Featured 1031 exchange real estate VIPs
TJ, Bruce & Elizabeth Starker
This article profiles the Starkers, who won a series of historic lawsuits in the 1970's which changed the real estate investment market by creating the precedent by which we structure the modern-day delayed 1031 exchange.
Biographical Background
TJ Starker moved with his family to Portland, Oregon in 1907. He studied Forestry, and graduated in the first class of foresters at Oregon Agricultural College(OAC), now Oregon State University(OSU), in 1910. He continued his studies at the University of Michigan, earning a MS in forestry, and returned to Oregon. Over the next 30 years, TJ worked for the Forest Department, as a professor at OAC, and other positions within Oregon's forest industry.
With and eye on the future and a keen understanding of conservation and forestry management, TJ Starker looked into purchasing second-growth forest (previously logged forest land in a state of regrowth). At the time, Oregon had seemingly endless forests for logging, so second-growth forest was not desirable to logging companies. TJ was able to purchase second-growth forest for much less; making his first purchase in 1936, Starker Forests planted its roots.
Bruce Starker followed the path of his father, TJ, studying forestry at OAC and went on to earn his MS in Forest Management from Yale University in 1941. After serving in World War II, Bruce returned home to Oregon, and joined his father acquiring and managing Oregon forest lands. Bruce actively worked with private industry, state, university & federal agencies to inspire better practices highlighting the Starker Forests values of conservation, management and reforestation.
TJ & Bruce's strategy of buying second growth forests paid off. Over time, through careful management and reforestation efforts, the Starker Forests timberland investments became desirous logging properties.
Trail Blazing Exchange Structure
The stage was set perfectly. TJ & Bruce were master foresters who worked to improve their land over years. They knew over time second growth forest regrows and matures into desirous logging land, but faced a great problem: 1. They bought land for less (They had a very low basis) 2. The property appreciated greatly in value (They were good at what they did) 3. Selling the property would expose the Starkers to a large capital gain. An exchange was the ideal solution for allowing Starker Forests to sell their property and purchase other investment and business use property, but there were issues.
1031 exchanges have been part of the IRS tax code (IRC 1031) since 1921. The purpose of exchanging (still is) was to encourage investors and capital owners to keep capital continuously invested. Before the Starkers, most people interpreted exchanges to be simultaneous and between buyer and seller only. This proved difficult at best. Finding and investor with a like-kind exchange property willing to trade, when you wanted to trade proved unworkable. Most people were forced to either suffer paying their capital gains tax or settle on a less desirable property.
When the Starkers were approached by Crown-Zellerback & Longview Fibre (paper milling companies), TJ, Bruce & Bruce's wife Elizabeth, decided to sell certain parcels for a combined price of over $1.6M. Investment, Conservation, Managed Growth were/are core values of Starker Forests. Rather than pay capital gains taxes, the Starkers intended to reinvest the proceeds from the sale by use of a real estate 1031 exchange. Because neither company had the right property to trade simultaneously, the Starkers created an innovative delayed reinvestment structure.
On August 31, 1967, the Starkers closed on the sale, and received consideration in the form of "exchange credits". No cash was transferred to the Starkers. Over the next several years, the Starkers selected suitable exchange properties which were purchased by Crown-Zellerbach and Longview Fibre and deeded to the Starkers, reducing their exchange credits.
IRS & Court Decisions
Because the Starker exchange was significantly different to past exchange structures, the IRS disallowed the exchanges when the Starkers filed their taxes. The Starkers paid their capital gain taxes, and brought the matter to court to sue for a refund.
Although there were several lesser arguments to the case that would ultimately help define other aspects of modern day 1031 exchanges, the core dispute revolved around defining what the tax code inferred and created with the 1031 exchange process. In particular, the final outcome centering around the definition and connotations of the word "exchange". Did exchange infer a simultaneous transaction? Did exchange mean 1 business/property for 1 business/property? Was the exchange process limited to only the direct principals involved in the initial transaction?
In a series of landmark decisions from 1975 to 1979, that went back and forth, the Starker Exchange structure prevailed. The Starker cases set the precedent for the delayed 1031 exchange. This defining structure would allow business/real estate owners greater flexibility to purchase like kind property more suitable for their investment goals and timelines.
1031 delayed exchanges were added to the amended IRS tax code in 1984. The 1031 tax exchange structure laid out reflects our modern day, 45 day identification 180 day replacement period, and today, remains as one of the few investment methods for deferring capital gains taxes. In 1991, the Treasury Department extended to business property owners the same consideration under IRC 1031 creating a boom in activity that extends through today.
The Starkers and Starker Forests, Inc today
Starker Forests was officially formed in 1971, with partners T.J., Bruce, Elizabeth and their two sons, Bond and Barte (also OSU forestry graduates). Bruce Starker died in an airplane crash in 1975, at which time Elizabeth, Bond, Barte and Gary Blanchard took over management of the company. Starker Forests Inc. was formed in 1981, and T.J. & Elizabeth remained active in the company until their deaths in 1983 and 2004, respectively.
The contributions of the Starkers are remembered today not only through their innovative delayed 1031 exchange structure. OSU hosts the Starker Lecture Series offering students a mind-broadening variety of viewpoints on natural resource issues. The Starker family also supports scholarships and has supported many Oregon charitable projects through the years including the Starker Arts Park, The Majestic Theatre, The Valley Library at OSU, Good Samaritan Hospital, the Boys and Girls Club, Community Outreach & the Oregon Coast Aquarium.
Starker Forests today holds approximately 60,000 acres of forest land in Western Oregon. The land is currently managed by Bond and Barte and a staff of dedicated, longtime Starker Foresters and professionals headed by Chief Forester, Gary Blanchard. In addition to practicing intensive forest management, the people at Starker Forests also promote and encourage recreational use of their lands with a free Starker Forests permit.
The future of Starker family business and Oregon Forestry looks bright with the 4th generation of Starkers, Jim (OSU, Forest Management 2004) & Anna (OSU, Forest Management, Summa Cum Laude 2005) poised to assure a continuity of core Starker Forests values with a goal of managing a perpetual forest.
The Starker family & Starker Forests are unaffiliated with 1031store. The article provides an insight into the historic case that created a foundation for the delayed 1031 exchange structure, and is for general information purposes only.
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