Problem 19-55 (LO. 8, 9)

Robert and Lori (Robert's sister) own all of the stock in Swan Corporation (E & P of $1,000,000). Each owns 500 shares and has a basis of $85,000 in the shares. Robert wants to sell his stock for $600,000, the fair market value, but he will continue to be employed as an officer of Swan Corporation after the sale. Lori would like to purchase Robert's shares, becoming the sole shareholder in Swan, but Lori is short of funds. What are the tax consequences to Robert, Lori, and Swan Corporation under the following circumstances?

a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase Robert's shares.

Lori would have dividend income of $ 600,000 (correct) and a basis of $ 600,000 (correct) in the newly acquired 500 shares and become the sole shareholder of Swan. Robert would have a capital gain of $ 515,000 (correct) on the sale. As a result of the stock transaction, Swan recognizes no gain or loss and reduces its E & P by $______??