Conservation Charities Come Under Questioning by the Senate

Laying the groundwork for broad legislation that could affect all types of nonprofit groups, key senators took aim this month at one of the country’s best-known charities, while calling into question improper practices at many organizations.

During three hours of intense questioning into controversial practices by conservation groups, 11 members of the Senate Finance Committee — more than attended either of the committee’s other two nonprofit hearings in the past year — listened closely as committee staff members detailed findings from their two-year investigation into land sales and other deals at the Nature Conservancy, the nation’s wealthiest conservation organization.

The staff recommended big changes in the way conservation groups operate, urged the conservancy to take action to prevent future improper activities, and called on the Internal Revenue Service to crack down on conservation groups.

Sen. Charles E. Grassley, Republican of Iowa and the committee’s chairman, urged lawmakers to abolish tax shelters resulting from the “slippery slope of the donors’ own appraisals.”

“I’m troubled enough when I see the words ‘tax shelter’ appearing in tax-planning documents of for-profit corporations,” Senator Grassley said, describing a Nature Conservancy document. “When I see ‘tax shelter’ being used in documents of charities, we ought to be really worried.”

Mr. Grassley said he plans to introduce a measure in the next few weeks to fix problems he sees with donors’ taking inflated tax deductions for gifts of land. He says he hopes to correct the problems in part by improving the way charities and donors get appraisals for donated property.

Senator Grassley said he and the committee’s senior Democrat, Sen. Max S. Baucus, of Montana, hope their legislation “will encourage land donation while addressing the abuses.”

The two lawmakers are also expected to propose legislation that would cover a range of practices at charities and foundations, such as governance, public disclosure, and spending on salaries and travel.

Conservation Easements

At the center of the committee’s investigations into the Nature Conservancy and many other conservation groups is controversy over conservation easements — a legal tool used to protect private land from development. Landowners who donate easements to nonprofit conservation groups promise that the land will not be used for development; in exchange, they are allowed to write off the value of the development rights as a charitable deduction.

Steven T. Miller, the commissioner of the tax-exempt division of the IRS, said that potential problems with the valuation of conservation easements have led the revenue service to start 240 examinations of donors who have taken an open-space easement deduction. The IRS is considering examinations of another 100 donors who have participated in easement transactions, he said, and is looking into the easement practices of many charities.

Nature Conservancy

But for nearly two-thirds of the hearing, senators had questions about the staff’s inquiry into the Nature Conservancy. The Senate committee began its examination of the Arlington, Va., group in July 2003, following a series of reports in The Washington Post describing the organization’s land transactions and its relationships with for-profit businesses.

The newspaper said that in some cases the charity had purchased environmentally sensitive land, placed development restrictions on it, and resold it to trustees and supporters at a reduced cost. The purchasers then gave the conservancy cash donations that were about the same size as the discount they received — an approach that allowed them to take income-tax deductions for their charitable contributions.

The Nature Conservancy has said the newspaper articles were not entirely accurate, but it has also said that since the stories appeared and the Congressional investigation began, it has made dozens of changes to strengthen its governance, accountability, and transparency. The conservancy said it will study the Finance Committee report to determine if further changes are necessary.

The report noted that the Internal Revenue Service is auditing the organization, and said it would let the tax agency determine whether the organization’s activities violate tax laws. But the report says some Nature Conservancy pursuits “are potentially inconsistent with the tax-policy considerations” behind the rules governing tax-exempt status and charitable deductions.

The report asserts, for example, that the charity’s Trade Land program, in which the organization solicited and received donations of land that had no connection to the charity’s conservation mission and then sold the land to raise cash, had tax implications that the conservancy may have recognized, but ignored.

The report also rebukes the Nature Conservancy for not exercising sufficient due diligence to be certain that all of its transactions are consistent with its tax-exempt status.

But while the report scolds the conservancy in parts, it praises it, too. It commends the charity, for example, for adopting a new policy to require that all of its properties be made available for sale to the general public. In the past, many transactions were made with charity board members or major donors, raising concerns that people with ties to the charity were getting inappropriate financial benefits and that the organization was not receiving the optimal sale price for the land, the report said.

Among the report’s recommendations about actions the IRS should take:

• Consider revoking the tax-exempt status of conservation organizations that fail to properly monitor and enforce conservation easements, or making it impossible for donors to deduct their gifts to such organizations. In addition, laws should be amended to allow the tax service to impose penalties on charity officials and board members who fail to adopt policies to assure proper monitoring and enforcement of easements.
• Modify the Form 990 informational tax return filled out by charities to require more details about a charity’s programs and its transactions with trustees, donors, and other “insiders.”
• Update its forms on which donors declare the value of noncash gifts they are writing off on their income taxes. In addition, Congress should pass a law imposing stiff new penalties on charities that sign inaccurate or incomplete forms.

At the hearing, Steven J. McCormick, president of the conservancy, said that at times in recent years the organization “got a little outside our own headlights” by trying to engage in activities in which it has little competency. But, he said, “our mission compels us to come up with additional core competencies.” He added that in an effort to make sure the organization does not participate in activities that are beyond its expertise, it has put in place a risk-assessment committee.

Sen. Rick Santorum, Republican of Pennsylvania, cautioned his colleagues about making broad changes to conservation policy if it might damage the efforts of small groups. “The concern I’m hearing is that some of what is being proposed is already having a chilling effect on these small groups,” the senator said. If many small groups do not participate in complex land deals, he added, “why paint this with a broad brush?”

Testimony from the hearing is available online at http://finance.senate.gov/sitepages/hearing060805.htm. The Nature Conservancy report is at http://finance.senate.gov/sitepages/TNCReport.htm.

Debra E. Blum contributed to this report.