I enter the dialogue to give my adopted kid a gift, but the toy sword and child's doll that are in my inventory don't display in the list.

Admittedly they are stolen. Is this the problem? Should I fence them, buy back and retry?

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    Fence them? You should return them to the poor children you stole them from, criminal scum – Lawton Aug 24 '13 at 1:03

It was because they were stolen. Fencing the item, then buying them back removed the "stolen" tag and the children accepted them.

This isn't mentioned in the wiki.

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