FEDER:\l ElECTI( l' c( )f\1:\USSI():\;

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AK007894

April 10, 1996

MEMORANDCM

TO:

FROM:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ASSISTANT

ROBERT J. COSTA

STAFF DlREtTO;- ~~

AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON " CITIZENS FOR JACK METCALF

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Attached please find a copy of the final audit report

and related documents on Citizens for Jack Metcalf which was

approved by the Commission on March 12, 1996.

Informational copies of the report have been received by

all parties involved and the report .ay be released to the

public.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis DiJision

FEe Library

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REPORT OF THE AUDIT DIVISION

ON

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Citizens for Jack Metcalf

Approved March 12~ 1996

FEDERAL ELECTIO~ CO!\tMISSIO~

999 E STREET. !'.\\'.

\\' ASHI~GTO~.D.C.
TABLE OF CONTENTS

CITIZENS FOR JACK METCALF

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Executive Summary

Final Audit Report

Background

Findings

Legal Analysis

Transmittal to Committee

Chronology

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3

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1

FEDERAL ELECTIC)' C()f\1rv'ISSION

FINAL AUDIT REPORT

ON

CITIZENS FOR JACK METCALF

EXECUTIVE SUMMARY

The Committee registered with the Clerk of the U.S. House of

Representatives on January 6, 1994 as the principal campaign

committee for Jack Metcalf, Republican candidat~ for the U.S.

House of Representatives, Washington, 2nd District.

The audit was conducted pursuant to 2 U.S.C. Section 438(b),

which states that the Commission may conduct audits of any

political committee whose reports fail to meet the threshold

level of compliance set by the Commission.

The findings of the audit were presented to the Committee at

an exit conference held at the completion of fieldwork (6/20/95)

and later in an interim audit report.

The following is an overview of the findings contained in

the final audit report.

Apparent Excessive Contributions - 2 U.S.C. 441(a)(l)(A) and

431(8)(A)(i) and 11 CFR 110.10(b), 100.7(a)(1)(i)(A) and (0),

104.11(a), 116.1(e)(3), 116.3(a) and (C).

Apparent Excessive Contributions From Candidate's Spouse - The Committee received a $13,000 credit union loan that appeared

to have been obtained jointly by the Candidate and his wife. (A

jointly owned automobile was used as collateral for the loan;

moreover, the wife signed the loan application and also signed

for the loan check.) Half of the loan ($6,500) therefore

resulted in an apparent excessive contribution from the wife,

whose contributions were subject to a $1,000 limit.

Extension of Credit by Vendor Resulting in an Apparent

Excessive Contribution - Committee reports, as initially filed,

did not disclose a $10,000 debt owed to a vendor on Schedule 0,

as required. The Committee did not have any written

documentation to support that the vendor had ever attempted to

collect this debt. A vendor's failure to treat a debt in a

commercially reasonable manner results in a contribution from the

vendor to the Committee. In this case, the resulting $10,000

contribution would have been excessive.

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The Committee responded by providing documentation that

indicates that the transaction was commercially reasonable and

therefore not a contribution from the vendor. The Committee also

filed an amended Schedule D which corrected the public record.

Disclosure of Financial Activity, Loan Receipts and

Repayments, Contribu~ions from Political Committees - 2 u.s.c.

431 ( 11) and 434 (b) ( 1 ) , ( 2 ) , ( 3 ) ( B) and (E), (4) and (5) (D) and 11

CFR 104.11(a). The Committee's reported totals for receipts and

disbursements were understated by $13,498 and $4,232

respectively. Ending cash was also misstated as a result of the

receipt and disbursement reporting errors above. Part of the

receipts discrepancy was due to the Committee's failure to report

$5,000 in loans. Further, the Committee failed to itemize loan

receipts of $41,736 and loan repayments of $6,775. Although the

Committee disclosed all 12 loans on Schedule C of its reports, it

only reported (on its Detailed Summary Pages) $36,730 of the

$41,736. Lastly, political committee contributions totaling

$11,393 were not itemized.

In response to the interim audit report, the Committee filed

amendments which materially corrected the public record.

Page 2, Ap~roved 3/12/96
FEDERAL ELECTI()' CC).\\r\1ISSIC)N

REPORT OF THE AUDIT DIVISION

ON

CITIZENS FOR JACK METCALF

AK007654

AR#95-3

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I. Background

A. Overview

This report is based on an audit of Citizens for Jack

Metcalf (the Committee), undertaken by the Audit Division of the

Federal Election Commission in accordance with the provisions of

the Federal Election Campaign Act of 1971, as amended (the Act).

The audit was conducted pursuant to Section 438(b) of Title 2 of

the United States Code which states, in part, the Commission may

conduct audits and field investigations of any political

committee required to file a report under Section 434 of this

title. Prior to conducting any audit under this subsection, the

Commission shall perform an internal review of reports filed by

selected committees to determine if the reports filed by a

particular committee meet the threshold requirements for

substantial compliance with the Act.

B. Audit Coverage

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The audit covered the period from January 11, 1994, the

date of the Committee's first bank transaction, through December

31, 1994. The Committee reported a beginning cash balance of SO:

total receipts for the period of $388,329, total disbursements

for the period of S390,231: and an ending cash balance of

$2,856.11

c. Campaign Organization

The Committee registered with the Office of the Clerk

of the u.s. House of Representatives on January 6, 1994, as the

principal campaign committee for Jack Metcalf, Republican

Candidate for the u.s. House of Representatives from the state of

Washington, 2nd District. The Committee maintained its

headquarters in Everett, Washington.

1/ The amounts do no~ foot due to mathematical errors. All

figures in this report have been rounded to the nearest

dollar. "

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The audit indicated the Committee was financed

primarily through contributions from individuals ($237,632),

contributions from Political Party Committees ($125,086), and

loans from the Candidate and/or spouse ($41,736).

The Treasurer of the Committee during the period

covered by the audit was Mr. Donald Watts, who remains its

Treasurer.

D. Scope

The audit included such tests as verification of total

reported receipts and expenditures; review of required supporting

documentation, and analysis of the Committee debts and

obligations and such other audit procedures as deemed necessary

under the circumstances. However, although the contribution

records provided by the Committee met the min~um recordkeeping

requirements of 2 U.S.C. 432(c) and 11 CFR 102.9(a), records

related to $104,368 or 27% of the c0ntributions received did not

contain any documentation prepared outside of the Committee.

Therefore, substantive testing of contributions was limited to

approximately 73\ of the financial activity.

The audit included testing of the following general

categories:

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The receipt of contributions or loans in excess of

the statutory limitations (see Finding II.A.);

the receipt of contributions from prohibited

sources, such as those from corporations or labor

organizations;

proper disclosure of contributions from

individuals, political committees and other

entities, to include the itemization of

contributions when required, as well as, the

completeness and accuracy of the information

disclosed (see Finding II.C.);

4. proper disclosure of disbursements including the

itemization of disbursements when required, as

well as, the completeness and accuracy of the

information disclosed;

5. proper disclosure of campaign debts and

obligations (see Finding II.B.);

6. the accuracy of total reported receipts,

disbursements and cash balances as compared to

bank records (see F~nding 'r.D );

7. adequate recordkeeping for campaign transactions;

and,

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8. other audit procedures that were deemed necessary

in the situation.

Unless specifically discussed below, no material

non-compliance was detected. It should be noted the Commission

may pursue any of the matters discussed in this report in an

enforcement action.

II. Audit Findings and Recommendations

A. Apparent Excessive Contributions

Section 441(a)(1)(A) of Title 2 of the United States

Code states that no person shall make contributions to any

candidate and his or her authorized political committees with

respect to any election for Federal office which, in the

aggregate, exceed $1,000.

Section 431(8)(A)(i) of Title 2 of the United States

Code states that the term "contribution" includes any gift,

subscription, loan, advance, or deposit of money 0= anything of

value made by any person for the purpose of influencing any

election for Federal office.

Section 110.lO(b) of Title 11 of the Code of Federal

Regulations states, in part, that a candidate may use a portion

of assets jointly owned with his or her spouse as personal funds.

The portion of the jointly owned assets that shall be considered

as personal funds of the candidate shall be that portion which is

the candidate's share under the instrument(s) of conveyance or

ownership. If no specific share is indicated by an instrument of

conveyan,e or ownership, the value of one-half of the property

shall be considered as personal funds of the candidate.

Section 100.7(a)(I)(i)(A) of Title 11 of the Code of

Federal Regulations states, in relevant part, that a loan which

exceeds the contribution limitations of 2 U.S.C. 441a shall be

unlawful whether or not it is repaid.

Section 100.7(a)(I)(i)(D) of Title 11 of the Code of

Federal Regulations states a candidate may obtain a loan on which

his or her spouse's signature is required ",,-hen jointly owned

assets are used as collateral or security for the loan. The

spouse shall not be considered a contributor to the candidate's

campaign if the value of the candidate's share of the property

used as collateral equals or exceeds the amount of the loan which

is used for the candidate's campaign.
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Section 116.3(8) of Title 11 of the Code of Federal

Regulations states that a commercial vendor that is not a

corporation may extend credit to a candidate, a political

committee or another person on behalf of a candidate or political

committee. An extension of credit will not be considered a

contribution to the candidate or political committee provided

that the credit is extended in the ordinary course of the

commercial vendor's business and the terms are substantially

similar to extensions of credit to nonpolitical debtors that are

of similar risk and size of obligation.

Section l16.3(c) of Title 11 of the Code of Federal

Regulations states, in relevant part, that when determining

whether credit was extended in the ordinary course of busines~,

the Commission will consider whether the extension of credit

conformed to the usual and normal practice in the commercial

vendor's trade or industry.

Section l16.1(e)(3) of Title 11 of the Code of Federal

Regulations defines extension of credit as the failure of the

political committee to make full payment to the creditor by a

previously agreed to dee date. In addition, Section 116.1(f)

states that for the purpose of this part, creditor means any

person or entity to whom a debt is owed.

Lastly, section 104.11(8) of Title 11 of the Code of

Federal Regulations states, in relevant part, that debts and

obligations owed by a political committee which remain

outstanding shall be continuously reported until extinguished.

] . Apparent Excessive Contributions from Candidate's

Spouse

The Committe~ received twelve loans in 1994

totaling $41,736 from t~e Candidate and/or Candidate's spouse.

Two of the loans, one f·~ $1::'/000 and the other for $13,000,

originated from the Tea'=;~f;rs' '-"=redit Union. The Candidate

obtained the $12,000 }~~n on Au~ust 4, 1994. He retained $6,000

of the proceeds and ~'ff~lJered it as a repayment for a $6,000

loan he made to the Cc·!.J~~ttee on J~.1ly 28, 1994. The Candidate

then loaned the remaiJ~~n1 pr~ceeds (S6,000) to the Committee.

~)rS'~ ... JTa.:.aary docun"lentation pertaining to the loan

provided by the Co~~it~ee during fieldwork consisted only of the

Loan Transaction/Advance Voucher from the Teachers' Credit Union.

This Loan Transac~ion/Advance Voucher indicated that the

Candidate's spouse obtained the second loan for $13,000 on August

10, 1994 from Teachers' Credit Union, using the couple's 1991

Chrysler Lebanon automobile as collateral for the loan. That

voucher, signed by the Candidate's spouse~/, indicated the purpose

2/ Although requested, the Committee did not provide a copy of

the loan application.

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of the loan was for "campaign funds." Again the proceeds were

disbursed directly to the Candidate. The Candidate retained

$2,330 as repayment for a loan of $1,330 (actual amount loaned

$1,336) on July 25, 1994 and another loan of $1,000 on August 4,

1994. The remaining $10,670 in proceeds were loaned to the

Conunittee.

At the exit conference the Audit staff advised the

Committee representatives that the loan obtained from Teachers'

Credit Union by the Candidate's spouse would be considered an

excessive contribution. The Committee representatives related

that the loan was actually obtained by the Candidate, but the

Candidate's spouse signed for the funds at the Candidate's

convenience. The Committee could not produce documentation from

Teachers' Credit Union to substantiate their explanation prior to

the completion of the audit fieldwork, but stated they would

investigate further. Absent that documentation, the Audit staff

determined the Candidate's spouse made loans to the Committee

totaling $13,000, of which $12,000 were considered excessive

contributions.

In the interim audit report, the Audit staff

recommended the Committee provide evidence to demonstrate the

contributions noted above were not excessive or repay the

Teacher's Credit Union for the amount owing on the $13,000 loan.

Absent such a repayment, provide documentation from the credit

union that demonstrated the loan had been restructured to exclude

the candidate's spouse from being the maker and person

responsible for repayment of the loan.

In response the Committee provided a copy of a

loan application that encompassed both the $12,000 and $13,000

loan. With respect to the $13,000 loan, the Committee provided a

letter from the Teacher's Credit Union loan officer in which she

stated that under State regulations the Candidate's spouse could

not apply for a loan in her own name since she did not have her

own account at the credit union. The Treasurer again stated "the

only reason Norma [Candidate's spouse] signed on the Advance

Voucher was that Jack [Candidate] was not able to make a trip to

the credit union on that day." Lastly, the Committee

demonstrated it has repaid the entire $13,000 loan by providing a

copy of the loan repayment trans~ction history and a letter from

a Teacher's Credit Union loan officer, both of which documented

the loan was repaid in full. The final payment was made on May

26, 1995.

As previously stated, both loans were listed on a

single loan application. The Candidate signed the loan

application on August 4, 1994. The Candidate's spouse signed the

loan application on August 10, 1994. Even though both loans were

listed on a single loan application and both signatures were

included thereon, it remains our position that the Candidate was

the sole maker of the $12,000 loan. The loan application and the

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Loan Transaction/Advance Voucher were signed by the Candidate on

August 4, 1994, the date the proceeds of the $12,000 loan were

disbursed.

As to the $13,000 loan, it appears it was jointly

obtained by the Candidate and his spouse. The Candidate's spouse

signed the loan application and Loan Transaction/Advance Voucher

on August 10, 1994. The loan proceeds were di.~bursed

(August 10, 1994) payable to the Candidate and his spouse. As

previously stated, the $13,000 loan was secured by a vehicle

jointly owned by the Candidate and his spouse. Washington is a

community property state. Further, the Consumer Loan Agreement

and Disclosures state "when you sign as a loan applicant, you

agree, jointly and individually, to the following terms and

conditions and all other loan documents related to this Account

including any Loan Advance Voucher, Loan Proceeds Check, and

Power of Attorney." Therefore, half the value of the $13,000

loan represents a contribution by the Candidate's spouse for the

period of time the loan was outstanding (August 10, 1994 through

May 26, 199 5) .

As a result, it appears the Candidate's spouse

made contributions in the form of loans to the Committee totaling

6,500 of which $5,500 is in excess of the contribution

limitation.

Extension of Credit by Vendor Resulting in an

Apparent Excessive Contribution

On June 3, 1994, the Committee entered into a

fundraising/consulting contract with a vendor, The Walling Group

(unincorporated), which called for the Committee to make a total

of $9,000 in payments (5 at $1,500 and 2 at $750) between June

10, 1994 and November 1, 1994, plus a winning bonus of $10,000,

if the Candidate won, that became due and payable on November 15,

1994, for a maxLmum potential payment to the vendor of $19,000.

The Audit staff reviewed an undated vendor recap

of the payments owed by the Committee. The recap indicated the

last two payments, totaling $3,000, were waived by the vendor via

a revised contract, however, the $10,000 winning bonus was still

due and payable. There was no evidence the vendor attempted to

collect payment on any of the $13,000 debt. The revised contract

containing the vendor's payment waiver could not be located by

the vendor or the Committee. The Committee did not report on

Schedule 0 the $3,000 or the $10,000 as an amount owed to the

vendor as of the close of audit fieldwork.

Absent production of the duly executed revised

contract, it appears that the Committee still owes the vendor

$13,000, the vendor has not treated the debt in a commercially

reasonable manner, and there was no evidence the extension of

credit by the vendor conformed to the usual and normal practice

in the commercial vendor's trade or industry. Unless the

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Committee and/or vendor provides documentation to the contrary,

this unpaid $13,000 extension of credit will be considered a

contribution from the vendor.

In the interim audit report, the Audit staff

recommended the Committee provide evidence that the vendor acted

in a commercially reasonable manner and that the activity did not

represent an excessive contribution. The evidence requested

should include, but was not limited to: statements and invoices

from the vendor detailing all billings and efforts to collect

this amount; explanations to demonstrate that the extension of

credit from this vendor was in the ordinary course of business;

examples of other customers or clients of s~ilar size and risk

for which similar services have been provided and similar billing

arrangements have been used; any other pertinent information

concerning billing policies and cycles, advance payment policies,

and other debt collection policies of the vendor. Absent such

evidence, the Audit staff recommended the Committee reimburse the

$13,000 to the vendor and present evidence (copies of the front

and back of the negotiated checks). If funds were not available,

the required information was to be disclosed as a debt owed by

the Committee on Schedule D.

In response to the interim audit report, the

Committee provided a copy of a letter from the vendor, dated

November 2, 1995, which stated that the vendor did not have any

intention of making a contribution to the Committee. It also

explained the total amount due was reduced (by $3,000) because of

other commitments and a reduced level of service. Further, the

vendor stated that after his work with this Committee, a contract

modification of a similar nature was necessary with a different

committee, and provided details pertaining to that modification.

Finally, the vendor stated "my billing practices consist of

sending out an invoice followed up by personal phone calls."

The Committee acknowledged it still owed the

vendor the $10,000 winning bonus, and stated it had paid $3,000

of the ($10,000) bonus during 1995. The Treasurer further stated

"1 talked to Troy [Walling] about his efforts to collect the

amounts owed to him. Since the first of the year [1995], he has

talked to Chris Strow [c~~paign manager] on a monthly basis about

payment. This has been done over the telephone." The Committee

did not provide written documentation pertaining to those

telephone calls. Finally, the Committee filed amended Schedules

D that included the $10,000 debt due to the vendor at the end of

1994.

The information p1. ,)vided in response to the

interim audit report appears to indicate that the transactions

described above were commercially reasonable; therefore no

further action is warranted.

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B. Disclosure of Loan Receipts nnd Repayments

Sections 434(b)(3)(E) and (5)(0) of Title 2 of the

Un.ited States Code state that each report shall disclose the

identification of each person who makes a loan to the reporting

committee during the reporting period, together with the

identification of any endorser or guarantor of such loan, and

date and amount or value of such loan; as well as, the name and

address of each person who receives a loan repayment from the reportin~ committee during the reporting period, together with

the date and amount of such loan repayment.

Section 431(11) of Title 2 of the United States Code

states, in part, that the term "person" includes an individual,

partnership, committee, association, corporation, labor

organiza't.ion, or any other organization or group of persc2ns.

Section 104.11(8) of Title 11 of the Code of Federal

Regulations states, in relevant part, that debts and obligations

owed by a political committee which remain outstanding shall be continuous~y reported until extinguished.

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The Audit staff's review of r£cords made available

indicated that the Candidate or Candidate's spouse made 12 loans

to the Committee totaling $41,736 11. None of the loans were

itemized on Schedule A. Although the Committee itemized all 12

loans on Schedule C of its reports, it only reported (on its Detaile~ Summary Pages) $36,730 of ~he $41,736 in loans received.

The Committee did file, albeit untimely, Schedule C-1, as

required.

The Audit staff's review also indicated the Committee

did not itemize on Schedule B loan repayments of $6,775, (i.e.,

$6,000 repayment to the Candidate and $775 repayment to Teacher's

Credit Union). The repayment to Teacher's Credit Union was

underreported in part because the Committee mistakenly reported

only the interest portion of the loan repayment. Lastly, because

of the errors noted above, the Committee did not disclose

correctly the amount of loans owed on Schedule C.

At the exit conference the Audit staff advised the

Committee representatives that the loan receipts and loan

repayments were not properly reported on Schedules A, Band C.

The Committee representatives stated amended reports would be

filed.

In the interim audit report the Audit staff recommended

the Committee file an amendment for calendar year 1994, to

correct the reporting errors identified above.

3/ Refer to Finding II.A.I. of this report for additional

details.

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In response to the interim audit report, the Committee

filed amended Detailed Summary Pages, Schedules A, Band C, which

corrected the reporting errors.

c. Itemization of Contributions from Political Co~ittees

Section 434(b}(3)(B) of Title 2 of the United States

Code states that each report, filed by a committee, shall

disclose the ident.ification of each political co~:-!'t. ttee or other

political committee that makes a contribution to tia~ repor~ing

committee during the reporting period, together with the date and

amount of any such contributions.

The Audit staff's review of reports filed with the

Commission by other committees, compared to the Committee's

reported contributions, contributor check copies and other

records made available, revealed the Committee received

contributions from political party or other political committees,

totaling $11,393, that were not itemized.!! It appeared the

Committee did not itemize some contributions in this category

because they did not exceed $200. The Committee's in-kind

contributions from political party or other political committees

totaled $1,780; however, the Committee only disclosed $415 on

Schedule A and $1,096 on Schedule B.

Committee officials were provided with a schedule of

contributions that were not itemized. Committee officials stated

some of the contributions may not have been received until

December 1994 or January 1995 and would not be reported until the

Committee prepared its July 31 Mid-Year Report. The Committee

officials stated, however, the contributions would be

investigated and amended reports would be filed as needed.

In the interim audit report, the Audit staff

recommended that the Committee file an amendment for calendar

year 1994, to correct the itemization errors noted above.

In response to the interim audit report, the Committee

filed amended Schedules A and B which materially corrected the

public record.

D. Misstatement of Financial Activity

Sections 434(b)(1}, (2) and (4) of Title 2 of the

United States Code state, in relevant part, that each report

shall disclose the amount of cash on hand at the beginning of

4/ Since all contributions were reportedly made in 1994, with

the exception of one $5,000 contribution that Committee

records indicated was not received until February 12, 1995,

the Committee should have reported receiving these

contributions in calendar year 1994.

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each reporting period, the total amount of all receipts, and the

total amount of all disbursements for the period and calendar

year.

The Audit staff's reconciliation of the Committee's

reported activity to amounts reflected in its bank records from

inception through December 31, 1994 revealed the misstatements

detailed below. It was noted the Committee did not maintain

records to document the derivation of reported amounts. Absent

such records, the Audit staff was not able to explain all

differences between amounts reported and amounts reflected in the

Committee's bank records.

1. Receipts

The total amount of receipts reported for calendar

year 1994 was $388,329, which was understated by a net amount of

$13,498. The correct total was $401,827. The misstatement

resulted from not reporting a loan totaling $5,000; not reporting

interest income, in-kind receipts and miscellaneous errors

totaling $1,497; and a net reconciling adjustment of $7,001.

2 • Disbursements

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The sum of the Committee's reported disbursements

by period ~~s $390,231. The Audit staff's bank reconciliation

determined th~ Committee should have reported $394,462 in

disbursements for 1994. This represents a net understatement of

S4,232.~1 The misstatement resulted from misreporting $12,441 in

disbursements (i.e., disbursements reported twice, disbursements

reported but apparently not made, and voided checks not adjusted

properly); not reporting $18,743 in disbursements (i.e.,

disbursements made but not reported, including loan repayments,

in-kind, and bank charges): and a net reconciling adjustment of

$2,070.

The reported ending cash on hand, by period, at

December 31, 1994 was -$1,902. The correct reportable ending

cash on hand was $7,364. The misstatement was caused by the

receipt and disbursement reporting errors detailed above.

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3. Ending Cash on Hand

At the exit conference, a schedule, explaining the

cause of the misstatements, was provided to the Committee.

Committee representatives stated they would file amended reports

to correct the misstateme~ts described above.

51 The amounts do not foot due to rounding.

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In the interim audit report, the Audit staff

recommended the Committee file an amendment for calendar year

1994, to correct the public record.

In response to the interim audit report, the

Committee filed amendments for each reporting period in 1994,

which materially corrected the reporting deficiencies.

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Page 14, Approved 3/12/96
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FEDERAL ELECTION COtv\MISSION

\\,"'SH1"CT()~. D.C ~O.af, 1

February 22. 1996

MEMORANDUM

TO: Robert J. Costa

Assistant StaffDirector

Audit Divisio

Lav.Tence M Noble

General Co nsel

Kim Brigh -Coleman tOtIfAssociate tner3l Counsel

Rhond:l J. Yosdingh

Assistant General Counsel

~tanhe\\' J. Tanielian ~f-">11

La'" Clerk bl

BY:

FROM:

Sl!BJECT: Proposed Final Audit Report on Citizens for Jack Metcalf(LRA #490)

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C·. The Office of General Counsel has re"je\\'ed the proposed Final Audit Report on Citizens

for Jack ~1etc:llf C·Committee....) submitted to this Office on J3Duary 4, 1996.1 The following

menlorandum summarizes our comments on the proposed report. We concur with the findings of

the proposed report not discussed sepaT3tely in the foHo\\'ing memorandum. If you have any

questions concerning our comments. please contact l\1anhe\'· Tanielian.

Since the proposed Fmal Audit Repon does not Include maners exempt from public disclosure undc:r

11 C.F.R. ~~. \\e recommend the Commlsslon's diSCUSSion of this document be conducted in open session

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Page 15, Approved 3/12/96
Memorandum to Robert J. Costa

Proposed Final Audit Report on

Citizens for Jack Metcalf(LRA ##490)

Page 2

I. APPARENT EXCESSI\'E CONTRIBUTIONS FROM CANDIDATE'S SPOUSE

(l1.A.I.)

A. 512,000 Loan from Teachers Credit Union, August 4, 1994

The proposed Final Audit Report identifies a $12,,000 loan obtained from the Teacher"s

Credit Union "' on August 4, 1994: The proposed repon indicates that the loan application used

for the $12.000 loan was the same document used by the Candidate on August 10, 1994 to apply

for the $13,000 loan discussed belo\\·.

L0

Under the Commission·s regulations, the endorser or guarantor of a loan shall be deemed

to have contributed the amount ofthe loan. 11 C.F.R. §§ l00.7(a)(l)(i)(C) and (b)(ll).l

Candidates may make unlimited contributions from personal funds. 11 C.F.R. § 110.1 (}\a). In

this case. both the Candidate and his spouse"s signatures appear on the loan application.

Ho\\'ever. only the Candidate signed the loan application on August 4.. 1994. the date ofthe

SI:!"OOO loan:' Furthermore. only the Candidate signed the August 4, 1994 Loan

Transaction/Advance Voucher ("Advance Voucher"). and no jointly o\\ned assets appear to be

used as collateral for the loan. Thus" the S1:!.OOO loan appears to have been obtained solely by

the Candidate pursuant to 11 C.F.R. § l00.7(a){1)(i)(C). This Office concurs with the proposed

report" s conclusion that the August 4, 1994 loan for S12..000 ,vas obtained and provided to the

Committee solely by the Candidate.

B. S13,000 Loan from Teachen Credit Union, August 10, 1994

c

c.

The proposed Final Audit Report identifies a S13.000 loan obtained from the Teacher"s

Credit Union on August 10" 1994.s The proposed report indicates that on August 10.. 1994. the

Candid:ue·s spouse signed the loan application and an Advance Voucher. The report further

notes that the loan \\'as secured by collateral jointly oYtlled by the Candidate and his spouse. The

proposed report states that the loan \\'as jointly obtained by the Candidate and his spouse..

concluding th:lt ·"halfthe value of the $13.000 loan represents a contribution by the Candidate"s

A ronIon of the funds from thIS loan "ere retained by the Candidate as repayment for loans he previously

mJde to the Commlnee. TIllS does not 3lter the 3mount being loaned to the campaign because those funds were an

facI being used to pay Commlnee debts

The exception to this rule occurs an the e\'ent of 3 SIgnature of 3 spouse. where the prOVISIons of 11 C.F.R.

§ 100 7(a)( 1}(I)(D) apply. 11 C.F.R § 100 7(l"\' I)

The Candld:lte's spouse Signed the loan JpplacJtlon on August 10. 199~ for purposes ofa second loan

made after the August 4. 1995 loan

See supra footnote ::

Page 16, Approved 3/12/96
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Memorandum to Robert J. Costa

Proposed Final Audit Report on

Citizc;ns for Jack Metcalf(LRA #490)

Page 3

spouse for the period the loan was outstanding." This Office concurs that the loan was jointly

obtained.

The Committee states that the Candidate's spouse's signed the Advance Voucher on the

$13.000 loan "ecause the Candidate "'as unavailable at the time. The Committee further stales

that because ofstate regulations. the Candidate's spouse could not have applied for a loan in her

0\\11 name from the Teacher's Credit Union. Ho\\'ever. given that the spouse signed the loan

application in addition to the Advance Voucher and that the loan "'as secured by jointly o\vned

collateral. this Office beHeves that the apparent amount contributed by the spouse may be based

on the Candidate"s share ofthe jointly held collateral. See 11 C.F.R. §100.7(a)(1)(i)(D).

A Candidate is pennined to obtain Joans on which his or her spouse's signature is

required \vhen jointly owned assets arc used as collateral. 11 C.F.R. § 100.7(a)( I)(i)(D).

Furthermc~c.. funds from a loan signed by a candidate's spouse constitute personal funds up to

the value \..~ the candidate"s share ofthe propert)' used as collateral. ld; see Advisory Opinion

(,,"AO") 1991-10. Only funds in excess ofthe candidate" s interest in the joint collateral are

considered a contribution by the spouse. See 11 C.F.R. § 100.7(a)(1 )(i)(D).

Because the loan agreement \\-as signed by the Candidate"s spouse and "'as secured by

jointly o\\ned collateral an automobile" 11 C.F.R. § 100.7(a)(1)(i)(D) applies to the present case.

According to the loan documents. the collateral \\-as valued at S13,000. As joint owner ofthe

aC'omobile \\'ith his spouse" the Candidate may consider half the equity in the automobile as

personal funds. See II C.F.R. § IOO.7(a)(I)(i)(D); AO 1991-10. Accordingly. S6.S00ofthe

collateral is held by the Candidate; thus. S6,,500 ofthe Joan qualifies as the Candidate9s personal

funds. The remaining 56.500 represents a contribution by the candidate"s spouse. Jd.

Thus. irrespective ofthe reasons the Candidate", -;>owe signed the Advance Voucher.

this Office believes the Candidate"s spouse contributed $6.500 to the Committee. While our

analysis reaches the same numerical result as the proposed Final Audit Repon. the conclusion is

based on the value of the collateral. r:11her thJJl the value ofthe loan,

c. Loan from Candidatc"s Joint }j3nk .-\CCOUDt

The proposed Final Audit Report idt:ntifics S~.900 in loans to the Comminee from the

CandidJte's joint checking account hc=ld \\'lIh hIS spouse. The proposed report states that the

l('~~r..· fr'"" the Candidate's joint bank account "exceeded the Candidate· $ share (one half) of the

~~rr-~t:'\t "al.mce" resulting in a contribution by the candidate's spouse of$468,

Funds in a candidate" s joint bani-.. account constitute personal funds ofthe candidate if

ley meet the follo"'lng cnlena, First. tht: candidate must ha\'e a legal right of access to or

, '~!:-ol over the funds under apphcablt: stJlt: la\\. 11 C.F.R. § 110.1 O( b){ 1). Second" the

.:anJiJate must ha\ e either legal and n~htful title or an equitable Interest in the assets under

Page 1-, .:w:;roveC 3/12/96
'..1)

Memorandum to Robert J. Costa

Proposed Final Audit Repo11 on

Citizens for Jack Metcalf(LRA #490)

Page 4

applicable state law. Jd. Assets which meet both these criteria are considered a candidate·s

personal funds and are not subject to the limitations of2 l'.S.C. § 4413. 11 C.F.R. § 110.10(a).

To the extent the funds are not personal funds under 11 C.F.R. § 110.10(b)(1), they are

considered Ujointly o\vned.'· 11 C.F.R. § 110.1 O(b)(3). A candidate may use jointly owned

assets according to his or her share ofthe asset. Jd A candidate·s share of a joint asset is

determined by the instrument ofcon\'eyance or o\\llership. 11 C.F.R. § 110.10(b)(3). Ifno

instrument exists. the value of one-half ofthe asset used is considered the candidate's personal

funds. Id

In the present case, the Candidate made five loans to the Committee totaling $2,900 from

a joint personal checking account maintained with his spouse. Only the Candidate signed each of

the checks from the joint checking account. The candidate is a resident ofthe State of

\Vashington. and the transactions took place in Washington. In the absence of an instrument of

o\\nership defining the Candidate"s right of access or controi ofthe account" Washington state

13\\' provides that a joint checking account is held in a joint tenancy in which each person has an

undivided interest in the \\·hole. Ka/k \'. Security Pacific Bank Jf/ashingron ~·A, 866 P.2d 1276,

1:;78 (\\'ash. Ct. App.)" reversed on other grounds, 894 P.2d 559 (Wash. 1994). Each person

\\ hose name is on the account has the right to \\ithdra,,· the entire holdings ofthe account. See

\Vash. Re\'. Code Ann. §§ 30.2:!.090" 30.2:;.140 (West 1996). Thus" under Washington law, the

Candidate h~d '"'legal right of access to or control over·· and Uan equitable interest" in all funds

deposited in the joint bank account. Sec 11 C.F.R. § 110.t O(b)(3). 6 As such. all the funds in the

Candidate·s joint account constituted personal funds.

The proposed report applies 11 C.F.R. § 110.10(b)(3) to conclude that a ponioD ofthe

loan from the Candidate·sjoint bank account "'as an excessive contribution from the Candidate'ls

spouse. In previous cases. however. the Commission has generally considered funds in joint

bank accounts to be personal funds under 11 C.F.R. § 110.10(h)(1) and. therefore. not subject to

analysis under the one-half interest rule ofsection 110.10(b)(3). See fvtUR 3505; MUR 2292.

Joint bank accounts are unique in the la\\' and consequently are viewed differently from other

jO~r'tly held property for purposes of personal funds analysis under the Commission·s

regulations. Thus. 11 C.F.R. § 110.10tb)(3) is not applicable to the facts presented in the

proposed report.

The Office of Generall.ounsel recommends the proposed Final Audit Report be revised

to analyze the loans from the Candidate's JOint bank account under 11 C.F.R. § 110.1 O(b)( 1) and

to conclude that the loan \vas made from the Candidate's personal funds. Accordingly"

paragraph 1. at page 5 ofthe proposed report should be removed and the calculation of the

In contrast. a JOint account that specdicaI:\ requires Sl~natures of both panics on transactions would not

qUJ!lf~ as pe~on.11 funds under thiS definitIOn because the: candidate \\ould not ha\e "legal nght of access or control

o\e:-" the iunas S("l~ AD 1991-10 Onl~ 50 0 G or the ponlon mdlcated b~ the Instrument of conveyance 0r

o\\nershlp. "ould const~tute personal funds of the c~Jldate: S~:r 11 C F.R. § 1IO.IO(b)(3)

Pa~e 16, ApproveC 3/12/96

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, Memorandum to Robert J. Costa

Proposed Final Audit Report on

Citizens for Jack Metcalf(LRA #490)

PageS

apparent excessive contribution by the Candidate's spouse on page 6 ofthe proposed report

should be reduced by $468.

II. EXTENSION OF CREDIT BY A VENDOR RESULTING IN AN APPARENT

EXCESSIVE CONTRIBUTION (l1.A.2.)

The proposed Final Audit Report states that the extension of credit by one ofthe

Comminee"s vendors. The Walling Group, appears to represent an excessive contribution of

$9,000. This finding is based on the conclusion that the vendor has not demonstrated that it

acted in a commercially reasonable manner to collect this debt pursuant to 11 C.F.R. §§ 116.3(a)

and (c). The proposed report also notes that the Committee's cash balance on December 31,

1994 was approximately $7,300.. a balance sufficient to have made a payment to reduce the

amount owed to The Walling Group.

This Office disagrees \\rith the conclusion that The Walling Group appears to have made

an excessive contribution to the Comminee. Based upon the information available.. this Office

believes that The \Valling Group acted in a commercially reasonable marmer to collect the debt, a

"\\inning bonus 9<t of S10,000. The Walling Group indicates that its usual billing practices

consisted ofsending an invoice and foJlo\\ing up \vith personal calls and states that it did not

intend to make any contribution to the Conuninee. The proposed report does not indicate that

The Walling Group's billing practices "'ere outside the usual course of business in the vendor's

industry. that The Walling Group did not follow its usual practice, or that the Committee never

received an invoice from The Walling Group. On the contrary, it appears that the vendor

follo\\'ed its nonnal course of business \\ith respect to the debt owed by the Committee. For

example. the Comminee stales that the campaign manager spoke with Mr. Troy Walling ofthe

Walling Group on a monthly basis regarding the payment ofthe S10..000. This Office further

notes that the Comminee is anempting to payoffthe debt in question. According to the

Comminee"s amended disclosure repons" the Comminee owed The Walling Group S11.727 as of

January I" 1995. Bet\\'een JanuaJ)' 1 and December 31, 1995, the Committee carried substantial

debts to a number of vendors in addition to The \\'alling Group.' During this period.. the

Committee made payments of $5..227.50 on the debt to The Walling Group. which appears to be

comparable to the payments made on its debts to other vendors. Finally, the debt in question. a

"'\,"inning bonus." did not result from The \\'alling Group incurring any costs, and thus a more

flexible payment schedule may have been reasonable. While this Office ackno\vledges that the

Committee and The \Valling Group did not provide all documents pertaining to the inquiry of

\\'hether an anempt to collect the debt \\'as made in a commercially reasonable manner. we

believe that the facts provide sufficient basis to reach such a conclusion. Therefore. this Office

suggests the report be revised to indicate that no further action be taken \\'ith respect to this

finding.

According to the Commlnee's amended disclosure repons. the Commmee's debts and obligations \\fere

o'-er S80.000 as of December 31. 199~. mcludang. ne3J'ly S~~.OOO owed to several other vendors and former

employees and S~5.000 an loans from the cand.d.1te

Page 19, Approved 3/12/96
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.' -;Me8lOdDdani tit~1t~>l-C01ta ,Proposed Final Audit Report on

Citizens for Jack Metcalf(LRA 1490)

Page 6

In light ofthe other debts O\ved by the Committee, the proposed report's reference to the

Committee's $7,300 cash on hand and its inference that the amount could be used to partially pay

the debt to The Walling Group is misleading. Based on the amount ofdebts owed by the

Committee, the failure to pay The Walling Group should not be considered as a factor in

detennining whether the debt represents an excessive contribution. Therefore, the Office of

General Counsel recommends the Final ..-\udit Report be revised to omit reference to the

Committee·s cash on hand on December 31, 1994 and any implication tha~ in order to avoid an

excessive contribution, the Committee should have paid part ofits debt to The Walling Group

despite its other debts.

Page 20, Approved 3/12/96
FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C ~O"()3

AK007834

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April 2, 1996

Mr. Donald G. Watts, Treasurer

Citizens for Jack Metcalf

5705 Evergreen Way '202

Everett, WA 98203

Dear Mr. Watts:

Attached please find the Final Audit Report on Citizens for

Jack Metcalf. The Commission approved the report on March 12,

1996.

The Commission approved final audit report will be placed on

the public record on April 10, 1996. Should you have any

questions regarding the public release of the report, please

contact the Commission's Press Office at (202) 219-4155. Any

questions you have related to the matters covered during the

audit or in the report should be directed to Mary Moss or Tom

Nurthen of the Audit Division a~ (202) 219-3720 or toll free at

(800) 424-9530.

~:;;;~ 3. osta

Assistan Staff Director

Audit Division

Attachment as stated

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Page 21, Approved 3/12/96
Page 22, Approved 3/12/96
CHRONOLOGY

CITIZENS FOR JACK METCALF

Audit Fieldwork 6/12/95 - 6/20/35

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cInterim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

8/24/95

11/08/95

3/12/96

Page 23, Approved 3/12/96