An investigation by the Committee on Finance for the United States Senate has thrust The Nature Conservancy and its conservation buyer program under a spotlight, and along with it the record $64 million sale of the Herring Creek Farm in Edgartown.

The Conservancy bought Herring Creek Farm from owners Neil and Monte Wallace four years ago, in a complicated transaction that ended 11 years of legal battles with the town and the Martha's Vineyard Commission. The $64 million paid for 215 acres of Great Plains farmland still stands as the highest single price paid for a piece of real estate on the Vineyard.

But following the probe by the Senate Committee on Finance, an array of parties involved in the transaction have been questioned by the Internal Revenue Service for possible tax code violations.

The Senate probe was launched in July 2003 shortly after The Washington Post published a series of stories about the Conservancy. The series examined an array of practices at the agency, including the conservation buyer program and the 2001 Herring Creek Farm acquisition. Held up at the time as a high-profile model for the conservation buyer program, the sale involved the purchase of the farm by the Conservancy and a series of subsequent transfers that resulted in a limited subdivision and four separate owners. The coastal farm includes a large tract of globally rare sandplain grassland, named as one of the Last Forty Great Places on Earth in a Conservancy initiative 12 years ago.

In simple terms, the Conservancy paid the Wallaces $64 million for the 215-acre farm. But the cash for the sale came from a variety of sources, including the Wallaces - who donated $18.5 million to the Conservancy which was then paid back to them - plus a series of private buyers and the FARM Institute, then a fledgling nonprofit farm education group.

The Senate Committee on Finance issued its report in June of this year. A 30-page section of the report is devoted to the Herring Creek Farm transaction, along with another hundred-plus pages of appendixed information including confidential letters that were exchanged among numerous parties in the sale.

The report explores exhaustively whether the primary purpose of the transactions was to advance the goals of conservation or to provide a tax break for the various parties involved. At many points, it concludes that the answer is at best unclear.

The report also makes public for the first time details that were kept carefully under wraps at the time of the purchase. Among other things, the report shows:

* The Wallaces had obtained an appraisal for $78 million on the property, qualifying the $64 million transaction as a bargain sale.

* The descendants of Benjamin Cohan, who shared the rights to a 1969 covenant restricting any sale of the property until the year 2010, were paid $11.9 million by the Conservancy to release their rights to the covenant. The Cohan descendants also achieved a bargain sale because they had commissioned an appraisal that valued the covenant at $14 million.

* Charitable deductions claimed as a result of the sale included $2.068 million by the Cohan descendants and another $14 million by the Wallaces for four transactions.

The Senate report made special note of the fact that no charitable deductions were claimed for conservation restrictions.

"The staff did not find that any party to this transaction sought a charitable contribution deduction for the grant of a conservation easement. The filings suggest . . . This is the type of transaction that may lead to the circumvention of [statutory] requirements," the report found.

The report also concluded:

"The . . . terms of the purchase agreement between the Wallace family and TNC provided considerable flexibility to the Wallaces to determine the ultimate purchase price for the property, and how much was to be treated as a contribution by the Wallaces. . . .

"This flexibility may have allowed the Wallaces to achieve optimal tax benefits with respect to the transaction."

Correspondence between attorneys on both sides reveals a nearly impenetrable web of legal work that took place to arrange the transaction. In January 2001 Hans Giso 3rd, a partner at Choate, Hall & Stewart in Boston and an attorney for The Nature Conservancy, wrote a letter to a group of attorneys, including Stuart Johnson, a chief spokesman and attorney for the Wallaces, framing the deal.

"Let me begin by saying that The Nature Conservancy . . . understands the desire of the sellers to maximize the gift component of the contemplated transaction involving Herring Creek Farm . . . and is willing to cooperate with the sellers to the greatest extent possible in this regard, subject obviously to the constraints imposed upon TNC by the IRS . . ." Mr. Giso wrote. The letter continued:

"At the same time, TNC . . . would like the final form of this agreement to have as few moving parts as possible so that the final agreement between parties looks, feels and smells like a real purchase and sale agreement."

The Herring Creek Farm story dates back to 1990 when the Wallaces first filed plans for a $55 million upscale subdivision with 54 houses and a private beach club. The plan was rejected by the MVC, and the Wallaces launched an aggressive and expensive legal battle against the town and the commission that lasted for more than a decade. They lost at every turn - including a landmark challenge to three-acre zoning in the town of Edgartown. In the end another subdivision plan was filed - this time for 33 lots. The plan was approved by the commission by one vote, after spokesmen for the Wallaces worked hard behind the scenes to convince select MVC members that the subdivision was intended to create a tax benefit for the Wallaces by increasing the value of the property, but in fact would never be built.

The Senate Finance Committee review is expected to lead to changes in the federal tax code for conservation restrictions, and has already precipitated changes in policy at the Conservancy.

The outcome of the investigation by the IRS is not yet known. Tax code violations can include either civil or criminal penalties.

Meanwhile on the Vineyard the conservation buyer program, once heralded as a model for the future for the land trust movement, has ground to a halt.

"The Senate finance review has chilled everything," said Tom Chase, eastern Massachusetts program director for the Conservancy whose home and office are on the Vineyard.

Under the program a conservation organization buys an ecologically important property, places one or more conservation restrictions on it and then sells it to a prearranged buyer. The buyer claims a tax deduction for the difference between the market value of the property and the reduced value as a result of the restrictions.

"Two difficulties have emerged since the Senate review," Mr. Chase said. "One is that it used to be that when someone was going to be a conservation buyer we had to require them to sign a pledge that they would donate an easement . . . and that pledge was a separate document. In the future the IRS may consider a pledge a condition of the sale. . . . Lawyers for conservation buyers are advising them that this could be a problem, and it has had the effect of chilling the buyers."

Mr. Chase said the second difficulty centers on red tape.

"The internal review process is quite cumbersome," he said. "Now we have to be very careful to demonstrate within The Nature Conservancy that there is no conflict of interest in terms of a board member who is related to somebody. . . . In most places in the world that's not a problem, but we live on an Island and we know how frequently conflicts of interest arise here."

Jim Petterson, a spokesman for the Conservancy central headquarters, said the conservation buyer program remains a key tool for conservation.

"It is an important strategy, and in its most basic form it is identifying ecologically important properties that are on the market and trying to find ways we can buy those properties," he said, adding: "It is extremely cost effective - as the business school folks say, it's high leverage. It's a good way to make donors' dollars go far, and if you look on our web site under the conservation buyer program there are a lot of properties listed. We still believe, as do many land trust and conservation organizations, in this approach."

But he also said the Conservancy has put a hold on certain kinds of conservation buyer deals until the IRS provides more guidance about the rules.

"If there is one thing that the Senate finance committee report reinforced, it is that we have to make sure that everything will pass muster with the regulatory agencies," Mr. Petterson said.

He declined to comment on the Herring Creek Farm sale.

"I think because of the ongoing issues with that I am not going to comment specifically," he said.

In the end, Mr. Chase said he believes the conservation buyer program will see new life.

"I would say that probably within a year or two, if there are new regulations, they will shake out and be a lot clearer to everybody and we will probably be on track again. But for now the uncertainties in the aftermath of the Senate finance review have shaken the conservation buyer program."