New York’s A.G. Probes Nonprofits’ Political Spending

New York Attorney General Eric Schneiderman is investigating whether non-profit groups known to be active in politics are spending more than permitted by tax rules to influence the elections in November.

Schneiderman, a Democrat, asked two dozen non-profits to explain how they raise and spend political money, a person familiar with the matter said. They include Crossroads GPS, formed by former George W. Bush political adviser Karl Rove, and Priorities USA, which backs President Barack Obama, according to the person, who isn’t authorized to speak publicly on the subject.

By opening the probe based on his power to regulate charities in New York, Schneiderman has waded into a growing controversy over whether the groups may violate U.S. Internal Revenue Service regulations. The groups, which operate under section 501(c)(4) of the tax code, don’t have to identify their donors, leading critics to argue the so-called social welfare organizations are helping corrupt the political process.

“It’s certainly aggressive,” said Kenneth Gross, a specialist in political law at Skadden, Arps, Slate, Meagher & Flom LLP in Washington. “They’re stepping into a very complex area of the law. At the same time, we’re seeing the use of c4s more aggressively than ever before for electioneering activity.”

Photographer: Mark Wilson/Getty Images

New York Attorney General Eric Schneiderman is investigating whether non-profit groups known to be active in politics are spending more than permitted by tax rules to influence the elections in November. Close

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Photographer: Mark Wilson/Getty Images

New York Attorney General Eric Schneiderman is investigating whether non-profit groups known to be active in politics are spending more than permitted by tax rules to influence the elections in November.

More Disclosure

Two nonpartisan groups that are pushing for more disclosure of campaign financing, Democracy 21 and Campaign Legal Center, called in July 2011 for the IRS to change its rules. The fund- raising groups have generally said that they may maintain their tax-exempt status if they keep their political activity to less than 50 percent of overall expenses.

“Political operatives are using ‘social welfare’ organizations as conduits for injecting secret money into federal elections by attempting to exploit what they claim to be purported ambiguities in existing IRS standards,” the advocacy groups said in a letter to the agency last month.

“The IRS is aware of the current public interest in this issue,” Lois Lerner, the agency’s director for exempt organizations, wrote in a July 17 letter to the groups. “These regulations have been in place since 1959. We will consider proposed changes in this area.”

Schneiderman, who took office in January 2011, regulates charities that raise or spend more than $25,000 in New York state. He could revoke a group’s ability to operate in the state or determine it made false claims about its activities and make a referral to the IRS, according to the person.

Investigative Letters

Other organizations that received investigative letters include American Action Network, which says on its website it supports limited government, and American Future Fund, which says it promotes free-market ideals, the person said. American Bridge 21st Century, which identifies itself as “progressive,” and America Votes, which says its partners include labor unions and environmental groups, also got letters, according to the person.

America Votes got its letter on July 24 and responded on July 27, John Neurohr, a spokesman for the group, said in an e- mail. Chris Harris, a spokesman for American Bridge, said in an e-mail that the group is reviewing the letter. Jonathan Collegio, a spokesman for Crossroads GPS, said the group hasn’t responded to the attorney general’s office.

Phone calls or e-mails to the other groups seeking comment on the letters weren’t immediately returned.

Schneiderman doesn’t have the ability to declare these groups ineligible for tax-exempt status, Fred Wertheimer, president of Democracy 21, said in a telephone interview. Whether they qualify for 501(c)(4) status is an issue for the IRS, he said. If the attorney general believes the groups aren’t entitled to tax-exempt status, he may argue they’re raising money under false pretenses, he said.

A state attorney general “typically wants to be assured that non-profit groups raising money from citizens are bona fide organizations that are not defrauding or cheating citizens of the state,” said Lee E. Goodman, a lawyer at LeClair Ryan in Washington who advises clients on election law.

“He generally would not have license to look into the political affairs of these organizations,” Goodman said. “The political activities of an organization are within the purview of the IRS and the Federal Election Commission.”

To contact the reporters on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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