Malik,Inc.,a calendar year C corporation subject to a 35% marginal income tax rate,claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:

Question

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The overvaluation penalty applies when the claimed value is 150% or more of the correct value. Here, $30,000 is 300% of $10,000, so the penalty applies. However, the penalty is 20% of the underpayment attributable to the overvaluation. Since the deduction was reduced by $20,000, the tax effect is $20,000 x 35% = $7,000. But the penalty is only applied if the underpayment exceeds $5,000, which it does not in this case, so the penalty is $0.

Malik,Inc,A Calendar Year C Corporation Subject to a 35% Marginal