S. HRG. 109–1006

THE TAX CODE AND LAND CONSERVATION:

REPORT ON INVESTIGATIONS AND

PROPOSALS FOR REFORM

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 8, 2005

(

Printed for the use of the Committee on Finance

THE TAX CODE AND LAND CONSERVATION: REPORT ON INVESTIGATIONS AND PROPOSALS FOR REFORM

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40–617—PDF 2005

S. HRG. 109–1006

THE TAX CODE AND LAND CONSERVATION:

REPORT ON INVESTIGATIONS AND

PROPOSALS FOR REFORM

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 8, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

WITNESSES

Selib, Jonathan, Tax Counsel, U.S. Senate Committee on Finance, Washington, DC ............................................................................................................. 6

Zerbe, Dean, Tax Counsel and Senior Council to the Chairman, U.S. Senate

Committee on Finance, Washington, DC ........................................................... 8

Devaney, Hon. Earl E., Inspector General, U.S. Department of the Interior,

Washington, DC ................................................................................................... 9

McCormick, Steven J., president and CEO, The Nature Conservancy, Arlington, VA .................................................................................................................. 29

Wentworth, Rand, president, Land Trust Alliance, Washington, DC ................. 31

Lindstrom, Timothy, director of protection and staff attorney, Jackson Hole

Land Trust, Jackson, WY .................................................................................... 33

Maybank, Burnet R., III, Director, South Carolina Department of Revenue,

Columbia, SC ........................................................................................................ 36

Miller, Steven T., Commissioner, Tax Exempt and Governmental Entities

Operating Division, Internal Revenue Service, Washington, DC .................... 38

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 51

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 54

Crapo, Hon. Mike:

Prepared statement .......................................................................................... 55

Devaney, Hon. Earl E.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 56

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement with attachments ........................................................... 65

Lincoln, Hon. Blanche:

Prepared statement .......................................................................................... 78

Lindstrom, Timothy:

Testimony .......................................................................................................... 33

Prepared statement with attachment ............................................................. 79

Responses to questions from committee members ......................................... 104

Lott, Hon. Trent:

Prepared statement .......................................................................................... 107

Maybank, Burnet R., III:

Testimony .......................................................................................................... 36

Prepared statement with attachments ........................................................... 108

Responses to questions from committee members ......................................... 134

McCormick, Steven J.:

Testimony .......................................................................................................... 29

Prepared statement with attachments ........................................................... 138

Responses to questions from committee members ......................................... 204

Page

IV

Miller, Steven T.:

Testimony .......................................................................................................... 38

Prepared statement .......................................................................................... 210

Responses to questions from committee members ......................................... 221

Millstein, Ira M.:

Prepared statement with attachment ............................................................. 226

Responses to questions from committee members ......................................... 252

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 260

Santorum, Hon. Rick:

Prepared statement with attachments ........................................................... 261

Selib, Jonathan:

Testimony .......................................................................................................... 6

Wentworth, Rand:

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 274

Responses to questions from committee members ......................................... 283

Zerbe, Dean:

Testimony .......................................................................................................... 8

Responses to questions from committee members, with attachments ......... 288

COMMUNICATIONS

Edisto Island Open Land Trust .............................................................................. 321

The Northern Virginia Conservation Trust ........................................................... 326

(1)

THE TAX CODE AND LAND CONSERVATION:

REPORT ON INVESTIGATIONS AND

PROPOSALS FOR REFORM

WEDNESDAY, JUNE 8, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:08 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Present: Senators Lott, Snowe, Thomas, Santorum, Bunning,

Crapo, Baucus, Rockefeller, Lincoln, and Schumer.

Also present: Mark Prater and Theresa Pattara, Republican

Staff; John Angell, Pat Heck, and Bill Dauster, Democratic Staff.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Thanks, everybody, for being patient.

Today the Finance Committee will hear testimony on two very

significant reports. The first is the report on The Nature Conservancy prepared by the staff of the committee.

The second report is prepared by the Department of Interior’s Inspector General, discussing the Department of Interior’s proposed

purchase of mineral rights in Florida from a private organization.

The report on The Nature Conservancy provides the committee

and the public a window into the workings of not just The Nature

Conservancy, but large charities in general. The report and attached documents show that The Nature Conservancy at times participated in tax planning activities affecting it and its donors that

can result in substantial tax benefits.

Charities have gone far beyond raising money by just having

Santa ring a bell. Santa now has often engaged some of the Nation’s top tax lawyers and accountants with the sharpest pencils.

The exhibit that just was put up is a copy of a document, which

I am submitting for the record, used by The Nature Conservancy

in discussions with potential donors involving a bargain sale to The

Nature Conservancy.

[The exhibit appears in the appendix on p. 67.]

The CHAIRMAN. In this document, the charitable deduction is

based on the slippery slope of the donor’s own appraisal. The kicker

is, the calculation shows that a better deal can be had by using

what is referred to as ‘‘plus value of tax shelter from charitable

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contributions,’’ as you can see near the bottom of the right-hand

column.

Now, I am troubled enough when I see the words ‘‘tax shelter’’

appearing in tax planning documents of for-profit corporations.

When I see ‘‘tax shelter’’ being used in documents of charities, we

ought to really be worried. But not only are charities engaged in

sophisticated tax planning, they are also at times engaging in complex transactions and joint ventures. The staff report discusses and

educates us on The Nature Conservancy’s actions in this area.

While doing such deals are not in themselves good or bad, they

raise issues about whether charities are acting within the laws governing them as Congress intended, and within a manner that justifies their tax-exempt status to the public.

There is also a very real concern highlighted by the staff report

that complex transactions can shift a charity’s focus far away from

their areas of competence, while potentially wasting contributors’

dollars.

These concerns are well-articulated in the memorandum of The

Nature Conservancy’s Director of Internal Audit to Mr. McCormick,

president of The Nature Conservancy, who will be testifying today.

The report which I am also submitting for the record primarily

talks about a lawsuit involving The Nature Conservancy’s oil and

gas exploration activities in Galveston, TX.

[The report appears in the appendix on p. 68.]

The CHAIRMAN. The report states, ‘‘The Nature Conservancy

Texas’s attempt to balance the welfare of the prairie chicken with

gas and oil exploration at the Galveston Bay Prairie Preserve

seems to be a picture postcard strategy of the new Conservancy.

However, were the events that transpired at the preserve to become public knowledge, the Conservancy’s good reputation could be

badly damaged.’’

It goes without saying that this is not what should be happening

at The Nature Conservancy, or any charity, for that matter. The

Nature Conservancy and all charities should be operating with a

view that all transactions and activities will withstand public scrutiny.

I am going to come back to this internal audit memorandum during the questioning time, but I strongly encourage everyone to read

it very closely. It provides a great deal of caution of the dangers

to charities when they operate outside of their areas of core competence and core values.

While the report discusses at length areas of concern, I should

also note that I recognize, and I surely appreciate, that The Nature

Conservancy has engaged in significant reforms since the Finance

Committee announced its investigation months ago.

While there are still improvements that can be made, I appreciate the leadership of Mr. McCormick and Mr. Paulson on behalf

of The Nature Conservancy. Reforms their organization have undertaken are informative as the Finance Committee considers

changes in the law, particularly in the area of land and easement

donations, as well as governance of charities.

Now, for the Inspector General’s report. The country is wellserved by having Mr. Devaney serving at the Department of Interior, and he is at the table with us right now.

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He is, without question, one of the finest IGs that we have ever

worked with over the years. It is because of his excellent work and

that of his staff that we have had him before the committee several

times in recent years.

This is the second report that I have recently received on the

problems of land transactions with the Department of Interior. To

be candid, Mr. Devaney, I thought that you had already found the

bottom of the cesspool when it comes to land transactions at Interior, but this new report that you present to us shows that it is

even deeper than we ever thought, and particularly first thought.

It appears that since the mid-1990s, the Department of Interior

has basically thrown out the rule book when it comes to this deal

for the Florida mineral rights.

If that was not bad enough, I would note that, once again, we

have another Federal agency basically undermining the work of the

Department of the Treasury and the Internal Revenue Service. The

IG reports in detail about the Interior officials happily and ignorantly signing off on whatever tax planning is requested by the private party.

We have seen several problems with the Department of Transportation in the LILO and SILO transactions that we legislated on

in the FSC/ETI bill last year, and the SEC and other agencies on

fines and penalties, and the Department of Interior’s own facade

easements.

I would hope that the administration recognizes the need to

make sure that the rest of government does not make the Internal

Revenue Service’s tough job even tougher and raise this issue of

uncollected revenue coming in that ought to be coming in to the

Federal treasury that Senator Baucus so often brings before our

committee.

I thank you all who are going to participate today for presenting

these two sweeping reports, and also thank the enormous number

of staff who have made these reports possible.

Now, Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Thank you very

much for holding this hearing.

When I see the natural beauty of Montana, I often think of the

words in the book of Job: ‘‘Stand still and consider the wondrous

works of God.’’ You can see the hand of Providence when you stand

at the edge of the Blackfoot River, when you stand at the base of

Grinnell Glacier, when you look out across the field of Winter

Creek on a cloudless day near Glasgow, MT.

Montanans are close to the land. It is what it means to be a

Montanan. We are an outdoors people. We are a people very attached to the land. There are wonderful, clean rivers and streams,

abundant fish and wildlife, and farmers and ranchers committed to

the proud western heritage of responsible stewardship of the land.

That is what farmers and ranchers want to do, and that is what

means most to them. Protecting Montana’s and America’s natural

legacy is a commitment to which I hold fast.

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Today’s oversight hearing looks at gifts of land. We will hear

about two investigations involving the potential improper use of

charitable tax deductions for land donations: the Finance Committee staff investigation into The Nature Conservancy and the Inspector General’s investigation into the Department of Interior’s

proposed purchase of mineral rights in Florida.

These investigations show why it is so essential to maintain the

integrity of our tax incentives for conservation. Americans must be

able to trust that, when they give land for a conservation purpose,

that land will serve a conservation purpose.

Americans must be able to see that their tax dollars are being

used wisely, and they must be able to see that tax deductions have

a reasonable relationship to the value of donations claimed.

The tax code allows people to claim a deduction for the fair market value of land that they donate to a charitable organization.

Fair market value means what a willing buyer and seller would

agree on as a price for the land if it were not donated.

In addition, people could claim a charitable deduction for the fair

market value of part of their interest in the land, and they donate

that partial interest as long as the interest serves an important

conservation goal. People call this a conservation easement.

People may deduct up to 30 percent of their adjusted gross income for these donations, whether they are donations of full interests or conservation easements. Adjusted gross income is the

amount of income that a person pays tax on.

Let me give an example of how it works. A farmer who owns 100

acres of undeveloped lands decides that he wants his land to stay

as productive farmland forever and not allow the land to be developed or subdivided. The farmer appreciates the open space that is

created by his farm and wants to pass the farm on to his children

or grandchildren.

One way that the farmer or rancher can accomplish this goal is

to donate a conservation easement that prohibits future generations from building on or subdividing the farm.

The farmer would be required to donate the easement to either

a qualified organization, like a land trust, or an arm of the government, Federal, State, or local. The value of the deduction would reflect how much the restriction on development and subdivision reduced the price of the farm.

In a place like the Bitterroot Valley in Montana where developers are buying up farms to build vacation homes, such a restriction could be valuable. In other places where there is less demand

to develop, the value may be small or non-existent.

Now, the law requires the farmer to have a qualified appraisal

for any donation of more than $5,000. Finally, in order to qualify,

the farmer must prove that the restrictions placed on the farm

serve a real conservation purpose. It is not a qualifying conservation purpose to allow just 15 subdivisions instead of 20, nor is it

a qualifying conservation purpose to place an easement over a golf

course.

In order to meet a conservation purpose for an open-space easement, the farmer needs to show that the easement benefits the scenic enjoyment of the public or is pursuant to a Federal, State, or

5

local conservation policy. In either case, the farmer has to show

that the easement will yield a significant benefit to the public.

The laws allow the farmer to continue using the farmland productively as long as the productive use is consistent with conservation goals. This policy has allowed thousands of farmers to maintain the great American tradition of the family farm.

As you can see, current law has significant hurdles in place to

prevent abuse in land conservation, but unfortunately these obstacles have not prevented some from gaming the system.

The staff report on The Nature Conservancy and the Inspector

General’s testimony show how lax procedures by land trusts and

improper valuations can give conservation efforts a bad name. The

Nature Conservancy report shows that some conservation properties sold by the Conservancy were made available only to Nature

Conservancy insiders and not the general public.

Such collusion diminishes the ability of a land trust to fairly assess the conservation value of easements that are donated to a land

trust, and dims public confidence in tax deductions claimed for

land conservation.

I am glad that The Nature Conservancy has taken steps to address deals with insiders with reforms that they adopted last year.

This step, among others, should help to restore the public confidence needed in The Nature Conservancy. Mr. McCormick, I look

forward to hearing from you on what additional steps you are taking.

Mr. Devaney, welcome back. Mr. Devaney last came to the committee to testify on the abysmal state of jails run by the Bureau

of Indian Affairs. Today he has come to shine the spotlight on another shameful episode, this time the Department’s attempted acquisition of mineral rights from the Collier Resources Company.

In short, the report shows that the political leadership of the Department of Interior agreed to purchase mineral rights held in

Florida, held by the Federal Government, for an amount that was

over-valued by roughly $70 to $80 million. It also shows that the

Department failed to follow its normal appraisal procedures in arriving at a value for the interests.

Finally, after paying tens of millions of dollars too much for the

mineral rights, the administration agreed to sign a form allowing

Collier Resource Company to take a charitable deduction for selling

the property to Interior at a discount. That is, right, a discount.

Apparently, the Department allowed the taxpayers to be fleeced for

$70 to $80 million, and then authorized a big tax deduction for the

fleecing.

This transaction is an outrage. It is a terrible waste of taxpayer

dollars. It is an unmitigated outrage. Thankfully, the IG stepped

in, noticed the problem, spotlighted it, and stopped this transaction

from moving forward. Were it not for the IG, this transaction would

have gone forward.

I look forward to your testimony, Mr. Devaney. I am also interested in your opinion as to who should ultimately be held accountable. I doubt, frankly, that it was the bureaucrats in the Department. I suspect it was somebody else telling the bureaucrats what

to do, and I will be interested in your thoughts on all that.

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I am not going to give the rest of my statement, Mr. Chairman.

It is a little lengthy. For the interest of getting to the heart of the

matter here, I will stop. But I would just say, thank you for doing

this.

I thank you, Mr. Devaney and others, who have worked so hard

on this. You have kind of put your reputation on the line, Mr.

Devaney. There are IGs in this town, and there are IGs. Some are

worth their salt, some are not. Some do not do anything, you do.

Thank you.

[The prepared statement of Senator Baucus appears in the appendix.]

The CHAIRMAN. Yes. I want to obviously associate myself with

what Senator Baucus just said about the IG.

More importantly, I want to thank him for the months of cooperation that Senator Baucus and his staff have given us, working

together in a bipartisan way on this. Thank you very much.

This is also evident in the fact that our first panel has the Democratic staff and Republican staff making the presentation.

So, I would also introduce Mr. Jonathan Selib, Tax Counsel on

the Democratic staff, and Mr. Dean Zerbe, Tax Counsel and Senior

Counsel on my staff. They will each have 5 minutes to present the

staff report on The Nature Conservancy.

Then we are going to give Mr. Devaney 10 minutes to present

the Office of Inspector General’s report on the investigation regarding the Department of Interior’s agreement with the Collier family

to purchase the family’s mineral rights.

So, however you folks worked out your testimony, Mr. Selib, then

Mr. Zerbe, then Mr. Devaney.

STATEMENT OF JONATHAN SELIB, TAX COUNSEL, U.S. SENATE

COMMITTEE ON FINANCE, WASHINGTON, DC

Mr. SELIB. Chairman Grassley, Senator Baucus, members of the

committee, my name is Jon Selib, and I am a Tax Counsel on the

Democratic Staff for the Senate Finance Committee.

I am here with my colleague, Dean Zerbe, Tax Counsel and Senior Counsel to the Chairman, to walk through the Finance Committee’s staff information into The Nature Conservancy.

Let me begin by stating that, given the ongoing IRS audit of The

Nature Conservancy, the staff has made no specific determination

whether any particular Nature Conservancy activity did or did not

comply with the relevant technical requirements of the Internal

Revenue Code.

In May of 2003, a series of newspaper stories was published on

The Nature Conservancy that raised serious questions about the

policies and practices of The Nature Conservancy, including issues

of corporate governance, charitable contributions, commercial activity, unrelated business income, and arrangements with insiders.

In the wake of those articles, the committee undertook an investigation of The Nature Conservancy to better understand the questions raised by the articles, and their significance regarding the administration and enforcement of Federal tax laws governing exempt organizations and charitable donations.

In conducting its extensive investigation, the committee reviewed

three types of sources: (1) IRS forms and filings; (2) internal NaVerDate 11-MAY-2000 15:05 Mar 06, 2008 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 40617.000 SFIN1 PsN: SFIN1
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ture Conservancy documents; and (3) interviews with Nature Conservancy staff and outside experts.

A review of IRS documents included all of The Nature Conservancy’s annual informational returns to the IRS: the Form 990, including information on their primary activities, executive compensation, and expenditures for the past 11 available years; The

Nature Conservancy’s IRS annual form showing business taxable

information, the Form 990–T, for the past 4 available years; IRS

forms relating to various charitable contributions of non-cash property made to The Nature Conservancy during the past decade; and

IRS forms and related financial statements for tax-exempt and taxable entities affiliated with The Nature Conservancy.

A review of Nature Conservancy internal documents included

narrative responses and documents relating to hundreds of transactions that The Nature Conservancy engaged in; internal Nature

Conservancy policies and operating procedures; various internal

audits, reports, and studies pertaining to The Nature Conservancy;

publicly available information relating to The Nature Conservancy,

including annual reports and financial statements; tax opinions

from The Nature Conservancy’s outside legal counsel provided to

The Nature Conservancy with respect to various transactions and

activities; and documents, policies, and procedures relating to reforms implemented by The Nature Conservancy after commencement of the committee’s investigation.

Our outreach to Nature Conservancy staff and experts included

engaging the expertise of the staff of the Joint Committee on Taxation, as well as the staff of the IRS Exempt Organizations national office, with respect to document review, technical explanations of present law pertaining to charitable organizations and

charitable contributions, and preparation of information and document requests from The Nature Conservancy.

The staff provided The Nature Conservancy the opportunity to

review and offer comments on Parts I, II, III, and IV of the report

prior to publication. Finally, the staff also conducted meetings of

The Nature Conservancy personnel during the course of the investigation and periodically updated The Nature Conservancy personnel about the status of the investigation.

The committee’s investigation confirms that The Nature Conservancy’s reputation as a leading and innovative conservation organization is well-deserved. The Nature Conservancy 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.

The Nature Conservancy is proud of its innovation, especially of

its use of public/private partnerships to attempt to achieve its conservation goals and objectives.

However, some of the activities that The Nature Conservancy

conducted in the past are potentially inconsistent with the policy

considerations behind the rules governing tax-exempt status under

section 501(c)(3), and charitable contribution deduction rules of the

code.

The report addresses the following issues, among others: The Nature Conservancy’s involvement in mission credit arrangements

with for-profit partners; conservation buyer program transactions;

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The Nature Conservancy policies on easement modifications; The

Nature Conservancy’s reporting to the IRS; and joint ventures with

for-profit entities.

Mr. Chairman, that concludes my testimony. I am happy to answer any questions the committee may have.

My colleague, Dean Zerbe, will now cover issues raised in the report.

STATEMENT OF DEAN ZERBE, TAX COUNSEL AND SENIOR

COUNSEL TO THE CHAIRMAN, U.S. SENATE COMMITTEE ON

FINANCE, WASHINGTON, DC

Mr. ZERBE. Mr. Chairman, Ranking Member Baucus, Senators,

the staff report discusses a number of significant issues. However,

given the focus of today’s hearing, I will discuss four issues that directly affect conservation easements: monitoring, enforcement,

valuation, and modifications, as well as proposed staff recommendations.

Enforcement of easements limiting modifications for appropriate

cases and providing adequate funding to ensure enforcement of

proper valuation are important concerns with respect to conservation easements. Organizations are required to enforce, in perpetuity, the terms and conditions of the easements to ensure that

conservation goals are not compromised.

Failure to enforce these restrictions increases the risk that easement-restricted property will not be conserved in perpetuity, or

that the actual conservation benefits will be less than what was

claimed when the amount of the resulting charitable contribution

was calculated.

The staff’s review indicates that TNC’s monitoring and enforcement practices were not always consistent or adequate with respect

to site visits and documentation of these visits. These results, as

to the historical monitoring effort by TNC, are mixed and failed to

comply with TNC’s current standards.

In addition, TNC’s conservation easement compliance efforts

failed to meet the tests established in Land Trust Alliance standards and practices set forth in the LTA guidebook.

Not only is monitoring important, but, given that these easements are in perpetuity, it is vital that organizations have adequate funds set aside for monitoring and enforcement. TNC generally does not establish a specific stewardship fund with respect

to a specific easement, but instead relies on an aggregate endowment fund of $200 million for this purpose.

While staff are not in a position to determine whether this is a

sufficient endowment, it is significantly better than many other interests that have little to nothing in the way of an endowment fund

to monitor and enforce in perpetuity.

The determination of the value of the conservation easement or

restriction is critical to determining the amount of any charitable

deduction claimed as a result of the donation of the easement or

the restriction. Valuation of land generally involves a straightforward process: willing buyer, willing seller, comparable sales of

similar property.

In contrast, valuation of conservation easements is more difficult

because of the absence of a market for their trade and the variety

9

and differences of restrictions that may be imposed on a particular

property.

In addition, valuations of easements must reflect any increase in

value of other properties owned by the taxpayer contributing the

easement and must consider whether the tax benefits accruing to

the taxpayer as a result of the contribution exceed a benefit that

inures to the public.

The difficulty in completing these valuations of conservation

easements also poses significant challenges and costs to the IRS in

assessing whether the appraisal that forms the basis for a qualified

conservation contribution is reasonable.

Finally, modifications to an easement held by a conservation organization may diminish or negate the intended conservation benefits and violate the present-law requirements that a conservation

restriction remain in perpetuity. The TNC agreed to 75 easement

modifications since 1994, but under current law there is no provision for reporting to the IRS about such modifications.

Mr. Chairman, staff made several recommendations to the committee for consideration in this report. Those relevant to the issues

I have just discussed include: (1) that the IRS consider revoking or

suspending the tax-exempt status of a conservation organization

that regularly and continuously fails to monitor and enforce conservation easements; (2) that the IRS consider modifying Form 990

to require conservation organizations to provide information regarding its ongoing policies for monitoring and enforcement; (3) implementation of an accreditation system for conservation organizations—this may be a particularly effective means to ensure best

practices with respect to monitoring and enforcement of easements,

as well as compliance with section 178’s requirements under the

code; and (4) that the committee consider limiting charitable deductions for certain small easement donations and consider providing,

in some cases, the IRS with authority to require pre-approval of tax

deductions for such donations.

Finally, Mr. Chairman, we would like it to be clear that, after

this investigation, we believe that there remains a real benefit to

the Nation’s environment and communities by encouraging charitable gifts of conservation easements and that the committee

should continue to seek changes in the law that will encourage the

gifts of conservation easements that were included in the CARE

Act.

Thank you, Mr. Chairman. That concludes the staff testimony.

The CHAIRMAN. Thank you.

Now, Mr. Devaney?

STATEMENT OF HON. EARL E. DEVANEY, INSPECTOR GENERAL, U.S. DEPARTMENT OF THE INTERIOR, WASHINGTON,

DC

Mr. DEVANEY. Mr. Chairman and Ranking Member Baucus, I

want to thank you for your kind remarks earlier. I really appreciate them. It is true that if you have seen one IG you have seen

one IG, and most IGs are only as good as their staffs, and I am

blessed with an excellent staff. So, I appreciate your remarks.

I also want to thank you and the rest of the members of the committee for inviting me here today to talk about the results of our

10

recent investigation into the agreement to buy the mineral estate

owned by the Collier Resources Company in the Big Cypress National Preserve.

Mr. Chairman, with your permission I would like to submit my

full testimony and redacted special report for the record, make

some brief remarks, and answer any questions.

The CHAIRMAN. It is accepted.

[The prepared statement of Mr. Devaney appears in the appendix.]

Mr. DEVANEY. The attempted acquisition by the Department of

the Collier Company’s mineral rights in the preserve has been

years in the making. This was an acquisition supported by the

Clinton administration, as well as the present Bush administration. It was heralded by environmentalists and enjoyed the enthusiastic backing of the citizens and leadership in Florida.

The intentions behind the attempted acquisition have always appeared to be firmly grounded in the Department’s righteous desire

to protect the environmentally sensitive Everglades from potential

harm. The means by which these intentions were advanced, however, were very troubling.

The Colliers have been the driving force behind the Department’s

potential acquisition of their mineral rights from the start. Collier

representatives initiated discussions with the Department in the

mid-1990s, renewed them in January of 2000, and again with the

present administration in 2001.

By the time they approached the Department in 2001, they had

positioned themselves nicely for another round of negotiations, having embarked on a public outreach effort to signal that they were

about to exercise their rights to explore for subsurface oil and gas

in the preserve. In fact, between 1997 and 2001, the Collier’s had

submitted 27 separate plans of operations to explore within the

preserve. Not unexpectedly, this caused great concern in the environmental community, which in turn captured the attention of the

new Secretary of Interior.

Ignoring career appraisers in the National Park Service and over

the objection of the Mineral Management Service, senior officials

and attorneys for the Department pushed MMS to once again

evaluate the mineral interests in the preserve. Unable to determine

what percentage of those interests actually belonged to the Colliers,

MMS evaluated all of the mineral reserves in the preserve at a

mean value of $68 million.

Unable to reach the Collier’s absolute minimum of $130 million,

a senior attorney from the Office of the Solicitor sought the assistance of an outside contractor to develop a range of value around

the MMS mean of $68 million.

Using an approach that has no specific provision in economic theory, the contractor determined that a range of value around the

$68 million mean was $31 million to $140 million, for 100 percent

of the preserve’s mineral rights. Using this range, the Department’s negotiators then justified the final offer contained in the

agreement of $120 million.

Here, I would like to state that our investigation revealed that

the Collier Resource Company has never certified to the Department any specific percentage of mineral rights ownership in the

11

preserve. We did hear during the course of our investigation estimates that they might own about 63 percent, but certainly not 100

percent.

Despite the difficulties that the Department had to go to to reach the $120 million price tag, the Colliers continued to insist that

their sub-surface mineral rights were considerably more valuable.

In keeping with this position, they insisted that the agreement include language that would allow it to do two additional things:

first, to claim credit for a donation for any amount it could sustain

with the IRS over the $120 million figure, and second, to reap the

tax benefits associated with the sale of the property in lieu of condemnation, which would potentially allow them to defer or avoid

capital gains.

With few questions and little analysis, the Department’s negotiators agreed to these terms. With respect to the tax treatments

in the agreement, we sought the assistance of the staff on the Senate Joint Committee on Taxation. Committee staff opined that it

seemed like the Colliers wanted it both ways. That is, they not only

wanted to secure the benefits of donating a portion of their mineral

rights under IRS code section 170 which applies to charitable donations, but also wanted to claim the tax benefits associated with IRS

code 1033, which contemplates involuntary conversion.

Committee staff explained to us that tax treatment under those

two code sections is essentially mutually exclusive. One of the attorneys who drafted the agreement justified inclusion of these tax

terms because he claimed the Department had used similar language in a prior exchange. Another attorney who helped draft the

agreement said that, while he was aware of the donation aspect of

the agreement, he did not understand it.

Like the failed agreement itself, this tax treatment today might

be dismissed as ‘‘no harm, no foul.’’ However, I take exception to

that for the following reasons.

First, it represents a careless practice to conclude that something

is appropriate simply because it has been done before. Without factual basis and analysis, it is reckless to draw such a conclusion and

then advise decision makers.

It represents a compartmentalization view of responsibility that

has haunted and thwarted other transactions investigated by my

office. This compartmentalization results in a wholesale lack of accountability, with the various participants pointing to one another

as being responsible for whichever aspect of this transaction turns

bad.

Taking compartmentalization one step further, it represents the

view that the Department acts only in its own self-interests and

not in the interest of the Federal Government and the American

public.

It represents yet another aspect of the deal that was being driven

and controlled by the Colliers, with the acquiescence and assistance

of the Department. By including in lieu of condemnation language

in the agreement, the Department was acceding to a statement

that was factually false.

Finally, including both aspects of the tax treatment that the Colliers insisted upon, aspects that are mutually exclusive, causes the

Department to look, at best, foolish, and at worst, complicit.

12

Simply stated, Mr. Chairman and members of the committee,

this is not the substance of a sound agreement in the best interests

of the Federal Government and the American public.

Having said all of this, however, I would like to compliment the

Department for some significant changes it recently made to the

land appraisal program in process.

In November of 2003, following the issuance of our report, concerning the troubled San Raphael land exchange, the Secretary directed the consolidation of the Department’s real estate appraisal

functions and established an appraisal services directorate within

the Office of the Secretary to ensure appraiser independence, accountability, high standards, and proper oversight.

I am confident that these reforms will, if strictly adhered to, correct most, if not all, of the problems we discovered during this investigation.

Mr. Chairman and members of the committee, before I conclude

I would like to credit the two case investigators who are present

with me here today behind me. They have worked tirelessly on this

matter for 21 months, and in the end I firmly believe that these

two civil servants helped save the American taxpayers $120 million.

This concludes my formal testimony. Thank you for the opportunity to appear. I will be happy to answer any questions you have.

The CHAIRMAN. I appreciate all of the testimony we have received on the first panel.

I am going to start my questioning with Mr. Devaney. There will

be 5-minute rounds for each of us.

I take it from your remarks and from the report that has been

presented to us, that with respect to the bad actors, you have focused on two senior lawyers in the Solicitor’s Office. Is that true?

If so, what have you recommended to the Secretary that she do

with them? And by the way, was one of these lawyers not also involved in the San Raphael land deal that you told us about within

the last 2 years?

Mr. DEVANEY. Yes, Mr. Chairman, they were the focus of most

of the attention we gave to this matter. One of them was, in fact,

involved in the San Raphael matter several years ago.

An IG’s role, from my perspective, is to report the facts of the

matter and make a recommendation to the Secretary or the deciding official, other officials in the Department, to take administrative action. What that administrative action ends up being is entirely on their side of the aisle. It is up to them what that action

is.

I rarely ever make recommendations of specific actions, but I

have, in fact, recommended that the Secretary provide the report

to the appropriate Department officials for review for taking some

administrative action.

The CHAIRMAN. Based on this matter as well as a bad situation

that I had come to my attention a little while back, I would ask

that you inform the Secretary that she can expect a letter from me

asking for a complete statement of what actions are going to be

taken to hold these individuals accountable in regard to this. You

will do that, right?

Mr. DEVANEY. I will, sir.

13

The CHAIRMAN. Thank you.

Mr. Zerbe, the report raises several concerns about insider deals,

and I need to have you elaborate for the committee on that point.

Mr. ZERBE. Yes, Senator. The report discusses at length some of

the issues we saw on insider deals. They really were of two types.

One, we had a series of insider deals with board member-related

affiliates that involved a conservation buyer program, and those

had their own difficulties.

But I think what particularly caught our attention was those

deals that were more of kind of a business transaction nature, say

the emissions credit which Mr. Selib has spoken to, issues regarding trademark, royalty usages, and things like that. What concerned us, is several points.

The Nature Conservancy was very good at getting legal opinions

of, was this appropriate, is this a proper thing, in terms of what

they are engaging in, in terms of nonprofit law. We asked them directly on this and were told that they had not gotten any legal outside opinion on the propriety of these activities.

Second is that, unlike the land deals where at least there was

an effort to get appraisals in almost all cases, there was never a

case where we were seeing an appraisal of the transaction to determine whether or not it made sense for The Nature Conservancy

and if it was going to give them a fair value for what they were

providing.

I think the last issue that was of concern to us was on the 990s.

This also reflects, to be honest, some limitations of the 990 as well.

But it was, at best, a very thin discussion of what was going on

in these transactions. You would not be able to read the 990 and

be able to understand in any real sense what was going on with

this transaction.

The CHAIRMAN. All right.

Also for you, Mr. Zerbe, the report contains significant discussion

and analysis about current IRS reporting and public disclosure requirements. So, tell us and the committee here about some of the

staff’s observations in this area.

Mr. ZERBE. Thank you, Mr. Chairman. I think that, just going

off of what I had just made a point about, not only was the 990—

and just to remind the Chairman and all the Senators here, the

990 is the cornerstone of so much of what we try to do in this area.

The 990s are a publicly available record. They are not only the filing with the IRS, these are publicly available. They are easily

available on the Web, and reporters and other folks, donors, all

take advantage of them, so getting it right is important.

But, unfortunately, what we would see again is that The Nature

Conservancy, on a lot of major transactions, be it the conservation

buyer, the emissions credit, trade lands, issues like easement monitoring and enforcement, there just is really not anywhere approaching a robust discussion.

And again, I told you, that is not something that is just at the

feet of The Nature Conservancy. Jon and I spent a lot of time looking at a lot of 990s of a lot of different organizations. That is something that we see time and time again in terms of problems.

I would just state to you—and I think, Mr. Chairman, your quote

from the internal memorandum said it exactly right. Not only is it

14

a benefit for sunshine; I think the more that organizations know

that they are going to have to be very up-front about what they are

doing perhaps will keep them from doing a bad deal in the first

place, and really thinking twice about how they are doing it brings

a benefit as well, too.

The CHAIRMAN. Thank you very much.

Now, Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Devaney, these decisions made by the Department with respect to the minerals rights of the Interior that the Collier family

owns are not made in a vacuum. I mean, there is a reason why,

I am supposing, the Interior came up with these kinds of valuations.

The question is, who is really running the show there? I know

that your report spotlights Mr. Roth and Mr. Shomberg, but my

guess is that the lawyers there were told what to do by some outside political influence.

Let me just mention some names, and I want you to tell me what

you know about these people and what part they played.

Ann Klee. She is a political appointee who headed the Interior

Department’s Working Group on the Collier Big Cypress transaction. What is her role? What did she do?

Mr. DEVANEY. Ann Klee was the principal person that the Secretary turned to to oversee this transaction. When the Secretary

and Ann Klee came into office, one of Ann Klee’s principal portfolios was the Everglades. I think it was a natural thing for the

Secretary to turn to her to oversee this.

Senator BAUCUS. And she is a political appointee?

Mr. DEVANEY. She is.

Senator BAUCUS. What about Steven Griles? He is the Deputy

Secretary who attended a White House meeting on the Collier deal.

What was his role?

Mr. DEVANEY. Former Deputy Secretary Griles——

Senator BAUCUS. Excuse me. Sorry.

Mr. DEVANEY [continuing]. In fact, was the individual from the

Department who actually went over to the White House and had

conversations over there.

Senator BAUCUS. I know you do not know definitely, but what is

your best guess as to the nature of those conversations?

Mr. DEVANEY. Well, I think the report chronicles, as opposed to

his memory, that he had several appointments over there to discuss this issue, which I do not think is unusual. But they were on

his calendar.

There were memos briefing him before he went over there. One

memo in particular was written as sort of a, you need to think

about this and here are some issues we see that are problematic

before you go over there. Quite frankly, I was somewhat disappointed by his loss of memory about all these events.

Senator BAUCUS. Was there an announcement of this transaction

at the White House attended by the President, and also by Governor Bush from Florida?

Mr. DEVANEY. There was. And the Secretary and other officials

were there as well.

15

Senator BAUCUS. I do not understand how the Interior Department gets in the business of granting tax breaks. I mean, is that

an Interior Department function?

Mr. DEVANEY. Well, as I mentioned earlier, one of the principal

negotiators here was told, in the distant past, that the Department

had allowed that to be in a previous agreement. The other fellow

understood it was in the agreement, but did not understand it. So,

they should not be in that business.

I think it is fair to say that the language is in the agreement because the Collier Resource Company wanted it in the agreement,

put it in the agreement, and the Department did not object to it

being in there because they knew that that was part of a deal.

That is the way that the Collier’s would accept the $120 million,

which was considerably less than they thought the mineral rights

were worth.

Senator BAUCUS. Right. But why do you suppose the Collier family never told the Department, as far as you know, their percentage

ownership interest? I do not quite understand how the Department

can pay the family without knowing what percent of the mineral

rights they own.

Mr. DEVANEY. Well, when I think of this, Senator, I think of it

as sort of, I have a house for sale and you may come along and

want to buy it, and you ask me where the property line is and I

say, it is over by that big tree. You ask me, well, do you have a

survey or can you prove that? I say, no, and I am not going to.

Then would you buy the house?

Senator BAUCUS. Are you saying that perhaps their percentage

interest was significantly less than 100 percent or that it was

maybe the tree next to the boundary line, so maybe it was 99 percent? Or do you know?

Mr. DEVANEY. Well, we do not actually know. We have heard

that they may own as much as 63 percent. They have never certified that to the Department. In fact, any proposed agreement

with the Department has always—and if I could just briefly read

a small paragraph in a confidentiality agreement that the Department signed with them: ‘‘The Collier Resource Company makes no

warranty, expressed or implied, as to the accuracy, correctness, or

completeness of the above-listed proprietary data. This data is supplied for the convenience and information of the evaluator, and any

reliance on this data is at the evaluator’s sole risk.’’ They have always insisted that that be in the agreement.

Senator BAUCUS. Just a couple of quick questions here, Mr.

Chairman.

The Office of Mineral Management. Is that the name?

Mr. DEVANEY. Right.

Senator BAUCUS. What is their reputation? Are they generally

within the ballpark or not in the ballpark when they give estimates

of mineral rights?

Mr. DEVANEY. Well, that is their job. The folks who are chronicled in our report from the Minerals Management Service, they

are the Department’s experts on oil and gas exploration and any

evaluations or appraisals of those kinds of things.

Senator BAUCUS. And their estimate was about, what, $68 million?

16

Mr. DEVANEY. Well, their estimate, or their valuation, not an appraisal, was a mean value of $68 million, which is sort of an average and where they would probably start an auction if this was offshore minerals.

Senator BAUCUS. And that would be for the full value, not a percentage value.

Mr. DEVANEY. All of the valuations we came across in our investigations had been for 100 percent.

Senator BAUCUS. What is the tie between the independent contractor that gave the much wider range? Where do they come from?

How often is an outside contractor called in?

Mr. DEVANEY. Well, he was called in, as I mentioned earlier, because $68 million was obviously not a figure that was going to

work. He was called in to, first, verify that MMS had come up with

the $68 million in a proper way, and then he was subsequently

asked to develop this range, which he had never done before and

he said he would never do again.

Senator BAUCUS. Do you think the outside contractor is competent to value mineral rights? Is that the business of that particular contractor? Do they do that customarily?

Mr. DEVANEY. Actually, I think he is a very reputable contractor,

but his specialty is offshore oil and gas, not onshore. It is apples

and oranges, really. He had never done that before.

Senator BAUCUS. I appreciate that.

My time is way over, Mr. Chairman. Thank you for your indulgence.

The CHAIRMAN. Yes. Thank you.

One sentence I would like to give before I go to Senator Thomas.

That is that, remember that these negotiations started in the mid1990s, going on through this administration, but actually started

in the previous administration.

Senator Thomas?

Senator THOMAS. Thank you, Mr. Chairman.

I would like to get on to a little broader aspect of it, I guess, as

opposed to analyzing individual behavior. Do we need changes in

the law or do we simply need better oversight and adherence to the

law as it exists? I would like each of you to give me a short reaction to that.

Mr. ZERBE. Yes, Senator. I think you raise a good question. It

may be a little bit different, the issues for the Interior Department

than the issues that we are facing in the tax code, but I think the

staff has recommended certain areas where we do think the law

can be changed, and it would be benefitted from being changed in

ensuring that the intentions of the code, that conservation easements are actually being used for their intended purpose and that

we are getting a good valuation on it and that we are ensuring that

they are being monitored and that they are being enforced, and

that if they are being modified, that it is done within a certain

framework, or things that we think that would be helpful.

I guess I would also add that in some ways The Nature Conservancy has done a fine job with a lot of reforms. A lot of things that

they have done we think would be beneficial as best practices

across the industry, and have been working very closely with the

17

Land Trust Alliance, who will be on the second panel, and other

organizations on that. So, I think it is a little bit of both.

Yes, the IRS has been active and it has been enforcing, but I

think we also recognize that this is a very difficult area right now

for them to get their arms around and to work.

Jon?

Mr. SELIB. Senator, I think one thing that is important to keep

in mind is the majority of conservation easements that are done in

this country are completely above the board and are done by very

good land trusts that do good work.

I think that there are changes that could be made to the law that

would make it easier for the IRS to administer the law. For example, there is not a lot of expertise within the IRS regarding conservation value. They are not environmentalists by nature, they

are tax collectors.

So perhaps the creation of some sort of expert panel within the

IRS, like they have currently for art valuations, may be helpful to

the IRS in order to discern what type of easement is really providing a good conservation value and what type of easement is not.

I think that could be helpful to land trusts as well as the government.

Senator THOMAS. There are lots of experts on appraisals outside

of the government, however.

Yes, sir?

Mr. DEVANEY. Senator, I think there is a host of expertise in Interior in various bureaus that have the expertise and have been

doing this for years. In this particular matter they were sort of put

aside and were not allowed to be involved in it, so I think it is not

a matter of changing laws as much as it is trying to correct the

process within Interior. As I mentioned earlier, the Secretary has

done some things in the last year that I think will prevent this

from happening again.

Senator THOMAS. All right.

Is this matter primarily one of TNC or is this broader than that?

Mr. ZERBE. Right. Yes. Good question, Senator. I think that is

one of the points we would probably like to most emphasize, and

Jon was touching on it earlier, is that the issues and problems we

are seeing in conservation, we certainly look far beyond TNC.

But in terms of the land issues you are focusing on, this is not

unique to TNC. In other words, the fact that TNC has done a good

job of getting themselves squared away does not mean that we still

do not have significant issues out there.

Fortunately, you will get very good testimony from the South

Carolina Department of Taxation on the second panel. While Jon

is certainly right that a good majority of folks are doing the right

thing, we do have folks who are really kind of involved in very aggressive things.

We have testimony of someone wanting to claim, well, I have

open space on my golf course, and I should get a $40 million tax

deduction because my golf course is open space, as an example. So,

that is really is kind of outside the bounds of what we were really

intending when the tax code was passed in this area.

Senator THOMAS. All right. Well, thank you.

18

Open space is very important, and this whole project is important. But I hope we deal with the basis and not so much the individuals. When we look at open space in Wyoming, I cannot see

Montana from where we are, but I like it. [Laughter.] Thank you,

Mr. Chairman.

Senator BAUCUS. You have to get up on top of the Tetons there.

[Laughter.]

The CHAIRMAN. Senator Rockefeller is next. If Senator Crapo or

Senator Schumer comes back, I am going over them right now. So,

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman. I want to

thank the panelists for doing a very thorough and comprehensive

review of this.

A couple of things occur to me. The Nature Conservancy is taking a lot of hits on this simply because they have a lot of ink in

the Washington Post, and because they committed some errors

which they have since, for the most part—or all, from my point of

view—cleared up. It was a real learning experience for them, and

perhaps for the whole conservation/conservation easement movement.

I think they were horrified by what had happened. In the last

hearing, I referred to them as now having kind of a gold standard.

I say this because government spending on conservation is going

down because of our budget crisis, the trade deficit, and debt problems, and it will continue to for a number of years.

So, my motivation is not just The Nature Conservancy and organizations like it, but also the fact that others are not going to be

doing this and that they need to be foundations, and the private

sector has to be encouraged as much as possible to fill in where the

government is simply not going to be there, and that, I could go

over 25 different fields.

So I have a specific question for you, Mr. Zerbe, just to clarify.

Mr. ZERBE. Yes, sir.

Senator ROCKEFELLER. And then one for you, Mr. Selib. I think

it is one of your criticisms that The Nature Conservancy failed to

report to the IRS modifications to easements. Is that correct?

Mr. ZERBE. It is not a criticism that they failed to report, just to

be correct, Senator. We note that they did not report it. We also

noted that there is not a requirement, under current law, for them

to report. Senator Grassley accuses me often of talking fast. I

apologize if my speed did not make that clear.

Senator ROCKEFELLER. Well, you do actually talk fast.

Mr. ZERBE. I apologize. But to make that clear, no, there is no

current legal requirement. To give you the full flavor of that——

Senator ROCKEFELLER. I do not want to use up all my time here,

or for you to use up all my time. [Laughter.]

Senator LINCOLN. Well, he is talking fast. [Laughter.]

Senator ROCKEFELLER. Yes, I know. But I am not. [Laughter.] So

that is the point I wanted to make. I understand that there is not

that requirement.

Mr. ZERBE. And we think there should be a change in law that

there is a requirement. Yes, sir.

19

Senator ROCKEFELLER. Now, are you aware of whether The Nature Conservancy has reported such easement modifications to

State governments that do require it?

Mr. ZERBE. My understanding, Senator, is that what has happened is this. Since they have undertaken reform, since the Finance Committee has begun its investigation, one of the reforms

they have done internally now is to notify the States that, previous

to the 2003 time period, if you will, they had not notified.

Sometimes they might because there was a court action, but basically they were not. But now it is their practice to notify States

if they are engaged in a modification.

Senator ROCKEFELLER. My further understanding is that there is

a sort of four-part test on easement requirements, and that what

they are doing is perhaps a little bit more stringent than the law

in those States requires.

Mr. ZERBE. I cannot speak to specifically that, but what I would

say is, that could very well be the case. A good learning experience

for us is the problem is out there in this, and that there has not

been good notice for the tax authorities at the State and Federal

level.

So, I think what we are looking at is the reforms that they have

taken are something that may serve as a good model across the

board in terms of notification at the State and Federal level in

terms of modifications.

Senator ROCKEFELLER. And I appreciate that.

Now, if I could ask both of you my final question. That is, in the

last hearing we had on this, there was a good deal of criticism

about very much smaller foundations that are trying to do this and

do not have either the staff or the money, or whatever, to do the

reporting requirements.

Now, what I have just said constitutes something which is not

good. What is the answer? I mean, not everybody can be big. We

heard examples the last time of people who were using it to enrich

members of their own family, put cousins, nephews, nieces on

boards. That kind of thing is clearly, clearly wrong.

What can be done? What do you recommend for those that are

not large, have good intent, but do not necessarily have the resources with which to carry out that good intent?

Mr. ZERBE. I would say, Senator, briefly, then turn it to Mr.

Selib, this is an issue that plays on all minds of the staff, given

very much our bosses, and they, just like in your State, have a lot

of small trusts. We are in very good discussions with them.

I would say, too, very much with the Land Trust Alliance, which

represents over 1,000 organizations, many of them very small organizations—and Mr. Wentworth will be testifying—I think it is trying to get that balance of what is reasonable in terms of the requirements that we can place on these smaller land trust organizations.

But I think there is, further, wide agreement that situations like

reporting on modifications is really a pillar. If you let that slip,

then we do not know what is going on in modifications.

All the good work that you so much want to see of conservation

and protection of the environment can be lost if we are not making

sure it is being monitored and it is being enforced, because you can

20

take that great deduction saying, I am not going to put two homes

on that property, but if no one is there to monitor and enforce it

and it gets modified, it does not get you there.

But I think we feel we are working on that balance. I think we

feel, with the Land Trust Alliance, we can strike that. But we are

aware that, for some of these organizations, they are very much a

one-man shop, or something like that, and trying to do it. I think

it may actually help them, also in terms of an accreditation process.

In some ways, they want to do the right thing, and giving them

the education, the tools, and what-have-you to say, here is what we

are expecting of you, will actually put them in a better place.

Jon?

Mr. SELIB. My colleague took the words right out of my mouth.

I mean, I agree, Senator, with Mr. Zerbe here that education for

these groups is essential. The laws are complicated. The requirements are difficult to navigate.

To the extent that groups like the Land Trust Alliance, either

under the auspice of some government-created accreditation system

or just on a voluntary basis, can provide that type of guidance to

these smaller land trusts, that will make a big difference.

Senator ROCKEFELLER. Thank you, Mr. Chairman. I will have a

few questions to submit to the next panel.

The CHAIRMAN. All right. Thank you very much.

Now it is Senator Bunning’s turn.

Senator BUNNING. Thank you, Mr. Chairman.

I would like to go to the two staff people, Mr. Zerbe and Mr.

Selib. I wanted to ask you a little bit about your findings and

thoughts regarding unrelated business income in the areas of land

conservation organizations.

What are your thoughts with regards to charities that routinely

help to preserve unique lands by buying them when they first go

on the market, and then holding them until a State or Federal

Government can appropriate the funds to buy those properties? Do

you feel that that type of activity would produce taxable unrelated

business income to the charity?

Mr. ZERBE. Senator, let me try to answer you in a couple of ways.

One, you are raising a very significant issue. Just The Nature Conservancy alone engaged in over $900 million in sales of land to

Federal, State, and local governments over the last 10 years, and

we see this trust for public land. Other land conservation groups

are active in this area as well, too, so it is not unique to The Nature Conservancy that you see that.

The question about whether it is UBI is one we have also wrestled with, because so often, particularly in the scenario that you

are laying out, what you will see is that, setting aside The Nature

Conservancy, a land organization will get a grant from, say, Fish

and Wildlife Foundation or some other government or quasi-government entity to purchase the land, or basically purchase the land

at the request of the government so that at a later time, when

there are funds available, they can then basically purchase it from

the organization. I think it is something that we have wrestled

with and have not made a conclusion. I think our concern, and

other members’, looking at the history of this issue, have expressed

21

a concern about, are we comfortable with the idea of an organization getting a grant of $500,000, say, from the government, buying

land, and then later selling that land to another government agency, say, for $500,000. How do we want to treat that?

Senator BUNNING. Or a plus.

Mr. ZERBE. Yes, sir. Or a plus. I guess I would say it is an area

we have wrestled with. I do not know. Maybe Jon can respond.

Senator BUNNING. Do we need new tax laws in regard to this or

do you think that the IRS should be involved in clarification of

what we now have?

Mr. ZERBE. It is a difficult area for the IRS, I think. We have

looked at this and talked about it in some ways with trade lands,

of whether this is an ongoing business for them, that they are, in

a sense, engaging it in a business-like manner.

I am not directly answering your question. I apologize. UBI is a

very, very difficult area. I think the easy answer is always to say,

could there be clarification? Yes, absolutely.

Senator BUNNING. Mr. Selib?

Mr. SELIB. I would agree with Mr. Zerbe. It is a complicated

issue. I think what a lot of land trusts would say is that it is important to look at the aggregate of the transactions for the government.

In other words, that on some sales to the government, land

trusts or the nonprofit would actually take a loss on the transaction, and on some they may make money in some situations, and

that at the end of the day, it would balance out and there would

be no income.

Senator BUNNING. Well, I do not think that is the job of the government, to balance out. I think the individual persons or the trust

would have to make that decision along individual cases with the

Federal Government.

Mr. SELIB. That is right, Senator. And the report does not delve

into this issue or make recommendations on it, but it is an issue.

Senator BUNNING. The committee understands that there are a

lot of factors that go into figuring out if a gift to a charity should

be deductible, and how much can be deducted. The first hurdle,

however, is getting a decent appraisal of in-kind donations, particularly land donations.

Could you address the ideas or ways that the IRS, the State governments, or the Federal Government can make sure that the appraisers themselves are qualified and that the particular appraisals

are accurate?

Mr. ZERBE. Senator, this is an issue we struggle with a lot, and

we do have recommendations in the report. Some of the basic recommendations—and I think there is wide agreement—are having

certified appraisers, appraisers that are blessed under their local

State rules, that they are using Uniform Standards of Professional

Appraisal Practice (USPAP) standards, appraisal standards.

I think, also getting potential penalty regimes more accurate.

Right now there is a significant safe harbor for someone who has

a very aggressive posture in valuation that they take. It is very difficult to bring penalties in that area.

22

I think the other interesting idea—you would appreciate this

from your past—is baseball arbitration, is what we call it. You

would probably know it better than we do.

But right now, what we see is people kind of coming in with a

high valuation as their first negotiating point with the IRS, and

the idea being a little bit of a variant of saying, well, what you are

going to do is come in at closing, and whatever you come to the

table with, you with that number, the IRS comes in with their

number, and we will not split the baby. The judge will choose between one of the two numbers.

Senator BUNNING. In other words, not have any in between?

Mr. ZERBE. Right. Not have any splitting of the baby, enforce

people’s behavior.

Senator BUNNING. That is exactly like baseball arbitration is

right now. It is a lousy set-up. [Laughter.]

The CHAIRMAN. All right.

Senator BUNNING. No. It really is. It is bad that you cannot negotiate somewhere in the middle.

Thank you. Thank you very much. Thanks, Mr. Chairman.

The CHAIRMAN. Yes. Thank you.

Now we have two left of the people who are here, Senator Lincoln, then Senator Santorum.

Senator LINCOLN. Thank you, Mr. Chairman, and thanks to this

panel. I know the Finance Committee staff has put a tremendous

amount of work into this, and I am grateful.

In our home State of Arkansas, I know that there are many organizations whose land conservation work really depends on the

kinds of donations, both of easement and of property outright, that

we are talking about today.

So, it has been a tremendous benefit for our State. We all know

that there may well be instances where those tools were used badly

or incorrectly, but we also know, too, that there are others where

a lot of good has been done, particularly in our State.

One of the specifics my colleagues may see that comes to mind

from our State, or be aware of, is that in Arkansas we did recently

discover the existence of the Ivory-billed woodpecker, which is a

bird long thought to be extinct, in the Cash River Refuge, which

is not far from where I grew up.

I think it is important just to note, because it is a huge product

or evidence and a confirmation that conservation programs are

very important and they do a tremendous job. Whether it is land

easements, conservation easements, or the outright purchase of

those properties, to be put into conservation is important.

But with that said, again, I do appreciate all of the hard work

of the Finance Committee staff, and I especially thank Mr. Zerbe

and Mr. Selib for all their hard work in helping us look to make

sure that things are done correctly so that we do not lose these

types of opportunities.

We do not want the baby out with the bath water. We want to

make sure that we do maintain these opportunities, and, as Mr.

Devaney has mentioned, the American public gets good value for

that. I am enormously grateful for what you all have done in that.

Just a couple of quick questions for Mr. Zerbe and Mr. Selib. In

terms of The Nature Conservancy’s case, the stated mission of The

23

Nature Conservancy has been preservation and conservation. In

the outline of your report, there are certainly some activities from

The Nature Conservancy that raise concerns.

I guess, going back to that, would you all, in your opinion, in

terms of those questionable activities, are they inconsistent with

The Nature Conservancy’s purpose in terms of something other

than conservation or preservation, and were they widespread?

Were they just small pieces in different areas, and have they been

addressed by The Nature Conservancy?

Mr. ZERBE. Yes, Senator. I guess, in terms of inconsistent, it is

a little bit sweeping. I guess I would say it is one thing for the

charity’s mission, it is another thing that the charity needs to operate itself in a manner that is consistent with its tax-exempt status.

I think part of the concerns we get to at times is, are they, when

they are engaged in certain insider transactions, doing those in a

manner that is consistent with their kind of bigger requirement,

which is that they operate like a charity.

I would say that at times we certainly raised concerns about

whether that is the case. I think I understand your question of,

other times, say the conservation buyer program, or what have you,

is that inconsistent. I can see your point that, yes, it is within the

overall framework of what they are trying to accomplish at times.

In terms of widespread, that is a difficult one to answer. I certainly would not want to leave the impression that The Nature

Conservancy has problems under every rock. I think if your sentiment is that most of the land deals that they look at seem fine, yes,

that is the case.

I would note that that is, unfortunately at times, a contrast. We

do see—and again, this is the kind of report that talks not only

about The Nature Conservancy, but also illuminates land issues in

general, and also big charitable issues in general—other charities—

and again, you will hear from other witnesses on the second

panel—that are, unfortunately, very consistently active in areas

that we would view as inappropriate and not in keeping with the

law.

Jon, do you want to respond?

Mr. SELIB. I will start off with, in terms of widespread. I believe

the conservation buyer program constitutes about 2 percent of The

Nature Conservancy’s activities, and some of the emissions credit

arrangements represent about $34 million worth of their activities

out of a $4-billion organization.

So, I would say that there are isolated cases, and The Nature

Conservancy is an organization that engages in a lot of very runof-the-mill conservation activities that are, without a doubt, clearly

within their conservation agenda.

I am wary about talking specifically about whether or not the activities they have engaged in are related to a conservation purpose

because they are in the midst of an audit right now, so I do not

want to give a specific opinion as to whether those would fall into

that category.

Mr. ZERBE. If I could add just one more point, Senator Lincoln.

I guess I would encourage you to review the internal memo that

the Chairman mentioned at the very beginning, which, I think,

does give a cautionary note that The Nature Conservancy, unlike

24

a lot of land organizations, likes to term it ‘‘entrepreneurial,’’ is

their phrase.

But they engage and are very active, albeit it is a small percentage. But it is certainly their cutting edge. They did the conservation beef program. They are involved in cattle, involved in oil drilling, involved in forestry, involved in emissions credits/transfers.

There are a lot of things that are kind of their cutting edge.

It again raises the questions of kind of the core activities of what

they are doing, but also that memo does an excellent job of laying

out that, when they get outside of their core activities, problems

arise and they arise very quickly, and they find themselves perhaps

not keeping in terms of the best stewardship for their work and

what their donors are hoping when they give that money, if that

helps you.

The CHAIRMAN. Senator Santorum?

Senator LINCOLN. The last question I asked, which neither of you

got to, is, do you feel like they have gotten to a reasonable amount

of addressing those issues?

The CHAIRMAN. A short answer.

Mr. ZERBE. Yes, Senator. I think they have done a good job. I

think there are some additional things that the Chairman has

mentioned, but, yes, they certainly have. Yes, ma’am.

Senator LINCOLN. Right.

Thanks, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Santorum?

Senator SANTORUM. Mr. Zerbe, you just mentioned that The Nature Conservancy gets in trouble when they get outside of their

core activities. How pervasive if this problem throughout these

other charitable organizations?

For example, I have 140 organizations in my State alone that

deal with land trusts, and most of them are very, very small. I understand this is a huge organization and they are entrepreneurial,

as you suggest. This audit obviously was well-deserved.

My question is, how pervasive is this problem with all my little

land trusts in Pennsylvania who are just trying to do their little

part to keep their community from being overrun by development?

Mr. ZERBE. I think that is a fair point, Senator, and I guess I

would answer in two ways. The issues that we see here regarding

The Nature Conservancy—again, that word ‘‘entrepreneurial,’’ just

kind of new ways of doing things, joint ventures, and all sorts of

things that are out there. For big charities, we are seeing that

more and more. I think that is one of the most important things

that we are trying to bring to the committee and bring illumination

to, is that for big charities they can be involved in very—and that

is not to say it is bad, good, or indifferent. It is just, the law has

not changed since 1969.

But charities and how they operate really have changed dramatically. So, I would say to you, for big charities, what we are seeing

with The Nature Conservancy in kind of style and form, would not

be that different from other big charities.

I think for the smaller land groups, just going back to your other

question, I would be surprised that we would see that, although I

would say things like the conservation buyer program are not an

25

uncommon activity for a lot of charities to engage in, and that is

something that we have paid some attention to.

But I think my sense would be, from having looked at some of

the smaller charities, smaller land groups, that that would be uncommon that you would see that. I would say that they would probably have their own problems.

A great example would be, are they monitoring properly? Are

they making sure there are no modifications? Really, most critically, do they have stewardship funds available to ensure that they

are going to be able to monitor and enforce these easements in perpetuity?

We have seen reports repeatedly of land groups that basically

disband, and there is no one there to pick it up, and unfortunately

it falls on State or local government to pick up the burden of ensuring that these enforcements are there.

So, the small ones may have their own difficulties, but I think

you are right, Senator, that our hope would be that we probably

would not see that much activity for those organizations.

Senator SANTORUM. All right. I guess the concern is, at least the

concern I am hearing from a lot of our land groups, is what is being

proposed here is already having a chilling effect on them, on people, and their willingness to come forward and participate.

I guess, if most of these groups are not getting involved in some

of these entrepreneurial activities, does it make any sense for us

to sort of have a broad-brush approach to how we deal with this

problem, or do we need to segment it out, or is there some way for

us to make sure that my little community land trust that has no

paid staff, that is run by all volunteers, that is community-based,

is not going to basically lose their ability to be able to survive in

the future?

Mr. ZERBE. Right. I think that is a fair point, Senator, and it is

one that we are cognizant of. I think what we are trying to do is

respect the balance. Obviously, I think some of the rules that we

may be looking at would that would touch on The Nature Conservancy just would not even kind of show up on the map for these

organizations in terms of being concerned about. I think for the

smaller ones, I think there are a variety of issues.

In some ways, I think it will be a two-fold benefit. One, I think

giving them best practices will give them a road map of how they

should be behaving and what we are expecting of them.

Senator SANTORUM. Is there not an organization that does that

already?

Mr. ZERBE. Yes, sir. There is the Land Trust Alliance.

Senator SANTORUM. Right

Mr. ZERBE. Yes, sir. One of the things we are looking at is, for

instance, having an accreditation regime with an education so that

they could be members of that and they would get benefits of being

a member and engaging in those best practices out there. Right

now, it is a voluntary system.

Unfortunately, a lot of the bad actors are not complying with

what the rest of the good organizations are doing, and are actually

putting the good organizations at a disadvantage in terms of encouraging people to give, because, of course, some other fellow

across the street—as you mentioned, there are 140 out there. There

26

are a lot of land organizations out there who would be willing to,

say, lower their standards.

So, by giving a kind of a common playing field with best practices, we can help organizations know where they stand, what they

need to be doing. And, most importantly, just to step back, ensuring that the goal of conserving the property is preserved.

In other words, if we do not do monitoring, if we do not do enforcement, if we do not watch for modifications, the whole reason

we are doing this will be lost and the good work that your groups

are trying to accomplish would be lost because, 10 years from now,

that land will have been developed because no one was there to

monitor it and check easements, and enforce them.

The CHAIRMAN. Senator Schumer, did you come back for this

panel?

Senator SCHUMER. Yes, I did.

The CHAIRMAN. All right. Then take your 5 minutes now.

Senator SCHUMER. I do not mind if somebody has to go.

Senator LINCOLN. I just would like to ask unanimous consent to

include my statement and other questions in the record, if that is

appropriate.

The CHAIRMAN. Yes. And let me make it clear to this panel, because I had another set of questions, but I am going to go to the

next panel when Senator Schumer is done, I will have some questions for answer in writing.

So let me announce then to the next panel that might not be familiar with how things go here. If every member does not show up,

or even for members who do show up, you will get requests for answers in writing.

Yes?

Senator LINCOLN. I just also wanted to compliment the staff on

such a thorough job. They have been very helpful with their

memos. Thank you.

The CHAIRMAN. They have done very well.

[The prepared statement of Senator Lincoln appears in the appendix.]

[The questions appear in the appendix.]

The CHAIRMAN. Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman. I will make a brief

statement, then I have a couple of quick questions for two of the

witnesses.

First, I want to thank you for calling this hearing. As I read the

report, The Nature Conservancy has undergone, itself, an exhaustive, 2-year review. There have been some problems with some of

TNC’s transactions in the past, that is clear.

But I think the report shows that The Nature Conservancy has

emerged from this investigative process with its reputation for good

work intact. They have cooperated fully with the committee. They

have provided more than 50,000 pages of documents.

They asked one of the preeminent experts, someone whom I

know, Ira Millstein, to make a series of recommendations to improve its governance and operation. The Conservancy has adopted

all of those recommendations and is well on its way to fully implementing them. As a result, TNC is clearly at the forefront of chariVerDate 11-MAY-2000 15:05 Mar 06, 2008 Jkt 095484 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 40617.000 SFIN1 PsN: SFIN1
27

table organizations. They have done more than just about anybody

else.

I urge the committee to keep the big picture in mind as it considers changes to the nonprofit sector. The staff report on The Nature Conservancy focuses on a handful of transactions among tens

of thousands.

No question, these transactions are important, and any wrongdoing should be changed, exposed, and punished, but they need to

be considered in the context of the extraordinary record of accomplishment that The Nature Conservancy has achieved over its 50-

year history.

The Conservancy has a strong New York base, and I am familiar

with the organization. Its first chapter was in New York. It completed its first land transaction in 1955 in New York and remains

very active in my State.

It just recently protected a very important part of the Long Island Pine Barrens and has helped fight invasive species in the Adirondacks. More broadly, as we know, it has protected 15 million

acres of wildlife habitat in all 50 States.

So, its record of doing a great job is clear, and I want to congratulate Mr. Paulson, the chairman of the board, as well as Mr.

McCormick and the employees who have accomplished all of these

things.

Now I have a few questions for Mr. Zerbe. Because I have limited

time, if you could answer them quickly, that would be great. I wonder why I have limited time? Anyway, I am concerned that the report gives short shrift to the reforms that the Conservancy has

adopted. They are included in the text of the report but do not appear prominently in the executive summary. So, let me just ask

you a few questions about these reforms.

First, have they reduced the size of their board and changed the

structure of the committees and responsibility of directors?

Mr. ZERBE. Yes, they have. I am sorry Ira Millstein will not be

here to testify. That is kind of an ongoing process, though, of what

they are ultimately doing. But, yes, they have reduced their board

size.

Senator SCHUMER. All right.

Have they adopted the Sarbanes-Oxley standards for auditing?

Mr. ZERBE. They have stated to us that they have, is my recollection, Senator.

Senator SCHUMER. Yes.

Have they created a position of chief compliance officer who administers an organization-wide compliance program?

Mr. ZERBE. Yes, they have. Mr. Millstein himself commented on

that, that he was concerned, though, on two factors. One, that this

person was from inside the organization and was not an outsider,

and also that this individual is not based in their Washington

headquarters. Just like you respect Mr. Millstein, I do, too, and I

would just note his comments that were in his testimony on that.

Senator SCHUMER. Right. All right. Thanks. That is relevant.

Fourth, have they strengthened their conflict of interest policy?

Mr. ZERBE. Yes, I believe they have. I think we still have some

concerns, but, yes.

28

Senator SCHUMER. So they have made real progress, no question

about that. Is that fair to say?

Mr. ZERBE. I think they have certainly made progress. Absolutely, Senator.

Senator SCHUMER. All right.

The last question, before my time is up, for Mr. Selib. One of the

issues that I am visited about most often as it relates to the reforms the committee is considering involves how the tax code treats

donations of property. I understand the desire of the committee to

tighten the rules in some cases to eliminate abuses, no question

about that, and I support that effort.

It seems to me, however, that moving to a deduction of one’s

basis in the property, whether we are talking about conservation

easements, restricted stock, or other gifts of property, may well

move too far in the direction of reducing charitable activity rather

than closing abusive shelters.

There is always a balance. We have it in the criminal justice system. I always disagreed with the Civil Liberties Union, for instance, because they would let 1,000 guilty people go free so you

should not convict one innocent person. I think most Americans

would have the balance somewhere else.

So, there is a trade-off here between good charitable activity and

closing the abusive shelters. Could you please comment on how the

committee is likely to handle these donations of property? Are we

likely to see a shift to a basis deduction or will we tighten the ways

in other rules and still allow the deduction for the fair market

value of the donation?

Mr. SELIB. Thank you, Senator. Well, at the end of the day, that

will obviously be your choice.

Senator SCHUMER. What do you think?

Mr. SELIB. But I think you are referring, I believe, to the Joint

Committee on Taxation’s proposal. I think there are a lot of very

smart people over there who worked on that proposal. With all due

respect to them, I think it would have a significant impact on the

donations of, for example, conservation easements and other conservation property, and other gifts of real property.

Senator SCHUMER. Reductions. Significant reductions.

Mr. SELIB. It could have a significant reduction. For that reason,

it may go too far, but I think it is a discussion that the committee

should have.

Senator SCHUMER. Mr. Chairman, thank you.

The CHAIRMAN. You bet. Thank you very much.

Now I have to say thank you to this panel, because they did a

very, very good job, not just now, but each of you over a long period

of time.

Now we have a chance to hear from our second panel. In the first

case, we invited Mr. Ira Millstein, a well-recognized expert in the

area of corporate governance. But he was called away by the Governor of New York to fulfill his duties for a board on which he sits,

and so was unable to testify today as originally scheduled. However, he has submitted very good testimony, and I encourage everyone to read his testimony closely.

[The prepared statement of Mr. Millstein appears in the appendix.]

29

The CHAIRMAN. Now we have Mr. Steven McCormick, president

and CEO of The Nature Conservancy on the reforms recently undertaken with that organization; Mr. Rand Wentworth, president of

the Land Trust Alliance, to discuss conservation donations to charitable organizations; Mr. Timothy Lindstrom, director of protection

and staff attorney for the Jackson Hole Land Trust, to provide another perspective on land trust issues; Mr. Burnet Maybank, Director of the South Carolina Department of Revenue, to discuss his department’s experience in auditing land and conservation easement

donations; and, finally, Mr. Steven Miller, Commissioner of Tax Exempt and Government Entities Operating Division of the Internal

Revenue Service, to discuss the laws that relate to deductibility of

contributions for conservation easements and how the Internal

Revenue Service would enforce those laws.

Welcome, Mr. McCormick.

Senator THOMAS. Mr. Chairman?

The CHAIRMAN. I would just have you go in the way that we introduced you. I am sure my staff suggested that your printed statement, if it is longer than 5 minutes, will be included in the record,

and we would ask you to summarize in 5 minutes.

Senator THOMAS. Mr. Chairman?

The CHAIRMAN. Yes?

Senator THOMAS. May I just welcome Mr. Lindstrom, who came

all the way from Jackson, WY to be with us today. For 5 minutes

of reporting, why, that is quite a long trip, and we appreciate it.

Thank you.

The CHAIRMAN. Yes. I would have been glad to let you introduce

your constituent. I did not give it a second thought. Welcome, everybody here.

Mr. McCormick?

STATEMENT OF STEVEN J. McCORMICK, PRESIDENT AND CEO,

NATURE CONSERVANCY, ARLINGTON, VA

Mr. MCCORMICK. Mr. Chairman, Senator Baucus, and members

of the committee, thank you very much for the opportunity to

present the views of The Nature Conservancy this morning.

We are an international nonprofit organization dedicated to conserving the world’s biological diversity. We are known, and proud

of that reputation, for achieving tangible, lasting results, securing

conservation of places that are carefully and scientifically selected.

Our on-the-ground conservation work is carried out by 3,000 employees, working in all of the 50 States and in 27 countries around

the world, and we are supported by over a million members and

donors.

We have helped conserve nearly 15 million acres in the U.S. and

more than 100 million acres with local partners globally.

I must say that the last 2 years have been a particularly challenging time for The Nature Conservancy. The actions and projects

by our people have been subject to the closest scrutiny.

But based on that examination and our own internal reviews, I

can say with confidence that all of our work is, and has been, in

compliance with the law and applicable regulations, and motivated

by the sincerest dedication to our mission.

30

On occasion we have made mistakes, but all of our work has always been done in genuinely good faith. Nonetheless, we have come

to realize that we must hold ourselves to a higher standard beyond

mere compliance with the law and devotion to our mission.

In this spirit, over the past 2 years we conducted an extensive

and rigorous internal review to strengthen our governance, enhance management oversight, increase accountability to all of our

constituencies, and make our actions more transparent to our supporters and to the public.

As a result of this comprehensive effort, The Nature Conservancy

improved, and significantly added to, our policies and procedures,

including those applicable to our newer conservation strategies.

As was mentioned, we convened a panel of independent experts,

led by Ira Millstein, to assist in an extensive review of governance.

The panel presented a far-reaching set of recommendations that

are detailed in my written testimony.

The Conservancy’s board and management acted quickly to adopt

and implement virtually all of the panel’s recommendations.

Among the many steps we have taken are changes in the size and

structure of our board of directors to provide increased strategic

guidance and more active and engaged oversight, and adoption of

many of the governance principles embodied in the Sarbanes-Oxley

Act, including a whistle-blower policy and prohibitions on relatedparty transactions.

I will say that implementation of these reforms has not been

easy. We are a highly decentralized organization with our conservation work done by State and country programs that have been

given wide latitude for decision making. We have flourished with

a culture that encourages risk-taking and bottom-up innovation.

Still, we are now committed to instilling a culture imbued with

the principle that doing good is simply not enough. We must carry

out our work against a higher standard of integrity and public

trust. We understand that, as we continue to innovate, we must

also continue to refine and enhance our policies, procedures, and

practices to keep pace with that innovation.

In that regard, the staff report on The Nature Conservancy

issued yesterday makes recommendations for a few additional

changes in our policies and procedures. I promise you that we will

take a very careful look at those recommendations and let the committee know what we will do to respond to them.

In that regard, I do want to add, on behalf of myself and my colleagues, a note of admiration and respect for the hard, long, and

good work that committee staff did in preparing the report.

Now, the subject of this hearing, Federal tax incentives encouraging the donation of conservation lands and easements, is of great

importance because conservation easements have become one of the

most effective and widespread tools for protection of lands that provide a variety of public benefits.

At a time when the Nation has become more sensitive to the

rights of private landowners and more fully appreciates the need

to provide financial incentives for wise management of private

lands, the many attractive features of conservation easements, as

a public policy tool, are quite clear.

31

For example, under conservation easements, property remains

privately owned, and therefore on local tax rolls. In addition, many

types of private use that are compatible with the underlying purpose and benefit to the public, such as farming and ranching, can

continue. In that regard, the land can remain productive, generating jobs and revenue for local communities.

Although the vast majority of conservation easements benefit the

public significantly and have been done properly, as with any charitable endeavor, there have been abuses.

To ensure that conservation easements are used only in the manner intended by Congress, The Nature Conservancy submitted a series of recommendations for specific reforms. These are more fully

described in my written testimony.

I believe that our proposals effectively address all of the concerns

that we have heard expressed by members and staff of the committee as we prepared for this hearing.

In closing, let me again say that The Nature Conservancy has a

very strong fidelity to its mission of protecting natural diversity,

and in our steadfast adherence to that mission we are constantly

experimenting with new approaches to achieve more effective, more

efficient land conservation, including activities that demonstrate

the linkage between conservation and human use.

But we are a charity. We are allowed to do our work under the

policy framework that this committee creates and oversees. What

we recognize is that changes may be warranted in that public policy.

We stand ready to work with you to shape those changes to ensure that proper incentives are in place for conservation of our irreplaceable natural heritage, and therefore for the unique quality of

life that we all enjoy in this Nation.

Thank you very much, Mr. Chairman.

The CHAIRMAN. Yes. Thank you, Mr. McCormick.

[The prepared statement of Mr. McCormick appears in the appendix.]

The CHAIRMAN. Now, Mr. Wentworth?

STATEMENT OF RAND WENTWORTH, PRESIDENT,

LAND TRUST ALLIANCE, WASHINGTON, DC

Mr. WENTWORTH. Thank you, Mr. Chairman and members of the

committee.

My name is Rand Wentworth and I am the president of the Land

Trust Alliance, the national organization that provides training, information, and standards for the 1,500 land trusts conserving lands

in America. Thank you for the opportunity to testify today.

I want to take this opportunity also to thank the committee staff,

Dean Zerbe and Jon Selib. In our discussions over the past 18

months with committee staff, they have challenged virtually every

aspect of land trust operations, but they have also been responsive

to our suggestions for more practical ways to address their concerns.

Private land conservation is a stunning success story for tax policy. In the 25 years since Congress first enacted the current law

governing conservation easements, land trusts have protected over

32

34 million acres of important wildlife habitat with farms, ranches,

and forests.

All are, on a voluntary basis, working directly with private landowners. This is an extraordinary legacy of land for future generations, actually more land than is in all of the national parks in the

lower 48 States.

Conservation easements protect land at a fraction of what it

would cost the government to buy it. A conservation easement

keeps land in private hands, on the tax rolls, supporting local

schools. It contributes to strong rural economies and keeps working

farms and ranches in the family.

This is only possible because of land owners who make an extraordinary charitable gift to conserve their lands in a way that

benefits all of us. Today, there are several of those land owners

who have made these donations here with us today, and I would

like to recognize two of them: Jim Cruise from Mississippi, if you

could stand, and John Lundt, who has a ranch in Wyoming, if you

could stand.

We want to thank all of the generous land owners across the

country who have made sacrificial gifts to promote conservation in

America.

The vast majority of conservation donations are properly valued

and have clear benefit for the public, but there have been problems,

primarily from two sources: from small, volunteer groups that have

good intent but limited resources; and, second, an emerging small,

but troubling, group of private enterprises abusing the incentives

for private gain.

The solution to these problems requires a coordinated approach

between the government and the private sector each doing their

part, with three steps: (1) strong accreditation; (2) strong enforcement; and (3) strong reform legislation. Let me briefly address each

of those.

First, I think it is the responsibility of the private sector to do

our part and develop a standards, training, and accreditation program. The Land Trust Alliance first developed the ethical standards for land trusts in 1987, and this is our 564-page manual that

provides detailed guidance on the legal, ethical, and governance

issues for land trusts.

Last year, in response to the Senate’s concerns, we completely rewrote those standards, and we require all of our member land

trusts to adopt them.

We are now setting up a training and accreditation program that

will create a national seal of approval to identify those land trusts

that meet high standards. I am pleased to report that, just yesterday, we signed a memorandum of understanding with the Appraisal Institute and the National Appraisal Standards Board to

develop specific standards, training, and certification for the appraisers who do conservation easement appraisals.

Point number two, strong enforcement. In April, IRS Commissioner Everson acknowledged that his agency had paid too little attention to these problems in the past 8 years.

The good news is, he and Commissioner Steven Miller, here with

us today, have demonstrated strong leadership and they are now

reviewing hundreds of easements. This increased enforcement actuVerDate 11-MAY-2000 15:05 Mar 06, 2008 Jkt 095484 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 40617.000 SFIN1 PsN: SFIN1
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ally is in the benefit, and serves the interests, of legitimate charities.

The States also can play a major role in education and enforcement, as Director Maybank is demonstrating in South Carolina.

This new enforcement activity will have a major effect on discouraging abuses, and it is absolutely essential to the success of whatever rules we have.

Finally, reform legislation. Given the success of the current tax

incentives, we are understandably reluctant to change the rules.

But we cannot turn a blind eye to abuses that, while limited,

threaten our credibility.

We have proposed a number of changes to the committee, with

the approval of many conservation organizations, including The

Nature Conservancy, which has played a very constructive role.

There is a detailed list in my written testimony. But, in short,

let us insist on real standards for appraisers, let us have real penalties for abuses, and let us have simple rules that exclude the

worst abuses, golf courses and backyards.

In closing, 2 decades ago, Congress passed a far-sighted bill to

encourage private land owners to donate for public benefit. It is a

great idea that is working, and it has great promise for the future.

Let us not allow a few bad apples to spoil a highly successful program. We in the private sector will do our part with standards,

training and accreditation. We support strong IRS enforcement,

and we support common-sense reform legislation targeted at the

worst abuses.

Thank you.

The CHAIRMAN. Thank you, Mr. Wentworth.

[The prepared statement of Mr. Wentworth appears in the appendix.]

The CHAIRMAN. Now, Mr. Lindstrom?

STATEMENT OF TIMOTHY LINDSTROM, DIRECTOR OF PROTECTION AND STAFF ATTORNEY, JACKSON HOLE LAND

TRUST, JACKSON, WY

Mr. LINDSTROM. Mr. Chairman and members of the committee,

thank you very much for inviting me to come today. I especially

want to thank Senator Thomas, not only for his role in this visit,

but also for all of the work he has done with land trusts in Wyoming.

I am speaking on behalf of the Wyoming Stock Growers Agricultural Land Trust, the Green River Valley Land Trust, as well as

the Jackson Hole Land Trust. These are the three local land trusts

operating in Wyoming.

For the past 5 years, I have been, and still am, the staff attorney

and director of protection for the Jackson Hole Land Trust. I will

tell you, it snowed all day yesterday, which is why it took me 16

hours to get here. [Laughter.]

I am also speaking from my experience as the donor of two conservation easements on farms that my family has owned in Virginia and Michigan. I have taught, lectured, and written extensively around the country on conservation easements and conservation easement tax benefits to ranchers, farmers, land trusts, and

34

lawyers, and have spent a considerable amount of the past 10 years

involved in the tax code.

I will not repeat what Mr. McCormick and Mr. Wentworth have

said about the importance of easements, except to say that I spent

a long time teaching planning law, and a long time as an elected

official at the local level in Virginia. Conservation easements are

the most effective long-term conservation method that we have in

the United States, and the tax benefits are central to that.

My personal belief is that the existing law is adequate to address

the abuses that we have heard. I know that there are abuses. Now,

I am speaking of conservation easements on land. I am not talking

about historic facade easements or some of these other transactions.

I believe that much of this abuse can be effectively addressed by

more vigorous enforcement of existing law. I recently wrote a Law

Review article in Wyoming, and as part of that I had to do some

research. I researched all of the reported cases in which the IRS

has challenged the deductibility of a conservation easement, and

there were about 115 cases we could find.

Of those 115 cases, only 3 dealt with the substance of the conservation easement and not just the value of the easement. Valuation is a very difficult thing for the IRS to tackle. They are dealing with local values and local appraisers and local knowledge. But

compliance with the law—is there a valid conservation purpose, are

there inconsistent uses reserved in the easement, is it in perpetuity, et cetera, and so forth—is a very clear compliance matter.

I have looked at hundreds of conservation easements in the

United States, and I can guarantee you, if the IRS was to look at

the substance of those documents, its record would be substantially

different.

The message to land trusts, lawyers that represent land owners,

land owners, and appraisers, would be very different. It would be,

you must comply. A tax deduction is not a matter of right, it is a

matter of legislative grace. I know from sad experience, if you do

not get it exactly right, you do not get it at all.

So, I think that if the IRS were to focus on compliance with the

law that we have—and this is not to be critical; I recognize there

is a huge amount on their plate—if they were to compare the documents with the bright line requirements of the law, which are very

elaborate, with lots of examples and lots of details, I suspect that

we would see a much different attitude towards compliance.

I have to say that you have gotten everybody’s attention. The

Washington Post, the Joint Committee on Taxation, and the Treasury Department really have made it clear that we have to pay attention. I do not truly believe there are very many organizations

or people involved in this business in the United States that are

out to rip off the system.

I just do not think people ever really have paid attention. They

think they are conservationists. They do not realize they are dealing with a very technical area of tax law that requires compliance.

I have taught, and taught, and taught, and said you have to do

it the way it says in the book. If you do not, you could get screwed.

Excuse me, but that is the fact. People have not truly followed that.

35

I think, today, people are willing to listen. I have some specific

suggestions for following up on that. One is, I think that we need

to create, within the Internal Revenue Service—and this is totally

out of my province, but it has just been my observation—a group

of folks who are trained to deal with conservation easements. This

is not rocket science. Frankly, it is not half as complicated as most

of the tax code.

In one week of seminars on conservation easement requirements

and conservation transactions and conservation buyer programs, I

will bet you could create a solid core of folks who could audit easements effectively, knowledgeably, and in way that would be convincing, and I do not think it would take a huge amount of money

or allocation of resources.

Second, I think that, while I agree thoroughly with Rand and I

am pleased that the Land Trust Alliance feels that it can deal with

accreditation, which I think is very important, I think right now we

can start mandatory continuing education for land trusts.

At least one official at every land trust holding a tax-deductible

easement in the United States ought to have to take a lesson in

compliance every year. I have to do it as a lawyer in three States.

There are millions of lawyers who have to get accredited.

I do not think it is a huge issue. I think it is something that the

Land Trust Alliance is set up to do, and is doing. If we mandate

that, I think it would do a lot. I say the same for appraisers.

Finally, I would suggest that we create a new form for reporting

conservation easement tax deductions. The current form is Form

8283, which is a generic form for all non-cash contributions.

The details of conservation easements are so specific that there

ought to be a specific form for that deduction, and that form ought

to require some certifications specifically from the appraiser that

are not now required, from the land owner who is donating the

easement, or his advisor, and from the land trust that holds that

easement. I think those certifications will make people look at the

law.

Finally, and in closing, I would just like to say, we have heard

a lot about conservation buyer transactions. They are critical to

land conservation today. The IRS issued a notice last July which

has cast a pall over virtually every conservation buyer transaction

in the United States.

We cannot tell from that notice what is intended to be bad and

what is intended to be good. I wrote an article, which is attached

to my written statement which was submitted, that goes into that

in some detail.

Thank you very much. I just want to end by saying that I truly

believe conservation easements in the United States are advancing

what virtually no other government program has done, and I think

you all support it. It is bipartisan. It is something everybody likes.

The abuses have been spectacular, but the abuses are the exception. If we enforce the law and give people incentives to follow the

law, I believe you will have done a great service to conservation

and to compliance. Thanks very much.

The CHAIRMAN. Thank you for your positive statement, Mr.

Lindstrom.

36

[The prepared statement of Mr. Lindstrom appears in the appendix.]

The CHAIRMAN. Now, Mr. Maybank?

STATEMENT OF BURNET R. MAYBANK, III, DIRECTOR, SOUTH

CAROLINA DEPARTMENT OF REVENUE, COLUMBIA, SC

Mr. MAYBANK. Thank you.

My name is Burnet Maybank, director of the South Carolina Department of Revenue, appointed by Governor Sanford. In addition

to being a lawyer, I have co-authored two books on conservation

easements, one published in 1996, the other a few months ago.

While a vast majority of easements are very good, and South

Carolina, I think, is a leading success story in that regard, and the

vast majority of land trusts are very good, there are a small percentage of easements which are bad. The problem is the valuation

on those very small percentages is astonishing. I think, even at the

IRS levels, the numbers we have seen are simply astonishing.

We have looked at probably about 100 easements in South Carolina from 2001 to 2003, and the charitable deductions of those cumulatively is about $300 million.

South Carolina is well ahead of many other States on conservation easements. We have a much more mature, professional land

trust community than many other States, so we are probably overrepresented in terms of the dollars.

I do think, however, that additional audit resources alone are not

going to solve the problem. No amount of audit resources, standing

alone, is going to solve the abusive easements. I do think we do

need some legislative solutions, which I will get to.

In drafting the legislative fixes, I would urge the committee not

to be distracted at all by The Nature Conservancy. That was a

unique situation. I have never seen anything remotely like it anywhere in the U.S., and it would appear to be largely fixed. So, in

expending the committee’s value time, I would not be distracted by

The Nature Conservancy.

I do think there are a couple of areas that the environmental

community, the Treasury, elected officials, and the tax collectors

will agree on: (1) excessive valuations; (2) quid pro quo; (3) golf

courses; (4) small lots or someone’s backyard; and, last, (5)

strengthening the standards for land trusts.

Excessive valuation hurts not only the Congress, but it hurts the

States in two ways. One, the charitable deduction flows through

and reduces the amount of income subject to State taxation, and

South Carolina, like many States, has a State tax credit, so it is

a double-dip, so to speak, in South Carolina.

We have seen astonishing appraisals. We routinely see appraisals that claim that the value of the easement exceeds the original

acquisition cost of the property; remember, when you give a conservation easement, you keep the property. We have routinely seen,

for golf courses, MAI appraisals that claimed that the value of the

golf course has been reduced by 95 percent.

We have seen in many cases—many cases—an appraisal that

says that the value of the easement is worth 4 to 5 times more

than the original property cost, even though the easement is only

a very small percentage of the land.

37

Now, how can you possibly do that? How can you put an easement on 10 percent of the land and claim it is worth 5 times more

than what the entire property cost? It is done through an appraisal

technique called the Subdivision Development Analysis.

It is according to The Appraisal of Real Estate, which is an appraisal bible. It can be the least accurate raw land valuation technique; however, we see it routinely in South Carolina.

Basically, what it says is, you take a hypothetical subdivision,

develop it to the maximum extent legally and economically feasible,

and it produces astonishing valuations.

We would encourage the committee to either ban its use or simply adopt in statutory form the numerous cautionary language

which is found in The Appraisal of Real Estate, the bible that appraisers use, and just simply adopt that cautionary language in

legislation.

We would also urge that the 8283 be amended to contain the

valuation when signed by the land trust, even though the land

trust does not vouch for it. We would also urge, as previous speakers have, that 8283 should be greatly expanded, perhaps an 8283

just for conservation easements over $100,000 to prevent administrative burden on others.

Quid pro quo is another issue we are seeing. Conservation easements have been turned on their head. They are being used as a

tool to promote development of natural property rather than inhibiting that.

What developers are doing, they are giving an easement to buy

preferential zoning. They are given easements in order to comply

with State and Federal environmental requirements. There is nothing wrong with that, but then they are taking charitable deductions.

So, the concept of donative intent and quid pro quo needs to be

returned to the Internal Revenue Code. It is now just a valuation

swearing match. I have given you a bill, draft legislation, in my

package which I think will accomplish that.

The next thing is golf courses. As I have mentioned, in a rough

aggregation, we have seen about $300 million worth of conservation easements given in South Carolina. Of that, $125 million of

that $300 million is from golf course easements. We would urge you

to either narrow the definition of public recreation or to revisit the

definition of protection of a relatively natural habitat.

I see my time is ending, so I am going to rapidly end.

Small lots is another issue. We would ask you to take a look at

restricting charitable contributions on easements of less than 10 to

15 acres.

Land trusts is another area. We have seen strong land trusts. We

have seen real estate developers establish land trusts. Currently,

there is no minimum commitment and resource standards on land

trusts, and we would urge something of that nature. We would

urge you to simply adopt the land trust standards for land trusts.

Just take the land trust standards and put them into the Federal

law.

Lastly, with my time up, I would urge you to do a conservation

panel. The problems I have discussed today crept up on us. We

started our audit based on a single Washington Post article by reVerDate 11-MAY-2000 15:05 Mar 06, 2008 Jkt 095484 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 40617.000 SFIN1 PsN: SFIN1
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porters Joe Stephens and David Ottaway. The vast majority of the

tax collection community was not aware of that until that Washington Post article.

Obviously, audit selection based upon the Washington Post is not

the best system, and I think a conservation easement panel would

go a long way to identifying abuses before they become national in

scope.

The CHAIRMAN. Thank you, Mr. Maybank.

[The prepared statement of Mr. Maybank appears in the appendix.]

The CHAIRMAN. Now, Mr. Miller?

STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX EXEMPT AND GOVERNMENTAL ENTITIES OPERATING DIVISION, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Mr. MILLER. Thank you, Mr. Chairman, members of the committee.

Conservation easements are becoming a matter of greater concern and attention at the Service. From a practical point of view,

we are primarily concerned about two aspects: first, whether the

easements are being created exclusively for conservation purposes;

second, whether the appraisals that determine the value of the deduction are reasonable as opposed to fanciful and inflated.

I have outlined them all in my written testimony, and I will

touch on it here, but I want to concentrate on our enforcement efforts and some challenges we face.

Today, I will also talk a little bit about the preservation of open

space for the public’s scenic enjoyment. To qualify for deductibility,

an open space easement must restrain development and there

must, at a minimum, be visual access to or across the property.

Most importantly, the open space conservation easement has to

yield a significant public benefit. If the contribution meets these requirements, the question then becomes how to value the easement.

Generally, the amount is limited to the fair market value.

With that background, let me turn to our compliance program.

To increase our information about conservation easements, we are

modifying our tax forms to identify conservation easement programs and their donors. These changes will better inform the Service and the public about the solicitation, receipt, use, and protection of these easements.

We have also established a cross-functional team to lead our efforts in this area. The team is responsible for case selection, training, acting as a resource for field personnel, and ensuring consistency in our case work.

Currently, the team is leading a review of donors, charities, promoters, and appraisers. The IRS has over 240 open space easement

donors under audit, and these are high-dollar cases in our inventory.

The IRS is also examining a number of charities involved in the

area concerning their easement practices. We are also looking at

promoters, because we have seen pass-through entities use the conservation easement as an investment tool. To date, we have recommended five promoters for investigation under section 6701.

39

Finally, we are working with our Office of Professional Responsibility on possible future referrals of at least three appraisers who

appear to have prepared grossly unreasonable easement valuations.

It is still too early to draw conclusive findings about practices in

this area, but I have some preliminary observations I would like

to make.

As others on the panel have mentioned, the rules here are difficult and present opportunities for abuse and manipulation. We

are seeing problems in several areas: cases where we do not believe

there is any public access, visual or otherwise, to open space; cases

where the contributed tract appears ordinary in character; and

cases where no conservation purpose is served.

We also face very difficult valuation issues. Appraisal valuation

assumptions are based upon the facts and circumstances of each

case, and each case is unique. Appraisal assumptions concerning

future development have been particularly problematic.

In some cases, appraisers are inappropriately assuming major

zoning changes, aggressive timing of development, and low or nonexistent development costs. For example, in some cases the appraisal has assumed extensive development in an arid area where

the developer does not have water rights. Thus, the economic feasibility of the development may not have been adequately evaluated.

Other assumptions may similarly be unrealistic.

So, although the conservation contribution serves a vital role in

the preservation of our open spaces, the work we have done so far

leaves us concerned. Our work raises the question of whether rules

governing appraiser qualifications, appraisal standards, and the

standards for referral to the Office of Professional Responsibility,

are sufficient.

I would also ask you to consider the questions that were outlined

by Commissioner Everson in his April 5th testimony before this

committee. Those questions included, first, whether there are gaps

in the statutory or regulatory framework.

Examples in this area are whether current appraisal standards

are sufficient and whether the current barriers to referral for disciplinary action are workable; second, whether the IRS has the

flexibility it needs to respond appropriately to compliance issues.

An example in this area is whether there should be an intermediate sanction for those charities that do not monitor the easements in their care. That was outlined in the administration’s 2006

budget proposal.

Third, whether more should be done to promote transparency.

This includes not only the forms changes that we have discussed

today and in our written testimony and the need for enhanced electronic filing, but the possible ability of the IRS to leverage its resources with those of the States and the Federal Government who

co-administer these provisions.

I will be happy to take any questions.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Miller appears in the appendix.]

The CHAIRMAN. I am going to call on Senator Thomas and Senator Snowe before I ask questions because they have to go. I will

probably have more than 5 minutes of questions, myself, and I will

finish up.

40

So, Senator Thomas, then Senator Snowe.

Senator THOMAS. Thank you. I will be short.

Mr. Lindstrom, do you have any particular basic comments on

the issues raised by the staff in the context of the TNC investigation?

Mr. LINDSTROM. Yes. The staff, Mr. Zerbe, made four specific

suggestions regarding easements. I thought most of them were

ones I support and agree with. I am a little bit concerned about the

issue of de minimis deductions.

As I mentioned in my written testimony, in Jackson Hole, we

look at a number of inholdings in the national park, which may

often be less than 10 acres in size. Also, along sea coasts and lake

shores, you have small parcels. Protecting those parcels can be very

important. So, just saying anything under 10 acres ought not to get

a deduction would raise a problem. I think maybe different standards for that would be appropriate.

Also, I would like to just mention the issue of conservation buyer

programs, again, which was touched on in the staff suggestions. I

think that there is a concern that when somebody structures a

transaction so that, before they buy land, they are committing that

they will conserve that land, that they do not have donative intent

and should not get a tax deduction, that that is the essence of

these transactions that ensures that conservation will occur after

the sale has happened.

So, I think, while there may be a lot of smoke around that issue

that needs to be pierced, I really think at the heart, those are valid

conservation transactions that we should continue to allow. It

would be great if we could get some clarification in terms of the

Service’s concerns.

Senator THOMAS. Thank you very much.

Mr. LINDSTROM. Thank you.

Senator THOMAS. Mr. Miller, it seems kind of interesting that

most of this debate, discussion, and so on was sort of unearthed by

the media looking into the 990s. Why did IRS not see these things,

review these filings, and enforce the current law?

Mr. MILLER. Well, Senator, I think it is fair to say that the media

was ahead of us in this area, and I acknowledge that. We obviously

have a lot of ground to cover in our work, and believe that we are

doing a better job on reviewing forms. But there are some 700,000

Forms 990 filed each year with us.

Senator THOMAS. Really?

Mr. MILLER. That represents a significant barrier.

Senator THOMAS. I see. Well, get Mr. Grassley to get you some

more money. [Laughter.]

The CHAIRMAN. Thanks a lot.

Mr. MILLER. Thank you, Senator. [Laughter.]

Senator THOMAS. Thank you, sir.

The CHAIRMAN. Thank you.

Now, Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

I appreciate it, because I think this is obviously a very important

question with respect to these conservation easements, and as a

tool, certainly, that has been used in Maine by The Nature ConserVerDate 11-MAY-2000 15:05 Mar 06, 2008 Jkt 095484 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 40617.000 SFIN1 PsN: SFIN1
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vancy, I think it has worked exceptionally well, both from the conservation benefits, and also the economic benefits.

I think, really, we need to get to the heart of the issue as to how

we resolve these transactions, in a way, because they are extremely

sophisticated, to ensure that there is public benefit and that there

are not abuses and that it is a transparent process.

So, I would like to ask the panel—I will start with you, Mr. Miller, because the source is recognizing whether or not on these IRS

forms, where they make the details of all these transactions of

these charitable organizations available—what information or data

would you all recommend be on this form? I guess it is IRS Form

990.

What should be available on those forms? What should we require to be made available so that these transactions not only are

transparent, but I think have full disclosure for the activities that

are involved with respect to these transactions, to make sure, if

there is anything questionable regarding these transactions, that

they are transparent?

Mr. MILLER. Yes, Senator. I think we are of one mind on this

panel, no doubt, that the 990 does not do what it needs to do at

this point in putting this into the public domain. We have taken

steps to improve the 2005 return. I have outlined that in my testimony. And into the future, hopefully we will be able to do more.

Right now, there is nothing specific, other than very general program service discussion that is required on the 990.

As we move forward, we will have to, first, identify those organizations that are actually doing this line of charity, and even beyond

that, figure out how we can get more information. Because I do not

know that you want 10,000 transactions outlined on the Form 990.

And we will be working on what that balance will be, to try to get

enough information to us, to the States, and to the public, to make

a judgment as to whether this is a worthy organization to contribute to, whether we should be taking a look at it, and those sorts

of matters.

Senator SNOWE. Would others respond? I think the question is

whether or not we sort out what is going to be readily apparent on

the IRS forms to make sure, if there are any questionable activities, that they are detected, and whether or not the penalties

should be increased for abuses as well for these activities.

Mr. MAYBANK. If I might respond. The form we would like to see

expanded is the Form 8283. That is a form that goes along with

the specific charitable deduction. It is not a public record. However,

that would be the form we would look at. For ease of administration, perhaps an expanded Form 8283 only when the donation is

more than, say, $100,000 or $250,000.

Stephen J. Small, a tax analyst, in an article I have attached to

my testimony, submitted 11 things he thinks that form could use.

For example, have you owned the property for less than 24

months? If so, are you claiming a deduction more than 21⁄2 times

what you paid for it?

To the auditor, that is an obvious audit selection. You just

bought the property and you are claiming that the easement is

worth more than 21⁄2 times what you bought it for. That would be

the kind of thing we could use for audit selection.

42

Mr. MCCORMICK. I would pick up on Mr. Maybank’s observation

about the Form 8283, because that is required currently to be

signed by the recipient organization. So, the nonprofit that receives

a conservation easement signs that form simply to signify that it

has actually received the gift.

We, in our new reforms, require now that we see the appraisal

that has been done by the land owner before we sign that form. We

require that that appraisal be conducted by a certified appraiser.

We require that all elements of the appraisal that is required by

the IRS are in place. We now, as a matter of policy, have to conclude that the value put on the easement passes a good judgment

test.

Mr. LINDSTROM. Senator Snowe, great ideas seem to all come at

the same time. I had not seen Steve Small’s suggestions when I

wrote mine. But in my written testimony, I outlined some specific

questions that the appraiser should be required to address on the

Form 8283.

I am currently reviewing five appraisals for private clients, and

I can guarantee you that not a single one would pass muster in an

audit. It is not because somebody is trying to take advantage of the

system, it is because the appraiser does not understand the rules.

Second, one exception I would make to what was suggested about

validating the values is, land trusts should not be put in a position

of saying, yes, we agree the value is correct.

We are not appraisers. What we should be in a position of certifying is, yes, we have a proper stewardship program, yes, we are

compliant with the organizational requirements for holders. The

donor should also have a checklist, such as Mr. Small suggested,

and some other things, to focus these folks on what the law requires.

Because I think a lot of them, when they are asked to sign their

name to something where they are certifying that they have complied with this, that, and the other thing, are going to ask a lot of

questions.

I, finally, think they should have a chance to amend their easement before they take their deduction if they discover, in the compliance process, that they have screwed up. So, this compliance test

works for them as well as for the government.

Senator SNOWE. Well, can I just follow up on that? In terms of

qualified appraisers, should there not be a standard that is uniform, or is there currently in law?

Mr. LINDSTROM. The law requires that they meet a standard, yes.

Senator SNOWE. With these standards, though, why is there such

variation? What is the issue there?

Mr. MILLER. Well, Senator, the law—and you all have modified

most recently in the JOBS Act some of these rules—for certain appraisals, there is a requirement that they be done by a qualified

appraiser.

At this point, that only means that they are in that business,

that they know that if they state something wrong, they can be

subject to penalties not related to the specific transaction or to the

parties of the transaction. Those are fairly minimal requirements.

Senator SNOWE. So should we enhance those requirements in

law?

43

Mr. MAYBANK. The problem is, appraisals are more of an art

than a science. Different appraisers can come up with quite different values.

Mr. WENTWORTH. It is our recommendation to the committee,

speaking for the Land Trust Alliance, that the committee pass reform legislation requiring the USPAP standards for appraisers. As

I said earlier today, we will go one step further in working with

the National Appraisal Standards Board and develop specific

standards for conservation easements.

Mr. LINDSTROM. If I might add just one last thing. I agree that

there is a lot of subjectivity with appraisals, but I would say that

the current tax code and regulations contain a number of brightline requirements that that appraiser is taking into account, including quid pro quo, enhancement of other property owned by the

donor, and so forth. I do not think a lot of those requirements are

fully appreciated by the appraiser, or even acknowledged.

So if the appraiser had to certify, yes, there is other property

that is not restricted, it is not enhanced or it is enhanced, and go

down that checklist, I think it would make that appraiser stop and

think: I am certifying something here; is it really true? Because,

while it is subjective, there are some very clear bright-line standards that have to be complied with which are not often complied

with.

Senator SNOWE. Well, maybe that is something that we ought to

look at that could help to minimize this problem being readily evident in these transactions. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

I have a few questions. They will not take forever to ask, so you

will be able to go in just a little while.

Before I ask questions, though, I would like to give some compliments. And though I give compliments, I do not want them to

detract from the seriousness of what we are talking about and proposed changes we have made, and even some criticisms that have

been expressed today.

I think they fall into the category of the strong statement that

Mr. Lindstrom made, I think, at the end of his comment about the

message being received. But, for instance, for The Nature Conservancy and referring back to a meeting I had with Mr. Paulson way

back in the members’ dining room for breakfast January of 2004,

and he came in with a long letter expressing changes that he was

going to make, and realizing that things were not right, and going

to right them. That shows good intent, and I appreciate that very

much.

I do not know whether it was Mr. Wentworth or somebody with

your organization that, maybe 6 months ago, came to my office and

talked about your self-policing and the standards you were setting.

That shows very good intent, and I want to thank you for that.

We have been working beyond just the land issue and the easement issue. We have been working with the Independent Sector as

they have held meetings around the country trying to bring attention to this, and to help us in the drafting of legislation. We have

had the help of the Internal Revenue Service in the strong letter

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that we got from the Director of the Internal Revenue Service. All

of this, it seems to me, emphasizes what Mr. Lindstrom said.

So, having said those things, we just have to work our way

through this. I think you folks are helping us work our way

through it. So, now I will go to some questions that will probably

detract from what I just said, but I say it from my heart, what I

have said. I think my staff felt the same way as time went on, and

you have even said positive things about the staff.

So I am going to start with you, Mr. McCormick. I note that the

TNC has been unique and innovative when finding new ways to

fund conservation programs. I am concerned, when your internal

auditors state that there are inherent risks associated with moving

away from your core competency to engage—and I have this

quote—‘‘in the business that the TNC has little expertise.’’

This was stated by your internal auditor who reviewed the oil

and gas activity in Galveston, TX. She highlights other areas in

which TNC staff are not experts, such as eco-tourism, cattle grazing, and timbering operations.

So, I think, Mr. McCormick, it is safe to say that the oil and gas

and cattle grazing activities, while intended to further your exempt

purpose, were failures and raised questions about whether such activities are justifiable in the name of furthering your tax-exempt

purpose.

How do you think the TNC and other exempt organizations

should manage such activities, and what does TNC plan to do to

ensure that it attains appropriate levels of expertise before conducting those activities? And before you answer, I want to put

something out here then for Mr. Miller to comment on.

I would also like for Mr. Miller to comment, in general, on what

we should be doing to ensure that nonprofit activities that are only

a different shade of gray when compared to for-profit activities are

receiving adequate scrutiny by the IRS and the general public.

First, Mr. McCormick?

Mr. MCCORMICK. Thank you, Senator. You raise a very, very

good question. Let me say, too, that that memo that our internal

auditor prepared was done as a consequence of my request that she

go look at that situation in Texas.

Shortly after I became president, I heard about this activity and

heard about some of the concerns that, even inside The Nature

Conservancy, were being raised. So I asked our internal auditor,

Cheryl Place, because she is very good at sizing things up, to go

down there and not conduct a formal audit, which is done at the

request of the board, but on my behalf, just to size up what had

happened, what had gone wrong, what lessons we would learn.

I also sent down an outside scientist to review the decision that

we had made to engage in that activity to make sure that the staff

and trustees were using good science before going into that project,

because we claim that is what we do.

Dr. Temple verified that the science was sound. He said we

should have done a better job at monitoring activities over time

against original assumptions, and I concur.

With respect to Ms. Place’s report, I think, in that case, we did

get ahead of ourselves. We got involved in an activity where we

45

really did not have sufficient internal expertise to make good judgments about what was appropriate.

I will say, as I mentioned in my testimony, that our desire to

work there was very much based on our mission, and that we were

concerned about the imperiled status of the Atwater’s Prairie

Chicken, in the midst of a large oil drilling activity.

The desire was to try to see if oil drilling could be conducted in

that area, because it was already happening, in a fashion that

would not have a detrimental long-term effect on the bird. I am

happy to say, today, that the population of the bird has actually

gone up.

We believe at The Nature Conservancy that our mission compels

us to develop new core competencies over time. Scientists have

come to the conclusion that traditional protected areas, parks and

refuges, at best, worldwide, will capture only about 5 percent of the

globe’s biological diversity.

And inasmuch as our mission commits us to conserving biological

diversity, we have felt compelled to reach beyond some of the

things that we have done traditionally—land acquisition, including

conservation easements, particularly in the arena of demonstrating, or attempting to demonstrate, that land use can be designed

and carried out in a way that maintains the economic vitality of

local communities, but also is compatible with conservation of biological diversity.

Outside the United States, that is our core competency. We are

working in the Zahada region of Brazil with the farmers who are

doing conversion to soybean production. We are working with indigenous peoples in the Amazon to make sure that their lands are

managed for economic activity as well as for conservation of forest

systems. We are working in China on improving how energy is produced in a fashion that does not result in continued cutting of pine

forests.

But from time to time, we do get a little outside of our own headlights. In those cases, we should step back and make sure that we

are doing a better job at developing core competencies rather than

moving too far, too fast.

In that regard, in our current set of reforms, a project like that

in Texas would go through a very enhanced vetting process internally, including review by a new risk assessment committee. We

also have heightened standards for management to review projects

of this nature. With our current changes in governance, a project

of that nature would come to the board of directors. It did not at

the time. The decision was made locally.

So, I do think it is important for us to expand our competencies.

I think we have to do that thoughtfully, carefully, and with outside

input. I think in that case we did not get enough outside judgment

as to what we could have been doing down there, and how we could

have done it better.

But I do think we need to expand our competencies, and I can

assure you that, in our new standards and our processes, procedures, and policies, a project like that would not spring up on its

own locally. It would get very careful, thorough review and would

be designed, I am convinced, in a way that would not compromise

the kind of organization that we are.

46

The CHAIRMAN. Now, Mr. Miller, would you respond to my question to you?

Mr. MILLER. Certainly, Mr. Chairman. The slippage or the drift

of some nonprofits, some exempts, into for-profit areas has been a

concern, and continues to be a concern. Commissioner Everson

spoke about it on April 5th. He has spoken about it since.

Some of that mission drift, I think it is fair to say, is a good

thing. I think we need to foster some innovation in the way we do

business, in both the exempt sector and elsewhere.

Some of it is more problematic. I mean, the Commissioner speaks

about credit counseling as his most difficult situation, where we

have organizations masquerading as nonprofits, and that is an extreme, possibly. But joint ventures with for-profits is another example that is extremely commonplace today in the exempt sector, and

does cause us considerable concern.

In terms of what we could ask you to do, I would again go back

to the Commissioner’s testimony, which is, we would ask as we

move forward here to think about whether there are gaps in the

regulatory framework or with the statute. The law has not changed

in 30 years.

I think it is fair to say that the nonprofit sector has changed dramatically. We need to look at that. We need to ask whether we, as

the Service, have the tools we need. Are there additional things we

need?

The example I have used in my testimony is what I would say

here, which is, one of the issues is, are land trusts following up on

these easements? Well, in point of fact, if we check on that, it may

be an indicator that there is a problem, but it is not necessarily

going to go to the exemption of the organization.

So, the administration proposed, in their 2006 proposal, a penalty on the organization which would drive that sort of behavior,

which would ensure that, when we showed up and said you are not

following the law, that we could actually do something about it.

That is the second piece.

The third piece is what we have talked about, and that is the

transparency issue, enhancing as much transparency as we can in

the sector. Finally, I will go back to what Mr. Thomas was talking

about. The final question is, do we have the resources we need?

The Commissioner would be upset with me if I did not say, please

support the administration’s budget proposal. [Laughter.]

The CHAIRMAN. I have never met a bureaucracy that ever had

enough resources. [Laughter.]

Mr. MILLER. I think that is fair as well.

The CHAIRMAN. Yes.

A question on a different point to you, Mr. Miller. In your testimony you stated that the IRS is considering changes to Form 8283.

So, your thoughts on the staff’s recommendation that the IRS consider adopting rules similar to those adopted by the TNC? Specifically, should donors be required to complete the appraisal information on Form 8283 before submitting it to a charity for signature?

Mr. MILLER. I think it is something that we should look at. I do

not know whether we will end up doing it or not. It really goes to,

what is the donee’s responsibility? What are you expecting from the

donee?

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Originally, on the 8283, the reason for the donee’s signature was,

one, establish the fact of the gift, and two, the donee needed to be

reminded that if and when it subsequently sold the donated property within a 2-year period, that it had reporting obligations, and

to help us do some matching in that regard.

If we are moving to the point—I am not saying we should not—

where we are expecting the donee, the charity, to take a look at

what is on that form to give it an eyeball test, or to do more than

that, then it makes abundant good sense to modify the requirements.

Right now, it is not a requirement that someone who gives a parcel and hands over an 8283 for signature has a fully filled out

8283. That is something we will take a look at, but it really does

depend on the question of what you expect that charity to do.

The CHAIRMAN. So your caution is based upon too big of a burden

on the charity?

Mr. MILLER. I think that is one thing to think about, and exactly

what do I do as a charity when I receive something that has a

number on it, and some appraisal information, and I have no real

way of coming to a conclusion on that?

The CHAIRMAN. Mr. Wentworth, your testimony indicated that

the Land Trust Alliance is in the process of designing an accreditation program that could be used to improve easement monitoring

and enforcement by conservation organizations.

Please explain how that program might work and how it would

help ensure that the conservation purposes justifying the charitable deduction will not be diminished or will exist in perpetuity?

Mr. WENTWORTH. Thank you for that question. Senator Grassley,

again, I appreciate the good work of your committee, as we have

had a long dialogue about the appropriate role of private sector

leadership and accreditation. It is our strong feeling that the private sector is the right place for an accreditation program to be

rooted.

For the past 20 years, we have developed very detailed standards

and practices on a wide range of governance issues, including conflicts of interest and other issues addressed today, but specifically

to the work of land trusts, this very complicated legal instrument

called the conservation easement.

What an accreditation program would do for land trusts, for the

public, and perhaps as a new tool for the IRS, is it would take

these standards, which to date have been essentially voluntary—

we now, for the first time, are requiring all of our members to

adopt these new standards. But accreditation, for the first time,

would provide third-party verification of compliance. There are

some dozens of documents for proper tracking of easements, proper

design of an easement, records of annual monitoring. Mr. Zerbe’s

testimony raised concerns about the resources to enforce and regularly monitor those easements.

An accreditation program does not solve all the problems, but it

does provide a third-party oversight to confirm and get into the infrastructure of how a land trust is organizing its conservation easement business, and probably at a level of detail and at a breadth,

in looking at organizations, that the IRS would never contemplate.

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The CHAIRMAN. Now, to Mr. McCormick and Mr. Miller. First,

Mr. McCormick, with respect to TNC’s reporting of payments pursuant to emission credit agreements, we understand that TNC reports these payments as contribution revenues on Form 990, Line

1. However, TNC does not classify these contributions as charitable

contributions.

Could you tell me what other types of revenue TNC might include in the category of non-charitable contribution revenues?

For Mr. Miller, tell me if my understanding is correct that, in

general, non-charitable contribution revenues reported on Form

990, Line 1, are not required to be disclosed or explained elsewhere

on Form 990, including Schedule B. Maybe you should answer first,

Mr. Miller, before I go to Mr. McCormick.

Mr. MILLER. What I can say about Line 1 on the 990 is, it does

include all contributions, so that would include deductible and nondeductible. It does not include anything where there would be a

quid pro quo to the transaction, or at least you have to net that

out.

I do not know, and will have to get back to you in writing,

whether it is required or would not be required on the Schedule B.

If you look at the instructions on the Schedule B, they say you

need to explain Line 1. So, on its face, I cannot say. I think you

would have to include that, but that is asking me for a level of

specificity that I could be specifically incorrect on. So, I will have

to get back to you on that one.

The CHAIRMAN. Well, then answer in writing, would you please?

Mr. MILLER. All right.

[The information appears in the appendix on p. 224.]

The CHAIRMAN. Mr. McCormick?

Mr. MCCORMICK. We can get you much more detail, but the

kinds of things that would be reported as non-contribution revenue

would be—and this is very rare cases—fees that we derive from

providing some management services, and lease income derived

from some properties where we have a lessee in place. Those would

be the sorts of things that would be described.

The CHAIRMAN. Would you feel more comfortable answering in

writing?

Mr. MCCORMICK. Yes, I would. Off the top of my head, I just cannot give you the full list. We can provide that.

The CHAIRMAN. Yes.

[The information appears in the appendix on p. 209.]

The CHAIRMAN. My last question would be to Mr. Maybank. In

your written testimony, you make several suggestions to address

abuses in the area of conservation easements, particularly with respect to over-valuations, absence of donative intent, and cases involving developers and golf course easements.

You point out that these abuses affect State tax collections in addition to Federal tax benefits. Could you explain which of your suggested reforms would have the most immediate and dramatic impact on addressing abuses in that area?

Mr. MAYBANK. Well, in South Carolina several years ago, for example, Congress had outlawed charitable contributions for golf

courses. With that, there would be 125 million less charitable deductions taken by South Carolina residents.

49

So, clearly, one-third of the charitable deductions taken in South

Carolina for conservation easements were taken by golf course developers. So that would obviously have the greatest impact.

In terms of across the board, adopting language that basically

just, verbatim, quotes the Appraisal Institute book on use of subdivision development analysis, would have an immediate, acrossthe-board impact.

It would not limit contributors to basis, a long way away from

basis, but it would prohibit them from taking a deduction based

upon a hypothetical subdivision that nobody would ever envision

would be built.

The CHAIRMAN. In addition to thanking this panel, I would like

to give this summation. I think this hearing has been of very great

benefit to our committee. As you know, most hearings are not wellattended. This one was very well-attended, so there is a lot of interest in it. It has provided a detailed look at the realities of today’s

major charities, and will inform members and the public as we look

at reforms.

In addition, we have had a good discussion about the problems

and issues facing us as we look at ensuring that the tax code provisions that encourage donations of conservation easements are effective.

Senator Baucus and I have been in close discussions on this matter over a long period of time, as I indicated when I introduced the

first panel, which included two of our staff. So, I am hopeful that,

in the next few weeks, Senator Baucus and I will be able to propose reforms in the area of conservation easements.

Issues that we would look at, and that you maybe would want

to comment on with my staff in the future, would be valuations,

especially improving appraisals; adequate monitoring and enforcement of easements; ensuring conservation purposes of easements;

proper reporting and limitation on modifications of easements; accreditation of land trusts; and greater transparency in reporting by

land trusts. We thank you very much.

[Whereupon, at 12:42 p.m., the hearing was concluded.]

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