Q:To my surprise, I recently received a large sum of money in recognition of my past scientific achievements. I didn't apply for the award -- it was entirely unsolicited. Do I need to report it as taxable income? Also, I'm curious: Do Nobel Prize winners pay income tax on their prize money?

A: Awards such as the one you received are taxable unless you immediately give the money to a charitable organization or a government entity, says Internal Revenue Service spokesman Jesse Weller.

That means, for example, that if you present the money as a gift to the IRS,

they won't tax you on it. (In fairness to Weller, I should stress that he didn't suggest you do that.)

A more likely scenario would be giving the money to a public school, which is considered a government entity. Or you could give it to any private charity.

To qualify as tax-free, an award also must have been earned without being actively pursued by the recipient -- as yours was. And the recipient must be entitled to the money without being required to perform substantial services in return -- which I assume is true in your case.

You may have a problem, however, because the money is supposed to be given away immediately. As a rule, you must arrange in advance -- before the money is presented -- to have the donor turn it over directly to the recipient of your choice.

However, if you laid hands on the money unexpectedly -- for example, if someone shoved it at you as you stood dumbstruck -- you still can avoid taxation if you reroute it at once, without spending, depositing or investing any of it.

And, yes, the same rules go for Nobel Prizes. Is that what you think might happen next?


Q: My son amassed a $1 million net worth by investing all his savings and retirement-plan money in the stock of a single, large pharmaceutical company. He realizes that he violated the precepts of diversification. Now he wants to wring current income from his investments but still stick with one company, sinking all his money into the preferred stock of a large, financially sound food company, which has a dividend rate of 9.25 percent. What do you think?

A: Your son gambled and was lucky enough to win. Certainly you have to give him credit for choosing a pharmaceutical company, rather than, say, a dot-com. It will be a while yet before people stop getting sick.

Now that he has such a large chunk of money, he really ought to give more thought to diversification, to preserve his ample capital. But you may find it tough to reason with him while he is riding the wave of success.

The preferred stock of a solid food company might be safe enough. Even though people continue to get sick, they also continue to eat.

But there are things that your son should remember about preferred stocks.

That 9.25 percent dividend is not guaranteed. If the company gets bogged down in hard times, it might stop paying the dividend altogether, at least for a while. That, in turn, would almost certainly cause the market value of the stock to fall sharply.

The stock price also would be likely to fall if the general level of interest rates rises. Preferred stocks, because they are fixed-income securities, behave like bonds, which means that their prices move in the opposite direction from interest rates.

On the plus side, preferred stocks are somewhat safer than common stocks if the company gets into grave trouble. If the company goes bankrupt and has to be liquidated, when the assets are distributed, holders of preferred stock rank ahead of those holding common stock.

But the possibility that your son might not lose the entire $1 million in a bankruptcy is hardly a consoling thought.


Q: If I take a distribution from an individual retirement account in the form of stock rather than cash, how do I figure the taxable amount? Also, what would be my cost basis if I sell the stock later?

A: The answers to your questions are as straightforward as anything in the tax code.

IRS spokesman Weller says the value of the stock on the day it is handed over to you will be the value you use to figure your tax liability. That value also becomes your cost basis in case you sell the stock later.

Normally, the value is calculated as the midpoint between the stock's high and low market prices on the day of distribution. You probably won't have to look that up yourself. The IRA administrator ought to give you that information.

IRA distributions, as you perhaps know, are taxed as ordinary income.

Once you have the stock in your possession, you can qualify for the reduced long-term capital-gains tax on a future sale if you hold it for more than a year. If you are in the 28 percent tax bracket or higher, any long-term capital gains will be taxed at no more than 20 percent.