Curtis Brothers Bakery Inc Curtis Brothers Bakery, Inc. (Bakery) is a calendar year, accrual basis C corporation. Its 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 outstanding shares are owned as follows. Brothers Darryl and James Curtis are equal general partners in D&J Curtis Investments. The partners contributed Bakery stock to the partnership in 1999 for use as collateral for certain partnership debt. This debt was repaid long ago. James and his wife Hazel Curtis established the Curtis family trust in 2009. First National Bank of St Louis is the independent trustee, and the Curtis' various minor grandchildren are the only beneficiaries. The entity is not a grantor trust. Shareholder Number of shares Darryl Curtis 350 James Curtis 300 Chazz Curtis, daughter of James Curtis 100 Daniel Curtis, son of James Curtis 100 Sean Curtis, daughter of James Curtis 100 Curtis family trust 200 D&J Curtis Investments, a partnership 50 Total Shares Outstanding 1,200 D&J Curtis Investments (50 sh) Darryl Curtis James Curtis Darryl Curtis (350 sh) James Curtis (300 sh) Chazz Curtis (100 sh) Daniel Curtis (100 sh) Sean Curtis (100 sh) James Curtis Curtis Family Trust (200 sh) Curtis Grandchildren Hazel Curtis

PwC | PwCs tax case studies 3 Darryl Curtis is President, and James Curtis is Chairman of the Board of Bakery. Chazz, Daniel, and Sean Curtis all are employees of the corporation, and they receive substantial salaries. During the past several years, James Curtis has become less interested in involving himself in the corporation's business. James lack of interest has resulted in considerable friction between him and his three children. After an 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 corporation. James holds a tax basis in his 300 shares of $1,000,000. The redemption tentatively is scheduled to take place on January 1, 2022. Bakery will finance the redemption in full, 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, 2023. The note will provide for six percent simple interest per annum on the unpaid balance payable every January 1. Market rates of interest for similar debt is about four percent. Today is December 31, 2020, and Bakery reports $8,300,000 of accumulated earnings and profits. Pro rata cash dividends for 2021 are expected to total $200,000. The corporation's projected income statement for 2021 is attached. Due to the upheaval related to James retirement, E&P from Bakerys operations for 2022 is assumed to be $50,000, all produced after the redemption occurs. Further, annual cash dividends to the remaining shareholders are suspended for 2022. James Curtis refuses to commit to the terms of the redemption until he fully understands and can accept the federal income tax consequences to him. Therefore, the Curtis family has retained you to determine the tax consequences to both James Curtis and Bakery of the proposed redemption. The continuing shareholders particularly want to know the amount of Bakery's accumulated earnings and profits immediately before and after the redemption. Be as specific as possible in responding to the parties questions, and provide suggestions and/or alternatives that might result in more favorable tax consequences to those involved, including Bakery itself. Full operating year for Bakery 2021 James resigns, redeems shares, takes note 2022 First payment on note 2023

PwC | PwCs tax case studies 4 Curtis Brothers Bakery, Inc. Projected book income statement for year ending December 31, 2021 Revenue from sales $ 4,900,000 Cost of sales (2,175,000) Gross profit $ 2,725,000 Deductions Salaries, wages, fringes $ 1,200,000 Interest on business debt 3,000 Payroll, state/local, and other taxes 340,000 Other operating expenses 250,000 MACRS depreciation, ADS cost recovery would be $ 125,000 215,000 $ 2,008,000 Net income before federal income taxes 717,000 Federal income taxes, flat 21% 150,570 Net income after taxes $ 566,430 Notes 1. Ignore state/local income taxes. 2. Business debt is held by unrelated parties, at a market interest rate. 3. MACRS computations include any available elections for accelerated and bonus cost recovery.PwC | PwCs tax case studies 4 Curtis Brothers Bakery, Inc. Projected book income statement for year ending December 31, 2021 Revenue from sales $ 4,900,000 Cost of sales (2,175,000) Gross profit $ 2,725,000 Deductions Salaries, wages, fringes $ 1,200,000 Interest on business debt 3,000 Payroll, state/local, and other taxes 340,000 Other operating expenses 250,000 MACRS depreciation, ADS cost recovery would be $ 125,000 215,000 $ 2,008,000 Net income before federal income taxes 717,000 Federal income taxes, flat 21% 150,570 Net income after taxes $ 566,430 Notes 1. Ignore state/local income taxes. 2. Business debt is held by unrelated parties, at a market interest rate.