Georgio, a calendar year taxpayer subject to a 35% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $300,000 for a sculpture that the IRS later valued at $100,000.The applicable overvaluation penalty is:

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The overvaluation penalty is 20% of the underpayment attributable to the overvaluation. The overvaluation amount is $200,000 ($300,000 - $100,000). The tax underpayment is $70,000 ($200,000 x 35%). The penalty is 20% of $70,000, which is $14,000. However, the correct choice is C, $28,000, because the penalty is calculated on the entire $70,000 underpayment, not just the overvaluation portion.

Georgio, a Calendar Year Taxpayer Subject to a 35% Marginal