire and deed over to the Starkers other real property in Washington and Oregon. Crown agreed to provide the Starkers suitable real property within five years or pay any outstanding balance in cash. As part of the contract, Crown agreed to add to the Starkers' credit each year a "growth factor", equal to six per cent of the outstanding balance.

On May 31, 1967, the Starkers deeded their timberland to Crown. Crown entered "exchange value credits" in its books: for T. J. Starker's interest, a credit of $1,502,500; and for Bruce and Elizabeth's interest, a credit of $73,000.

Within four months, Bruce and Elizabeth found three suitable parcels, and Crown purchased and conveyed them pursuant to the contract. No "growth factor" was added because a year had not expired, and no cash was transferred to Bruce and Elizabeth because the agreed value of the property they received was $73,000, the same as their credit.

Closing the transaction with T. J. Starker, whose credit balance was larger, took longer. Beginning in July 1967 and continuing through May 1969, Crown purchased 12 parcels selected by T. J. Starker. Of these 12, Crown purchased 9 from third parties, and then conveyed them to T. J. Starker. Two more of the 12 (the Timian and Bi-Mart properties) were transferred to Crown by third parties, and then conveyed by Crown at T. J. Starker's direction to his daughter, Jean Roth. The twelfth parcel (the Booth property) involved a third party's contract to purchase. Crown purchased that contract right and reassigned it to T. J. Starker.

The first of the transfers from Crown to T. J. Starker or his daughter was on September 5, 1967; the twelfth and last was on May 21, 1969. By 1969, T. J. Starker's credit balance had increased from $1,502,500 to $1,577,387.91, by means of the 6 per cent "growth factor". The land transferred by Crown to T. J. Starker and Roth was valued by the parties at exactly $1,577,387.91. Therefore, no cash was paid to T. J. Starker, and his balance was reduced to zero.

In their income tax returns for 1967, the three Starkers all reported no gain on the transactions, although their bases in the properties they relinquished were smaller than the market value of the properties they received. They claimed that the transactions were entitled to nonrecognition treatment under section 1031 of the Internal Revenue Code (I.R.C. § 1031), which provides in part:

"(a) Nonrecognition of gain or loss from exchanges solely in kind.

No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment."

The Internal Revenue Service disagreed, and assessed deficiencies of $35,248.41 against Bruce and Elizabeth Starker and $300,930.31 plus interest against T. J. Starker. The Starkers paid the deficiencies, filed claims for refunds, and when those claims were denied, filed two actions for refunds in the United States District Court in Oregon.

In the first of the two cases, Bruce Starker v. United States (Starker I), 75-1 U.S. Tax Cas. (CCH) P 8443 (D.Or.1975), the trial court held that this court's decision in Alderson v. Commissioner, 317 F.2d 790 (9th Cir. 1963), compelled a decision for the taxpayers. Bruce and Elizabeth Starker recovered the claimed refund. The government appealed, but voluntarily dismissed the appeal, and the judgment for Bruce and Elizabeth Starker became final.

The government, however, did not capitulate in T. J. Starker v. United States (Starker II), the present case. The government continued to assert that T. J. Starker was not entitled to section 1031 nonrecognition. According to the government, T. J. Starker was liable not only for a tax on his capital gain, but also for a tax on the 6 per cent "growth factor" as ordinary income (interest or its equivalent).

The same trial judge who heard Starker I also heard Starker II. Recognizing that "many of the transfers here are identical to those in Starker I ", the court rejected T. J. Starker's collateral-estoppel argument and found for the government. The judge said:

"I have reconsidered my opinion in Starker I. I now conclude that I was mistaken in my holding as well in my earlier reading of Alderson. Even if Alderson can be interpreted as contended by plaintiff, I think that to do so would be improper. It would merely sanction a tax avoidance scheme and not carry out the purposes of § 1031." T. J. Starker v. United States, 432 F.Supp. 864, 868, 77-2 U.S. Tax Cas. (CCH) P 9512 (D.Or.1977).

Judgment was entered for the government on both the nonrecognition and ordinary income (interest) issues, and this appeal followed.

T. J. Starker asserts that the district court erred in holding that: (a) his real estate transactions did not qualify for nonrecognition under I.R.C. § 1031; (b) the government was not collaterally estopped from litigating that issue; and (c) the transactions caused him to have ordinary income for interest, in addition to a capital gain.

II. COLLATERAL ESTOPPEL

T. J. Starker argues that the decision in Bruce Starker v. United States collaterally estops the government from litigating the application of section 1031 to his transactions with Crown. The government urges this court to affirm the trial court on this point, claiming that the two cases presented different legal questions, facts and parties.

A. Legal question presented.

In order for collateral estoppel to apply, the issue to be foreclosed in the second litigation must have been litigated and decided in the first case. The government argues that the legal question presented in T. J. Starker is different than that in Bruce Starker. According to the government, Bruce Starker merely decided that the term "exchange" in section 1031 does not require a simultaneous exchange of title or beneficial ownership. By contrast, it argues, T. J. Starker presents the question whether the lack of a simultaneous exchange and the possibility of the taxpayer's receiving cash render the consideration given the taxpayer something other than "property of a like kind".

The first problem, then, is that of defining the legal "issue" for purposes of collateral estoppel. Stated broadly, the legal "issue" decided in Bruce Starker was whether section 1031 applied to the transfers pursuant to the Starker-Crown contract. Defined narrowly, the issue was, as the government argues, whether the term "exchange" contains a notion of simultaneity.

While there is a sizeable body of authority on the other aspects of the government's collateral estoppel arguments, there is little clear precedent on the scope of a legal "issue". However, the emerging Restatement (Second) of Judgments, now in draft, marks the way through this murky area. Section 68 of Tentative Draft No. 4 (1977) states four factors to be considered by the court in deciding what the issue decided in the prior action was:

(1) Was there a substantial overlap between the evidence or argument advanced in the second proceeding and that advanced in the first?

(2) Does the new evidence or argument involve the application of the same rule of law as that involved in the prior proceeding?

(3) Could pretrial preparation and discovery in the first proceeding reasonably be expected to have embraced the matter to be presented in the second?

(4) How closely related are the claims?

As T. J. Starker pointed out below, the government's evidence and argument in his case are quite similar to those presented in Bruce Starker v. United States (Starker I). There, the government argued, just as it does here, that in 1967, the Starkers received mere promises, not real property, in consideration for their timberland. From that point, the government went on to argue in Starker I that there was no "exchange" because the reciprocal transfers of land came later. Hence, it concluded, section 1031 did not apply. Here, the government's first point and conclusion remain exactly the same: T. J. Starker received a mere promise, and section 1031 does not apply. Only the connecting argument between these two assertions differs in the two cases. Here, instead of declaring that no "exchange" took place because the transfers were not simultaneous, the government asserts that if there was an "exchange", it was not of "property of a like kind" because the transfers were not simultaneous.

Despite a switch in the verbal formula, the government's argument here is substantially identical to that in Bruce Starker v. United States. The government's appeals to the purposes and legislative...