June 08,2005

Chairman Chuck Grassley Committee on Finance Hearing, “The Tax Code and Land Conservation: Report on Investigations and Proposals for Reform”

Opening Statement of Chairman Chuck Grassley
Committee on Finance Hearing, “The Tax Code and Land Conservation:
Report on Investigations and Proposals for Reform”
Wednesday, June 8, 2005

Today, the Finance Committee will hear testimony on two very significant reports. The firstis the report on The Nature Conservancy (TNC) prepared by the staff of the Committee. The secondreport, prepared by the Department of Interior’s Inspector General, discusses the Department ofInterior’s proposed purchase of mineral rights in Florida from a private organization. The report onThe Nature Conservancy provides the Committee and the public a window into the workings of notjust The Nature Conservancy but large charities in general. The report and attached documents showthat The Nature Conservancy at times participated in tax planning activities affecting it and itsdonors that can result in substantial tax benefits.

Charities have gone far beyond raising money by just having Santa ring a bell. Santa now isoften engaging some of our nation’s top tax lawyers and accountants with the sharpest pencils. Theexhibit here is a copy of a document, which I am submitting for the record, used by TNC indiscussions with potential donors involving a “Bargain Sale” to The Nature Conservancy. In thisdocument, the charitable deduction is based on the slippery slope of the donor’s own appraisal. Thekicker is that the calculation shows that a better deal can be had using the “Plus Value of Tax Shelterfrom charitable contributions.” I’m troubled enough when I see the words “tax shelter” appearingin tax planning documents of for-profit corporations. When I see “tax shelter” being used indocuments of charities I really get worried. But, not only are charities engaging in sophisticated taxplanning, they are also at times engaging in complex transactions and joint ventures. The staff reportdiscusses, and educates us on, The Nature Conservancy’s actions in this area.

While doing such deals are not in of themselves good or bad, they raise issues about whethercharities are acting within the laws governing them as Congress intended and within a manner thatjustifies their tax-exempt status to the public. There is also a very real concern, highlighted by thestaff report, that complex transactions can shift a charity’s focus far away from their areas ofcompetency while potentially wasting contributors’ dollars. These concerns are well articulated ina memorandum from TNC’s Director of Internal Audit to Mr. McCormick, President of TNC, whowill be testifying today. The report, which I am also submitting for the record, primarily talks abouta lawsuit involving TNC’s oil and gas exploration activities in Galveston, Texas. The report states:“TNC Texas’ attempt to balance the welfare of the prairie chickens with gas/oil exploration at theGalveston 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, theConservancy’s good reputation could be badly damaged.”

It goes without saying that this is not what should be happening at The Nature Conservancyor any charity, for that matter. The Nature Conservancy and all charities should be operating witha view that all transactions and activities will withstand public scrutiny. I will come back to thisInternal audit memorandum in my questions but I strongly encourage everyone to read it closely. Itprovides a great deal of caution of the dangers to charities when they operate outside of their areasof core competency and values.

While the report discusses at length areas of concern, I should also note that I recognize andappreciate that The Nature Conservancy has engaged in significant reforms since the FinanceCommittee announced its investigations. While there are still improvements that can be made, Iappreciate the leadership of Mr. McCormick and Mr. Paulsen on behalf of The Nature Conservancy.Reforms their organization has undertaken are informative as the Finance Committee considerschanges in the law, particularly in the area of land and easement donation as well as governance.

Now, for the Inspector General’s report. The country is well served by having Mr. Devaneyserving at the Department of Interior. He is without question one of the finest IG’s we’ve had overthe years. It is because of his excellent work, and that of his staff, that we have had him before theCommittee several times in recent years. This is the second report I have recently received onproblems of land transactions at the Department of Interior. To be candid, Mr. Devaney, I thoughtyou had already found the bottom of the cesspool when it comes to land transactions at Interior, butthis new report shows that it is even deeper than we first thought. It appears that since the mid-1990s, the Department of Interior has basically thrown out the rules book when it comes to this dealfor Florida mineral rights. If that wasn’t bad enough, I would note that once again we have anotherfederal agency basically undermining the work of the Department of Treasury and IRS. The IGreports in detail about the Interior officials happily and ignorantly signing off on whatever taxplanning is requested by the private party.

We’ve seen similar problems with the Department of Transportation in the LILO/SILOtransactions, the SEC and other agencies on fines and penalties and the Department of Interior onfaçade easements. I would hope that the administration recognizes the need to make sure that the restof the government doesn’t make the IRS’ tough job even tougher. I thank you all for being heretoday to present these two sweeping reports and also thank the enormous number of staff who madethese reports possible.

Closing Statement of Chairman Grassley

This hearing has been of great benefit to the committee. It has provided a detailed look atthe realities of today’s major charities and will inform members and the public as we considerreforms. In addition, we have had a good discussion about the problems and issues facing us as welook at ensuring that the tax code provisions that encourage donations of conservation easements areeffective. Senator Baucus and I have been in close discussions on this matter, and I’m hopeful thatin the next few weeks we will be able to propose reforms in the area of conservation easements.

Issues that we will look at in such reforms include: valuation, especially improving appraisals;adequate monitoring and enforcement of easements; ensuring conservation purposes of easements;proper reporting and limitations on modifications of easements; accreditation of land trusts; andgreater transparency and reporting by land trusts.