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

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The applicable overvaluation penalty is 40% of the underpayment of tax resulting from the overvaluation, subject to a maximum penalty of 20% of the amount overvalued. In this case, the underpayment of tax resulting from the overvaluation is $120,000 x 32% = $38,400. The applicable penalty is 40% x $38,400 = $15,360, which exceeds the maximum penalty of $60,000. Therefore, the maximum penalty of $60,000 applies, which is 20% of the amount overvalued ($300,000 - $120,000 = $180,000). The answer is thus C, $23,040.

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