Eric Schneiderman Defends Authority To Investigate Dark Money Groups, Private Equity Firms

New York Attorney General Eric Schneiderman is pushing back against two Republican lawmakers who have challenged his investigation into nonprofits that funnel "dark money" into political campaigns and private equity firms that use accounting tricks to avoid millions of dollars in taxes.

In a letter last week, Sen. Orrin Hatch (R-Utah), the top Republican on the Senate Finance Committee, and Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, told Schneiderman that his office should "cease its efforts" to request tax information directly from these entities and that he should instead route any such requests through the Internal Revenue Service.

"We are particularly concerned by reports that indicate your office has not followed the federally prescribed process for legally obtaining tax returns and other financial information from these organizations and businesses," Hatch and Camp said.

In a response sent Monday, Schneiderman wrote that as New York's top law enforcement official, he is perfectly entitled to ask for tax information directly -- and that, indeed, he and officials in many other states do so all the time.

"The Internal Revenue Code in no way precludes a nonprofit or business from sharing its own tax returns or tax return information with law enforcement officials voluntarily, in response to a subpoena, or as required by state laws requiring disclosure," Schneiderman wrote.

The battle over Schneiderman's methods comes as he investigates whether some nonprofits, known as 501(c)4s, are violating their federal tax-exempt status by spending money on partisan political activities.

Some of these nonprofits, which according to the IRS should be "primarily engaged" in promoting the common good and general welfare of the community, are funnelling millions of dollars without any donor disclosure into powerful super PACs that can spend unlimited sums on political advertising. Some of these groups even share office space.

For example, the nonprofit Crossroads GPS, which was co-founded by Karl Rove and spent $58 million on ads through the end of August, is closely linked with the super PAC American Crossroads. But the nonprofit arm of the Republican-aligned group hasn't had to disclose its donors, fueling speculation about what businesses and individuals might be bankrolling it.

The IRS has yet to clarify its rules about how to treat political donations from nonprofits with the 501(c)4 designation.

Hatch has previously come to the defense of the politically driven nonprofits, according to Politico.

Nonprofits that raise more than $25,000 in New York, a group that almost certainly includes all the major politically aligned nonprofits, are subject to regulation by the attorney general under state law. Schneiderman's office sent more than a dozen of these entities a letter asking them to register with the state if they haven't already done so, or answer questions explaining why they are exempt from registering, according to a source familiar with the investigation.

As the IRS has acknowledged, nonprofits routinely share federal returns with state officials in order to satisfy financial reporting requirements, Schneiderman said in his letter.

The attorney general is also investigating whether more than a dozen private equity firms, including Mitt Romney's Bain Capital, converted management fees into investment income in order to benefit from a lower tax rate.

Schneiderman's letter does not directly mention these investigations, which have not been publicly disclosed. Instead, it broadly defends his ability to ensure compliance with his state's tax laws and to regulate certain activities of nonprofit. It also not-so-subtly dings his Republican critics, who typically champion states' rights, for suggesting that federal authority should usurp state authority.

"Under our federalist system, each state has a fundamental interest in ensuring compliance with its tax laws and in regulating certain activities of nonprofits," Schneiderman wrote.