Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $8,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

Question

Quizplus · Accepted Answer

The penalty for undervaluation of property transferred by gift applies if the tax understatement is more than 25% of the gift tax due. In this case, the additional gift taxes of $8,000 represent a tax understatement of $8,000/$0 = infinity, which is greater than 25% of the gift tax due. Therefore, the penalty for undervaluation would apply.

Because He Undervalued Property That He Transferred by Gift, Dan