http://www.washingtonpost.com/wp-dyn/content/article/2005/06/07/AR2005060701640.html

The Senate Finance Committee issued a report yesterday raising questions about a range of financial practices at the Arlington-based Nature Conservancy and recommending regulatory changes that would affect many of the nation's nonprofit organizations.

The report, the result of a two-year investigation into the world's largest environmental organization, questions whether the charity's actions at times may have been "inconsistent" with the policy underlying federal tax laws. The committee raises concerns about the size of tax breaks claimed by the Conservancy's supporters, about the group's shortcomings in monitoring development restrictions on some land under its supervision, and about private "side deals" with Conservancy "insiders."

Mobil Oil Corp. donated to the Nature Conservancy a bird-breeding preserve in Texas City, Tex., that became the site for an oil-drilling rig. (By Phillippe Diederich For The Washington Post)

The report refrains from making factual and legal conclusions, stressing a desire to avoid influencing an audit of the Conservancy begun by the Internal Revenue Service in December 2003. But the report spotlights the Conservancy's financial dealings and highlights the organization's failure to fully disclose transactions with Conservancy officials and corporations whose officers sat on the charity's board.

Changes sought by the committee include creation of an accreditation system for conservation groups, limits on tax deductions associated with conservation easements and increased public disclosure for charities.

Committee Chairman Charles E. Grassley (R-Iowa) praised the Nature Conservancy for enacting some reforms on its own.

"This report makes it clear that such reforms were necessary, and I commend the Nature Conservancy for making them," he said yesterday. "Yet, in several areas, such as related party transactions, public disclosure, conservation buyer transactions, and the reporting and payment of taxes, my hope is that this report will encourage the Nature Conservancy to consider additional reforms."

Grassley also called for sweeping changes in tax laws affecting charities. "There are real shortcomings in current law in many areas," he said.

In a statement yesterday, the Conservancy said that the committee's concerns largely focused on past practices.

"The Conservancy remains confident that all of our work is, and has been, in compliance with the law and in furtherance of our mission," it said. "Not everything we tried succeeded, and on occasion we made mistakes, but all of our work was done in good faith and was undertaken to accomplish significant conservation goals."

Conservancy officials are to testify today at a committee hearing.

The panel began investigating the Conservancy in May 2003, in response to a series in The Washington Post. The articles detailed the organization's rapid growth -- its assets last year reached $4 billion -- and described financial transactions that benefited Conservancy supporters, including corporations that had paid pollution-related fines. The articles revealed that the Conservancy had logged forests and drilled for oil under the breeding ground of an endangered bird species, and bought land and services from corporations whose executives sat on the nonprofit's governing board.

The series also revealed that the Conservancy had repeatedly sold land to its own trustees, in transactions that allowed the buyers to claim significant tax breaks.

After the series, the Conservancy restructured its board and banned some practices, including lending money to insiders, selling land to trustees and drilling on preserves.

The Finance Committee report recounts many of the transactions described in the series and explores their tax implications. Documents relating to the transactions are contained in a 1,700-page appendix to the 200-page report.

The investigation looked extensively at conservation easements -- development restrictions placed on land to preserve wildlife habitat and open space. The Conservancy holds easements on 1,600 tracts of land.

In some cases, the committee found, years passed without the Conservancy formally documenting that the easement restrictions had been honored. Documents collected by the committee "indicate a level of monitoring that may be considered inadequate for the small conservation easements and minimally adequate for the larger easements," the report said.

In many cases, landowners donated the easements to the Conservancy and claimed substantial tax breaks for the charitable contributions. The Conservancy acknowledged that it had allowed a number of donors or subsequent property owners to alter the terms of the "perpetual" easements, presumably after donors had already cashed in on their tax breaks.

Sometimes, the report said, the Conservancy allowed property owners to expand a home on the sites, construct additional buildings or cut timber. Such changes could harm conservation efforts and violate the law, the report said. In the document, the Conservancy defended its actions, saying it required landowners who sought to change easement restrictions to agree to other concessions.

Without naming the Conservancy, the report recommended that the IRS "consider revoking the tax-exempt status of a conservation organization that regularly and continuously fails to monitor and enforce conservation easements." The committee also called for a law that would allow the IRS to fine officers and directors of charities that fail to monitor and enforce easement restrictions.

The report questioned whether the Conservancy's conservation buyer program allowed participants to claim inflated tax deductions, and whether they used the transactions to circumvent tax laws. It recommended that the IRS look into the transactions, which often benefited Conservancy insiders.

Under the program, the Conservancy purchases land, attaches conservation easement restrictions, and then resells the property at a lesser amount designed to reflect the decrease in land value caused by the restrictions on development. The buyers, in turn, make charitable contributions to cover the difference between the Conservancy's original purchase price and the lower resale price. That cash gift allows the buyers to claim substantial tax breaks.

Such transactions, the report said, "test the limits" of the law, because in most of the deals examined by the Finance Committee it appeared as though the Conservancy would not have sold the property if the buyer had not simultaneously made the cash contribution. The panel questioned whether the buyers could legitimately claim the cash payments as tax-deductible charitable donations.

The Conservancy appeared to have failed to consider the effect such transactions "could have on its tax-exempt status," the report said.

Until recently, the Conservancy generally did not market the properties to the public, but instead sold many of the tracts to its trustees, staff members and other supporters, the report said. The report questioned whether the buyers, who often helped craft the terms of the land deals, paid less than full price for the tracts.

The committee expressed concern that, although the Conservancy had entered business transactions with board members and their corporations, it provided only limited details about the transactions in its annual return to the IRS. In many cases, the report added, "it appears that TNC did not confirm that the transactions were done at terms that were fair and reasonable to TNC."

The organization's public disclosure of the deals "was oftentimes ambiguous or incomplete, and in a few instances, misleading," the Finance Committee said. It recommended that the IRS require fuller disclosure of conflicts of interest for all charities.

The Senate panel also looked into the Conservancy's innovative emissions trading program, under which U.S. companies that produce air pollution gave the Conservancy $34 million over a period of years to help preserve Latin American forests. In return, General Motors Corp., American Electric Power Inc. and other large businesses received "emissions credits." The companies hope the transactions will one day allow them to avoid spending millions of dollars for emissions controls on their U.S. plants.

The report questioned whether the deals would truly benefit the environment, and whether the companies had "obtained an impermissible private benefit as a result of the arrangements."

The report noted that during a period in which the Conservancy sealed a $10 million emission credit deal with General Motors, former GM chairman John F. Smith Jr. sat on the boards of the Conservancy and GM. The Conservancy reported to the IRS in its annual return that Smith had not taken part in the deal, to avoid a conflict of interest.

"TNC's statement that Mr. Smith 'did not participate or vote' . . . is misleading and inaccurate," the report said. "TNC records provided to the Committee show that Mr. Smith voted on the transaction as a member of TNC's Conservation Committee, and executed the agreement on behalf of General Motors Corporation and GM's Brazilian affiliate . . .

"Mr. Smith's role in the transaction should have been more accurately described by TNC."

A Conservancy spokesman said Smith mistakenly signed a ballot for a board vote on the issue.