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    Income Tax: overvaluation of charitable artwork donation

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    Cheryl (a calendar year taxpayer) donates a statue to a local art museum (a qualified charity). The statue cost Cheryl $13,000 ten years ago and, according to one of Cheryl's friends (an amateur artist), is worth $50,000. On her income tax return, Cheryl deducts $50,000 as a charitable contribution. Upon later audit by the IRS, it is determined that the true value of the painting was $20,000. Assuming that Cheryl is subject to a 35% marginal income tax rate, what is her penalty for overvaluation?

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    Solution Preview

    Your question is quite complex, and I want to answer it correctly for you. The length to which I would go to answer the question depends, primarily, upon your major. I will provide two answers, not knowing your major, and will guide you toward which is correct for your situation.

    I see that you are a college senior. The correct answer for your depends upon your major. If you are an accounting major, your professor is looking for a very detailed answer to this question. Here it is:

    According to IRS Form 8283, Section B any donations of $5,000 or greater require a professional appraisal to be made with a copy of the appraisal and a statement as to ...

    Solution Summary

    The problem is concerned with the tax treatment for a donation of art and how an improper classification triggers an IRS audit.