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Review of Senate Finance Committee Staff Report on The Nature Conservancy“The Committee’s investigation confirms that TNC’s reputation as a leading and innovative conservation organization is well deserved. TNC has grown to become a worldwide conservation organization that, through a variety of creative approaches and strategies, attempts to preserve many of the world’s most valuable lands and resources. TNC is proud of its innovation, especially of its use of public-private partnerships to attempt to achieve its conservation goals and objectives.” June 7, 2005—The Senate Finance Committee publicly released its Staff Report on The Nature Conservancy earlier today. The Staff Report will be one of several subjects discussed at tomorrow’s Finance Committee hearing on conservation land transactions and related tax legislative proposals. The inquiry consumed nearly two years and the Conservancy cooperated fully with the staff throughout the entire process. The Conservancy did not wait for the Finance Committee staff to complete its work before undertaking its own comprehensive self-evaluation. That evaluation was conducted with the assistance of independent and able experts. The resulting changes in the Conservancy’s governance, policies and procedures were substantial and were largely implemented in 2003 and 2004. The Conservancy remains confident that all of our work is, and has been, in compliance with the law and in furtherance of our mission. Not everything we tried succeeded and on occasion we made mistakes, but all of our work was done in good faith. The Conservancy is committed to expanding and strengthening its accountability beyond what is simply required by law or current practice. We realize that to maintain the public’s trust we must hold ourselves to a higher standard. This memorandum contains a brief overview of a number of the key items in the Staff Report. The practices and transactions examined by the Finance Committee staff comprise only a small portion of the Conservancy’s total activities. All of those practices and transactions were subject to advance tax law compliance review by the Conservancy’s legal department and the Finance Committee staff did not undertake to determine whether any of these practices and transactions violated the technical requirements of the current tax laws. While the Finance Committee staff did on several occasions identify issues under current law, the general focus of the Staff Report is properly on whether current law effectively implements Congressional intent and whether additional legislation would be appropriate. At tomorrow’s hearing, the Conservancy will present its own suggestions for legislative reforms. Moreover, virtually all the questions raised in the Staff Report with respect to a number of the Conservancy’s past practices and transactions involve matters that have previously been addressed by one or more of the Conservancy’s strengthened policies and procedures. For example, the Staff Report suggests that joint ventures and other projects between tax-exempt organizations and for-profit enterprises to advance conservation goals can present important questions of conflicts between the two classes of participants. This is true and the Conservancy’s Risk Assessment Committee was created in 2004 precisely to ensure that all proposed transactions and programs that raise important inter-disciplinary issues, including reputational issues, are addressed and resolved properly on a timely basis. Conservation EasementsConservation easements are an important tool in implementing The Nature Conservancy’s Conservation by Design methodology. Based largely on an examination of large and small easements in four States, the Staff Report suggests that the Conservancy’s monitoring activities should be more consistent and uniform with respect to frequency and documentation. Many of the Conservancy’s easements are located near Conservancy preserves or other holdings and are therefore monitored on an almost constant basis by Conservancy personnel. Nevertheless, and notwithstanding the Conservancy’s continued commitment to a largely decentralized method of operation, the Conservancy does agree that its monitoring and documentation should be more uniform and its Easement Working Group has been active for nearly two years in fashioning a more effective easement strategy, including monitoring and enforcement, which is currently being implemented. The Staff Report also questioned whether organizations that hold conservation easements should, as the Conservancy from time to time does, enter into voluntary agreements with landowners to modify the terms of easements. Neither the tax code nor the current IRS regulations provide any specific guidelines on who should approve proposed easement modifications. Moreover, the IRS itself has not established any criteria or process even as to how such changes should be submitted for review and approval. Although many of the modifications to the Conservancy’s easements merely add more land to the easement or correct mutual mistakes in the original documentation, the Conservancy takes seriously its responsibility to ensure that, if there is any private benefit resulting from a particular easement modification, that benefit is required to be offset either by new conservation benefits or financial adjustments of at least equal value. The Conservancy’s current procedures, which were developed in 2001 following consultations with outside tax counsel and the IRS, require a specific determination on the question of private benefit and provide for review and approval of many proposed modifications by the relevant state authorities. The Conservancy will continue to be vigilant to ensure that all future modifications are consistent with the underlying principles of the tax laws. Involvement in Donor Tax PlanningThe Conservancy’s long-standing policies prohibit giving legal and tax advice to donors. The Staff Report questions whether the Conservancy was nevertheless involved in assisting donors in structuring and documenting several specific land conservation transactions to maximize tax savings and reduce the likelihood of an IRS audit. The Staff Report also suggests that the Conservancy proceeded with one transaction even though one or more staff members questioned whether the donor “intended” to make a gift and that it is common knowledge that appraisers overvalue conservation lands to benefit donors. Among the specific transactions examined by the staff were Martha’s Vineyard, Shelter Island, Lake Huron and Davis Mountains. The Conservancy does not believe any of the specific instances cited in the Staff Report in fact reflect practices that are not permitted under existing tax laws. For example, the Conservancy has previously been advised by independent tax counsel that required donor “intent” will be presumed to exist when individual makes a payment to an organization such as the Conservancy that exceeds the fair market value of the property. Moreover, all of the specific transactions reviewed by the Finance Committee served important conservation objectives, as determined under the Conservancy’s science-based procedures, and therefore were unlike typical tax shelters that have no substantial purpose other than tax avoidance. Nevertheless, the Conservancy has strengthened its policies and procedures to ensure that they positively promote tax compliance by donors and others. For example, while conservation land organizations are not required by law to review or approve the appraisals used by donors to substantiate their tax deductions, the Conservancy in 2004 implemented a policy that it will not sign a donor’s IRS Form 8283 (validating for tax purposes receipt of a gift of land) unless the donor and the appraiser both certify in writing that the appraisal meets all IRS requirements for a qualified appraisal. More broadly, the Conservancy’s restated tax policy, also adopted as part of the Conservancy’s efforts to strengthen its policies and procedures, provides that the Conservancy will not engage in any conservation land transaction that provides any tax benefit to any third party unless the transaction (1) as in the past, enhances the Conservancy’s ability to carry out its conservation mission, (2) has not been identified by the IRS as a tax shelter, and (3) has not been structured in whole or in part to enable any person to avoid a tax reporting or substantiation requirement (for example, by documenting components of a single transaction as if they were unrelated to each other). Moreover, all conservation land transactions continue to be subject to advance tax review by the Conservancy’s legal department and, as appropriate, the Risk Assessment Committee. Transactions generally will not be approved unless the Conservancy determines that an independent and qualified tax counsel would issue a confident opinion concluding that the intended tax benefits “should” be upheld by a court (and not merely that the tax benefits are “more likely than not” to be available). Related Party TransactionsThe Staff Report describes certain transactions, such as loans and conservation buyer transactions, between the Conservancy and employees, chapter trustees or businesses where a senior executive serves on the Board of Governors. These types of related party transactions are permitted under current tax laws where they are conducted in accordance with arm’s length standards (e.g., property can be sold by the Conservancy to a related party so long as the Conservancy receives fair market value for the property and loans to employees generally are permitted if they are made at market interest rates). The Staff Report properly emphasizes the importance of conflict of interest procedures and other processes to ensure the fairness of these transactions. The Conservancy strengthened its conflict review procedures in 2004 and will, as appropriate in the future, consider the suggestion in the Staff Report that independent counsel be asked to review the terms of selected significant related party transactions to supplement the review of those terms by the Conservancy’s legal department and conflicts committee. The Conservancy’s legal department includes qualified tax professionals and it would therefore be both duplicative and costly to have outside counsel review each and every transaction. More broadly, the Conservancy announced in 2003 that it would not under any circumstances engage in certain types of related party transactions (such as loans to employees and conservation buyer transactions with chapter trustees) even though those transactions continue to be permitted under current tax law. Joint Ventures and Transactions with For-Profit EntitiesThe Conservancy has participated in joint ventures or other conservation programs with third parties, including for-profit corporations. The Staff Report reviews the Conservation Beef and Forest Bank joint ventures. Contrary to the initial understanding of the Finance Committee staff, these ventures involved other non-profit organizations as partners and did not involve for-profit entities as partners. The Staff Report also reviews the Conservancy’s “carbon sequestration” transactions in which large, intact primary forests likely to be logged were conserved or previously clear-cut tracts were reforested. For-profit companies such as General Motors participated in these transactions and anticipated that the conserved forests or reforested lands might someday qualify as offsets under future, but currently non-existent, “cap and trade” emissions legislation. The joint ventures and activities, such as the “carbon sequestration” program, were not undertaken by the Conservancy to raise money for its other conservation activities, but were in fact first and foremost conservation programs themselves. The Staff Report suggests that joint ventures and other conservation programs with for-profit companies present important issues of conflicts of interest between exempt purposes and profit motivations, as well as tax-specific issues such as whether financial contributions to the activity by for-profit participants may be deducted as “charitable contributions” and whether any income earned by the venture should be subject to the federal income tax on unrelated business income. The Conservancy agrees and such issues were and are in each case specifically reviewed in advance by the Conservancy’s legal department. Under the Conservancy’s strengthened policies adopted in 2004, these types of transactions are also subject to further review at the senior staff level through the Risk Assessment Committee and thereafter by the Board of Governors or an appropriate committee of the Board. Trade LandsThe Conservancy often accepts donations of lands that have no substantial conservation value (frequently houses and unimproved land distributed as part of an estate). As in the case of other non-cash gifts such as stock or securities, the Conservancy resells those “trade lands” to raise funds for its conservation programs. The Staff Report notes that the Conservancy explains the tax benefits of such transactions for donors on its Web site (a practice followed by almost every organization that seeks tax-deductible contributions). The Staff Report also notes that the Conservancy sometimes takes back promissory notes from trade lands buyers that provide for little or no interest and does not treat trade lands sales income as taxable under the unrelated business income tax. The Conservancy previously reviewed both of these practices and concluded that they are entirely consistent with all applicable tax laws. Form 990 ReportingLike all publicly supported tax-exempt organizations, the Conservancy files an annual information return with the IRS on Form 990 and, where appropriate a Form 990-T to report any income that is subject to the unrelated business income tax. The Staff Report observes that in prior years some of the Conservancy’s Form 990s contained certain inaccuracies and were in some instances incomplete. More generally, the Staff Report notes that its examination of the Conservancy’s Form 990s suggests that Form 990s generally are not an effective device for disclosure to the public and the IRS of many of the activities undertaken by tax-exempt organizations. That general finding that the Form 990 is not effective disclosure device is correct and not infrequently results from the nature of the Form 990 itself and the IRS instructions, which in certain instances directs filers to be “brief” in their descriptions and not to add attachments. Commencing with its fiscal year ending June 30, 2003, the Conservancy took greater steps to ensure that its Form 990 filings are correct and complete in all material respects. These returns are and will continue to be reviewed in advance by a firm of independent auditors. More broadly, and consistent with the recommendations of the Governance Advisory Panel, the Conservancy will view the Form 990 as an important public disclosure tool by including many items of information that are not required under current IRS regulations. The Conservancy expects that its Form 990s together with its public annual reports and Web site content will provide all readers, inside and outside the government, with a clear understanding of the Conservancy’s goals and the specific programs undertaken to convert those goals into reality. The Conservancy has grown substantially, both in absolute size and in the number and complexity of the financial transactions it undertakes in support of its mission. At the same time, Congress and other policymakers have focused increased attention on the governance and specific activities of tax-exempt organizations such as the Conservancy as well as for-profit enterprises. To meet these internal and external challenges, the Conservancy in 2003 and 2004 raised the bar of its own performance to a “best practices” level. The results of the Finance Committee inquiry, as set forth in the Staff Report, suggest that this self-evaluation process addressed most if not all of the key issues that are of concern to Congress and other policy makers. ### For More Information About The Nature Conservancy’s Review of the Senate Finance Committee Staff Report:
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