Summary: GAO found no evidence of any violations of recusal statements, federal conflict-of-interest law, regulations, or standards of conduct by Internal Revenue Service (IRS) officials in connection with the issuance of Revenue Ruling 90-27. The central question concerning this ruling, which involves financial instruments known as auction rate preferred stock, is whether such stock should have been characterized as debt or equity for tax purposes and whether it met the necessary holding period to qualify for the dividends-received deduction to the holder. GAO did find, however, that the ways in which the IRS Commissioner's and Chief Counsel's recusal statements were written could lead to some uncertainty as to the situations in which they applied. This situation exists because the recusal statements are written in such broad terms that they may lead to the impression that there is a violation when none has occurred. Finally, GAO did not find any instances in which IRS staff had failed to follow procedures in the Revenue Ruling Handbook. GAO is concerned, however, that IRS' reliance on individuals representing only one brokerage house--Shearson Lehman Hutton, Inc.--for consultations about auction rate preferred stock could be viewed as inappropriate, even though GAO found nothing improper about the actions Shearson's representatives had taken. Auction rate preferred stock, although now underwritten by many brokers, was originally marketed by Shearson, which, along with other brokers, issuers, and holders of such instruments, had a major stake in seeing that such stock was characterized as equity for tax purposes. GAO is troubled by Shearson's preeminent involvement.
