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August 16, 2004

Micrel, Inc., named in stories by The New York Times and Tax Analysts about assertions of improper insider influence at the IRS, has issued a press release denying aspects of the story.

From the press release:

   "There was never a closing agreement 
   between the IRS and Micrel, as the article 
   implies. Micrel cooperated fully with the 
   IRS during an audit of the company that 
   lasted 18 months and was completed in 
   July of this year,” added Mr. Zinn. “While 
   the false statements in the article are almost 
   too numerous to mention, Micrel has an 
   obligation to its shareholders to correct the 
   record. In particular, at no time was there 
   ever a proposed deal to escape any tax 
   obligation of the Company, nor did we ever 
   have an estimated tax bill of $58 million. 
   Moreover, Micrel and the IRS never 
   cooperated to keep Micrel’s shareholders 
   uniformed on some basic terms of its 
   stock-option plan as the article asserts. In 
   addition, there is absolutely no truth to the 
   allegations that the stock option feature in 
   question enriched the Company’s four top 
   executives by as much as $20 million or 
   that Micrel ran its stock-option plan in 
   violation of the law,” Mr. Zinn stated.

Those of us who follow politics too closely probably tend to read too much into these things. The statement "In particular, at no time was there ever a proposed deal to escape any tax obligation of the Company..." could contain multitudes. If you dispute the legitimacy of an asserted tax, you aren't "escaping" it if there is never an assessment.

Saying that "there is no truth" in an allegation that the plan enriched executives by "as much as $20 million" leaves open the possibility that they were enriched by,say, $19.95 million.

The Micrel release adds "...nor did we ever have an estimated tax bill of $58 million." The source for the $58 million figure appears to be Micrel's pleadings in its own malpractice lawsuit related to the stock-option issue. Tax Analysts article mentions the $58 million number here:

   Based on its projections, Micrel claims that 
   revamping the 30DPM as a nonqualified 
   disposition could ‘‘total in excess of $52 
   million dollars and may eventually total as 
   much as $58.6 million. The pricing differential
   alone exceeds $12 million in cash, as well 
   as equity, lost to Micrel and is also a direct 
   and proximate result of the incorrect advice
   given to Micrel by defendants.’’

In short, he $58 million figure is the cost of "revamping" the stock option program, not the cost of the tax bill, as the Times article would lead one to believe.

Overall, the Micrel release attacks specific numbers used in the stories without necessarily debunking the stories themselves.

The Micrel press release goes on to illustrate how taxpayer confidentiality rules can keep a veil over the truth or falsehood of the allegations:

   “Unfortunately, we are precluded from 
   debating the specifics of the Times’ 
   assertions by an overriding concern for the 
   privacy of our employees and the 
   confidentiality of personal information,” 
   explained Mr. Zinn. “However, neither can 
   we remain silent after the New York Times 
   has used the uncorroborated statements of 
   one individual to cast Micrel in a negative 
   light and therefore felt obligated to come 
   forth with this public statement.”

The Micrel statements may be true, but, as they point out, there is no way to verify them in light of taxpayer confidentiality rules. As a practical matter, we suspect that the information could be sanitized by the company before release while still protecting employee confidentiality - at least other than the "four top executives" mentioned in the release. The executives could waive confidentiality, but they apparently choose not to do so. This reliance on privacy provisions by a public company seems incongrous, but is perfectly legitimate under the tax laws.

In a way, it is interesting that Micrel finds the stories cast it "in a negative light." In a coldly rational world, one would expect a firm to do all in its power to avoid unnecessary taxes. Shareholders like not paying taxes. Micrel is apparently sensitive to perceptions; there must still be social pressure to be a "good" corporate citizen, or to at least to be seen as one.

Our prior coverage of the issue may be found here.

The Tax Analysts coverage of the Micrel release is here.

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