March 03,2004

Senators Continue Inquiry Into The Nature Conservancy

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, today continued their independent review of The Nature Conservancy’s activities, transactions and practices. The senators sent a detailed letter asking questions about previously raised issues as well as new issues.

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

March 3, 2004

Mr. Steven J. McCormick
President and Chief Executive Officer
The Nature Conservancy
4245 North Fairfax Drive
Arlington, VA 22203-1606

Dear Mr. McCormick:

We appreciate the cooperation of The Nature Conservancy (TNC) with the FinanceCommittee’s independent review of TNC’s activities, transactions and practices. This letter is afollow-up regarding certain information the Finance Committee received from the first round ofquestions. Further, some questions (noted as such at the end of this letter) relate to new issues notraised in our earlier letter dated July 16, 2003.

I. Conservation Buyer Program

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

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

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

a. Did _____ make a charitable pledge (or charitable contribution) with respect to thetransaction for the 5,854 acres on or about December 22, 1997?
b. Why did _____ give back to TNC the land she had purchased two years before? Whydid she give back just part of it and not all of it?
c. Was there anything different about the land she kept as opposed to the land she gaveback such as an improvement of the land, or a special feature of the land retained (orgiven up)?
d. What did _____ end up paying for the land she retained? Was it approximately thesale price of $1,160,834?
e. Did _____ pay the $5,426,632 purchase price for the 27,133 acres? If not, what didshe pay?
f. Did _____ pay the $2,839,717 for the charitable pledge she made? If not, how muchdid she pay? When were payments made on the pledge?
g. Did _____ hold a position with TNC as a director, officer or employee? If so, discussher position, her term with TNC, whether she continues to have a relationship withTNC, and, if so, in what capacity.
h. Attach all correspondence and other communications, including e-mail and anymemos that relate to the purchase of Davis Mountains property by _____.
i. Please provide a copy of the January 31, 1992, opinion letter to _____ from Steptoe& Johnson, referred to in the January 29, 1997, letter from _____ to _____ of Steptoe& Johnson, regarding charitable contribution deductions for premiums paid for realproperty and donations of appreciated stock to pay the premium portion of thepurchase price.

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

a. The value of the conservation easement was appraised at $1,594,000.00 as of October28, 1999. When was this information conveyed to the TNC and the Dougherty’s?
b. Did the _____ donate part of the land that now makes up Mashomack Preserve? Ifso, how much land and what percentage of the total? What was the then value of thegift?
c. If yes to question b, above, describe the nature and environmental importanceof the Mashomack Preserve. Is TNC the owner/trustee?
d. The memo of August 6, 1999, from the TNC counsel to Jim Dougherty suggests thatDougherty may be required to pay interest via the charitable pledge if the pledge isnot fulfilled by a certain date. Did the Dougherty charitable pledge that was actuallymade to TNC consist of a portion that may be considered attributable to an interestelement? If so, please discuss in detail.
e. Did any of the sellers of the Thompson Hill property take a charitable deduction fora bargain sale of the Thompson Hill property? If so, please discuss and attach anyrelevant documents.
f. State the date and the amounts actually paid and/or to be paid by the Doughertyspursuant to the charitable pledge with TNC.
g. Did TNC market or offer for sale the Thompson Hill property to any persons otherthan the Doughertys. If so, please discuss in detail. In this regard, discuss the letterof TNC dated February 14, 2000, that stated that there were several interestedconservation buyers to the Thompson Hill property. Were other buyers contactedabout the property by TNC? Please provide any relevant documents relating to otherbuyers or any other offers.
h. If TNC did not actively market the property to potential purchasers other than theDoughertys, why did it fail to do so? Discuss in detail.
i. Was it TNC or the Doughertys that knew of the valuation expert and engaged hisservices for the appraisal of the conservation easement? Is there documentation thatconfirms or supports your answer?
j. Are there any other documents or other files in TNC’s possession relating toconversation or correspondence that TNC had with Dougherty, especially regardingDougherty’s intentions to make a charitable contribution? Does TNC disagree withDougherty’s statements regarding his intent that were contained in the Postarticle? Please provide copies of the cancelled checks issued by Dougherty to TNCwith respect to shi transaction.

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

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

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

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

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

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

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

II. Government— Transactions Regarding Land Sales

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

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

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

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

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

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

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

a. The 100 largest property dispositions (based on FMV of property transferred) byTNC of properties that were transferred to State and local governments (of the 7039transactions reported on the schedules TNC has already provided).
b. If the following are not included in your response to the preceding question, providesimilar information pertaining to Virginia Coast Reserve, VA (Nos. 416-420);Virginia Eastern Shore Megasite, VA (Nos. 421-423); Herring Creek Farms, MA(Nos. 604-607); Mashomack (Shelter Island), NY (Nos. 1027-28); Kentucky RiverPalisades, KY (Nos. 3617-3623); and Davis Mountains, TX (No. 5856). Is there anyconnection between the last four items and the conservation buyer transactions –related parties detailed in your answer to question 1 of the July 16, 2003 letter? If so,please discuss.

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

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

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

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

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

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

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

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

III. Trade Land

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

2. Why was revenue from the sale of trade lands reported on the 2001 Form 990, Part VII, line93d, but no revenue was reported for sale of trade lands on that same line for Form 990 for 1996through 2000.

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

IV. Loans

V. Internal Reports, Audits, and Studies

VI. Easements

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

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

3. State in detail your practices, policies, and procedures for monitoring landowner compliancewith the terms of an easement granted to TNC. Include in your answer how frequently you inspectthe property or contact the landowner. Does your policy on monitoring the easement vary withrespect to the of the property subject to easement or the importance of the easement forconservation of the environment? Attach copies of TNC reports to monitor conservation easementsfor the ten largest and the ten smallest conservation easement properties in each of Ohio andCalifornia since 1998.

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

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

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

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

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

9. Please respond to assertions or concerns regarding conservation easements as follows: (i)How many easements has TNC written off as unenforceable or of little value? (ii) Please providea list of any such write-offs including the name of the owner of the property subject to the easementand the location of the property. (iii) Does TNC fail to enforce easements where it is aware ofviolations because of the cost of litigation relative to the worth of the easement in question? Pleasediscuss your answer. (iv) Is TNC concerned that over time, with change in ownership, new ownersnot having conservation goals may violate easements in large numbers? Please discuss. (v) Howdoes TNC defend its conservation easements on small tracts (from less than one acre to up to 2 or3 acres) where monitoring and enforcement of easements is more difficult economically? Pleasediscuss.

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

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

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

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

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

15. Your response to our letter of July 16, 2003, included a chart of “Conservation EasementPurchases and Donations” greater than $1 million. Item 14 of the chart lists a site name of “SanJoaquin Hills Portfolio” with a listed fair market value of the easement of $2,016,100. Item 15 of thechart, the same site, lists a fair market value of the easement of $16,376,300. Item 16, the same site,lists the fair market value of $17,685,000. Item 17, the same site, list the fair market value of theeasement as $89,415,400. All four easements were provided by the same company. As to all fouritems please provide all information in your files relating to these transactions including, but notlimited to, appraisals, identification of the grantor, identification of the property, the charitabledonation claimed, a copy of forms 8283, copy of deeds, copy of e-mail, letters, memos, and providea narrative description of the transfers and the environmental purpose and significance of theproperty.

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

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

VII. Board Membership and Organization

VIII. Executive Compensation

IX. President’s Discretionary Fund

X. Major Donations, Sales, Exchanges of Land

XI. Valuation

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

XII. Related Organizations

1. The Report to Management for the year ended June 30, 2002, states that in several instances,separately created legal entities or relationships that may be controlled by TNC were created withoutthe prior approval of the Headquarters Office, in violation of the organization’s policies andprocedures. Please provide any documentation pertaining to your response or follow-up to therecommendation made in the Report to Management for the year ended June 30, 2002, that you“enforce policies and procedures for identifying related parties, monitoring the status of therelationships, and receiving current financial information to properly account for these entities.”

2. Conservation Beef, LLC (CBL):
a. Please provide the LLC’s organizational documents includingagreements, and all amendments thereto.
b. Explain the parties’ agreement regarding capital, profit, and loss allocations. Whyis TNC only a 50% owner of capital, profits and losses, when to date it hascontributed 72% of the capital to CBL? Why hasn’t AWF made any capitalcontributions to CBL since 2000?
c. Please provide a copy of the IRS determination letter for AWF.
d. Please provide a copy of AWF’s most recent Form 990.
e. How did you select AWF as your co-venturer for this project?
f. For fiscal year ended 2000, line 20 other deductions on Form 1065, explain “lossallocation to exempt purposes” in the amount of $372,512.
g. Please provide a copy of CBL’s 2003 Form 1065, when available. Please providecopies of CBL’s financial statements for 1999 through 2002.
h. Who are the participants in CBL’s retirement plan? Why did contributions to the planincrease from $8,661 in 2000 to $16,387 in 2002?
i. Who provided the $40,000 loan to CBL in 2002? Was TNC a lender orguarantor?
j. Explain in detail the LLC’s activities and mission, and explain how they substantiallyfurther TNC’s exempt purposes.
k. The article in the Washington Post describes the use of the brand name“Conservation Beef” by TNC, a brand name that is co-owned by TNC and theArtemis Wildlife Foundation. The Post article provides, in part that the programwas used to bolster imperiled cattle ranches, and, along the way, entice ranchers intoenvironmentally friendly grazing practices.

· Provide a general description of the Program involving use of thebrand name “Conservation Beef.” Include in your answer whetherTNC realized any profit or loss from this program for the periodbeginning in 1999, and if so, how much profit or loss was realizedeach year?

· Attach copies of the contracts with all interested parties such as, theranchers, the co-owner(s), the marketing agent. Attach copies offinancial reports beginning with 1999.

· How did TNC report its distributable share of losses from thisprogram or entity on its Form 990 or 990T for the years beginning in1999?

3. Nature Serve (Formerly the Association for Biodiversity Information) (ABI):

a. Please provide a copy of the July 1, 1999, agreement between ABI and TNC, and anysubsequent amendments thereto.
b. Please provide a copy of ABI’s governing instruments and organizationaldocuments, and amendments thereto.
c. Please provide a copy of ABI’s determination letter.
d. Did TNC report its fee income from its ABI agreement dated July 1, 1999, asunrelated business income? If not, why not?
e. Please provide a copy of the TNC line of credit arrangement with ABI (see note 2 ofthe 2000 financial statements).
f. Explain how TNC’s agreement with ABI substantially furthers TNC’s exemptpurposes.
g. What was the purpose of TNC’s contributions to ABI in the annual amounts of$966,264; $5,395,311; and $4,690,800 for 1999, 2000, and 2001, respectively?
h. Why did the organization respond to Questions 84a and 84b as “N/A” in its Forms990s (regarding soliciting contributions)?
i. Describe any affiliations with the independent contractors listed on Schedule A ofForm 990, and specific information regarding the nature of services rendered by thecontractors.
j. Why did the number of employees increase from 4 in 1999 to 91 in 2000?
k. Explain why the data base service fees received in 2000 ($75,488) and 2001($168,191) are not unrelated business income to ABI? NOTE: Required explanationwas not provided on Form 990, Part VIII Schedule for 2000 or 2001.

l. Provide a copy of the organization’s financial statement for 2002.

4. Eastern Shore Enterprises, LLC

a. Certain persons other than TNC received profits or capital interests in EasternShore Enterprises LLC. Describe the terms and conditions under which thefollowing persons received LLC interests, and explain whether such persons weretreated by the LLC as having received a partnership capital or profits interest otherthan in a tax-free transaction: _____.
b. Did any other persons ever hold interests in the LLC?
c. Please provide copies of any agreements relating to the acquisition by _____of LLC interests.
d. Please provide corrected partnership profit, loss, and capital percentage informationfor 1999 (K-1s total to more than 100% capital interests).
e. Provide detail of “other deductions” for each of 2000 through 2002; there is nobreakdown in the return.
f. Describe the relationship between Eastern Shore Enterprises LLC andVirginia Eastern Shore Sustainable Development Corporation, beginning with theLLC’s formation.
g. Did any members other than TNC ever make capital contributions to the LLC?

5. Virginia Eastern Shore Sustainable Development Corporation (VESC)

a. Who were the eight shareholders of VESC, and what were their respective holdingsat all times they were shareholders? Who was offered an opportunity to participateas a shareholder of VESC?
b. Please provide copies all shareholder agreements, subscription agreements, andorganizational instruments, including amendments thereto.
c. Who provided shareholder capital to the corporation and at what times and amounts?
d. Please provide copies of the loan documents pertaining to the corporation’s longtermdebt, and describe the organization’s relationships with the following lenders,The Ford Foundation, the Mary Flagler Cary Charitable Trust, and the Lincoln-LaneFoundation.
e. Please provide copies of any royalty agreements pursuant to which the organizationincurred royalty expenses.
f. Please provide copies of Forms 1120 for 1995 through 1997.
g. Please provide a copy of any notes receivable from TNC as obligor, to thecorporation, as holder (e.g., $80,000 relating to the Mill Creek Farm landtransaction). Confirm all debt owed by TNC was paid on or before thecorporation’s liquidation in late 1999 and early 2000.
h. Describe the corporation’s “investment in Waterside Capital” in the amountof $50,000. Describe any relationship between TNC or VESC and Waterside Capitaland its principals.
i. Please provide a list of shareholder capital contributions by date, shareholder,and amount, from 1995 through 1999. Describe any corresponding changes inshareholder ownership percentages.
j. The 1999 Form 1120 reports debt forgiveness income of $798,775. Who heldthe debt, and describe the negotiations that took place to ultimately cancel the debtwithout repayment.
k. Describe the corporation’s investments in real estate.
l. State which shareholders were Class A and Class B shareholders. Describethe differences in rights and obligations between the two classes.
m. What was TNC’s role in organizing the corporation?
n. Please provide a copy of the corporation’s Board resolution dated October 1999 toliquidate the company.

6. Adirondack Land Trust (ALT)

a. Please provide a copy of the Memorandum of Understanding dated October 3, 1988,between TNC and ALT, and any amendments thereto. Why did TNC enter into thisarrangement, and why does it continue to be involved in this relationship?
b. Why are all ALT employees also employees of TNC?


a. Describe the purposes and activities of STM from its inception in 1993 through thepresent.
b. STM has two members: TNC (34.6762%), and Sumner T. McKnight Foundation(65.3238%). What is the relationship between TNC and the McKnight Foundation?
c. Explain STM’s relationship to the Virginia East Coast Sustainable DevelopmentCorporation or its projects.

8. The Forest Bank, LLC

a. Please provide a copy of the LLC’s Board resolution authorizing liquidationof the LLC, and information regarding the payment of liabilities and the distributionof the LLC’s assets upon liquidation.
b. Please provide a copy of the SEC registration materials pertaining to registration ofthe LLC’s membership interests with the SEC.
c. Please provide a copy of the organization’s organizational documents and governinginstruments, including amendments thereto.
d. Please provide a copy of any subscription agreements or materials pertaining to theLLC membership interests.
e. Why was the LLC organized in 2001?
f. Why was the LLC liquidated in November 2002?
g. Please provide a description of the LLC’s legal expenses of $186,272.88 in 2001.
h. The 2001 Form K-1 lists TNC as the 100% owner. Why did TNC and the LLC takethe position that this was a partnership for Federal income tax purposes, rather thanan association taxable as a corporation or a disregarded entity?

9. Please provide a list of lawyers, accountants, and other outside counsel who have providedtax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other partiesregarding TNC’s relationships with, and activities conducted by, TNC’s related organizations; pleaseprovide a copy of such opinions or written advice.

VIII. Travel, Conferences, Meetings, and Other

XIV. Transactions with Board Members

1. Discuss in detail all the land and service transactions between TNC and Georgia PacificCorp., International Paper Co., and Orvis Services Co., or their subsidiaries, while an executive ofthese companies sat on TNC’s Board of Governors or Leadership Council. In discussing youranswer, include the following:

a. Identify the period that the executive of each company sat on the TNC Board ofGovernors or Leadership Council.
b. Identify each particular transaction with each company in a gross amount of over$200,000.
c. State whether TNC realized a gain or a loss on each transaction with such companiesidentified in your answer to the preceding question.
d. Describe TNC’s Leadership Council and discuss its official function with TNC.

2. Identify similar large transactions with other corporations having an executive serving ofTNC’s Board of Governors at the time of the transaction, beginning in 1998 to the present.

3. Please provide a list of lawyers, accountants and other outside counsel who have providedtax opinions or other tax advice (including opinions or advice regarding compliance withrelevant conflicts of interests requirements) to TNC with respect to the consequences to TNCor other parties regarding transactions between TNC and its board members, trustees,officers, executives or local chapter officials; please provide a copy of such opinions orwritten advice.

XV. Conservation – Texas Oil and Gas Drilling

XVI. Litigation

XVII. Grants

XVIII. Cash Donations Greater than $50,000: Individual donors from whom TNC haspurchased land or interests in land, from FY 98 through FY 2002Has TNC ever entered into agreements with donors that provided TNC will indemnify orreimburse the donor for lost tax benefits from the loss or reduction of the charitablecontribution deduction claimed by the donor? If so, please provide a copy of each suchagreement.

New Questions:

The following questions are new questions generated by the Finance Committeeinvestigation of TNC to date.

I. Functionally Related Revenue

1. List each specific and separate activity or program that generates program service revenueunder the broad heading “Activity Fees,” “Contract Fees,” and “Fees and Contracts fromGovernment Agencies.” (from statement 23 attached to TNC’s Form 990 for 2000 and 2001). Then,as to each item, explain in detail why such revenue is characterized as “Related or exempt functionincome.” Include in your answer a description of the types of services provided by TNC to otherparties. Explain how TNC complies with the instructions to Form 990 for completion of Part VIIand Part VIII of its Form 990 for 2001 and earlier years in that statement 23 failed to provide detailfor each specific type of revenue received and failed to itemize the specific types of revenue. See 990instructions, the example under Part VIII, page 32.

2. Please provide a list of lawyers, accountants and other outside counsel who have providedtax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other partiesregarding the activities described in the immediately preceding question (whether with respect toactual or hypothetical transactions); please provide a copy of such opinions or written advice.

3. Discuss whether for-profit businesses engage in some of the same activities asdescribed in response to the preceding question 4. In particular, address your answer toactivities under 93b and 93g of statement 23 attached to Form 990 for 2001.

II. Other Questions Regarding Revenues, Expenses and Form 990 Reported Items

1. The fiscal years 1992 through 1994 report no revenues from government contracts. Pleaseexplain what happened in 1995 that caused TNC to begin reporting government contract revenues.

2. Explain the Form 990 (2001) Statement 24 explanation regarding Cisco Systems, Inc./Mr.Morgridge transactions, and how the arrangement resulted in a 76% discount to TNC.

3. Explain TNC’s arrangement with General Motors described in the Form 990 (2001)Statement 24, p. 2 of 2, regarding the greenhouse gas mitigation offsets. Please provide a copy ofTNC’s agreement with General Motors.

4. Please describe the “insurance proceeds” revenues reported as other revenues on Form 990,Part VII, line 103, and the basis for exclusion from UBI.

5. Please demonstrate how the tax-exempt bond financings reported on Statement 15 comply,and have at all times complied, with the Federal tax-exempt bond laws.

6. Provide a description of the contribution of the conservation easement by SMI to TNC thatis reported on Schedule 24, Form 990 (2000), with regard to Mr. Ian Cumming.

III. Excess Benefit Transaction Issues

1. You stated in your answer to question 8 of our prior letter that the Board of Governorsapproves the compensation recommendation for the President/CEO in the January meeting. Sincethe compensation is effective for January 1, the compensation arrangement is not approved “inadvance” (Reg. 53.4958-6T(a)(1)). Please comment. Attach copies of the minutes of January Boardof Governors meetings approving the compensation of the President/CEO for the prior three years.

2. Were any loans made to any TNC officers, employees, or members of the Board ofGovernors treated as an economic benefit to the recipient as consideration for the performance ofservices where TNC clearly indicated its intent to treat the benefit as compensation within themeaning of section 53.4958-4T(c) of the regulations? If so, please discuss in detail and providesupporting documents.

3. In connection with your response to question 4 of our prior letter, state the title and salary of_____ and indicate your view as to whether he is treated as a “disqualified person” within themeaning of section 53.4958-3T of the regulations. Provide a narrative discussion of the details ofthe shared appreciation note and attach a copy. Indicate the value of the property on purchase andattach a copy of the appraisal. Provide the employment contract and correspondence and othercommunications or memos describing his salary and job description.

4. TNC’s Internal Auditors Report as of November 30, 2001, with a release date of February27, 2002 (“Report”), discusses, on page 4, two independent contractors who may be moreappropriately treated as employees of TNC. The Report further indicated that one of the contractorsreceived payments from TNC over 11 months totaling $350,000 and that the contractor, if deemedan “employee” by the IRS would qualify as an “insider” by virtue of her position with TNC. (a)Identify the person; (b) state how long she has been associated with TNC and whether she continuesto be associated with TNC as a contractor or employee; (c) indicate the period during which sheserved as a “contractor” with TNC; (d) state the amount of payments made to her over this period;(e) describe her duties, responsibilities and obligations to TNC in detail under the “contract” withTNC; (e) attach a copy of the contract(s) between her and TNC; and (f) attach all correspondenceand other communication or memos relating to her relationship to TNC as a contractor or as anemployee, including letters relating to her continued retention with TNC as either an employee orcontractor as well as her termination.

5. a. Further, with respect to the “Report” described in the preceding question, comment on theassertions in the Report that, if deemed as an employee, she would qualify as an “insider” and hercompensation could be viewed as excessive, thus possibly violating intermediate sanctions rules. b.Rev. Rul. 87-41, 1987-1 C.B. 296, provides a discussion of the employee – independent contractorissue. The Ruling lists 20 factors to be taken into consideration. Discuss each factor in connectionwith the “contactor” that is the subject of the preceding question. In addition to or as part of youranswer to the preceding questions, please address the following: It is our understanding that sheperformed her work at TNC’s headquarters in Arlington, Virginia. Further, it is our understandingthat her activities on behalf of TNC included hiring and supervising employees. It is ourunderstanding that she not only had a long-term relationship with TNC as a contractor but she alsohad previously been an employee of TNC. Please comment and discuss in detail. c. Please provideall information in TNC’s possession regarding this audit particularly in regards to filings with theIRS. d. Please explain in detail what actions TNC’s board took in response to this audit. e. Pleaseexplain the employment history of this individual. Specifically, the timing and amount of paymentsmade to this individual either directly or indirectly after the audit.

6. Submit a copy of the promissory note and mortgage signed by Mr. McCormick with respectto the loan to him by TNC dated May 22, 2002.

7. Did Mr. McCormick report the TNC loan to him as income on his Form 1040 prior to thecommencement of an IRS examination of TNC?

8. Please provide a list of lawyers, accountants, and other outside counsel who have providedtax opinions or other tax advice to TNC with respect to the tax consequences to TNC or other partiesregarding private benefit, private inurement, or excess benefit transaction tax issues (whether withrespect to actual or hypothetical transactions); please provide a copy of such opinions or writtenadvice.

Thank you for your time and assistance on this matter. We would ask that the answers beprovided in thirty days.

Cordially yours,

Charles E. Grassley 

Max Baucus
Ranking Member