Sharon Had Some Insider Information About a Corporate Takeover

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.

A) The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
B) The value of the necklace is not included in Sharon's gross income unless she sells it.
C) The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
D) The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
E) None of the above.

Correct Answer:

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