ble company contributions made to the profit-sharing plans. This is regarded as the first true ESOP because it embodied the core ESOP concept: productive assets can pay for themselves through the income those assets produce.
From this beginning, the ESOP became the focus of legislative efforts to create a system for such plans and the attendant regulations that would impact upon their implementation. This report will explore the legislative history that led to the enactment of Internal Revenue Code (IRS) ¦1042, establishing the ESOP as a financial vehicle for employers and a mechanism for acquiring ownership participation in a firm on the part of employees. The most common usage of ESOPs is the purchase of stock by employees from a closely held company. It is the intent of this report to explore the ways in which the initial legislation authorizing creation of an ESOP has been amended and modified over time, leading to the development of alternative strategies for the distribution of wealth and ownership of business entities and corporations.
According to Michael Kelling, President of the ESOP Association, as of 2000, 75 percent of all ESOPs were created because of tax incentives provided by the relevant section of the Internal Revenue Code. Section 1042 of the Code is the normative impetus for the creation of many if not all ESOPs in the United States today. However, after the initial excitement created by the establishment of the legislation enabling creation of an ESOP, the vehicle fell into listlessness; a plausible reason advanced for this phenomenon is that a well-established corporate profit-sharing plan offers a viable alternative to the ESOP.
The idea of establishing an ESOP, especially for a closely held corporation, may be regarded as both undesirable and unsuitable. Recognizing this, the U.S. Congress passed the Deficit Reduction Act of 1984 which included a tax-free rollover provision. For...