FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 20463

March II, 1999

MEMORANDUM

TO:

FROM:

SUBJECT:

RON M, HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERT 1. COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

MICHIGAN STATE REPUBLICAN COMMITTEE

Attached please find a copy ofthe final audit report and related documents on

Michigan State Republican Committee which was approved by the Commission on

February 3,1999.

Informational copies ofthe report have been received by all parties involved and

the report may be released to the public

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 204&3

•

February 24, 1999

Mr. William H. Gnodtke, Treasurer

Michigan Republican State Committee

2121 East Grand River

Lansing, MI 48912

Dear Mr. Gnodtke:

Attached please find the Final Audit Report on the Michigan Republican State

Committee. The Commission approved the report on February 3,1999.

The Commission approved final audit report and related materials will be placed

on the public record on March 2, 1999. Should you have any questions regarding the

public release ofthe report, please contact the Commission's Press Office at (202) 694-

1220. Any questions you have related to the matters covered during the audit or in the

report should be directed to Leroy Clay or Tom Nurthen ofthe Audit Division at (202)

694-1200 or toll free at (800) 424-9530.

Sincerely,

-rr-W-J CZ::-

Robert J. Costa

Assistant Staff Director

Audit Division

Attachment as stated

cc: Eric E. Doster

25
CHRONOLOGY

MICHIGAN REPUBLICAN STATE COMMITTEE

=

W

Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

27

011I6/96 - 02/23/96

03/28/97

05/31/97

02/03/99
REPORT OF THE AUDIT DIVISION

ON

MICHIGAN STATE REPUBLICAN

COMMITTEE

Approved February 3, 1999

FEDERAL ELECTiON COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

MICHIGAN STATE REPUBLICAN COMMITTEE

APPROVED FEBRUARY 3,1999

Page

Executive Summary 1

Final Audit Report 3

Background 3

Findings 4

Legal Analysis 21

Transmittal to Committee 25

Chronology 27
REPORT OF THE AUDIT DMSION

ON THE

MICIDGAN REPUBLICAN STATE COMMITTEE

EXECUTIVE SUMMARY

The Michigan Republican State Committee (the Committee) registered with the

Comptroller General ofthe United States on Aprill?, 1972.

The audit was conducted pursuant to Section 438(b) ofTitle 2 ofthe United States Code

which states, in part, 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 fmdings ofthe audit were presented to the Committee at an exit conference held at

the completion offieldwork on February 23, 1996 and later, in an interim audit report. The

Committee's responses to those finding are included in the final audit report.

The following is an overview ofthe fmdings contained in the fmal audit report.

JOINT FEDERAL AND NON-FEDERAL ACTIVITIES - 11 CFR § 100.8(a)(l), 11

CFR § 106.5(g)(l), 11 CFR § 104.l0(b)(4), 11 CFR § 106.5(g)(2)(iii). The Committee

maintains an account entitled "Michigan Republican State Comm Administrative Account" (the

Account). According to the Committee, funds expended from the Account do not impact federal,

state, or local elections, therefore, it considers such transactions to be non-campaign related;

receipt and disbursement transactions are not included in its federal or state disclosure reports.

The Audit staffidentified approximately $230,000 in expenses subject to allocation between the

Committee's federal and non-federal account. These expenses were administrative in nature and

associated with State Convention, State Committee Meetings, RNC Meetings/Conferences, as

well as, the day to day operations ofthe Committee. The interim audit report recommended that

the Committee reimburse the Account for its share of allocable expenses paid from the Account

and file memo Schedules H4 disclosing the shared expenses.

In response to the interim audit report, the Committee contended that only a small amount

ofexpenses were reimbursable by the federal account; evidence ofreimbursement was not

provided. Further, memo Schedules H4 disclosing such shared expenses were not filed.

The final audit report concluded that the Committee should reimburse the Account

$50,241 in payment ofthe federal account's share ofallocable expenses paid from the Account

and file memo Schedules H4 disclosing the shared expenses.

SHARED EXPENSES PAID FROM THE NON-FEDERAL CHECKING ACCOUNT -

11 CFR § 106.5(g)(I). Our review of a non-federal checking account identified $42,992 in

payments made directly to vendors for shared administrative expenses, the federal share of which
was $9,544. Although no reimbursement by the federal account was necessary in this instance

due to prior federal account overpayments, these payments should have been disclosed.

The Committee stated in its response to the interim audit report that it accepts the fmding

and recommendation. However, to date it has not filed memo Schedules H4 disclosing the

shared administrative expenses.

APPARENT CORPORATE CONTRIBUTIONS-2 USC § 44Ib(a),ll CFR §114.9(d),

11 CFR §§ 100.7(a)(I)(iii)(A) and (B). The Committee made disbursements totaling $8,841 to

approximately 72 corporations for the use oftelephones for get-out-the-vote activities from

October 29, 1992 through November 3,1992. The Committee paid each corporation $1.50 per

telephone per hour. The interim audit report noted that the payments to the corporations did not

appear to represent the normal and usual charge for the use oftelephones and facilities nor did it

appear that the payments were made within a commercially reasonable time.

In its response, the Committee provided affidavits andlor letters from 28 ofthe

approximately 72 corporations which represented, except for one entity, that each corporation

had been reimbursed in full for the use oftelephones and facilities and that the reimbursement

had been made within a commercially reasonable time. In addition, the Committee stated it had

made a good faith effort to calculate the normal and usual charge for the use oftelephones and

facilities and to make payment within a commercially reasonable time. The information

provided by the Committee was not deemed sufficient to resolve these issues.

DISCLOSURE IRREGULARITIES - 2 USC § 434(b), 11 CFR §§ 104.IO(b)(4),

106.5(g)(I) and (3), & 102.I7(iii)(8)(B). Reports filed by the Committee contained errors or

omissions for which amending action was recommended in the interim audit report. For

instance, the Committee did not disclose on Schedule H3 $177,464 in transfers from its nonfederal checking account to its federal payroll account nor did it report payroll disbursements

totaling $177,464 on Schedule H4. In a similar vein, $445,857 in payments to individuals were

disclosed as lump sum payments with the listed payee "Payroll Account" rather than disclosing

the identification of each individual who received a disbursement. Regarding receipts, the

Committee did not report contribution information, involving $72,439 in gross proceeds relative

to ajoint fundraising event. Finally, a comparison ofthe Committee's reported activity to its

bank account records revealed material misstatements occurred in the balances/dollar totals for

cash, total receipts and total disbursements disclosed on the Committee's 1993 and 1994 reports.

Concerning all ofthe above irregularities noted in the interim audit report, the Committee

in its response stated that it accepted the fmdings and recommendations, but did not file any of

the amending action requested.

2
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C 20463

AR#95-75

This report is based on an audit ofthe Michigan Republican State

Committee (the Committee), undertaken by the Audit Division ofthe Federal Election

Commission (the Commission) in accordance with the provisions ofthe Federal Election

Campaign Act of 1971, as amended (the Act). The audit was conducted pursuant to

Section 438(b) ofTitle 2 ofthe United States Code which states, in part, that the

Commission may conduct audits and field investigations of any political committee

required to file a report under Section 434 ofthis title. Prior to conducting any audit

under this subsection, the Commission shall perform an internal review ofreports filed by

selected committees to determine ifthe reports filed by a particular committee meet the

threshold requirements for substantial compliance with the Act.

hi

I.

REPORTOF THE AUDITDIVISION

ON THE

MICHIGANREPUBLICANSTATE COMMITTEE

BACKGROUND

A. AVDIT AUTHORITY

B. AUDIT COVERAGE

The audit covered the period January 1, 1993 through December 31, 1994.

During this period, the Committee reported a beginning cash balance of$126,495; total

receipts for the period of $7,441,120; total disbursements for the period of $7,391,757;

and an ending cash balance of$175,858.

C. CAMPAIGN ORGANIZATION

The Committee registered with the Comptroller General ofthe United

States as the Michigan Republican. State Committee on April 17, 1972. The Treasurer of

the Committee for the period covered by the audit was Ronald D. Dahlke. The current

Treasurer is William H. Gnodtke. The Committee maintains its headquarters in Lansing,

Michigan.

3
To manage its financial activity, the Committee maintained a number of

checking, saving and certificate ofdeposit accounts. Committee's receipts were

composed of contributions from individuals, political committees, transfers from party

committees, refunds/rebates, interest and transfers from its non-federal account.

D. AUDIT SCOPE AND PROCEDURES

The audit included testing ofthe following general categories:

1. The receipt of contributions or loans in excess ofthe statutory

limitations;

2. The receipt of contributions from prohibited sources (see Finding

ILC.);

3. 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 ofthe information disclosed (see Finding II.F.);

4. Proper disclosure of disbursements including the itemization of

disbursements when required, as well as, the completeness and

accuracy ofthe information disclosed (see Finding II.E.);

5. Proper disclosure of campaign debts and obligations;

6. The accuracy oftotai reported receipts, disbursements and cash

balances as compared to bank records (see Finding II.G.);

7. Adequate recordkeeping of campaign transactions;

8. Proper reporting and funding of allocable expenses (see Findings

ILA., B. and D.); and,

9. Other audit procedures that were deemed necessary in the situation.

Unless specifically discussed below, no material non-compliance was

detected. It should be noted that the Commission may pursue any ofthe matters

discussed in this report in an enforcement action.

u. AUDIT FINDINGS AND RECOMMENDAnONS

A. JOINT FEDERAL AND NON-FEDERAL ACTIVITIES

Section 100.8 (a)(l) ofTitle 11 ofthe Code ofFederal Regulations states

the term expenditure includes payments, gifts or other things of value. A purchase,

4
payment, distribution, loan (except for a loan made in accordance with 11 CFR

§I OO.8(b)(l2), advance, deposit, or gift ofmoney or anything ofvalue, made by any

person for the purpose ofinfluencing any election for Federal office is an expenditure.

Section 106.5(g)(l) ofTitle II ofthe Code of Federal Regulations states,

in part, committees that have established separate federal and non-federal accounts under

11 CFR 102.5(a)(l)(i) or (b)(I)(i) shall establish a separate allocation account into which

funds from its federal and non-federal accounts shall be deposited solely for the purpose

paying the allocable expenses ofjoint federal and non-federal activities; or pay the entire

amount of an allocable expense from its federal account and transfer funds from its nonfederal account to its federal account solely to cover the non-federal share ofthat

allocable expense.

Section 104.1O(b)(4) ofTitle 11 ofthe Code ofFederal Regulations states,

in part, a political committee that pays allocable expenses in accordance with II CFR

106.5(g) or 106.6(e) shall also report each disbursement from its federal account or

separate allocation account in payment for a joint federal and non-federal expense or

activity.

Section l06.5(g)(2)(iii) ofTitle 11 ofthe Code of Federal Regulations

states any portion of a transfer from a committee's non-federal account to its federal

account or its allocation account that does not meet the requirements ofparagraph

(g)(2)(ii) ofthis section shall be presumed to be a loan or contribution from the nonfederal account to a federal account, in violation ofthe Act.

Background

Our review encompassed activity related to eighteen bank accounts;

twelve of which were federal accounts and six were considered non-federal accounts. As

provided at 11 CFR §1 06.5(g)(I)(ii) and 102.5(a)(l), allocation of expenses between

federal and non-federal activities by party committees, the Committee maintained two

accounts from which expenses it viewed as allocable between federal and non-federal

activities were paid. One account paid all payroll expenses, while the second account

paid other shared expenses.

The Committee maintains an account entitled "Michigan Republican State

Comm Administrative Account" (the Account). According to the Committee, funds

expended from the Account do not impact federal, state, or local elections, therefore, it

considers such transactions to be non-campaign related. Further, receipt and

disbursement transactions are not included in its federal or state disclosure reports. The

Account was open during the entire audit period (1993/1994). The balance on January 1,

1993 was $13,911. During the period covered by the audit, $681,569 was deposited into

and approximately $672,560 expended from the Account. The majority ofthe funds

deposited was from corporations.

5
It should be noted that the State ofMichigan does not permit corporate or

labor union contributions to be used for non-federal elections. However, on August 21,

1979, the Michigan Secretary of State issued a declaratory ruling concerning corporate

expenditures at a state political party convention. A corporation proposed spending funds

for expenses related to a state convention. The expenses included but were not limited to

hotel rooms, food, beverages, telephone and travel, and were to be made for the purpose

ofinfluencing the decisions ofthe delegates to the convention with respect to the

adoption of certain resolutions and the election ofindividuals to office within the state

party. In part, the declaratory ruling stated that since none ofthe offices at stake at this

particular convention were public offices and none ofthe resolutions to be adopted were

ballot questions, the expenditures in question were not prohibited and also did not need to

be reported or recorded as expenditures under the Act (reference to the state ofMichigan

non-federal election law).

A Manual For Political Party Committees published by the Michigan

Department of State Bureau ofElections, April 1990, commonly referred to as the "green

book," at page 14 states political party committees may accept funds from an

incorporated source ifthe corporation clearly designates the funds for the committee's

administrative expenses. These funds must be deposited in a separate account maintained

by the committee solely for administrative purposes. Finally, another manual published

by the Michigan Department of State Bureau ofElections in February 1990, for

independent political and ballot question committees, at page 8, states a Ballot Question

Committee may receive corporate funds or be entirely funded by a corporation. At page

40 ofthis manual, it states a corporation is allowed to spend corporate funds to support or

oppose ballot questions. The corporation must register a Ballot Question Committee

within 10 calendar days after it spends $500 or more in a calendar year to support or

oppose ballot issues.

According to Committee records, expenses paid from the Account related

to the annual Michigan Republican State Convention, Michigan Republican State

Committee Meetings, conferences, and RepUblican National Committee State Chair

Conferences. Such expenses included but were not limited to air travel, reimbursements

for mileage, hotel costs, food, beverage, entertainment, construction costs, materials,

supplies and invitations, etc.

From the Account the Committee also repaid a $100,000 bank loan it

received for reapportionment activities and issued checks totaling $220,000 to the

Michigan Reapportionment Trust Fund (MRTF).I The Committee paid various expenses

According to the Committee, the MRTF is a non-profit corporation, established in 1989. It is

governed by a board of directors. Its purpose is to make expenditures to influence the

reapportionment process. Advisory Opinions 1981-35, 1982-14 (requested by the Michigan

Republican State Committee), 1982-37 and 1990-23 address receipts and expenditures relative to

reapportionment activities. The Commission has maintained that funds received and disbursed

6
associated with the purchase ofits headquarters, paid a telemarketing firm to conduct

surveys, which appeared to relate to non-federal elections, and paid another telemarketing

firm to make calls to encourage voters to support a ballot position. A Commission

imposed civil penalty ($12,500) was also paid from the Account.

1. Expenditures Apparently Related To Shared Federal And NonFederal Activities

The Audit staff analyzed all disbursements made from the

Account, including a review of all documentation made available. It appears that many

ofthe disbursements do in fact relate to federal and non-federal elections including many

shared administrative expenses. The Audit staffidentified disbursements, totaling

$66,525, for administrative expenses. These disbursements were associated with a

victory party (November 1992 election), building repairs, audits of all bank account~

(federal, non-federal, the Account), salary payments to the individual who raised funds

for the Account, reimbursement of expenses to the Party's general counsel (copying,

postage, delivery [including deliveries to the Federal Election Commission], phone,

telecopying, etc.) and holiday cards/gifts to contributors. Such disbursements would be

normally allocated between the Committee's federal and non-federal account, with the

Committee either paying the full amount and then receiving a reimbursement from the

non-federal account for its share of administrative expenses or transferring its share ofthe

expenses to an allocation account, with the non-federal account doing the same; payment

would then be made from the allocation account.

Further, the Audit staffidentified an additional $164,389 in

expenses which appeared to require allocation. For the most part, the expenses were

associated with the annual state convention, various state committee meetings, RNC chair

meetings and conferences. Such expenses included travel, mileage, hotel costs,

construction, materials, supplies and invitations. At the Audit staffs request, the

Committee provided agendas for most ofthe events discussed above.

With respect to the state conventions, RNC chair meetings,

conferences and state committee meetings, it appears that campaign-related components

(federal and non-federal) existed. For example, from the Account the Committee paid for

the printing of a four page leaflet entitled "What has Democrat Leadership Given

Michigan?" The handout featured articles on a U.S. Senator and President Clinton and

was distributed at the 1993 State Convention. Appearing on the last page is a notice,

indicating that the handout was paid for by the Michigan Republican State Committee.

Further, according to the agenda, a national committeeman andlor a committeewoman

addressed most State Committee Meetings. The agendas provided did not specify the

topics covered.

from a reapportionment account are not contributions or expenditures and thus not subject to

disclosure requirements, limitations or prohibitions ofthe Act or Regulations.

7
Further, the Audit staff noted that in September 1995 a presidential

candidate addressed the Michigan Republican Mackinac Conference Breakfast. It

appears that at the very least the expenses noted above (administrative - $66,525; state

conventions and committee meeting/conferences - $164,389) relate to shared federal and

non-federal activities. As such, $51,263 [($66,525 + 164,389) x .222] 2 in expenses

required payment by the federal account and $179,651 [($66,525 + 164,389) - 51,263] in

expenses required payment by a non-federal account(s). As explained previously, all the

expenses in question were paid from the Account which the Committee maintains does

not impact federal, state or local elections. None ofthese expenses were reported on FEC

Schedules H4.

2. Expenses Related To State Ballot Question And State Focus Group

Surveys

In May 1994, the Committee paid (from the Account) a

telemarketing firm $2,529 to make Prop A calls. These were calls made to voters to

support a ballot question. The aforementioned declaratory ruling stated, in part, that

corporate funds could be used for the convention in question since no resolutions that

were adopted were ballot questions. Further, the green book at page 40 states if a

corporation spends more than $500 in a calendar year to support or oppose a ballot

question, the corporation must register a ballot question committee.

During the period, January 6,1994 through May 25,1994, the

Account paid a vendor $17,668 to conduct focus group surveys. The surveys were

entitled Teach Michigan Statewide, Michigan Education Reform Focus Groups and

Teach Michigan Teacher Study. The various surveyed groups included, teachers,

registered voters/parents and taxpayers. Although there is mention of a candidate for

federal office the surveys appear to be a non-federal effort since the surveys primarily

address education reform in the state ofMichigan.

In the interim audit report, the Audit staffrecommended that the

Committee:

• demonstrate that the expenditures originating from the Account ($230,914)

were not expenditures as defined at 11 CFR §100.8(a); or,

• file memo Schedules H4 disclosing the shared expenditures which originated

from the Account ($230,914); and,

., using funds from its federal account(s) reimburse the Account $51,263 and

2 The allocation percentage for administrative expenses is 22.2%. The percentage is the ratio of

federal offices to total federal and non-federal offices expected to be on the ballot in the next

federal general election held in the state.

8
provide evidence ofsuch reimbursement.3

• Should the Committee successfully demonstrate that the expenses paid from

the Account do not relate to joint federal and non-federal activities then no

reimbursement to the Account is required.

As part ofits response to the recommendations contained in the

interim audit report, the Committee included a discussion ofvarious Advisory Opinions

issued by the Commission, as well as guidance received by the Committee concerning the

application ofMichigan state campaign finance law. The Committee correctly pointed

out that the Commission concluded4 that the influencing ofthe reapportionment decisions

of a state legislature, although a political process, is not considered election-influencing

activity subject the requirements ofthe Act. Also referenced was Advisory Opinion

1993-9 which addressed the Committee's proposal to establish a building fund,

maintained as a "separate segregated" account into which only designated contributions

would be deposited. Finally, the Committee included a reference to Advisory Opinion

1983-37 in which the Commission determined that the Massachusetts Democratic State

Committee could establish a fund that would not be subject the Act's limitations,

prohibitions, or disclosure requirements. The monies in this fund could be used only for

the purpose of defraying legal costs ofdefending legal actions brought by candidates

against the Massachusetts Democratic State Committee and would have to be maintained

separately from funds used for federal elections.

Using the above cited opinions to show that circumstances could

exist whereby a political committee may establish a "separate segregated" account to

fund certain types of activity not considered election-influencing activity subject to the

requirements ofthe Act, the Committee contended that, with the exception ofcertain

minor items, U[t]he disbursements from the Account are not made for the purpose of

influencing any election for Federal office." TIle response then addressed specific types

of expenses paid from the Account in an effort to demonstrate that the payments

questioned in the interim audit report were not subject to the requirements ofthe Act.

Conventions, Meetings, And Conferences

The Audit staffidentified $164,389 in expenses associated with the

annual state convention, various state committee meetings, Republican National

Committee chair meetings and conferences which appeared to require allocation between

the Committee's federal and non-federal accounts as administrative expenses. The

Committee, in its response, asserted that based on prior Commission determinations the

payments for expenses related to the state convention, meetings and other conferences

questioned by the Audit staff were not expenditures pursuant to the Act. 5 Advisory

Corrective action pursuant to Michigan state law is not within the scope of this report.

Advisory Opinions 1982-14, 1982-35.

The Committee did acknowledge that $216.62 in expenses paid from the Account

9
Opinion 1978-46 is cited, in part, as are Advisory Opinions 1982-35, 1983-37 and 1986-

66 within the narrative portion ofthe response.

The Committee contended, based on its reading ofthe advisory

opinions cited, that unless there is fundraising related to a campaign for federal office or

any communication expressly advocating the election or defeat of a clearly identified

candidate for federal office, the activity and attendant expenses cannot be regarded as for

the purpose ofinfluencing a federal election. The Commission in several advisory

opinions referred to these factors; however, the Commission has also indicated that the

absence ofsolicitations for contributions or express advocacy regarding candidates will

not preclude a determination that activity is "campaign-related." See Advisory Opinions

1992-6,1992-5,1990-5,1988-27, 1986-37, 1986-26, 1984-13 and 1983-12.

Nearly all the advisory opinions cited by the Committee were

issued by the Commission prior to the effective date (January I, 1991) ofthe

Commission's regulations for allocating expenses that jointly benefit both federal and

non-federal candidates and elections.7 These regulations provide for allocation of

expenses by political party committees making disbursements for administrative

expenses, fundraising, exempt activities, or generic voter drives in connection with both

federal and non-federal elections. More specifically, party committees that make

disbursements in connection with federal and non-federal elections shall allocate

expenses for administrative expenses not attributable to a clearly identified candidate,

including rent, utilities, supplies, and salaries. Advisory Opinion 1993-21. The

Commission's Explanation and Justification contains the following guidance regarding

administrative expenses:

"Please note that all administrative expenses must be allocated

between federal and non-federal accounts, ifincurred by a

committee that makes disbursements in connection with both

federal and non-federal elections, and that chooses to pay any

portion ofsuch disbursements from its non-federal account."

It seems the $164,389 in expenses questioned in the interim audit report do fall

into the general category of administrative expenses and therefore cannot be viewed as

not subject to the requirements ofthe Act.

representing the cost of a handout entitled "What has Democrat Leadership Given Michigan?"

was mistakenly paid for from the Account.

Also cited in footnotes were Advisory Opinions 1992-5,1981-37,1977-54,1980-22.

Advisory Opinions 1992-5 (candidate's participation in a series of public affairs forums) and

1993-9 (preemption of Michigan State law with respect to the prohibitions on corporate donations

to the Michigan Republican State Committee's building fund) were issued after 1/1/91.

10
Audit And Legal Expenses

As to the audit expenses questioned in the interim audit report

($26,423), the Committee contended that payment ofsuch expenses are subject to the Act

only in the case where they (1) directly further the election of any designated candidate

for federal office, or (2) assist the political committee in its compliance with the Act.

According to the Committee, "the purpose ofthe audits is ... to veritY to the officers and

members ofthe MRSC that the financial statements are appropriately stated and that the

MRSC staffis conforming with generally accepted accounting principles." The

Committee then concluded, there is no basis to designate payments from the Account for

these audit expenses as subject to the Act.

Regarding legal expenses questioned by the Audit staff($1 ,927),

the Committee restated the two factors directly above and added a third - are associated

with compliance or audit matters under the Act. The Committee cited examples oflegal

expenses which the Commission determined as not subject to the requirements ofthe Act,

such as legal defense to a charge ofslander (Advisory Opinion 1981-13).8

Again, in the Audit staffs opinion, the Committee's reliance on

the advisory opinions which it cites, is misplaced. Expenses related to an audit of

Committee accounts, both federal and non-federal, fall clearly into the administrative

expense category.

The Committee's General Counsel related that he reviewed the

reimbursed legal expenses questioned by the Audit staff and to the best ofhis knowledge

an insignificant amount ofreimbursed expenses could qualitY as 'expenditures,' which he

estimated to have been, at most, 5% or $96. The remainder, $1,831, in reimbursed

expenses did not concern federal candidates or the Act. No documentation beyond an

affidavit signed by the Committee's General Counsel was provided.

While it is true the Commission, in advisory opinions, has

concluded that certain types of activity and the legal expenses related thereto are not

subject to the Act's recordkeeping, reporting and other requirements, the type of activity

was clearly defined (e.g., a possible denial of access to the primary ballot ofthe state of

Massachusetts involving a party rule, AO 1982-35). Moreover, for such activity a

segregated fund would have to be established and maintained apart from other political

committee funds. For example in Advisory Opinion 1983-37, the Commission

concluded that "[t]o the extent monies in the fund will be used only for the purposes

described, and will be maintained separately from funds used for Federal elections, the

Party's legal expense fund would not be subject to the Act's limitations ... "

Given the expenses at issue, totaling $28,350, are not identified or

Also cited were Advisory Opinions 1980-4 and 1979-37.

11
documented as being for a purpose indistinguishable from any approved by the

Commission, the Audit staff views the expenses as administrative expenses subject to the

requirements ofthe Act and Commission regulations.

Holiday Cards, Flowers, Gifts, And Staff Social Outings

The Committee asserted that expenses for holiday cards, flowers,

gifts and staffsocial outings do not constitute expenditures under the Act. The reasoning

for this position apparently is that there was no electioneering message or fundraising

solicitation associated with the holiday cards or gifts, the flowers were not sent for the

purpose ofinfluencing any federal election, and no fundraising or electioneering activities

occurred at the staffsocial outings.9

As explained above, party committees that make disbursements in

connection with federal and non-federal elections shall allocate expenses for

administrative expenses not attributable to a clearly identified candidate, including rent,

utilities, supplies, and salaries. Advisory Opinion 1993-21. The types of administrative

expenses cited are illustrative and cannot be viewed as inclusive. The above expenses, in

the Audit staff's opinion, are classified properly as administrative expenses.

Fundraising For The Account

The Committee conceded that since certain disbursements from the

Account were mistakenly made and constitute expenditures under the Act, a certain

percentage ofthe fundraiser's salary should be reimbursed from the Committee's federal

account to the Account. The Committee is willing to concede payments in error of

$1,608.50 which according to its calculation represents 0.2% or about $16 ofthe

fundraiser's salary and is reimbursable by the Committee's federal account.

The fundraiser's salary should not be allocated based on a ratio of

federal expenditures to all expenditures from the Account. For example, it does not

appear that funds received from the Michigan Reapportionment Fund (for

Reapportionment expenses) and the various national party committees resulted from

fundraising efforts. As a result, the Audit staff's considers the entire amount ofthe

fundraiser's salary ($7,580) a shared administrative expense. These fundraising

expenses, as well as all other allocable expenses discussed above should not have been

paid from the Account. As previously stated, the Commission's regulations at 11 CFR

106.5(g)(l) provide two methods by which a party committee may defray the cost of

allocable expenses. Party committees that have established separate federal and nonfederal accounts may establish a separate allocation account into which funds from its

federal and non-federal accounts shall be deposited solely for the purpose ofpaying the

allocable expenses ofjoint federal and non-federal activities; or pay the entire amount of

an allocable expense from its federal account and transfer funds from its non-federal

Advisory Opinion 1981·26 is cited as support for the Committee's position.

12
account to it federal account solely to cover the non-federal share ofthe allocable

expense.

As stated, it is the opinion ofthe Audit staffthat expenditures for

activities such as independent reviews of committee accounts, staffsalaries, staff outings,

holiday cards, gifts, flowers, etc., clearly fall within the general category of

"administrative expenses" as noted at II CFR §106.5 (a)(2)(i).

Summary

Based on our analysis ofthe infonnation provided by the

Committee in its response to the interim audit report, the Audit staffrecalculated the

amount of expenses subject to allocation between the Committee's federal and nonfederal accounts. The revised total of allocable expenses disbursed from the Account

during the audit period was $226,309 ($66,525 +164,389 - 4,60510). As discussed above

"Fundraising for the Account," the Committee did not defray these allocable expenses in

accordance with 11 CFR 106.5(g)(l).

For purposes ofthe analysis and conclusions reached in this report,

the expenses paid from the Account (I) directly related to the purchase or construction of

an office facility, (2) directly related to influencing reapportionment decisions of a state

legislature, (3) directly related to legal actions approved by the Commission as not

subject to the Act, and (4) other identified costs directly and completely related to nonfederal activities are not considered as allocable expenses or expenses otherwise related

to influencing federal elections. However, the payments for each type of expense

enumerated directly above at items (I) through (3) should have been made from a

"separate segregated" account and the funds used in payment thereofshould have not

been commingled with funds used to pay allocable expenses. Further, the Committee

should revise its procedures to insure that payments for expenses noted in items (I)

through (3) above conform to the requirements set forth by the Commission. See e.g.,

Advisory Opinions 1993-09,1982-14 and 1981-13.

As to expenses paid from the Account which are viewed as

allocable expenses, the Committee's federal account should reimbursement the Account

$50,241 ($226,309 x .222) in payment ofthe federal account's share of allocable

expenses paid from the Account and file memo Schedules H4 disclosing the shared

expenses.

It should be noted that even though the Committee agreed that

certain identified expenditures should have been paid by the federal account, the

Committee did not provide evidence that the federal account reimbursed the Account nor

10 Represents expenses not related to shared activity incorrectly included in $230.914 cited, see page

7. interim report recommendations.

13
has it filed memo Schedules H4 disclosing such shared expenses. II

B. SHARED EXPENSES PAID FROM THE NON-FEDERAL CHECKING

ACCOUNT

Section 106.5(g)(I) ofTitle 11 ofthe Code of Federal Regulations states,

in part, committees that have established separate federal and non-federal accounts under

11 CFR 102.5(a)(I)(i) or (b)(l)(i) shall establish a separate allocation account into which

funds from its federal and non-federal accounts shall be deposited solely for the purpose

ofpaying the allocable expenses ofjoint federal and non-federal activities; or pay the

entire amount ofan allocable expense from its federal account and transfer funds from its

non-federal account to its federal account solely to cover the non-federal share ofthat

allocable expense.

In addition to the shared expenses paid from the Account discussed in

Finding A. above, our review ofthe Michigan Republican State Committee State

Account, a non-federal checking account, identified $42,992, in payments made directly

to vendors for shared administrative expenses. Funds expended from this account to pay

shared administrative expenses were not reported. The majority ofthe expenditures

related to the state convention held in August, 1994. The federal share ofthese expenses

is $9,544 ($42,992 x .222). Based on our testing ofshared activities originating from the

federal accounts, it was detennined that the Committee overpaid its portion ofsuch

expenditures in the amount of $41 ,978, therefore, no reimbursement by the federal

account is necessary.

Although these transactions were not handled in accordance with the

regulations, nevertheless, these payments should be reported as memo entries on

Schedule H4 (Joint FederallNon-Federal Activity Schedule).

A schedule ofshared administrative expenses originating from the nonfederal account was provided to the Committee

In the Interim Audit Report, the Audit staff recommended that, the

Committee: demonstrate the expenses in question are not allocable between the federal

and non-federal accounts; or, file memo Schedules H4 disclosing the shared

administrative expenses which originated from the non-federal checking account

($42,992).

In response to the recommendation, the Committee stated that it accepts

the findings and recommendations. However, to date the Committee has not filed memo

Schedules H4 disclosing the shared administrative expenses. 12

II

12

Our review ofthe Committee reports and statements filed through January 8, 1999 did not identify

any reimbursements or amending actions related to the transactions at issue.

See footnote II.

14
C. ApPARENT CORPORATE CONTRIBUTIONS

Section 441 b(a) ofTitle 2 ofthe United States Code states that it is

unlawful for any corporation organized by authority of any law of Congress, to make a

contribution or expenditure in connection with any election to any political office, or for

any corporation whatever, to make a contribution or expenditure in connection with any

election at which presidential and vice presidential electors are to be voted for, or for any

candidate, political committee or other person knowingly to accept or receive any

contribution prohibited by this section.

Section 114.9(d) ofTitle 11 ofthe Code of Federal Regulations states that

persons who make any use of corporate or labor organization facilities, such as by using

telephones or typewriters or borrowing office furniture, for activity in connection with a

Federal election are required to reimburse the corporation or labor organization within a

commercially reasonable time in the amount ofthe normal and usual rental charge for the

use ofthe facilities.

Sections 100.7(a)(I)(iii)(A) and (B) state, in part, that the provision of any

goods or services without charge or at a charge which is less than the usual and normal

charge for such goods or services is a contribution. Usual and normal charge for goods

means the price ofthose goods in the market from which they ordinarily would have been

purchased at the time ofthe contribution; and usual and normal charge for any services

means the hourly or piecework charge for the services at a commercially reasonable rate

prevailing at the time the services were rendered.

The Committee disclosed on Schedules H4 in its 1993 midyear report

disbursements totaling $8,841 that were categorized as exempt activity. In response to a

Reports Analysis Division request for additional information, the Committee stated that

the disbursements were related to 1992 phone banks, staffed by volunteers, on behalf of

the Republican Party Presidential nominee.

Our review indicated that Committee volunteers used telephones located at

approximately 72 corporations for get-out-the-vote activities from October 29, 1992

through November 3,1992. The script used by the volunteers reminded voters that

Tuesday was election day and requested them to support President George Bush, an

unnamed State Representative and the rest ofthe Republican ticket. It then asked "Can

President Bush and the rest ofthe Republican ticket count on your support?"

The Committee stated it was not invoiced for payment by any ofthe

corporations. As a result, payments for the use oftelephones and facilities were not made

until February 22, 1993, at which time, the Committee paid each corporation $1.50 per

telephone per hour. The Committee's calculation of $1.50 per telephone per hour was

based on various components. The components used in the calculation included local

access for each phone line, office space and utilities. However, the Committee did not

15
provide documentation justifying its calculation.

The interim audit report recommended that the Committee:

• provide invoices from the various corporate entities detailing its charges for the

services extended to the Committee including a breakdown for use of phones,

facilities and other equipment used. The documentation should include

components considered by the corporations when providing similar services to

other entities; and,

• demonstrate that the payments to the various corporate entities were made in a

commercially reasonable time, to include documentation that evidences the

standard billing practices ofthe various corporate entities.

In response to the interim audit report, the Committee provided affidavits

and/or letters from 28 ofthe approximately 72 corporations that provided telephones and

facilities for get-out-the-vote activities. The corporations responded to a letter from the

Committee which requested a statement explaining: "(1) whether or not your company

was fully reimbursed for costs associated with these telephone calls; (2) whether or not

this reimbursement was within a 'commercially reasonable time' (i.e. what are your

company's standard billing practices); and (3) whether or not our reimbursement to your

company covered any secondary costs such as electricity, heat, or water associated with

the operation ofthe phone bank from your business."

Except for one entity, the corporations responded in the affirmative to each

item contained in the Committee's letter. One response indicated the reimbursement did

not cover any secondary costs and was based on the $1.50 per phone per hour formula.

In addition, the Committee stated in its response that it has made a good

faith effort to calculate the normal and usual charge for the use ofsuch telephones and

facilities, and to make payment within a commercially reasonable time. It further stated

that, ifthe Audit Division determines that the Committee did not pay the normal and

usual charge for the use oftelephones and facilities, and did not make payments within a

commercially reasonable time, the Committee respectfully requests specific guidance in

order to comply with this requirement in the future.

The Audit Division is not in a position to calculate the normal and usual

charge for use of corporate facilities, nor should the calculation be done by the

Committee. Based on the wide range oftelephone services made available to business

entities and fluctuation in the cost to leased office space and other associated services, the

corporations are in the best position to calculate the normal and usual charge for use ofits

facilities. Further, the corporations should have invoiced the Committee, however, it is

apparent they did not. Reimbursements did not occur until approximately 3 Y, months

later.

16
As a result, it is the opinion ofthe Audit staffthat the payments to the

corporations do not appear to represent the normal and usual charge for the use of

telephones and facilities. Further, no documentation has been made available which

demonstrates that the payments were made within a commercially reasonable time.

D. UNREPORTED RECEIPTS AND DISBURSEMENTS

Sections 106.5(g)(l) and (3) ofTitie II ofthe Code ofFederal

Regulations state, in part, committees that have established separate federal and nonfederal accounts under II CFR I02.5(a)(l)(i) or (b)(I)(i) shall establish a separate

allocation account into which funds from its federal and non-federal accounts shall be

deposited solely for the purpose ofpaying the allocable expenses ofjoint federal and nonfederal activities; or pay the entire amount of an allocable expense from its federal

account and transfer funds from its non-federal account to its federal account solely to

cover the non-federal share ofthat allocable expense. A political committee that transfers

funds between accounts and pays allocable expenses according to this section shall report

each such transfer and disbursement pursuant to II CFR 104.10(b).

The Committee did not disclose on Schedule H3 transfers from its nonfederal checking account to its federal payroll account. These transfers totaled $34,913 in

1993 and $142,551 in 1994. In addition, the Committee did not report payroll

disbursements, totaling $177,464 (1993 - $34,913 and 1994 - $142,551), on Schedule H4.

The payments were made to committee personnel who had worked on non-federal

election polling. However, since the payments were made from a Committee account

they require disclosure on Schedules H4.

At the exit conference, the Committee agreed to amend its 1993 and 1994

disclosure reports to disclose the unreported transfers and the related payroll

disbursements.

The Audit staffrecommended that the Committee file amended Schedules

H3 and Schedules H4 for calendar years 1993 and 1994 to disclose the unreported

transfers and the related payroll disbursements made to Committee personnel.

In response to the recommendation, the Committee states that it accepts

the findings and recommendations. However, the Committee has not filed amended

Schedules H3 and Schedules H4 for calendar years 1993 and 1994 to disclose the

unreported transfers and the related payroll disbursements. 1J

E. ITEMIZATION OF DISBURSEMENTS

Section 434(b)(5)(A) ofTitle 2 ofthe United States Code states that each

1J See footnote II.

17
report under this section shall disclose the name and address of each person to whom an

expenditure in an aggregate amount or value in excess of $200 within the calendar year is

made by the reporting committee to meet a committee operating expense, together with

the date, amount, and purpose ofsuch operating expenditure.

Section 104.1O(b)(4) ofTitle II ofthe Code of Federal Regulations states,

in part, that a political committee that pays allocable expenses shall also report each

disbursement from its federal account or its separate allocation account in payment for a

joint federal and non-federal expense or activity. In the report covering the period in

which the disbursement occurred, the committee shall state the full name and address of

each person to whom the disbursement was made, and the date, amount and purpose of

each such disbursement.

The Committee did not itemize correctly payments, totaling $445,857, to

individuals from its payrol1 account for the period April 6, 1994 through November 16,

1994. The Committee disclosed payrol1 as lump sum payments on Schedule H4,

designating the payee as "Payroll Account". The Committee could not provide an

explanation for the error.

At the Exit Conference the Committee stated that it would amend its 1994

disclosure reports to correctly itemize the payments noted above.

The Audit staffrecommended that the Committee file amended Schedules

H4 disclosing the correct payees, dates and amounts for payments made from its payrol1

account during the period April 6, 1994 through November 16, 1994.

Although the Committee stated in its response that it accepts the findings

and recommendations, it has not filed amended Schedules H4 disclosing the correct

payees, dates and amounts for payments made from its payroll account. 14

F. ITEMIZATION OF RECEIPTS

Section 434(b)(3)(A) ofTitle 2 ofthe United States Code states that each

report un.der this section shall disclose the identification of each person who makes a

contribution to the reporting committee during the reporting period, whose contribution

or contributions have an aggregate amount or value in excess of $200 within the calendar

year, or in any lesser amount ifthe reporting committee should so elect, together with the

date and amount of any such contribution.

Section 102. 17(iii)(8)(B) ofTide 11 of the Code of Federal Regulations

states that after distribution ofnet proceeds, each participating political committee shall

report its share of net proceeds received as a transfer-in from the fundraising

representative. Each participating political committee shal1 also file a memo Schedule A

14 See footnote 11.

18
itemizing its share of gross receipts as contributions from original contributors to the

extent required under 11 CFR 104.3(a).

The Committee participated in ajoint fundraiser with Abraham For Senate

called the "Governor's Birthday Bash." The terms ofthe joint fundraising agreement

stipulated that the contributions were to be allocated: Twenty-five percent - Michigan

Republican State Committee federal account; Seventy-five percent - Abraham for Senate

Committee. The agreement further stipulated that any contribution not permitted under

the Federal Election Campaign Act of 1971 will be deposited in the Michigan Republican

State Committee non-federal account.

The Committee reported as transfers-in from the Governor's Birthday

Bash (net) receipts totaling $60,900. However, the Committee did not file memo

Schedule A's itemizing contributions from contributors representing its share ofthe gross

receipts ($72,439).

Committee officials agreed to file amended reports to correct the errors

noted above.

The Audit staffrecommended that the Committee file memo Schedule A's

itemizing its share of gross contributions.

The Committee stated in its response that it accepts the findings and

recommendations, but to date has not filed memo Schedule A's itemizing its share of

gross contributions.ls

G. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(l) (2) and (4) ofTitle 2 ofthe United States Code state, in

part, that a political committee shall disclose the amount of cash on hand at the beginning

ofthe reporting period and the total amount of all receipts and all disbursements for the

reporting period and calendar year.

The Audit staffs reconciliation ofthe Committee's reported activity to its

bank activity revealed that material misstatements occurred with respect to reports filed

covering calendar years 1993 and 1994.

For calendar year 1993, beginning cash on hand was overstated by more

than $73,659. The Committee was unable to provide an explanation for the discrepancy.

Receipts were understated by $34,802 primarily due to not reporting transfers from the

Committee's non-federal checking account to the federal payroll account. Disbursements

were understated by $35,055 due to unreported salary payments made from the

Committee's federal payroll account. Ending cash on hand was overstated by $73,912.

15 See footnote 11.

19
With respect to 1994, beginning cash on hand was overstated by $73,912,

carried forward from 1993. Receipts were understated by $146,703 primarily due to

unreported transfers from the non-federal checking account to the federal payroll account.

Similarly, disbursements were understated by $145,649 mainly due to unreported salary

payments made to individuals from the federal payroll account. Ending cash on hand for

1994 was overstated by $72,857.

The Committee was provided schedules ofthe above reporting errors at

the exit conference. Committee officials agreed to file a comprehensive amendment for

1993 and 1994 to rectify the errors.

The Audit staffrecommended that the Committee file a comprehensive

amendment for 1993 and 1994 to correct the errors noted above.

In response to the recommendation, the Committee stated that it accepts

the findings and recommendations, however, to date no comprehensive amendment for

1993 and 1994 has been filed. 16

" See footnote 11.

20
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 204b3

/\ClltIVl:V

FEDERAL ELECTION

COMMISSIO//

AUDIT DI~'If,ION

OCT I~ 9 16 AM '98

october 14, 1998

Robert 1. Costa

Assistant StaffDirector

Audit Division

TO:

THROUGH: James A. Pehrko

Acting StaffDi

MEMORANDUM

FROM:

BY:

Lawrence M. Noble

General Counsel

Kim Bright-Coleman I

Associate General Counsel

Lorenzo Holloway --;.../l}-

Assistant General Counsei .

Jamila 1. Wyatt ,'. :'. : .......\,..~..)

Law Clerk J

SUBJECT: Proposed Final Audit Report on the Michigan Republican State

Committee (LRA #509)

I. INTRODUCTION

The Office of General Counsel has reviewed the proposed Final Audit Report on the

Michigan Republican State Committee ("the Committee") submitted to this Office on

September 4, 1998, The following memorandum summarizes our comments on the proposed

Report,! We concur with the findings in the proposed Report which are not discussed

We recommend that the Commission consider this document in open session since the proposed

Final Audit Report does not include malleI'S exempt from public disclosure. See 11 C.F.R. § 2.4,

21
2

Proposed Final Audil Report

Michigan Republican Stale Commillee

LRA#509

Page 2

separately in the following memorandum. If you have any questions concerning our

comments, please contact Jamila Wyatt, the law clerk assigned to this audit.

II. JOINT FEDERAL AND NON-FEDERAL ACTIVITIES (II.A.)

The cover memorandum to the proposed Final Audit Report requests this Office to

specifically address the issue ofwhether the promulgation ofthe regulations on the

Allocations ofCandidate and Committee Activities affected the conclusions reached by the

Commission in some ofthe Advisory Opinions issued prior to the January 1, 1991 effective

date ofthe regulations. Explanation and Justification for 11 C.F.R. Parts 102, 104, and 106,

55 Fed. Reg. 26058 (June 26, 1990).

Political committees that engage in activity in connection with federal and non-federal

elections must establish either 1) a separate federal account for its federal activity or

2) establish a political committee that receives only contributions that are subject to

prohibitions and limitations ofthe Federal Election Campaign Act ("the FECA"). II C.F.R.

§§ 102.5(a)(I)(i) and (ii). Ifthe committee establishes a separate federal account, only fillJds

subject to the prohibitions and limitations ofthe FECA may be deposited into the separate

federal account. II C.F. R. § 102.5(a)(I)(i). Furthermore, all disbursements in connection

with federal election activity must be made from the separate federal account. Id.

Political commitlt.:es that have separate federal and non-federal accounts under

11 C.F.R. § 102.5(a)(I)(i) must allocate expenses in accordance with the Commission's

regulations at 11 C.F.R. § 106.5. 11 C.F.R. § 106.5(a)(I). The Commission's regulations

provide "detailed instrudions as to how [committees] are to allocate their administrative

expenses and cost for combined federal and non-federal activity." Explanation and

Justification for 11 C.F.R. § 106.5, 55 Fed. Reg. 26061 (June 26, 1990). For the purpose of

payment of expenses, the: Commission's regulations state that committees that have separate

federal and non-federal accounts shall establish a separate allocation account into which funds

from its federal and non-federal accounts shall be deposited solely for the purpose of paying

the allocable expenses orjoint federal and non-federal activities; or pay the entire amount of

an allocable expense from its federal account and transfer funds from its non-federal account

to its federal account solely to cover the non-federal share ofthat allocable expense. II

C.F.R. § 106.5(g)(l)2

The proposed Final Audit Report states that the Committee is engaged in both federal

and non-federal election activity. The Committee maintains an account entitled "Michigan

Republican State Comm. Administrative Account" ("the Account"). The proposed Final

Audit Report notes that $226,309 in allocable expenses were disbursed from the

Thc regulaliolls further slate that a political COllllllillee that pays allocable expellses sh~ll also reporl

each disbursement from its federal account or separate allocation account in paymenl for a joinl fedcral and

non-federal expense or activity. II C.F.R. §104.10(b)(4).

22
3

4

Proposed Final Audit Report

Michigan Republican State Commillee

LRA #509

Page 3

Account. The Committee's response to the Interim Audit Report states that the Account is a

"non-campaign" account because the funds expended from the Account are not spent for the

purpose ofinfluencing any election for Federal office or for the purpose ofinfluencing the

nomination or election of a state candidate. 3 The Committee identifies certain disbursements

from the Account that it believes were not made in connection with federal election activity.

However, the Committee concedes that the Account disbursed $6,811.41 related Lo shared

federal and non-federal activity.

The Committee relies on various advisory opinions issued by the Commission to

support the establishment ofthe separate non-campaign account. The Committee cites

Advisory Opinion 1982-14, in which the Commission determined that receipts and

disbursements from the reapportionment account would not constitute contributions or

expenditures, and thus are not subject to the FECA's disclosure requirements; Advisory

Opinion 1983-37, where the Commission determined that in certain circumstances, monies for

legal defense funds may be maintained separately and would not be subject to the FECA

limitations, prohibitions, or disclosure requirements; and Advisory Opinion 1993-9, where the

Commission held that creating a building fund is not done for the purpose ofinfluencing an

election, and that a separate account for the building fund would not be subject to the

disclosure requirements so long as it was segregated from any federal and non-federal

expenditures.

The Office of General Counsel believes that the legal principle in the advisory opinions

that committees can establish and maintain accounts that do not influence federal elections is

not applicable to the situation in this case.4 The Committee concedes that it made

disbursements from the Account in connection with a federal election. Therefore, the

Committee must follow the Commission's rules at II C.F.R. § 106.5 for allocating expenses

between the federal and non-federal accounts. 11 C.F.R. § 106.5(a)(1); see Advisory Opinion

1983-21 (once an account is established that does not influence federal elections, such as a

legal defense fund, it must be used for that purpose). Once the Committee makes

disbursements from the Account in connection with a federal election, it is no longer an

account that does not influence federal elections. Rather, it is account for which the

Committee must follow the "detailed instructions as to how [it] must allocate (its]

administrative expenses and costs for combined federal and non-federal activity." Explanation

and Justification for 11 C.F.R. § 106.5, 55 Fed. Reg. 26061 (June 26, 1990). Since the

According to thc proposcd Rcport. thc mnjorily of thc funds deposited into the Account were from

corporations.

Since the advisory opinions are not applicable to this situation, we do not believe that this case raises

the issue of whether the advisory opinions were affected by the Commission's promulgation oflhe regulations

on Allocation of Candidate and Committee Activities. The advisory opinions address the issue of whether

accounts that do not influence federal elections can be established. The regulations address the question of

allocalion once federal election activity has been eSLUblished. CV/Ilpare AO 1993-9 (building fund accounl)

with II C.F.R. § 102.5(a)(I) (political commi\\ees that engage in federal and non-federal activity) and

II C.F.R. § 106.5(a)(I)(i).

23
Proposed Final Audit Report

Michigan Republican State Committee

LRA #509

Page 4

Committee made disbursements from the Account in connection with federal activity it cannot

ignore the Commission's detailed instructions on allocating the expenses. This Office concurs

with the general proposition that the Committee must follow the rules for allocating expenses

between federal and non-federal activities. However, the rules require the allocation of certain

types of expenditures (i.e. administrative expenses, and the direct cost offundraising). 11

C.F.R. § 106.S(a)(2). Therefore, we recommend that the Audit Report discuss the basis for

characterizing certain expenses as allocable expenses.

This Office believes that the analysis used in section II.A.2 ofthe proposed Final Audit

Report that addresses expenses related to state ballot question and state focus group surveys

is equally applicable in some respects 10 section II.A.I ofthe Report which deals with

expenditures apparently related to shared federal and non-federal activities. This Office

recommends that the analysis in the two sections be reconciled. The Audit Division may

revise the proposed Final Audit Report to include a general section that discusses the same

issues that are raised in both sections ofthe Report.

ill. CORPORATE CONTRIBUTIONS (II.C.)

The Audit Division takes the position that corporations are best suited to calculate the

normal and usual charge for use of corporate facilities, rather than the Audit Division or the

Committee. While we agree that the Committee may not be in the best position to calculate

the usual charge for use of corporate facilities, this Office believes that the Committee has the

responsibility of calculating the normal and usual charge for use of corporate facilities and to

make payment within a commercially reasonable time. Committees may examine the fair

market value ofthe services being provided, as well as the current industry custom to

determine the normal and usual charge for use of corporate facilities, IJ C.F.R

§ lOO.7(a)(1)(iii)(B),

24