| Course | AC430 Advanced Tax - Corporate |
|---|---|
| Unit | Unit 6 |
| Paper type | Tax research memo |
| Length | About 790 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC430 Unit 6
Salary or Disguised Dividend? A Unit 6 Research Memo on an HVAC Owner's $840,000 of Pay
[Student Name]
Purdue University Global
AC430: Advanced Tax - Corporate
Unit 6 Research Memo With Citations
[Instructor Name]
[Date]
The company, its owner and every figure are composite; the statute, regulation and cases cited are real, and the analysis is coursework, not advice.
Header
To: Marisol Ortega, President, Ortega Comfort Systems, Inc. From: Tax staff Date: March 2 Subject: Whether 2025 compensation is deductible in full
Facts
Marisol founded the company in 2004 and owns all of its stock. She sets its prices, wins its commercial bids, supervises 46 technicians and holds the state mechanical contractor license the company operates under. Profit before her compensation was $900,000 in 2025. Her compensation was $840,000: a $210,000 salary and a $630,000 bonus set in December after the year's results were known. The company has never declared a dividend. Equity on the balance sheet is about $2.4 million.
Issue
Can the company deduct all $840,000, or could part of it be treated as a nondeductible distribution of earnings?
Short Answer
Part of the bonus is exposed. The company is located in Indiana, so an appeal would go to the Seventh Circuit, whose independent investor test is likely to treat compensation leaving shareholders a return of about 2.5 percent on equity as presumptively unreasonable. Marisol can rebut the presumption with evidence of what comparable executives are paid, but the December bonus timing weakens her position.
Analysis
The Code allows a deduction for "a reasonable allowance for salaries or other compensation for personal services actually rendered" (Trade or Business Expenses, 2024). The regulation adds that an amount paid as compensation but not in fact as the price of services is not deductible, and that "an ostensible salary paid by a corporation may be a distribution of a dividend on stock" (Treasury Regulation 1.162-7, 2024). The question is therefore what the payment was in substance.
The circuits differ on how to answer it. The Ninth Circuit applies five factors: the employee's role, comparison with salaries paid by similar companies, the character and condition of the company, conflicts of interest, and internal consistency in pay practices (Elliotts, Inc. v. Commissioner, 1983). Under that test, Marisol's role is strong evidence for her: she is the company's license holder, chief estimator and lead salesperson.
The Seventh Circuit rejected the multifactor approach in favor of one question: would an independent investor be satisfied with the return left after the owner's pay? If the return is far higher than an investor would expect, the pay is presumptively reasonable; if it is low, the presumption runs the other way (Exacto Spring Corp. v. Commissioner, 1999). Here, $60,000 of profit after pay on $2.4 million of equity is a return of about 2.5 percent before tax.
Because the Tax Court follows the law of the circuit to which an appeal would go, the location of the company's principal place of business decides which test applies, and in Indiana that test turns on the shareholders' return rather than on how hard Marisol works.
The Tax Court has held that it will follow a court of appeals decision squarely on point where an appeal lies to that circuit, as established in Golsen v. Commissioner (1970). An Indiana company's case would be decided under Exacto Spring.
Applying the Tests to These Facts
Under the five-factor approach, three factors favor Marisol: her role, the company's steady growth under her management, and the license that ties its revenue to her. Two cut the other way. As sole shareholder she set her own bonus, a conflict of interest the courts weigh heavily, and the bonus was fixed only after profits were known, which looks more like a distribution than a price agreed for services in advance. Under the independent investor test, those same facts matter as rebuttal evidence: a study showing that contractors of similar size pay their chief executives $700,000 or more would help, and a written bonus formula adopted in earlier years would help more.
Consequences
If, for example, $300,000 of the bonus were recharacterized:
1. The company would lose the deduction, adding $63,000 of corporate tax at 21 percent.
2. Marisol would report $300,000 as a qualified dividend rather than wages, which would lower her own rate from 37 percent plus Medicare tax to the 20 percent dividend rate with 3.8 percent of investment income tax on top.
3. A 20 percent accuracy-related penalty could apply to the company's underpayment (Imposition of Accuracy-Related Penalty, 2024).
Recommendations
Obtain a compensation study comparing contractors of similar size, document Marisol's duties in board minutes, set bonuses by formula before the year begins, and consider a regular dividend so that shareholders' return is visible.
References
Elliotts, Inc. v. Commissioner, 716 F.2d 1241 (9th Cir. 1983).
Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir. 1999).
Golsen v. Commissioner, 54 T.C. 742 (1970).
Imposition of Accuracy-Related Penalty on Underpayments, 26 U.S.C. § 6662 (2024).
Trade or Business Expenses, 26 U.S.C. § 162 (2024).
Treasury Regulation 1.162-7, 26 C.F.R. § 1.162-7 (2024).
Reading the AC 430 Unit 6 instructions
Unit 6 of AC430 asks for a research memo answering a client's tax question with authority. Use the format a tax file uses: facts, issue, short answer, analysis, conclusion or recommendations. State the facts that matter to the rule, and only those. Frame the issue as one question. Give the short answer before the analysis, with any condition it depends on. In the analysis, quote the operative words of the statute and regulation rather than whole subsections, then explain how courts apply them. Where circuits differ, explain which test governs this client and why, citing the rule that the Tax Court follows the circuit of appeal. Apply each test to the facts honestly, including the facts that hurt. Close with the consequences for both the corporation and the shareholder, and practical steps. Cite statutes, regulations and cases in APA 7 form.
How this AC430 Unit 6 example is built
The sample's header addresses Marisol Ortega. The facts describe her role, the $210,000 salary and $630,000 December bonus, $900,000 of profit before pay and $2.4 million of equity. The issue is one sentence, and the short answer says part of the bonus is exposed under the Seventh Circuit. The analysis quotes Section 162(a)(1) and Regulation 1.162-7, then sets out the five Elliotts factors and the Exacto Spring test, computing a 2.5 percent return on equity. The highlighted sentence explains why the company's location decides the test, and Golsen supports it. A section applies both tests to the facts, weighing her role against the self-set bonus. Consequences show $63,000 of added corporate tax and a lower rate for her if $300,000 is recharacterized. Four recommendations close the memo.
Where the points sit in the AC430 Unit 6 rubric
AC430 research memos earn their marks for precise use of authority, honest application and a usable answer. The issue must be framed narrowly enough to answer. The short answer should state the conclusion and its condition before the analysis begins. Quotations should be short and exact, and every rule should carry its citation. Where the law differs by circuit, graders reward memos that identify the governing circuit and explain why it controls. Applying the tests to unfavorable facts as well as favorable ones shows objectivity. Consequences must be traced at both the corporate and shareholder levels, including penalties where relevant. Recommendations should be specific enough for the client to act on. Proper citation of cases with court and year, and of statutes and regulations, is checked closely in this Purdue Global unit.
Common AC430 Unit 6 mistakes, and how to avoid them
Many Unit 6 memos summarize the law at length before reaching the client's facts. Others quote entire statutes, leaving the reader to find the operative words. Cases are cited without saying which circuit's test applies or why. Only favorable facts are applied. The short answer hedges until it says nothing. Consequences are given for the corporation alone, missing the shareholder side. Citations lack the court or year. If your research question concerns a different issue, such as a hobby loss, a home office or a related-party loan, our writers can draft the memo from your facts with the governing authority quoted.
Get an AC430 Unit 6 example written to your instructions
With the client question, any facts your Unit 6 prompt adds and the rubric, a memo is drafted conclusion-first, each authority quoted only as far as needed and cited in the style your section expects. It comes back within 24-48h. First custom samples are free, and the contractor and its owner are composite. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC430 Unit 6 questions, answered
Why quote so little of the statute?
Because a quotation is evidence for one sentence, and quoting a full subsection makes the grader search for the words that matter. The example quotes the phrase that states the rule and cites the rest. Where your rubric asks for a specific citation format, such as the Bluebook or a format your instructor posted, the memo follows it.
Can the memo cite court cases, or only the Code?
Cases belong in it when the Code leaves a standard open, as Section 162 does with the word reasonable. The example cites two circuit decisions and the Tax Court rule on which circuit's law applies, each with court and year. Regulations carry more weight than revenue rulings, and the memo keeps that ordering visible wherever both appear.
Is the memo's conclusion reliable for a real owner?
No. It is coursework on invented facts, written to show how an AC430 memo builds an answer from authority. A real compensation question would turn on comparables, the company's history and records that no unit prompt supplies, and on current law checked at the time. Its authorities are cited so the reasoning can be verified, not relied on.
Where can I find a free AC430 Unit 6 sample paper?
This page holds a complete AC430 Unit 6 research memo with citations on whether an HVAC owner's pay includes a disguised dividend, with quoted authority, two circuit tests, consequences and APA 7 citations.
What is the independent investor test in AC430 Unit 6?
The Seventh Circuit asks whether an independent investor would be satisfied with the return left after the owner's pay. A low return, here about 2.5 percent on equity, makes the pay presumptively unreasonable.