IRS to Audit Nature Conservancy From Inside

By Joe Stephens and David B. Ottaway
Washington Post Staff Writer

Saturday, January 17, 2004; Page A01

A team of IRS examiners will move into the global headquarters of the Nature Conservancy in Arlington to begin auditing the charity, the world's largest environmental organization.

A letter sent to the Conservancy by the Internal Revenue Service last month indicates that the audit will be of uncommon scope for a charity, tax specialists said. The memorandum proposes a preliminary meeting between four IRS examiners and the Conservancy's chief financial officer to discuss logistics, communications, telephone access, equipment and accommodations. The IRS will examine 2002 tax returns, the letter said.

"It is unusual," said former IRS commissioner Donald C. Alexander, now a private tax lawyer. "This is an extraordinary case. . . . It is an indication of a pretty strong audit."

Conservancy spokesman James R. Petterson said officials there have not been told the scope of the examination or its genesis. In a statement on the group's Web site, the Conservancy promised to cooperate fully and provide examiners with workspace, equipment and telephones "as needed."

An IRS spokesman declined to comment. Alexander and other specialists said such an audit could take a year or longer.

"If they go into General Motors, this is what they do," said attorney Sheldon Cohen, a former chief counsel and commissioner of the IRS. "This is a major audit, of consequence."

Live-in IRS auditors have become a fact of life at some Fortune 500 conglomerates but remain rare at nonprofit corporations, the specialists said. The charity has assets of more than $3 billion and ranks as the eighth largest nonprofit of any type in the nation.

The developments follow articles in The Washington Post over the past year that examined financial irregularities and conflicts of interest at the Conservancy. One story described alleged IRS code violations at a Conservancy project in Virginia, and another disclosed a dozen loans that the Conservancy extended to its employees. A $1.5 million home loan went to Conservancy board member and President Steven J. McCormick, who repaid the debt after he was questioned about it by a reporter.

The stories also reported that the Conservancy had repeatedly bought land, added some development restrictions, then resold the properties at reduced prices to its trustees and other supporters. The buyers made cash gifts to the Conservancy roughly equal to the difference in price, thereby qualifying for substantial tax deductions.

In the wake of the stories, the Conservancy banned a range of practices, saying it would no longer lend money to insiders, sell land to trustees or drill for oil on nature preserve land. The charity is conducting a broad internal review of its management practices and says more changes are expected.

The Senate Finance Committee began looking into the charity last year. Investigators have spent months sifting through internal Conservancy documents, debriefing whistle-blowers and weighing legislative reforms.

The IRS letter says auditors will examine the Conservancy's fiscal 2002 tax return, which was filed on what is known as an IRS Form 990. Past Conservancy tax returns contained misstatements and omissions.

For example, the Conservancy's 2001 tax return showed that the charity had lent the utility firm WEPCO, the Wisconsin Electric Power Co., $2.2 million. The lending was made in connection with a project aimed at protecting Central American forests and could have generated greenhouse-gas credits for the utility.

Conservancy officials later said the WEPCO loans totaled only $1.5 million. The rest of the money went to corporations whose names were mistakenly omitted from the filing, Conservancy Vice President Michael J. Coda said.

"That has no relation to reality," Coda said of the IRS Form 990 filing, during a June 2002 interview in which he acknowledged the errors.

Months later, the Conservancy filed its 2002 tax return -- which again showed that the loans to WEPCO totaled $2.2 million.

A specialist in nonprofit corporations who reviewed the Conservancy's tax returns described them as confounding.

"It stunned me," said the specialist, Peter Dobkin Hall, of Harvard University's Hauser Center for Nonprofit Organizations. "It's not exactly what I'd call a transparent organization.

"I find that very peculiar. I couldn't find out a damn thing about them. It was a brick wall."

Internal Conservancy documents show that the organization's auditor has complained about problems that could lead to IRS scrutiny or, in the words of one memo, to "the possibility of public exposure."

One internal audit report on a Conservancy project known as the Virginia Coast Reserve -- or VCR -- found numerous irregularities. Many financial transactions were improperly recorded, according to the March 2002 report, which is stamped "Confidential." The IRS was not told for years that the charity provided some employees with free housing and use of a car, lapses the report described as IRS violations.

One Conservancy contractor, identified in the report as a Virginia farmer, received payments though his wife, the report said.

"VCR negotiated [an employment contract] in the farmer's wife's name and issued an IRS Form 1099 [which reports miscellaneous income to the IRS] in her name and social number even though her husband performed all of the work under the contract," the report said. "VCR management wrote the contract in the wife's name so that the farmer could hide personal income."



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