I have a 1996 GMC truck two wheel drive. When it is placed in gear the shaft spins but the wheel do not turn.

You have AWD? full time all-wheel drive.
Transfer Case Description and Operation
The Borg Warner (BW) model 4481, RPO NR3 transfer case is a one-speed, full time, all wheel drive (AWD), transfer case. The transfer case provides power to both axles, through an external planetary type differential, which has two different sets of pinion gears. The planetary differential provides a 40/60 torque split, front/rear, full time. This means both axles are constantly being driven for maximum traction in all conditions.
The transfer case external type planetary differential functions the same as a typical rear axle differential. The transfer case differential pinion gears function as the spider gears, and the sun gears function as the side gears.
The following actions occur because of the planetary differential:
• If the vehicle is on a hoist, the front propeller shaft can be rotated by hand.
• The vehicle cannot be driven if one propeller shaft is removed.
• Operating the vehicle on the hoist can damage the differential pinion gears, by over-spinning.
• Operating the vehicle with one propeller shaft removed causes over-spinning of the differential pinion gears.
The BW 4481 design of the planetary differential allows the use with the Vehicle Stability Enhancement System (VSES) vehicles. The VSES takes use of the planetary differential, by applying braking to a tire that has less traction and dividing the engine torque to the other axle.
The BW 4481 case halves are high-pressure, die-cast magnesium. Ball bearings support the input shaft, the front output shaft, and the rear output shaft. The transfer case requires DEXRON®III ATF GM P/N 12378470 (Canadian P/N 10952622), which is red in color.

This system does not have an encoder motor.

I would assume that non spinning shaft you see is the front driveshaft. It only spins when you are in 4 Wheel Drive, otherwise it stays still.

when the rear is jacked up is it the wheels that turn only with no drive shaft movement. does the drive shaft turn when the rear wheels are off the ground. Does the drive shaft turn when you have it in neutral with you foot on the clutch and the rear wheels off the ground
The purpose of the questions is to establish whether the pinion and crown wheel in the diff are seized or if the main shaft and clutch shaft in the gear box are seized.

The Selectable Four Wheel Drive (S4WD) Front Axle consist of the following components:
• Differential Carrier Housing
• Differential Case Assembly
• Inner Axle Shaft
• Intermediate Shaft Bearing Assembly (located on the right side of the oil pan)
• Electric Motor Actuator
The front axle on Selectable Four Wheel Drive (S4WD) model vehicles uses a disconnect feature mounted on the right side of the oil pan in order to engage and disengage the front axle. When the driver engages the 4WD system, the Transfer Case Control Module sends a signal to the electric motor actuator to energize and extend the plunger inside. The extended plunger moves the clutch fork and clutch fork sleeve across from the clutch fork outer gear that is splined to the right side wheel drive shaft to the clutch fork inner gear that is splined to the inner axle shaft. The locking of the two gears allows the axle to operate in the same manner as a semi-floating rear axle. A propeller shaft connects the transfer case to the front axle. The differential carrier assembly uses a conventional ring and pinion gear set to transmit the driving force of the engine to the wheels. The open differential allows the wheels to turn at different rates of speed while the axle continues to transmit the driving force. This prevents tire scuffing when going around corners and premature wear on internal axle parts. The ring and pinion set and the differential are contained within the carrier. The axle identification number is located on top of the differential carrier assembly or on a label on the bottom of the right half of differential carrier assembly. The wheel drive shafts are completely flexible assemblies consisting of inner and outer constant velocity CV joints protected by thermoplastic boots and connected by a wheel drive shaft.

How To Install Repair Replace 4x4 Front Axle Actuator Chevy Trailblazer...

Is this a front wheel drive if so it has splines. Sounds like either you stripped the splines on the shaft or on the hub which is pretty hard to do. Considering it takes a puller to get it off and that nut with the cotter pin pretty much presses it on.

No!!!!!! Even though you remove the drive line the axle shafts are not able to disconnect from the front wheels. This means that every time your wheels turn the axle shaft turns and the ring and pinion and spider gears are turning in the front housing. If you tried this more than likely if not already the bearings may spin in the housing and destroy the housing that holds the third member gears. It will be a very costly item to replace the housing and gears. Rent a tow dolly and place the front wheels in the carrier or use a flatbed tow truck. Either of these items will cost you less money than destroying the housing.

To remove the rear axle to replace a bearing you have to remove the rear differential cover and remove the small retaining bolt holds the spider gear shaft in place and then slide this shaft out far enough to remove the "C" shaped axle shaft retaining clip. Once this clip is off then the axle can be slid out and the bearing & seal replaced. Make sure that none of the spider gears or thrust washers behind them get out of place and you should use a new retaining bolt when reassembling the differential components as they come [or should come this way] with thread locker to prevent them from coming loose.

ecm or pcm or both man does not sound good the fluid bothers me..

If your sure it is acually going into gear than check the auto hubs, they go bad alot. also you can with help from a 2nd person jack the truck up all 4wheels put the truck in 4x4 and drive and see if both drive shafts spin if they do its the hubs if the front one doesnt, its the transfer case

Yes it will spin.If the front tires are spinning so is the shaft.