The excess of the tax required to be shown on the

the excess of the tax required to be shown on the return over the amount of tax that is actually
shown on the return.
The penalty can be avoided if there was substantial authority for the tax treatment; if relevant
facts affecting the treatment are adequately disclosed in the return or a statement attached to the
return; and in the case of tax shelter items, if the taxpayer reasonably believed that the tax
treatment of such item was more likely than not the proper treatment. Code Sec. 6662(d)(2)(B)
and (C). The penalty can be waived on showing of reasonable cause and that the taxpayer acted
in good faith. Code Sec. 6664(c).
Substantial Valuation Misstatement Penalty
All taxpayers having an underpayment of tax attributable to a valuation misstatement are subject
to this 20 percent penalty. Code Sec. 6662(e). There is a substantial valuation misstatement if the
value of any property (or the adjusted basis of any property) is 150 percent or more of the
amount determined to be the correct amount of the valuation or adjusted basis of the property. If
the portion of the underpayment that is subject to the penalty is attributable to one or more gross
valuation misstatements, the penalty will be applied at the rate of 40 percent. A gross valuation
misstatement occurs if the value of the property (or the adjusted basis) was 200 percent or more
of the correct amount of the valuation of the adjusted basis of the property. Code Sec. 6662(h)(2)
(A). No penalty will be imposed on a taxpayer for a substantial valuation misstatement unless the
portion of the underpayment attributable to substantial valuation misstatements exceeds $5,000,
or $10,000 in the case of a corporation other than an S corporation or a personal holding
company.
EXAMPLE 2.15 Bert Barge gives a painting he purchased three years ago to his alma mater and
takes a charitable contribution deduction in the amount of $50,000, the value
placed on it by his art professor friend. If the actual value was only $20,000
and if the tax underpayment is $10,000, Bert would be subject to a $4,000
valuation misstatement penalty (40 percent of $10,000). The valuation was
more than 200 percent of the correct valuation.
Although valuation misstatements of charitable property resulting in understatements of tax are
subject to the accuracy penalty provisions, the charitable deduction penalty waiver for qualified
appraisers is still possible. No penalty will be imposed for an underpayment of tax resulting from
a substantial or gross misstatement of charitable deduction property if it can be shown that there
was a reasonable cause for the underpayment and that the taxpayer acted in good faith.
Substantial Overstatement of Pension Liabilities
The 20 percent penalty for substantial overstatement of pension liabilities applies only if the
actuarial determination of pension liabilities is 200 percent or more of the amount determined to
be correct. Code Sec. 6662(f). If a portion of the substantial overstatement to which the penalty
applies is attributable to a gross valuation misstatement of 400 percent or more, the penalty is
doubled to 40 percent of the underpayment. Code Sec. 6662(h). No penalty is imposed if the