Taxpayer sues Thief to recover $40,000 of jewelry Thief stole from Taxpayer. Taxpayer recovers the jewelry, as well as $120,000 in treble damages under the state’s civil theft statute. What are the tax consequences to Taxpayer?

Taxpayer has no gross income.

Taxpayer has gross income of $40,000; treble damages are excludable from gross income.

Taxpayer has gross income of $120,000; the recovery of the jewelry does not result in gross income as long as Taxpayer did not claim a theft loss deduction in a prior tax year.

Taxpayer has $160,000 of gross income.

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