During our annual tax preparation meeting in January, Donna disclosed that she had sold some stock...just as she had the prior year. When questioned, Donna indicated that she had sold investments in the amount of $60,000 - $70,000 for this tax year and a similar amount in the last tax year. Donna had not claimed these types of transactions in the past because the stocks had been gifts from her parents and she did not think they were taxable.

Additional Background:

Donna and her husband have been clients for 15 years.

There is no information in the client's tax file of any prior income from any investments.

There is no information in the client's tax file of ownership of any investments.

Donna and her husband are currently in the 28% tax bracket.

Donna's parents are alive and well and living in Washington DC.

Task:

Research the tax laws that are relevant to this set of facts and circumstances. Determine what the issues are and how they must be resolved. Provide your recommendation concerning the position that the Firm should take in this matter and what safeguards might be considered to prevent this from happening in the future.