Grassley, Baucus Continue Review of The Nature Conservancy

 March 3, 2004

For Immediate Release

http://www.senate.gov

Washington, DC - Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, today continued their independent review of The Nature Conservancy’s activities, transactions and practices.

The senators sent a detailed letter asking questions about previously raised issues as well as new issues.

The text of the senators’ letter follows. The names of individuals who have not been named publicly in media reports have been redacted.

March 3, 2004

Mr. Steven J. McCormick

President and Chief Executive Officer

The Nature Conservancy

4245 North Fairfax Drive

Arlington, VA 22203-1606

Dear Mr. McCormick:

We appreciate the cooperation of The Nature Conservancy (TNC) with the Finance Committee’s independent review of TNC’s activities, transactions and practices. This letter is a follow-up regarding certain information the Finance Committee received from the first round of questions. Further, some questions (noted as such at the end of this letter) relate to new issues not raised in our earlier letter dated July 16, 2003.

1. Identify each and all of the TNC conservation buyer transactions for the ten year period described in our letter of July 16, 2003 (whether related party buyers or non-related buyers), that involved a charitable donation or charitable pledge made to TNC by the purchaser within a time frame beginning 6 months prior to closing on the land purchase from TNC and ending two years after the land purchase. For each such transaction list the amount and date(s) of payment of the contribution or pledge; attach a copy of the charitable pledge documentation; and attach any paperwork associated with the charitable gift— to the extent such information was not already provided in response to our prior letter.

2. In response to question 1, above, if the information has already been provided to us, indicate where each item may be found in such materials, including transaction number.

3. Questions regarding the Davis Mountains, Texas, property transactions:

a. Did _____ make a charitable pledge (or charitable contribution) with respect to the transaction for the 5,854 acres on or about December 22, 1997?

b. Why did _____ give back to TNC the land she had purchased two years before? Why did she give back just part of it and not all of it?

c. Was there anything different about the land she kept as opposed to the land she gave back such as an improvement of the land, or a special feature of the land retained (or given up)?

d. What did _____ end up paying for the land she retained? Was it approximately the sale price of $1,160,834?

e. Did _____ pay the $5,426,632 purchase price for the 27,133 acres? If not, what did she pay?

f. Did _____ pay the $2,839,717 for the charitable pledge she made? If not, how much did she pay? When were payments made on the pledge?

g. Did _____ hold a position with TNC as a director, officer or employee? If so, discuss her position, her term with TNC, whether she continues to have a relationship with TNC, and, if so, in what capacity.

h. Attach all correspondence and other communications, including e-mail and any memos that relate to the purchase of Davis Mountains property by _____.

i. Please provide a copy of the January 31, 1992, opinion letter to _____ from Steptoe & Johnson, referred to in the January 29, 1997, letter from _____ to _____ of Steptoe & Johnson, regarding charitable contribution deductions for premiums paid for real property and donations of appreciated stock to pay the premium portion of the purchase price.

4. Questions regarding the Shelter Island (Thompson Hill) transaction:

a. The value of the conservation easement was appraised at $1,594,000.00 as of October 28, 1999. When was this information conveyed to the TNC and the Dougherty’s?

b. Did the _____ donate part of the land that now makes up Mashomack Preserve? If so, how much land and what percentage of the total? What was the then value of the gift?

c. If yes to question b, above, describe the size nature and environmental importance of the Mashomack Preserve. Is TNC the owner/trustee?

d. The memo of August 6, 1999, from the TNC counsel to Jim Dougherty suggests that Dougherty may be required to pay interest via the charitable pledge if the pledge is not fulfilled by a certain date. Did the Dougherty charitable pledge that was actually made to TNC consist of a portion that may be considered attributable to an interest element? If so, please discuss in detail.

g. Did TNC market or offer for sale the Thompson Hill property to any persons other than the Doughertys. If so, please discuss in detail. In this regard, discuss the letter of TNC dated February 14, 2000, that stated that there were several interested conservation buyers to the Thompson Hill property. Were other buyers contacted about the property by TNC? Please provide any relevant documents relating to other buyers or any other offers.

h. If TNC did not actively market the property to potential purchasers other than the Doughertys, why did it fail to do so? Discuss in detail.

i. Was it TNC or the Doughertys that knew of the valuation expert and engaged his services for the appraisal of the conservation easement? Is there documentation that confirms or supports your answer?

j. Are there any other documents or other files in TNC’s possession relating to conversation or correspondence that TNC had with Dougherty, especially regarding Dougherty’s intentions to make a charitable contribution? Does TNC disagree with Dougherty’s statements regarding his intent that were contained in the Post article? Please provide copies of the cancelled checks issued by Dougherty to TNC with respect to this transaction.

5. Lake Huron Transaction. It appears that TNC’s approach to the sale of property to Jerrold Jung of the land located in Mackinac County, Michigan, is different than some of the other conservation buyer transactions involving related parties. In Shelter Island, New York; Davis Mountains, Texas; and Gerrard [sic; should be Garrard] County, Kentucky, TNC received from each purchaser consideration from the sale and a charitable pledge or donation that was very roughly equivalent (in the aggregate) to the amount TNC paid for the acquisition of the property later transferred to the conservation buyer. In the sale to Jerrold Jung, the charitable donation of $650,000 made to TNC plus the consideration from the sale of the property of $1,062,000 paid to TNC was considerably less than TNC’s purchase price to the property of $2,277,730 allocated pro rata to the Jung portion of the transaction. Please comment. If you agree there is a difference in treatment, please explain why it was treated differently. To the best of TNC’s knowledge, did _____ ever claim any charitable contribution deductions with respect to either the _____ or the _____ tracts? If so, what amounts and on what basis? What was the total charitable contribution deduction claimed by Jung relating to the acquisition of the property from, and grant of conservation easement to, TNC (individually or through the trust), and describe whether it was cash or property? Please confirm that _____ did not claim a charitable contribution deduction with respect to his sale of property to TNC, despite TNC’s letter to _____ saying it was a bargain sale and providing a blank Form 8283. Please confirm that to the best of TNC’s knowledge, _____ claimed a charitable contribution deduction of $98,700, the amount reported on the Form 8283.

6. Please provide a copy of the resolution or other written action dated June 13, 2003, supporting the Board of Governors decision that “all charitable gifts associated with a conservation buyer transaction must be legally documented as part of the transaction.”

7. Please provide a schedule including the following information regarding CBP sales by TNC for each of TNC’s 5 most recent fiscal years: aggregate sales proceeds for CBP sales closed during the year; aggregate charitable contributions received and pledged with respect to CBP sales closed during that year; aggregate of sales proceeds, charitable contributions, and pledges with respect to CBP sales closed during the year; aggregate FMV of  conservation easements and conservation restrictions placed on CBP property sales closed during the year.

8. Please provide a list of lawyers, accountants, and other outside counsel who have provided tax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other parties to TNC’s CBP transactions (whether with respect to actual or hypothetical transactions); please provide a copy of such opinions and written advice.

9. Has TNC ever entered into agreements with buyers of conservation buyer program properties that TNC will indemnify or reimburse the buyer for lost tax benefits from the loss or reduction of the charitable contribution deduction claimed by the buyer?

10. Martha’s Vineyard transaction: Please provide a narrative description of the Martha’s Vineyard transaction, addressing all material aspects of the acquisition and disposition of the properties by TNC and the charitable deductions claimed with respect to these properties. In your narrative, identify all parties to the transaction, and describe their respective roles in the transaction. Also, identify and describe each material transactional document (e.g.,  purchase agreements, the tax indemnification agreement dated June 29, 2001, between TNC and HCAC). Further, discuss the Washington Post’s description of the transaction in its May 6, 2003, article, and explain whether you agree or disagree with the Post’s description of the transaction in that article.

11. Please provide the names and complete mailing addresses (most recent in your files) for each of the approximately 170 conservation buyers’ program buyers for whom you previously provided documentation to the Senate Finance Committee.

1. The TNC response to question 2 (of the July 16, 2003 letter) contains a summary of government transfers of $500,000 or over which is supported by the more detailed list. What was the price paid by the government for each land transaction listed? Is the total of the “Land Cost Recovery” and the “Other Cost Recovery” columns under the “SALE” heading equal to the purchase price paid by the government?

2. With respect to the summary list described in the preceding question, identify and itemize the costs, in summary form, that make up the “Other Costs” column under the “PURCHASE” column. We are requesting a description of the costs generally, not a numerical calculation of each line item. Include in your answer a discussion of whether these costs consist only of tax basis costs (closing costs and land improvement costs) or also include annual maintenance costs such as taxes, insurance, maintenance, non capital improvements, and the like. Confirm that your answer is equally applicable to the “Other Costs of Acquisition and Disposition” column of the detailed Government Transfers list (not the Summary) provided in answer to question 2 of the July 16, 2003 letter.

3. Discuss generally whether TNC makes a profit on some of the land sale transactions with governments. For example, line item 35 on your summary list would seem to indicate that TNC made a profit of over $1,300,000 on the sale. Discuss that transaction in detail including the appraised value of land at the time of acquisition of $7,100,000 (being greater than the sale amount). Are there other transactions like this one, including state and local transactions as well as federal transactions of any size? If so, itemize each transaction providing the information previously requested for this question by the Committee.

4. Provide a new summary list adding to and modifying the existing list you provided. Modify the list to indicate under one column the purchase price paid by the government for the property. Also, on that same list, and consistent with your answer to question 2, above, provide detail of costs under the “Other Costs” column, separating tax basis costs from other types of costs, if applicable.

5. Based on your narrative answer to question II. 2 above, we understand that the amounts appearing under the “Amount Donated to Government” column are being reported in cost of goods sold. Is our understanding correct? Also indicate how the “Amount Donated” column was treated for financial statement purposes.

6. It is our understanding that the information provided on your lists in response to question 2 regarding land transfers to the government over $500,000 represents only Federal transactions as so limited. We assume that amounts reported on Form 990, Part VII, line 93c also consists of other categories such as Federal transfers under $500,000, state and local transfers, Indian tribal government transfers, or foreign government transfers. Please confirm this understanding and discuss. Provide a breakdown of amounts reported on line 93c for each of the categories; Federal transfers under $500,000, state and local transfers, Indian tribal government transfers, or foreign government transfers; for the three most recent 990s by TNC filed with the IRS and related cost of sales information.

7. Provide detailed information and numbers on the following transactions using exactly the same format as provided in your response to question 2 of our prior letter dated July 16, 2003, the detailed list titled “Government Transfers The Nature Conservancy – All Interests in Land Sold, Donated, or Exchanged from July 1, 1997 to June 30, 2002 to Federal Government Agencies $500,000 or Over.”

a. The 100 largest property dispositions (based on FMV of property transferred) by TNC of properties that were transferred to State and local governments (of the 7039 transactions reported on the schedules TNC has already provided).

b. If the following are not included in your response to the preceding question, provide similar information pertaining to Virginia Coast Reserve, VA (Nos. 416-420); Virginia Eastern Shore Megasite, VA (Nos. 421-423); Herring Creek Farms, MA (Nos. 604-607); Mashomack (Shelter Island), NY (Nos. 1027-28); Kentucky River Palisades, KY (Nos. 3617-3623); and Davis Mountains, TX (No. 5856). Is there any connection between the last four items and the conservation buyer transactions – related parties detailed in your answer to question 1 of the July 16, 2003 letter? If so, please discuss.

8. Provide aggregate information in the same format requested for the preceding question and a narrative summary of the project for each of the following projects listed in the sales to State and local governments: Big Cypress National Preserve, FL (Nos. 1465-1608); Big Cypress Preserve, FL (Nos. 1609-1638); Big Pine Key, FL (Nos. 1645-1816); Wisconsin Scientific and Natural Area Dedication, WI (Nos. 4582-4757); Lower Ozark Reserve Megasite, MO (Nos. 5263-5336). In addition, please provide all information in TNC’s control or possession dealing with Big Cypress National Preserve and Big Cypress Preserve.

9. Why are land recoveries less than acquisition and transaction costs in so many cases, resulting in book losses from sales? Is there a potential concern that TNC paid too much for the land (e.g., from a related party) and couldn't recover the cost from the government?

10. Regarding the schedules previously provided for sales by TNC to Federal agencies (over $500,000), please provide a description of each of the column headings in the Federal agency sale schedule.

11. How does TNC identify properties for sale to governments? Does the process differ depending upon whether the buyer is the Federal or a State/local government?

12. How does TNC identify government buyers for these properties? Are the identities of the government buyers generally known before TNC acquires the properties?

13. Is TNC provided Federal (including Fish and Wildlife Foundation), state or local government grants that are earmarked to acquire properties that are later sold to Federal, state or local governments?

14. Describe TNC’s charitable mission in selling large tracts of land to government agencies. Include in your answer a discussion of whether the mission varies depending on whether the government is Federal, state or local government. Estimate the percentage of the land being sold that consists of property that may be described as serving a significant environmental or biodiversity purpose. Include in your discussion whether for each land transaction TNC has prepared a written report establishing such purpose. Indicate what portion of the government land sales consists of government requests prior to TNC’s acquisition of the land, and what portion consists of property transfers not originally requested by the recipient government agency prior to the TNC acquisition. Do any of the transactions involve land that has primarily a recreational purpose? If so, do you consider that purpose coming within TNC’s exempt purpose or activity?

15. Please provide a list of lawyers, accountants and other outside counsel who have provided tax opinions or other tax advise to TNC with respect to the tax consequences to TNC or other parties to government land sale program transactions (whether with respect to actual or hypothetical transactions); please provide a copy of such opinions or written advice.

1. Has TNC ever entered into agreements with donors of trade land properties that provided TNC will indemnify or reimburse the donor for lost tax benefits from the loss or reduction of the charitable contribution deduction claimed by the donor? If so, please provide a copy of each such agreement.

2. Why was revenue from the sale of trade lands reported on the 2001 Form 990, Part VII, line 93d, but no revenue was reported for sale of trade lands on that same line for Form 990 for 1996 through 2000.

3. Please provide a list of lawyers, accountants and other outside counsel who have provided tax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other parties to trade land program transactions (whether with respect to actual or hypothetical transactions); please provide a copy of such opinions or written advice.

1. State the number of conservation easements held by your organization as of December 31, 2003. As of December 31, 1993.

2. Is there on file with your organization a copy of each deed or other legal document that grants or establishes the conservation easement granted in favor of TNC? If so, describe how they are maintained. For example, is there a central file or are the files held in local offices? Are there any properties for which a copy of the conservation easement deed is missing or not immediately available to TNC? If so, state how many.

3. State in detail your practices, policies, and procedures for monitoring landowner compliance with the terms of an easement granted to TNC. Include in your answer how frequently you inspect the property or contact the landowner. Does your policy on monitoring the easement vary with respect to the size of the property subject to easement or the importance of the easement for conservation of the environment? Attach copies of TNC reports to monitor conservation easements for the ten largest and the ten smallest conservation easement properties in each of Ohio and California since 1998.

4. State how often TNC has engaged in litigation to enforce a conservation easement granted to it over the past ten years. For each such instance, describe the litigation briefly and discuss the outcome of such litigation.

5. Does TNC have a written policy or a general rule of thumb (written or unwritten) regarding when it will engage in litigation to enforce a conservation easement granted to it? If so, please attach a copy of the written policy, or describe any unwritten policy.

6. Explain the practices, policies, and procedures of TNC for granting a modification or amendment of a conservation easement held by or for the benefit of TNC? If there is a written policy, please attach a copy.

7. The easement modification chart submitted December 11, 2003, suggests that a number of conservation easement amendments or modifications would appear to benefit the landowner. Please describe in detail the easement adjustments provided for items 3, 4, 5, 6, 7, 8, 13, 14, 19, 20, 21, 26, 28, 29, 39, 44, 51, 56, 60, 61, 64, 65, 67, 70, and 74 of such chart. Discuss how TNC views such modifications as either benefiting or not benefiting the landowner. For each item, attach a copy of the easement before amendment and a copy of the easement after amendment, and provide a narrative discussion of the changes made.

8. Does TNC monitor and record changes in ownership of property subject to conservation easements granted in favor of TNC? If so, does TNC contact the new owner by letter or otherwise and impress upon such owner the obligations under the conservation easement? Please attach a copy of (a) any recorded effort to track such changes in ownership, and (b) any notice to new owners regarding easement obligations.

9. Please respond to assertions or concerns regarding conservation easements as follows: (i) How many easements has TNC written off as unenforceable or of little value? (ii) Please provide a list of any such write-offs including the name of the owner of the property subject to the easement and the location of the property. (iii) Does TNC fail to enforce easements where it is aware of violations because of the cost of litigation relative to the worth of the easement in question? Please discuss your answer. (iv) Is TNC concerned that over time, with change in ownership, new owners not having conservation goals may violate easements in large numbers? Please discuss. (v) How does TNC defend its conservation easements on small tracts (from less than one acre to up to 2 or 3 acres) where monitoring and enforcement of easements is more difficult economically? Please discuss.

10. Regarding the 78 transactions exceeding $1 million for fiscal years 1998 through 2002, how many of these were (1) purchases at fair market value, (2) bargain purchases, and (3) donations? Please identify each of the 78 transactions as being in one of these three categories.

11. Please provide supporting Forms 8283, and where applicable, Forms 8282, for these 78 transactions.

12. Does TNC use easement valuations to minimize book losses, or enhance book gains? Please explain how TNC’s financial statement treatment with respect to valuation of easements (whether acquired by purchase or by donation, or by other means such as by TNC creating the easement as a part of an acquisition or disposition of property by TNC) complies with accounting standards applicable to TNC and to nonprofit conservation organizations.

13. Please provide documentation to support TNC’s statement that it has advised donors in writing “that the donor’s proposed claim for that value may be excessive” if “TNC is made aware” the donor’s proposed claim of FMV is “clearly and significantly in excess of what would seem to be a reasonable value.” Please provide copies of all such letters sent within the last five years.

14. Please provide the names and complete mailing addresses (most recent in your files) for each of the first 50 persons who contributed conservation easements to TNC during calendar years 1999, 2001, and 2003.

15. Your response to our letter of July 16, 2003, included a chart of “Conservation Easement Purchases and Donations” greater than $1 million. Item 14 of the chart lists a site name of “San Joaquin Hills Portfolio” with a listed fair market value of the easement of $2,016,100. Item 15 of the chart, the same site, lists a fair market value of the easement of $16,376,300. Item 16, the same site, lists the fair market value of $17,685,000. Item 17, the same site, list the fair market value of the easement as $89,415,400. All four easements were provided by the same company. As to all four items please provide all information in your files relating to these transactions including, but not limited to, appraisals, identification of the grantor, identification of the property, the charitable donation claimed, a copy of forms 8283, copy of deeds, copy of e-mail, letters, memos, and provide a narrative description of the transfers and the environmental purpose and significance of the property.

16. An example of a small conservation easement is the conservation easement placed on 1.62 acres on land transferred to _____ with respect to New Mexico – Santa Fe Canyon Preserve. Is an easement appropriate since the _____ were encroaching on the land? How much of the driveway and fence were an encroachment on the land? Could TNC have sold a sliver of land outright that covered the area of encroachment? Does this easement serve a conservation goal?

17. Please provide a list of lawyers, accountants and other outside counsel who have provided tax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other parties regarding the acquisition or granting by TNC of conservation easements or similar conservation restrictions (whether with respect to actual or hypothetical transactions); please provide a copy of such opinions or written advice.

Please provide copies of documentation to support TNC’s statement that “TNC has given the donor notification in writing as part of the Form 8283 that there are serious concerns with the donor’s valuation.” Please provide copies of all such letters sent within the last 5 years.

1. The Report to Management for the year ended June 30, 2002, states that in several instances, separately created legal entities or relationships that may be controlled by TNC were created without the prior approval of the Headquarters Office, in violation of the organization’s policies and procedures. Please provide any documentation pertaining to your response or follow-up to the recommendation made in the Report to Management for the year ended June 30, 2002, that you “enforce policies and procedures for identifying related parties, monitoring the status of the relationships, and receiving current financial information to properly account for these entities.”

2. Conservation Beef, LLC (CBL):

a. Please provide the LLC’s organizational documents including agreements, and all amendments thereto.

b. Explain the parties’ agreement regarding capital, profit, and loss allocations. Why is TNC only a 50% owner of capital, profits and losses, when to date it has contributed 72% of the capital to CBL? Why hasn't AWF made any capital contributions to CBL since 2000?

c. Please provide a copy of the IRS determination letter for AWF.

d. Please provide a copy of AWF’s most recent Form 990.

e. How did you select AWF as your co-venturer for this project?

f. For fiscal year ended 2000, line 20 other deductions on Form 1065, explain “loss allocation to exempt purposes” in the amount of $372,512.

g. Please provide a copy of CBL’s 2003 Form 1065, when available. Please provide copies of CBL’s financial statements for 1999 through 2002.

h. Who are the participants in CBL’s retirement plan? Why did contributions to the plan increase from $8,661 in 2000 to $16,387 in 2002?

i. Who provided the $40,000 loan to CBL in 2002? Was TNC a lender or guarantor?

j. Explain in detail the LLC’s activities and mission, and explain how they substantially further TNC’s exempt purposes.

k. The article in the Washington Post describes the use of the brand name “Conservation Beef” by TNC, a brand name that is co-owned by TNC and the Artemis Wildlife Foundation. The Post article provides, in part that the program was used to bolster imperiled cattle ranches, and, along the way, entice  ranchers into environmentally friendly grazing practices.