Gadsden, who is subject to a 35% marginal gift tax rate, made a gift of a sculpture to Marvin, valuing the property at $150,000.The IRS later valued the gift at $400,000.The applicable undervaluation penalty is:

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The undervaluation penalty applies when the value claimed is significantly lower than the IRS's determined value. The penalty is 20% of the underpayment due to undervaluation. The underpayment is calculated as the difference in tax due to the IRS's valuation and the taxpayer's valuation. Here, the difference in value is $250,000 ($400,000 - $150,000), and the tax difference is $87,500 ($250,000 * 35%). The penalty is 20% of $87,500, which is $17,500. However, since the maximum penalty is $25,000, the correct penalty is $35,000.

Gadsden, Who Is Subject to a 35% Marginal Gift Tax