Except as otherwise provided in the Internal Revenue Code, and except to the extent inconsistent with subchapter S, the provisions relating to C corporations apply to an S corporation and its shareholders. Because the Internal Revenue Code does not contain any special rules for capitalization of S corporations, a shareholder’s contribution of stock in exchange for an interest in the S corporation is governed by the same rules that apply to capitalization of C corporations. See the section of this guide dealing with C corporations for a detailed treatment of these rules.
Shareholder Tax Consequences
S corporation shareholders do not recognize gain or loss on transfer of property to an S corporation in exchange for stock of the corporation if, immediately after the transfer, the contributing shareholders are in control of the corporation. In this context, “control” means ownership of stock possessing at least 80 percent of the total voting power of all classes of voting stock and 80 percent of the number of shares of each class of nonvoting stock. A shareholder’s receipt of consideration other than the corporation’s stock is taxable up to the fair market value of the non-stock consideration, but the shareholder cannot recognize loss on the transfer. A shareholder’s contribution of services to an S corporation in exchange for stock does not qualify for tax-free treatment.
The shareholder’s basis in the stock received from the corporation is initially determined using the C corporation rules. Assuming the transfer qualifies as a tax-free capitalization, the shareholder’s initial basis equals the adjusted basis of any property and cash contributed to the corporation, increased by any gain recognized and decreased by the fair market value of any assets other than stock received from the corporation and by any loss recognized on the transfer. If the capitalization does not qualify for tax-free treatment, the shareholder’s basis equals the amount paid for the stock.
Later transfers of property to a corporation are treated the same as initial transfers. The transfer is not taxable if the shareholders transfer property solely in exchange for stock and, immediately after the exchange, the contributing shareholders own at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock.
Corporate Tax Consequences
An S corporation’s receipt of property in exchange for stock is not taxable to the corporation. The corporation’s basis in the contributed assets is equal to the contributing shareholder’s basis in the property before the transfer, increased by any gain recognized by the shareholder.
 I.R.C. § 1371.
 I.R.C. § 351(a).
 I.R.C. §368(c); Rev. Rul. 59-259, 1959-2 C.B. 115.
 I.R.C. §351(b).
 See Rev. Proc. 93-27, 1993-2 C.B. 343; Rev. Proc. 2001-43, 2001-2 C.B. 191; Notice 2005-43.
 I.R.C. §§ 351(d), § 83(a).
 I.R.C. § 358(a).
 I.R.C. § 1012.
 See I.R.C. §§ 357; 362(d).
 I.R.C. § 357(c).
 I.R.C. § 752(c).
 I.R.C. §§ 351(a); 368(c).
 I.R.C. § 1032(a).
 I.R.C. § 362(a).