Reference no: EM131756656

Problem - Corporate Background - Quark, Inc. is a calendar-year accrual-based C corporation.

• Marvin Marshon owns 100% of the Quark stock.
• Quark manufactures aluminum casing for the lighting industry.
• At the beginning of 2017, Quark had $2 million of accumulated earnings and profits.

Situation - Quark's management has come to you and indicated that it has excess cash that Marvin wants to use personally.

• Quark intends to loan $500,000 to Marvin by the end of 2017.
• Quark gave you interim 10/31/17 financial statements. You have been able to determine that Quark will have $300,000 in working capital needs at the end of 2017.
• You are also aware that Quark needs equipment that will cost in the range of $150,000 to $250,000 but it has no current purchase orders or other arrangements.

Additional Information

• Its interim balance sheet shows $800,000 in current assets (other than inventories) of cash and marketable securities held for investment.
• Quark has not paid dividends yet this year or last year.
• Quark projects its taxable income to be $1,000,000 (not counting deductions for any equipment purchases).
• The taxable income amount includes a deduction for Marvin's salary of $200,000.

Special Considerations

• Assume that there are no charitable contribution, capital gain/loss or net operating losses (or any carrybacks or carryovers).
• Also, ignore the dividends received deduction.

Advise Quark about its potential tax problems and about any solutions you may have to reduce tax liability.