1. Would Mr. Curtis be able to defer recognition of the gain since he is receiving an installment note? Explain. Does the fact that Mr. Curtis is considered a nondealer affect his reporting and paymen
1. Would Mr. Curtis be able to defer recognition of the gain since he is receiving an installment note? Explain. Does the fact that Mr. Curtis is considered a nondealer affect his reporting and payment requirements for tax purposes? Explain.
2. Identify and discuss possible actions that might result in a more favorable tax consequences. Include a discussion of any negative consequences of such actions to the other parties involved.
CURTIS BROTHERS BAKERY INC.
Curtis Brothers Bakery, Inc. (Bakery) is a calendar year, accrual basis C corporation.
principal business is the baking and wholesale distribution of various bread and pastry products.
Bakery has a single class of voting common stock outstanding. The 1,200 outstanding shares are
owned as follows:
Mr. Darryl Curtis
Mr. James Curtis
Charles Curtis (son of James Curtis)
Daniel Curtis (son of James Curtis)
Sean Curtis (daughter of James Curtis)
Curtis family trust
D. and J. Curtis Investments
Brothers Darryl and James Curtis are equal general partners in D. and J. Curtis Investments.
The partners contributed the Bakery stock to the partnership in 1985 for use as collateral for
certain partnership debt.
This debt has long since been repaid. James and his wife Hazel Curtis
established the Curtis family trust in 1992.
First National Bank of St. Louis is the independent
trustee, and the Curtis’s various minor grandchildren are the only beneficiaries.
(This is not a
grantor trust for Federal tax purposes.)
Darryl Curtis is President, and James Curtis is Chairman of the Board of Bakery.
Daniel, and Sean Curtis are all employees of the corporation, and earn substantial salaries.
During the past several years, Mr. James Curtis has become less interested in involving himself in
the corporation’s business. His disinterest has resulted in considerable friction between him and
his three children.
After extensive and sometimes bitter discussion, all of the shareholders have
agreed that it would be in the best interest of the corporate business if (1) James immediately
resigns as Chairman of the Board, and (2) Bakery redeems his 300 shares of stock in the
James has a tax basis in his 300 shares of $875,000.
The redemption is tentatively scheduled to take place on January 1, 2001.
Bakery will finance
the redemption by issuing a 15-year installment note to James Curtis in the amount of
$3,600,000, the independently appraised fair market value of his shares.
Bakery will make equal
annual principal payments of $240,000, the first payment to be made on January 1, 2002. The
note will provide for 9 percent simple interest per annum on the unpaid balance payable every
Assume that the 9 percent simple interest is equal to the applicable Federal rate in
effect under Section 1274(d) on January 1, 2001, compounded semiannually.
As of December 31, 1999, Bakery had accumulated earnings and profits of $6,290,000.
cash dividends for 2000 are expected to total $200,000.
The corporation’s projected income
statement for 2000 is attached.
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James Curtis refuses to commit to the terms of the redemption until he fully understands and
can accept the tax consequences to him.
Therefore, the Curtis family has retained you to
determine the tax consequences to both Mr. Curtis and Bakery of the proposed redemption.
The continuing shareholders particularly want to know the amount of Bakery’s accumulated
earnings and profits immediately after the redemption.
Be as specific as possible in responding
to their questions, and provide suggestions and/or alternatives that might result in more
favorable tax consequences to the parties involved.
Curtis Brothers Bakery, Inc.
Projected Income Statement
For Year Ending December 31, 2000
Revenues from sales
Cost of sales
Salaries and wages
Interest on business debt
Business taxes (payroll, state and local)
Federal income tax payable (34%)
Net income after taxes
*ACRS depreciation deduction on 18-year recovery property (cost $1,800,000) placed in
service on January 1, 1985 equaled $100,000.
MACRS deduction on 7-year property (cost $340,000 and class life 12 years) placed in
service on March 12, 1998 equaled $59,466.