Ralph Nader
P.O. Box 19312, Washington, DC 20036

James Love
Consumer Project on Technology
P.O. Box 19367, Washington, DC 20036

4 January 2002

William H. Gates, III
Chairman of the Board
Microsoft Corporation
1 Microsoft Way
Redmond, WA 98052

Dear Mr. Gates:

We are writing to ask Microsoft to change its practice of not paying dividends to shareholders. Our reasons are as follows.

  1. The quantitative failure to pay dividends year after year is an inappropriate and we believe unlawful device to shelter Microsoft earnings from federal income taxes.

    By not paying dividends, wealthy Microsoft shareholders such as yourself avoid paying the top marginal tax rate of 39.6 percent that would apply to income distributed as dividends. By taking earnings entirely through stock sales, wealthy shareholders lower their tax rate to the maximum 20 percent that applies to capital gains. According to the most recent SEC reports on insider trades, you personally sold more than $2.9 billion in Microsoft stock last year, benefiting enormously from the lower tax rate that applies to stock sales.

    It is of course unfair that the top management of Microsoft benefit from these lower tax rates, while persons with far fewer resources pay higher taxes, including for example the many Microsoft workers who work as self employed contractors, paying both higher federal income tax rates and steep self-employed social security taxes.

    US Tax law provides that when a corporation accumulates earnings "beyond the reasonable needs of the business," it is subject to an accumulated earnings tax of 39.6%. According to the IRS, "the fact that a corporation has an unreasonable accumulation of earnings is sufficient to establish liability for the accumulated earnings tax unless the corporation can show the earnings were not accumulated to allow its individual shareholders to avoid income tax." (IRS Publication 542, Accumulated Earnings Tax, http://www.irs.gov/prod/forms_pubs/pubs/p54208.htm).

    Microsoft recently reported cash and short term securities of more than $36 billion, nearly 50 percent more than last year's entire revenues, and twice the cash held by GM, a corporation that reported sales about seven times larger than Microsoft's. Moreover, the cash holdings by Microsoft are growing at an astonishing rate -- about $1.5 billion per month over the last quarter. It is difficult to imagine how Microsoft, which has never paid a dividend, is not subject to the accumulated earnings tax.

  2. Many shareholders would benefit from the payment of dividends.

    While it is of course true that some of the Microsoft shareholders benefit from these tax avoidance strategies, others would surely prefer that Microsoft distribute its earnings through dividends, so they could reinvest or spend Microsoft's earnings as they see fit, rather than leave them to be managed by Microsoft's management team, which is better known for its ability to market software than to manage investment portfolios. Moreover, not all of Microsoft's shareholders are in high income brackets, and indeed, in many cases the shares are held by pension funds or other non-profit entities that do not benefit from strategies designed to minimize the federal income tax liability of wealthy shareholders.

    It is significant that a small number of persons who run the company hold a substantial share of the stock in the company (17.3 percent for the executive officers and directors as a group, according to the Microsoft 2001 proxy statement, not mentioning holdings by Paul Allen), a fact that is very unusual for such a large ($370 billion in current market capitalization) publicly traded corporation. This also raises questions about whether or not these persons, including yourself, are accumulating these staggering sums of cash to advance other agendas, rather than to advance the interests of shareholders.


Ralph Nader

James Love

(not included in letter)

Subchapter G - Corporations Used to Avoid Income Tax on Shareholders

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