We installed a water heater and we attached the nipples using sealing tape. The nipples leak where attached to the heater. The threads are clean and even on the nipples and feel the same on the inside of the water heater. What could be causing them to leak?

If they leaked at the inlets I'd shut the water off and remove then nipples Give the threads 3 wraps of Teflon Tape and use a 14" pipe wrench to tighten them. Good luck, Tom

Heck, I even say give it a good four or five wraps, or merely use pipe dope. The key here is the pipe wrench (or pump pliers if you have a plumbers grip) to get them things good and tight.