The leveraged employee stock ownership plan (ESOP) has been in existence formally since 1974 when the U.S. Congress codified ERISA. ESOPs are considered to be one of the fastest growing and most visible forms of employee benefit plans in the United States. ESOPs can be traced to the concepts of Louis Kelso, who observed during the Great Depression that there were significant failures of system design that had created a situation in which large-scale productive capacity in the form of idle factories was positioned alongside consumers desperately wanting the goods those idle factories were physically capable of producing and workers equally desperate in their need for income-producing jobs. From this beginning, and with enormous political support from Senator Russell Long, the ESOP was born and became an entrenched form of pension and retirement planning mechanism with myriad benefits for participants.
This article examines the legislative history that led to the enactment of IRC 1042 and ESOPS as well as the special tax treatment accorded to this vehicle. After a general introduction to ESOPS and the underpinning ESOP philosophy, the article examines the claim that ESOPS have a clear and distinct advantage over other forms of wealth generation, specifically profit-sharing plans. References to ERISA and the IRS Code are made.
Kelso ultimately developed a strategy for income redistribution that would help to maintain widespread purchasing power in the economy. Kelso's argument was that the effort at income redistribution should be directed upstream rather than downstream. In other words, policymakers should emphasize not only the widespread employment of labor resources, but the widespread ownership of capital resources.
The first true ESOP was designed by Kelso in 1956 and involved the Peninsula Newspapers Incorporated ownership, whose principal shareholders owned 72 percent of the company's stock and wanted ...