Georgio, a calendar year taxpayer subject to a 32% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $300,000 for a sculpture that the IRS later valued at $120,000. The applicable overvaluation penalty is:

Question

Quizplus · Accepted Answer

The overvaluation penalty is 20% of the underpayment attributable to the overvaluation. The overvaluation amount is $180,000 ($300,000 - $120,000). The tax underpayment is $180,000 x 32% = $57,600. The penalty is 20% of $57,600, which is $11,520. However, the penalty is calculated on the entire $180,000 overvaluation, leading to $180,000 x 32% x 20% = $11,520. The correct penalty is $23,040, which is 20% of the $57,600 underpayment.

Georgio, a Calendar Year Taxpayer Subject to a 32% Marginal