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The Internal Revenue Service announced yesterday that it is cracking
down on improper tax deductions taken by people who give real estate and
cash to environmental groups, warning that taxpayers could face
penalties and charities could lose their tax-exempt status.

The IRS is specifically targeting gifts of "conservation easements" --
deed restrictions that limit some types of real estate development. The
easements have become the environmental movement's key tool for
preserving fragile ecosystems and millions of acres of open space.

The IRS is focusing on easements that have questionable public benefit
or have been manipulated to generate inflated deductions.

"We've uncovered numerous instances where the tax benefits of preserving
open spaces and historic buildings have been twisted for inappropriate
individual benefit," IRS Commissioner Mark W. Everson said in a
statement. "Taxpayers who want to game the system and the charities that
assist them will be called to account."

The IRS warned that it intends to levy penalties on charity executives
and board members who collect or knowingly help secure improper
deductions claimed in connection with such transactions.

The announcement did not name individual taxpayers or charities. It
comes as the IRS is conducting a major audit of the Arlington-based
Nature Conservancy, the world's largest environmental organization.

The Washington Post reported last year that the Conservancy had
repeatedly bought land, added some development restrictions, and 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 -- just as if they had given money to their local charity.

The Conservancy said the sales prices were proper because the
development restrictions reduced the market value of the tracts. In the
wake of the news articles, however, the Conservancy announced that it
would no longer conduct such deals with its board members and trustees.

Sheldon Cohen, a former IRS commissioner now working as a private lawyer
in Washington, called yesterday's announcement an unusually strong
action. He said, "It is pretty obvious who it is aimed at."

Conservancy spokesman James Petterson said yesterday that executives
there were studying the IRS action.

"The Nature Conservancy over the last decade has received several legal
opinions reflecting other interpretations of the law," Petterson said.
"We are reviewing what the IRS issued, assessing its impact on our
programs and determining appropriate actions."

In a statement yesterday, the IRS said that it "intends to disallow" and
may assess penalties for improper tax deductions claimed for gifts of
easements to charities. Easements that serve no conservation purpose and
create no significant public benefit do not qualify for tax deductions,
the agency said. Some taxpayers have claimed deductions for amounts that
exceed the value of the restrictions placed on their land, the IRS added.

The agency also said that in "appropriate cases" it may treat cash
payments made to charities coincident with land deals as part of the
purchase price -- not as tax-deductible charitable gifts.

"The IRS may impose penalties on promoters, appraisers and other persons
involved in these transactions," the release said. "The IRS may
challenge the tax-exempt status of the charitable organization, based on
the organization's operation for . . . private benefit."

The IRS said one of the agency's top priorities now is fighting abusive
tax-deduction schemes involving nonprofit organizations.

The Senate Finance Committee began investigating easement transactions
involving the Conservancy and other charities last year. Committee
Chairman Charles E. Grassley (R-Iowa) said the investigation's findings
so far demand "a serious rethinking" of tax laws and stronger
enforcement by the IRS.

"The IRS is right to subject these sweetheart deals, often to insiders,
to hard scrutiny," Grassley said yesterday. "I'm encouraged that the IRS
is willing to challenge the tax-exempt status of charitable
organizations that engage in shady practices in land-donation
transactions. Shutting down the bad actors will be a strong signal that
'business as usual' has been put out of business.

"Land donated for a conservation purpose should help the environment or
create open space," he said. "All too often, these conservation
donations appear to do very little for the environment and only help
fill the bank accounts of donors and middlemen."

Rand Wentworth, president of the Land Trust Alliance, called the IRS
action "really good news for legitimate charities." The group represents
1,260 nonprofit land banks, many of which hold conservation easements.

"This will help restore the integrity of good land trusts," Wentworth said.

Stephen J. Small, a former IRS lawyer and a leading expert on easements,
said he is pleased the agency is targeting appraisers and promoters of
improper tax deals. "In this field, this is new," he said. "I think
that's great."

Land trusts hold more than 12,000 conservation easements nationwide,
though not all of them generate tax deductions for the owners. The IRS
said it has no figures for the total value of tax deductions generated
by easements.