Max (a calendar year taxpayer)donates a painting to a local art museum (a qualified charity).The painting cost Max $2,000 ten years ago and,according to one of Max's friends (an amateur artist),is worth $50,000.On his income tax return,Max deducts $50,000 as a charitable contribution.Upon later audit by the IRS,it is determined that the true value of the painting was $30,000.Assuming that Max is subject to a 30% marginal income tax rate,his penalty for overvaluation is:

Question

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The penalty for overvaluation is 20% of the underpayment of tax attributable to the overvaluation. The overvaluation is $20,000 ($50,000 claimed - $30,000 actual). The tax underpayment is $6,000 ($20,000 x 30%). The penalty is 20% of $6,000, which is $1,200.

Max (A Calendar Year Taxpayer)donates a Painting to a Local