I have two friends, A and B, who are currently building a mobile application, in exchange for equity in an S corporation. Right now they are just building the app and do not own any shares in the S corp. I have some knowledge of ?351 and the rules for a non-taxable transaction.

Here is my question:

Would the transaction be non-taxable if A and B transfer ownership of the app to the S corp, in exchange for 50% of the stock (20% to A, and 30% to B)? and at the same time, there was a transfer of 30% of the equity to another new member in exchange for marketing services? I know this would total 80%, but because 30% is for services, does this not qualify for ?351?

Any insight or ways to possibly structure this would be great! (They will have the help of a professional, i'm just trying to help/understand initially)

Would the transaction be non-taxable if A and B transfer ownership of the app to the S corp, in exchange for 50% of the stock (20% to A, and 30% to B)? and at the same time, there was a transfer of 30% of the equity to another new member in exchange for marketing services? ======> as you said, in general, no gain or loss shall be recognized if property is transferred to the S corp by one or more persons solely in exchange for stock in the S corp and immediately after the exchange such person or persons are in control; Control means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of outstanding shares of all other classes of stock of the S corp.


I know this would total 80%, but because 30% is for services, does this not qualify for ?351?=======>>Correct as said, say, A and B form JJ Corp. A contributes a building he originally purchased for $50k in exchange for 50% of the shares. The building has a current FMV of $100K.B contributes $100k worth of consulting services for the remaining 50%. Section 351 does not apply. A recognizes a $50K gain on the building (FMV of 100k less basis of 50k). B recognizes $100k of ordinary income.