Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired.

Question

Quizplus · Accepted Answer

The value of the necklace must be included in Sharon's gross income for the tax year it was received by her, as it represents income from a taxable source (the insider information about the corporate takeover). The fact that the friend was not legally required to make the gift does not affect the taxability of the income. Similarly, the fact that the SEC may confiscate the necklace if it determines that Sharon violated insider trading laws does not affect the taxability of the income. The value of the necklace is not excluded from gross income simply because she already owned similar jewelry.

Sharon Had Some Insider Information About a Corporate Takeover