Question

Peter, who is subject to a 45% marginal gift tax rate, made a gift in 201 9 of a building to Yule, valuing the property at $300,000. The IRS later valued the gift at $700,000. The applicable undervaluation penalty is:

a. $0.

b. $5,000 (maximum penalty).

c. $36,000.

d. $72,000.

e. None of the above.

Answer 1

Answer is C $ 36000

Undervaluation penalty is 20% of Tax Under payment amount if gift is undervalued by 50% or more but less than 75%

In this case Undervaluation is $ 400,000

So percentage of Undervaluation is $ 400,000/$700,000=57.14%

In this case Tax that needs to be paid actually as per IRS Valuation= $ 700,000*45%=$ 315,000

Less:   Tax paid by Peter by Under valuation =$ 300,000*45%=$ 135,000

Tax Underpaid ($315,000-$135,000)   = $ 180,000

Undervaluation penalty is 20% =$180,000*20%= $36,000