Employee Involvement Tips/S Corporation ESOP Taxation/Transfer of QRP to a GRAT

Employee Involvement Tips/S Corporation ESOP Taxation/Transfer of QRP to a GRAT
May 4, 2007

The latest NCEO Employee Ownership Update is online. It discusses how the leaders of Google and W.L. Gore and Associates share employee involvement tips. Google allows 20% of an employee’s time to pursue any project of mutual interest. W.L. Gore allows associates to pursue their own projects. The World's Ten Greatest Innovators discusses both W.L. Gore and Google, including W.L. Gore’s six secrets of innovation success:

"The Power of Small Teams: Gore tries to keep its teams small (and caps even its manufacturing plants at 200 people). That way, everyone can get to know one another and work together with minimal rules, as though they were a task force tackling a crisis.
No Ranks, No Titles, No Bosses: Associates (employees) select mentors, they don't have bosses. Associates decide for themselves what new commitments to take on. Committees evaluate an associate's contribution and decide on compensation. There are no standardized job descriptions or categories.
Take the Long View: Gore is impatient with the status quo but patient about the time -- often years, sometimes decades -- it takes to develop revolutionary products and bring them to market.
Make Time for Face Time: There's no hierarchical chain of command; anyone in the company can talk to anyone else. Gore discourages memos and prefers in-person communication to email.
Lead by Leading: Associates spend 10% of their time pursuing speculative new ideas. Anyone is free to launch a project and be a leader, so long as they have the passion and ideas to attract followers. Many of Gore's breakthroughs started with one person acting on his or her own initiative, and developed as colleagues helped in their spare time.
Celebrate Failure: Don't stigmatize it. When a project doesn't work out and the team kills it, they celebrate with beer or champagne."

I have tried to stay away from the constant barrage of uninformed, negative articles. However, sometimes an article is so negative or so uninformed (or both), that it must be discussed. The Update references a Newsweek article that refers to the S corporation ESOP as a "tax dodge". The Update points out that if the ESOP were taxed, the earnings would effectively be taxed twice, both at the corporate level and at the participant level. This blog post compares the S corporation ESOP tax exemption to charitable contributions that are only available if ownership is shared with the employees, adding that it “seems more like a gift than a tax dodge”.

The Update also discusses how the IRS ruled in two private letter rulings (PLRs) that the transfer of Section 1042 qualified replacement property (QRP) to a grantor retained annuity trust (GRAT) does not constitute a disposition of the QRP. One of the PLRs also indicated that a contribution to a charity would not constitute a disposition. One of the PLRs was also discussed in the March 2007 edition of the ESOP Report.