FEDERAL ELECTION COMMISSION

WASHINGTON. D.C. 20463

."

June 30, 1997

MEMORANDUM

SUBJECf: PUBLIC ISSUANCE OF THE AUDIT REPORT ON

ARLEN SPECTER '96

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TO:

FROM:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERT J. COSTA A.,J~.""" N~f-( te- ~<.' -()7

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

.'

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

Specter '96 which was approved by the Commission on June 12, 1997.

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 ofGeneral Counsel

Office ofPublic Disclosure

Reports Analysis Division

FEC Library
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REPORT OF THE AUDIT DIVISION

ON

Arlen Specter '96

Approved Jue 12, 1997

:rEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASBINGTON, D.C.

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REPORT OF THE AUDIT DIVISION

ON

Arlen Specter '96

Approved JUDe 12, 1997

FEDERAL ELECI10N COMMISSION

999 E STREET, N.W.

WASRINGTON, D.C.

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TABLE OF CONTENTS

ARLEN SPECTER '96

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•0 Executive Summary

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7• Audit Report

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02 Background

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5 Findings

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•1 Legal Analysis 23 38 Transmittal to Committee 29 1

Transmiual to Candidate 31

Chronology 33
FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 204&3

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REPORT OF THE AUDIT DIVISION

ON

ARLEN SPECTER '96

EXECUTIVE SUMMARY

Arlen Specter '96 (the Committee) registered with the Federal Election

Commission on January 20, 1995. The Committee was the principal campaign

committee ofSenator Arlen Specter, candidate for the 1996 Republican nomination for

President ofthe United States.

The audit was conducted pursuant to 26 U.S.C. §9038(a), which requires the

Commission to audit committees that receive Federal funds. The Committee received

51,010,457 in matching funds from the United States Treasury.

The audit findings were presented to the Committee at a conference held on

August 27, 1996, and in the Exit Conference Memorandum on November 26, 1996. The

Committee tiled a response to matters presented at ta'te conference as well as matters

addressed in the Exit Conference Memorandum.

In the Audit Report, the Commission made detenninations that the Committee

pay the United States Treasury 5233,768 in connection with the receipt ofa prohibited

corporate in-kind contribution; 583,749 in connection with the receipt of excessive

contributions and 53,562 for checks issued by the Committee that were never casbed.

The Committee has paid 587,311 ($83,749 + $3,562) to the United States Treasury.

These matters are summarized below.

AppAUNT PROHIBITED IN-KIND CONTRIBUTION - 2 U.S.C. 441 b(a) and 11

§CFR 100.7 (a)(1Xiii). The audit report noted that the Committee received a prohibited

in-kind contribution in the amount of$233,768. The Committee used an incorporated

charter air service for most ofits campaign travel and paid a first class rate for each

person traveling on its behalfinstead ofthe usual and nonna! charter rate. Since Koro

Aviation, Inc. is licensed to offer commercial service, the Committee should have paid

the usual and DOnna! charter rate. The Committee contended that 11 CFR §114.9(e)

provides for reimbursement at the flI'St class airfare. It should be noted that 11 CFR

§114.9(e) addresses the use ofaircraft owned or leased by corporations, other than a

corporation licensed to offer commercial services.

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..- J1NBEsoLVED Excrs-gnCONTRJRJmONs-2 U.S.C. §441a(aXIXA) and 11

\ ~- CPR §§110.1(k), 110.1(1), 103.3(bX3) and (4). The Committetrpaid the United States

Treasury 583,749, representing the value ofexcessive contributions that were not

reattributed or refunded in accordance with the Commission's P..egulations.

.STAI.£-DAT£D 0IE<;Jc$ - 11 CFR §9038.6. The Committee paid the United

States Treasury 53,562, representing the value ofchecks issued by the Committee that

were never cashed

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REPORTOF THE AUDITDIVISION

ON

ARLENSPECTER '96

I. BACKGROUND

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A. AUDIT AVTHORITV

This report is based on an audit ofthe Arlen Specter '96 (the Committee).

The audit is mandated by Section 9038(a) ofTitle 26 ofthe United States Code. That

section states that "After each matching payment period, the Commission shall conduct a

thorough examination and audit oftbe qualified campaign expenses ofevery candidate

and his authorized committees who received payments under section 9037.tt Also,

Section 9039(b) ofthe United States Code and Section 9038.1(aX2) ofthe Commission's

Regulations state that the Commission may conduct other examinations and audits from

time to time as it deems necess.ary.

In addition to examining the receipt and use ofFederal funds. the audit

seeks to detennine ifthe campaign has materially complied with the limitations,

prohibitions, and disclosure requirements ofthe Federal Election Campaign Act of 1971

(FECA), as amended.

B. AUDIT COVERAGE

The audit ofthe Committee covered the period from its inception,

November 1994, through April 30, 1996. The Committee reported an opening cash

balance ofS-o-; total receipts ofS4,134.24S; total disbursements of$3,983.428; and a

closing cash balance ofS150,817. In additio~ a limited review was conducted through

December 31, 1996 for purposes of detennining the Committee's remaining matching

fund entitlement

C. CAMPAIGN ORGANlZAnON

The Committee registered with the Federal Election Commission on

January 20, 1995. The Treasurer ofthe Committee is Mr. Paul S. Diamond. The

Committee maintains its headquaners in Philadelphi~ PA.

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During the period audited, the Committee maintained depositories in

Pennsylvania and in the District ofColumbia. To handle its fiJiancial activity, the

Committee utilized a total of4 bank accounts. From these accounts the campaign made

approximately 2,600 disbursements. Approximately 20,800 contributions from 16,450

persons were received. These contributions totaled 52,341,071.

In addition to the above contributioDS, the Committee received 51,010.457

in matching funds from the United States Treasury. This amount represents 6.54% ofthe

515,455,000 maximum entitlement that any candidate could receive. The Candidate was

determined eligible to receive matching funds on August 31, 1995. The Committee made

a total of6 matching fund requests totaling 51,011,171. The Commission cenified

99.93% ofthe requested amount. For matching fund purposes, the Commission

determined that Senator Specter's candidacy ended on November 22, 1995. This

determination was based on the date the candidate publicly announced he was

withdrawing from the campaign. The Commission's Regulations at 11 CFR 9033.5(a)(I)

states, in part, that the candidate's ineligibility date shall be the day on which the

candidate publicly announces that he or she is not actively conducting campaigns in more

than one State. On February 1, 1996, the Committee received its final matching fund

payment to defray expenses incUlTed through November 22, 1995 and to help defray the

cost ofwinding down the campaign.

D. AUDIT SCOPE AND PROCEDURES

In addition to a review ofthe Committee's expenditures to detennine the

qualified and non-qualified campaign expenses incUlTed, the audit covered the following

general categories:

1. The receipt ofcontributions from prohibited sources, such as those

from corporations or labor organizations (Finding II.A.);

2. the receipt of contributions or loans in excess ofthe statutory

limitations (Finding II.B.);

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;

4. proper disclosure ofdisbursements including the itemization of

disbursements when required, as well as the completeness and

accuracy ofthe infonnation disclosed;

5. proper disclosure ofcampaign debts and obligations;

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the accuracy oftotal reponed receipts, disbursements and cash

balances as compared to campaign bank records;

7. adequate recordkeeping for campaign transactions;

8. accuracy oftbe Statement ofNet Outstanding Campaign

Obligations filed by the Committee to disclose its fmancial

condition and establish continuing matching fund entitlement

(Finding II.C.);

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the Committee's compliance with spending limitations; and,

other audit procedures that were deemed necessary in the situation

(Finding 11.0.).

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As part ofthe Commission's standard audit process, an inventory of

campaign records is conducted prior to the audit fieldwork. This inventory is conducted

to determine ifthe auditee's records are materially complete and in an auditable state.

Based on our review ofrecords presented, it was concluded that the records were

materially complete and fieldwork began immediately.

Unless specifically discussed below, no material non-compliance was

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

discussed in this memorandum in an enforcement action.

II. AUDIT FINDINGS AND RECOMMENDATIONS - AMOUNTS DUE

TO THE U.S. TREASURY

A. ApPARENT PROHIBITED IN-KIND CONTRIBUTION

Section 441b(a) ofTitle 2 ofthe United States Code states, in part, that it

is unlawful for any national bank or 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 or labor organization, to make a contribution or

expenditure in connection with any election to federal office and that it is unlawful for

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

contribution prohibited by this section.

Section lOO.7(a)(1)(iii) ofTitle 11 ofthe Code ofFederal Regulations

states.. in part, that the tenn contribution includes the following payments, services or

other things ofvalue: A gift, subscription, loan (except for a loan made in accordance

with II CFR §lOO.7(b)(Il», advance, or deposit ofmoney or anything of value made by

any person for the purpose ofinfluencing any election for Federal office is a contribution.

For purposes of 11 CFR §100.7(a)(1), the tenn anything a/value includes all in-kind

contributions. Unless specifically exempted under 11 CFR §100.7(b), the provision of

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

normal charge for such goods orservices is a contribution. Ie-goods or services are

provided at less than the usual and normal charge, the amount ofthe in-kind contribution

is the difference between the usual and normal charge for the -goods or services at the

time ofthe contribution and the amount charged the political committee. (See also 11

CFR §114.l(a)(I»

Section IOO.7(a)(I)(iii)(B) ofTitle II ofthe Code ofFederal Regulations

states for purposes of II CFR §100.7(a)(1)(iii)(A), 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,

other than those provided by an unpaid volunteer, means the hourly or piecework charge

for the services at a commercially reasonable rate prevailing at the time the services were

rendered.

The Candidate/Committee used Koro Aviation Incorporated (Kora), a

charter air service, for the majority ofits campaign-related travel. Koro was fonned in

1984 and incorporated in the state ofDelaware on September 27, 1988. Koro has an Air

Carrier CertificateI and is authorized to operate an aircraft charter business which serves

the general public and commercial concerns. It maintains a hangar at the Hazleton

Municipal Airport, located in Hazleton, Pennsylvania

According to the Committee, it did not have a contract with Koro, nor did

Koro calculate the cost ofservice provided and submit an invoice to the Committee.

Rather, the Committee initially deposited $3,500 on account with Koro. Prior to each

flight, Committee personnel detennined the cost offU'St class commercial airfare2 for the

flight leges) in question and infonned Koro ofthat amount. Koro would then apply the

amount to the Committee's deposit.3 The Committee then issued a check to KOTO in the

same amount in order to maintain a $3,500 deposit balance and in effect, pay in advance.

During the period March 22, 1995 through November 10, 1995, the Committee paid

An Air Canier Cenificate certifies that an entity has met the requirements ofthe Federal Aviation

Act of J958, as amended, and the rules. regulations, and standards prescribed thereunder for the

issuance ofthis cenifieate and is hereby authorized to operate as an air carrier and conduct

common carriage operations in accordance with said Act and the rules. regulations. and standards

prescribed thereunder and the tenns, conditions. and limitations contained in the approved

operations specifications.

Committee representatives did not know ifthe rust class airfare represented an unrestricted. nondiscounted rate, the Committee merely called an airline to obtain the first class fare.

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$83,799 (including the initial deposit) directly to Koro for charterservices. In additio~

during the period November 14, 1994 through March 19, 1995, $37,948 was paid using

the Candidate's American Express credit card.

At the Audit staff'srequest, the Committee obtained from Koro what the.

charge for each flight would have been at the usual charterrate. However, it should be

noted that the information provided by Koro related to only those flights paid directly by

the Committee ($83,799), it did not include the charter rate for the flights paid with the

Candidate's American Express credit card ($37,948). Based solely on the information

provided at that time, the Committee should have paid $239,680. Consequently, it

appeared Koro made and the Committee received a prohibited in-kind contribution ofat

least 5155,881 ($239,680· 83,799).4

Finally, it appeared that Koro sub-contraeted three charters to Hazleton

Aviation. The Committee paid Hazleton Aviation $4,895. The Audit staffdid not

receive the flight log or itinerary for these trips. Therefore, it is not known ifthe cost

associated with these charters was based on a first class rate or an actual charter rate.

During our conference subsequent to fieldwork, Committee

representatives stated that this matter is analogous to a campaign using an aircraft owned

by a corporation and that the Committee bas complied with the Regulations at 11 CFR

§114.9(e), since the Committee paid in advance the first class commercial rate.

It isthe opinion ofthe Audit staffthat the Committees reliance on II CFR

§114.9(e) is misplaced. The applicable regulation is II CFR §lOO.7(aXl)(iii) which

requires the Committee to pay the usual and normal charge for the service provided. The

requirement ofadvance payment at a first class commercial rate is not applicable in this

matter. The Regulation at 114.9(e) addresses the use ofan airplane which is owned or

leased by a corporation, other than a corporation Iiccused to offer commercial service.

Koro is a corporation licensed to provide charter service, therefore, the Committee was

required to pay the same fare as other similarly situated customers ofKom.

In the Exit Conference Memorandum (the Memorandum), the Audit staff

recommended that the Committee:

(a) provide the flight itineraries and the actual charter cost for each

flight paid with the Candidate's American Express credit card;

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This amount will increase once the cbaner rates for the flights, paid with the Candidate's

American Express credit card and paid directly to Hazleton AYiation, are made available.

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(b) provide documentation from Hazleton Aviation, to include the

flight itineraries, the actual charter cost" for each flight, the number

ofcampaign stafftraveling, the type ofaircraft chartered and the

tail number ofeach aircraft chartered; -.

(c) provide documentation which demonstrates that the Committee did

not receive a prohibited in-kind contribution from Koro; or,

(d) make a payment to the United States Treasury equal to the

difference between the usual and Donnal cost ofall campaignrelated charters and the amount paid by the Committee. The

amount payable by the Committee is 5155,881. Once infonnation

is obtained regarding the charter costs requested in (a) and (b)

above, the amount payable will increase.

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In its response to the Memorandum, the Committee provided

documentation from Koro with respect to its charter rate for the majority offlights paid

with the Candidate's American Express card. The charter cost for those flights total

592,019. Documentation has not been provided for trips occurring on December 6, 1994,

December 12, 1994, February 5, 1995 and March 6, 1995. In addition, no documentation

has been provided for services provided by Hazleton Aviation.

As previously stated, the value ofcharterservices provided by Koro for

flights paid directly by the Committee totaled 5239,680. This amount is 2.86 times the fll'St

class rate paid by the Committee (5239,680/83,799). The charter rate for flights paid by the

Committee (via the Candidate's American Express credit card) totaled $92,019. This

amount is 2.66 (592,O19/34,643) times the first class rate paid by the Committee.

Therefore, the Audit staff applied the lower factor (2.66) to the December 6th, December

12th, February 5th and March 6th charters as well as to the Hazleton Aviation charters and

estimated a charter rate to be $28,711. Based on the above, the total value ofthe charter

services provided by Koro and Hazleton Aviation was 5360,410 ([S239.680 + 92,019

actual] + 28,711 estimated). The Committee paid a total ofSI26,642, for these services.

Therefore, it received contributions in the amount of5233,768 (see Attachment 1.).

In response to the Memorandum, the Treasurer stated that in seeking to

determine how to value and pay for the Koro air travel, the Committee looked to Federal

Election Code (the Code) [sic] Section 114.9 titled "Use of corporate or labor

organization facilities and means oftransponation." The Committee submits that this

provision governs the Koro situation.

The Treasurer further stated:

"It is the opinion ofthe Audit staff that the Committees reliance on II

CFR §114.9(e) is misplaced. The applicable regulation is II CFR

§IOO.7(a)(I)(iii) which requires the committee to pay the usual and

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informal [sic] charge for the service provided. The requirement of

advance payment at a first class commercial rate is not applicable in

this matter. The Regulation at 114.9(e) addresses the use of an airplane

which is owned or leased by a corporation, other thqll acorporqtion

licensed to Q,'" commercialservice Koro is a corporation licensed to

provide chartered aircraft service, therefore, the Committee was

required to pay the same fare as othersimilarly situated customers of

Koro would be required to pay for the same charter flights. [Emphasis

in original].

AS '96 believes that the Division has re-written the Code to come to

this conclusion. Koro is a corporation 'other than a

corporation...licensed to other [sic] commercjal service (or trq"el jn

connection with a federal electiqn. ' The Audit Division determined

that this reference to 'a corporation licensed to offer commercial

services in connection with a federal election was the same as a

corporation licensed to other [sic] commercial services.' In so doing,

the Audit Division has simply read out ofexistence part ofthe

regulation itself. I respectfully submit that this is legally indefensible.

As a matter ofwell-accepted legal interpretation, all the words in a

statute or regmation must be given effect."

"In applying the Code, the Commission must also give effect to each

word. Accordingly, the Commission must give some effect to the

language ...'in connection with a Federal election...' Because Koro is

not licensed to offer commercial service in connection with a Federal

election, AS '96 was obligated to pay Koro first class air fare for each

trip 'to a city served by regularly scheduled commercial service.'

Moreover, courts have long held that statutes and regulations like the

Code, which have penalty provisions, must be strictly construed ....

These extremely well-settled principles ofconstruction compel the

conclusion that AS '96 properly valued the Koro flights as first class

travel. Indeed, the Commission has itself expressly approved ofthis

valuation formula In a public notice disposing ofa Petition for

Rulemaking on December 11, 1991 (56 Fed. Reg. 64566), the

Commission stated:

The reimbursement rate set forth at 11 CFR 114(e) [sic] is cons;Stenl

with iraol more str;nren, than the rates used by the HQuse 0.(

Representatjves' CommjU,e on Stqndards Q(Qtlicia1 Conduct in

investigation [sic] potential violations ofthe Rules ofthe House of

Representatives. It is qlsq consis'ent with the General Services

Admjnistration's reru[Qljons regarding disclosure ofthe value of

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Darlene Waltm y MettQpOUtIO Educatjon Entaprisc$ Jne _U.S._, 1997 U.S. Lexis 462

(1997); Adamo Wrcc;kjnr Co y US., 434 U.S. 275 (1978); GRYhound Corporation y )n.caIm

Cornmme Cpmmjujon, 668 F.2d 1354, 1362 (D.C. eire 1981); Tobey y National Labgr

~JatiQn$ BQm;J. 40 F.3d469 (D.C. Cir. 1994); biroi y U 5.,476 F.2d Sll (D.C. Cir. 1973).

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permissible air travel by fecL-ral officials on corporate airplane under

the Ethics in Government Act. (Emphasis supplied fin original]).

The General Services Admi'listration regulatijus in effect at the time of

the 1991 Commission statement provided as follows:

...in the case ofacceptance oftravel on q private or chartered qirerqft

for purposes ofagency reports under this section, values shall be

determined by computing the total constructive cost oftransportation

usipW premium class ajr (ares to the extent scheduled air service is

ayailable between the relevant cities (56 Fed. Reg. 9878, promulgating

41 CFR § 301-1.9.) (Emphasis supplied [in original]).

The House regulations in effect at the time ofthe Commission

statement identically provided that chartered flights between cities with

regularly schedule [sic] air service were to be valued the same as fll'St

class flights: ... limw: Mannal, April, 1992 at 80.

Since the Commission approved ofthese GSA and House regulations,

it is conclusive that private aircraft travel between cities with regularly

scheduled commercial service is valued at the first class charge, without

any additional limitation on use in federal elections.

Similarly, a ruling by the Senate Ethics Committee supports the

interpretation that first class fares are appropriate for Koro's charges:

...Select Committees OfEthics United States Senate Intcz:pretatjve

RyHna No 412

In conclusion, AS '96 believes not only that it has followed the Code as

written, it has acted in accordance with the statements ofthe FEe

itself:"

In further suppon ofhis position concerning rules ofstatutory

construction, the Treasurer cited U.S. Supreme Court cases and cases before the Court of

Appeals for the District ofColumbia Circuit.5 The Treasurer also submitted two

affidavits from individuals responsible for scheduling air travel for the Candidate's

presidential and senate campaigns. The affidavits state that arrangements were made with

Koro in its capacity as a corporation, not under any arrangement for leasing chaner

aircraft services from Koro. A third affidavit was from Steve Jordan, who states he is the

General Manager for Koro Aviation, Inc.. Mr. Jordan also states that:

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"Koro became a licensed aircraft charterservice provider on or about

June 11, 1990. Koro is not a carrierlicensed to offer commercial

servicesfor bvel in connection with a federal election. In making

aircraft available to SeDator Specter during the period 1994 through

1995, as well as other periods, Koro did so in its capacity as a

corporation for reimbursement offirst class air fares and did not make

planes available to Senator Specter under any agreement for charter

services."

Finally, Senator Spectersupplemented the Treasurer response:

"I wish to add my strong disagreement with the audit staff's findings.

It is hard to see how the FEe can disagree with AS '96 response when

the FEe expressly approved the GSA regulation which said first class

fares applied:

,...in case ofacceptance oftravel on ...chartered aircraft ••.t

Similarly, the House and Senate Committees approved payment offirst class

fares on private aircraft without any distinction as to whether the aircraft was

licensed to offer commercial service. In the absence ofany such limitation. the

first class fare would apply to all private aircraft.

And, the FEe regulation itselfpurports to contain a limitation only on:

'an airplane ... licensed to ofTer commercial services for travel in connection

with a federal election. t

Since Koro is not licensed to ofTer commercial service 'in connection with a

federal electiont, that limitation does not apply to OlD' situation.

On the face ofthese provisions, AS '96 made the proper calculations."

The Committeets contention that it made the proper calculations seems to

rely on the premise that its interpretation of 11 CFR 114.9(e) is correct. It is not.

The wordina at issue is "... who uses an airplane which is owned or leased

by a corporation or labor orpnization other than a corporation or labor organization

licensed to offer commercial services for travel in connection with a Federal election

must, in advance, reimbune •.." As a matter ofinterpretation, the words - for travel ill

connection with a Fedena1 election - do not modify or otherwise pertain to "other than •

corporation or labor orpniution licensed to offer commercial services." The rqulation

covers travel in connection with a Federal election by a candidate, candidates agent or

person traveling on behalfof a candidate who uses an airplane which is owned or leased

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by a corporation or labor organization proyided that corporation or labor organization is

not licensed to offer commercial services. Koro is licensed to offer commercial services

by the Federal Aviation Administration (FAA). The FAA does not issue any license

expressly for commercial services for travel in connection with a Federal election.

Rather, any entity that is licensed to offer commercial services may offer those services.in

connection with travel for a federal election.

The Commissions Explanation and Justification for this regulation states,

in relevant part:

The above explanation is clear • "An administrative agency's

interpretation ofits own regulations is controlling unless it is plainly erroneous or

inconsistent with the regulation [footnote omitted].,,6 Also on point. "...[an]

administrative role may not, under the guise ofinterpretation, be modified, revised,

amended or rewritten [footnote omitted]".7

Subsection (e) allows candidates, candidates agents or persons

traveling on behalfofcandidates to use airplanes owned or leased by a corporation or

labor organization which is not licensed to offer commercial services provided that the

corporation or labor organization is reimbursed in advance for the use. The advance

reimbursement is required because the corporation or labor organization is not in the

regular business ofoffering commercial transportation for credit. Under the standard

reimbursement formula provided in (eX1Xi) and (ii)t the amount ofthe required

reimbursement will be known in advance.

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(e) Use ofairplanes and other means oftransportation

Additional guidance concerning the use ofaircraft owned or leased

by a corporation or labor organization which is not licensed to offer commercial services

is contained in the Financial Control and Compliance Manual for Presidential Primary

Candidates Receiving Public Financing. Chapter V, Campaign Travel, at Section B.3.,

Page 161, Corporate or Labor Organization Aircraft, which states - ,. To varying degrees

campaigns make use of aircraft for campaign travel which are owned or operated by labor

organizations or corporations Dot licensed to offer commercial senrices." (emphasis

added). The Commission's publication entitled, Campaign Guide for Congressional

Candidates and Committees at page 22, states "A candidate and his or her campaign staff

may use an airplane owned or leased by a labor organization or by a corporation that is

not licensed to offer commercial services (one that is not an 'air canier' under Federal

Aviation Administration roles) .....,1

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Nonnan SiDler. Statutes and Statutory Construction, Vol. lA (New York, 1993), p. S4S.

Singer, p. S4S.

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Finally, the Committee's references to valuation methods contained in the

General Services Administration regulations, House Ethics Manual, April, 1992 at page

80, and Interpretative Ruling No. 412, Select Committee on Ethics, United States Senate

are Dot germane in that the JUles cited do not relate to travel by candidates in connection

with a Federal election.

It is the opinion ofthe Audit staffthat the Committee's arguments are

without merit. The Commission's Regulation and related publications are clear and

unambiguous with respect to this matter.

Based on all the infonnation made available to date, it appears that the

Committee should have paid Koro S360,410. Consequently, it appears that Koro made

and the Committee received a prohibited in-kind contribution ofS233,768 (5360,410-

126,642).

Recommendation 1#1:

The Audit staffrecommends that the Commission make a determination that the

Committee make a payment of$233,768 to the United States Treasury, representing the

value ofprohibited in-kind contributions received.

B. APPARENT UNRESOLVED EXCESSIVE CONTRIBVTlONS

Section 441a(a)(1)(A) ofTitle 2 ofthe United States Code states that no

person shall make contributions to any candidate with respect to any election for Federal

office, which, in the aggregate, exceed $1,000.

Section 110.l(k) ofTitle 11 ofthe Code ofFedcral Regulations states, in

part, that any contribution made by more than one person, except for a contribution made

by a pannership, shall include the signature ofeach contributor on the check, money

order, or other negotiable Ub1IUlnent or in a separate writing. A contribution made by

more than one person that does not indicate the amount to be attributed to each

contributor shall be attributed equally to each contributor. If a contribution to a candidate

on its face or when aggregated with other contributions from the same contributor

exceeds the limitations on contributions, the treasurer may ask the contributor whether

the contribution was intended to be a joint contribution by more than one person. A

contribution shall be considered to be reattributed to another contributor ifthe treasurer of

the recipient political committee asks the contributor whether the contribution is intended

to be a joint contribution by more than one person, and infonns the contributor that he or

she may request the return ofthe excessive portion ofthe contribution ifit is not intended

8 Similar language is contained in the Campaign Guide (for Congressional Candidates and

Committees] cWcd July 1988.

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to be a joint contribution; and within sixty days from the date ofthe treasurers receipt of

the contribution, the contributors provide the treasurer with a Written reattribution ofthe

contribution, which is signed by each contributor, and which indicates the amount to be

attributed to each contributor ifequal attribution is not intended.

Section 110.1(I) ofTitle 11 ofthe Code ofFederal Regulations states, in

part, that ifa political committee receives a written reattribution ofa contribution to a

different contributor, the treasurer shall retain the \\Titten reattribution signed by each

contributor. Ifa political committee does not retain the written records concerning

reattribution as required, the reattribution shall not be effective, and the original

attribution shall control.

Section I03.3(b)(3) ofTitle 11 ofthe Code ofFederal Regulations states,

in part, that contributions which exceed the contribution limitation may be deposited into

a campaign depository. Ifany such contribution is deposited, the treasurer may request

redesignation or reattribution ofthe contribution by the contributor in accordance with 11

CFR §11 0.1 (k). Ifa redesignation or reattribution is not obtained, the treasurer shall,

within 60 days ofthe treasurers receipt ofthe contribution, refund the contribution to the

contributor.

Section I03.3(b)(4) ofTitle 11 ofthe Code ofFederal Regulations states

that any contribution which appears to be illegal under 11 CFR §103.3(b)(3), and which

is deposited into a campaign depository shall not be used for any disbursements by the

political committee until the contribution has been determined to be legal. The political

committee must either establish a separate account in a campaign depository for such

contributions or maintain sufficient funds to make all such refunds.

At the entrance conference, Committee representatives informed the Audit

staffthat excessive contributions received early in the campaign had not been refunded.

Further, the Committee's Statement ofNet Outstanding Campaign Obligations (NOCO)

filed with each matching fund submission included, in the liability section, an amount for

refunds due to contributors.9 As a result, certain contributions were tested on a 100%

basis, while the remaining contributions were tested on a sample basis.

Based on our 10()O;/c) review, the Audit staffidentified excessive

contributions totaling $74,370 that were not refunded or reattributed in accordance with

11 CFR §103.3{b)(3).

In addition, our sample review ofcontributions identified two excessive

contributions totaling $2,000. The identified exceptions, when used to estimate the total

dollar value of unresolved excessive contributions in the population sampled, resulted in

9

This amount remained constant on each NOCO submined.

Page 14
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a projection of 59,379. It should be noted that the Committee maintained sufficient

funds to make all necessary refunds.

At our conference subsequent to the close offieldwork, the Committee

was provided with a schedule ofthe apparent excessive contributions. The Committee

stated they would research the contributions.

In the Memorandum, the Audit staffrecommended that the Committee

provide evidence that the contributions in question were not excessive or make a payment

to the United States Treasury in the amount ofS83,749.

In response to the Memorandum, the Committee did not contest the

matter. On February 19, 1997, the Committee issued a check to the United States

Treasury covering the amount ofthe excessive contributions noted above. The check was

received in the Audit Division on March 5, 1997 and delivered to the U.S. Treasury on

March 7, 1997.

c. DETERMINATION OF NET OUTSTANDING CAMPAIGN OBLIGATIONS

Section 9034.5 (a) ofTitle 11 ofthe Code ofFederal Regulations requires

that within 15 calendar days after the candidates date ofineligibility, the candidate shall

submit a statement ofnet outstanding campaign obligations which reflects the total of all

outstanding obligations for qualified campaign expenses plus estimated necessary

winding down costs.

In addition, Section 9034.1 (b) ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that ifon the date ofineligibility a candidate has net

outstanding campaign obligations as dermed under 11 CFR §9034.5, that candidate may

continue to receive matching payments provided that on the date ofpaynlent t'tere are

remaining net outstanding campaign obligations.

Senator Specter's date ofineligibility was November 22, 1995. The Audit

staffreviewed the Committee's financial activity through June 30, 1996, examined

disclosure reports for the period July 1, 1996 through December 31, 1996, analyzed

winding down costs, and prepared the Statement ofNet Outstanding Campaign

Obligations which appears below.

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ARLEN SPECTER '96

STATEMENT OF NET OUTSTANDING CAMPAIGN OBLIGATIONS

as of November 22, 1995

as updated through December 31, 1996

ASSETS

Cash in Bank

Cash on Hand

Accounts Receivable

Capital Assets

Total Assets

OBLIGATIONS

Accounts Payable for Qualified campaign Expenses

loans Payable

loan Interest Payable

Amount Payable to U. S. Treasury

Apparent Prohibited Contributions $233,768

Apparent Unresolved Excessive Contributions 83,749 (b)

Stale-dated Checks 3,562

Actual Winding Down Costs (11/23/95 -12131/96)

Estimated Winding Down Costs (01/01/97 -12/31/97)

Total Obligations

Net Outstanding Campaign Obligations

as of November 22,1995 (Deficit)

$ 57,643 (a)

36

112,190

2UZ3

392,088

551,000

12,082

321,079

140,678

1ZJ.8.S

$ 198,242

1 434 116

($1 235874)

<a> Outstanding checks issued prior to the date ofineligibility and determined to be stale-dated have

been added back to the Cash in Bank figure.

(b) On September 26, 1996, the Committee made a contribution refund of$4,796. This amount is

included in the amount of unresolved excessive contributions, payable to the U.S. Treasury (see

Finding II.B.). The 9/26/96 refund is not included as an obligation for purposes of calculating the

Candidate's remaining entitlement.

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IS

Shown belc.ware adjustments for funds received after November 22, 1995, based

on the most current financial information available.

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Net Outstanding Campaign

Obligations (Deficit) as of

11122195

Matching Funds Received

11123/95 - 12131/96

Net Private Contributions

Received 11123195 to

12131/96

Other Receipts/Income

Received 11/23195 to

12/31/96

Remaining Net Outstanding

Campaign Obligations (Deficit)

($1,235,814)

1,010,457

8,993

4099

($ 21 232S)

As presented above, the Committee bas not received matching fund payments in

excess ofits entitlement

D. STALE-DATED COMMITfEE CHECKS

Section 9038.6 ofTitle 11 ofthe Code ofFederal Regulations states, in

part, that ifthe committee bas checks outstanding to creditorsthat have not been cashed,

the committee shall notify the Commission. The committee shall inform the Commission

ofits efforts to locate the payees., ifsuch efforts have been necessary., and its efforts to

encourage the payees to cash the outstanding checks. The committee shall also submit a

check for the total amount ofsuch outstanding checks payable to the United States

Treasury.

During the review ofCommittee disbursement activity, the Audit staff

identified three checks made payable to vendors which had not been cashed. Those

checks totaled 53,562 and were dated April 23, 1996.

At the conference subsequent to the close of fieldwo~the Committee was

provided a schedule ofthe outstanding stale-dated checks but did not comment with

regard to this matter.

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In the Memorandum, the Audit staffrecommended that the Committee

provide evidence that eitherthe checks were not outstanding orthat the outstanding

checks were voided with evidence that DO Committee obligation existed.

In its response to the Memorandu:m, the Committee did not contest this

matter. On February 19, 1997, the ec.mmittee issued acheck to the United States

Treasury covering the amount ofstale dated checks. The check was received in the Audit

Division on March 5, 1997 and delivered to the U.S. Treasury on March 7, 1997.

RecommendatioD #0.

The Audit staffrecommends that the Commission make a detennination that

stale-dated checks, totaling 53,562, are payable to the United States Treasury. The

payment has been made.

III. SUMMARY OF AMOUNTS DUE TO THE U.S. TREASURy ..

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Finding II.A.

Finding n.B.

Finding II.D.

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Apparent Prohibited Contributions

Apparent Unresolved Excessive Contributions

Stale-dated Committee Checks

Total

5233,768

83,749*

3.56'·

$321.079

As stated in Findings U.B. and D. these amounts have been paid.

Page 18
Attachment 1

J)IIge 1 of3

~, AlLIN IPIC'IB..

I

Ken ,............ DiNcIIr ..,c.n••• CMcIc

\'

Check Cheek Amount hid T,. -- Koro's

DIll tA Br CC!'I'*M' DIll QwterCqlt

1307 3.soo.oo ..... 03127. 1318 2.412.00 03l25Il5 PHL~-PHt.. 8.180.00

03I2M5 1323 818.00 03127. PHL-PIT-DCA 2.924.10

03f3CW5 1327 2.".50 03f3CW5 DCA-MHT-DCA 4.124.93

03131. 1321 4.020.00 03131115 DCA-PSM DCA x

0WC#95 1335 5.1•.00 04J01. DCA-DSM-HYS-PHL 10.281.00

04121195 1429 822.00 0tI21115 PHL-BTV-MHT-PSM 4.589.55

CMI2M5 PSM..fIHL x

04124115 1431 211.00 04124115 AVP-DCA 1.737.83

<j 04128195 1433 413.50 04I2M5 8QS.PIAt.DCA 3.234.15

05ID8I95 1470 1.183.00 05105II5 DCA-MHT 2.810.00 '1 05111115 1471 4.018.00 05I0M5 DCA-MHT-DCA 2.327.12

05112115 CGX-ALO-DSM x • 0!113115 011' DEN 12.044.10 0 05114115 DEN-HZL x

7 05115115 1410 1.218.00 05115115 ACYePIT-ERI-DCA 4.080.29

05I22IH 1535 331.00 05I22III AVP-DCA 1.302.83

• 08I0BI95 1578 251.00 0IID5II5 PT-DCA 1.410.83 e 08I0ItI5 1_ 1.454.00 "'HEF~ 5.940.00

2 0611M5 1834 1.741.00 0111l1li DCA-MHT-8DL 2._.81

5 01111115 PHL-PIT-DCA 3.515.4lI8

08123#15 1858 3.038.00 08123#15 DCA-DSlI MKC-ICT-PHL 10.100.00

.. 06I26IH 1. 874.00 0II28II5 PHL-AOO-JST-PHL-DCA 2.835.83

1 07I03Il5 1. 1.204.00 0II3QfI5 PHL-MHT 3.404.00 07~1115 MHT~ x 11 07105195 1701 4.215.00 071D1115 PHL-8UX-DSM 11.820.00

e 07107115 DSM-8RL4)SM .v:t x

0 07/10195 1707 2.187.00 07110115 ACY-MHT-PSM-DCA 5.784.50

07/17/95 1716 2.814.00 07117115 PtL-PWM BGR-MHT-PSM-DCA 4.178.12

08107195 1838 3.335.50 07124115 PHL-ATL-DCA 7.201.• 0713G115 ACY-MHT 4.....38

07131115 MHT-8OS-DCA x 08111115

,_

287.71 0IID5II5 DCA-ACY 2.507.• 08114195 1113 8.315.00 01111115 DCA-OSM x 01112115 DaM CIDDAL 15.020.08

01113115 DAL-Pti. x 08123#15 1825 2.821.00 01114115 PHl-DEN-PHL. 2.847.10

01117115 PSM..osM x 09101195 1952 2.000.00 08111115 DSM-AZo-DSM 12.188.00

0111M5 QSM.DCA x 09112/95 1984 5.240.50 0lI03II5 DCA-ACY 1.521.81

0lI07115 DCMIOS-DCA 4.588.85

09114195 2037 830.00 08lOIII5 PHL-MHT-PHl 3.358.75

0II22II5 2011 2.218.20 0II1Qt15 PHL1lSM PHL 8.753.00

otItlll5 PHL-PIT-MHT-PHI.. 2.803.50

01125195 2076 3.341.00 0II22II5 DCA-DlW-PLN 11.443.81

08l23Il5 PLNDSM PHI. x 1Qt0611S 2115 3.371.00 09I2M5 DCA-MHT 2.526.81

10101. MHT.fIV1IM x 1Q1Q2115 PWM IGR-MHT 5.304.25

1Q1D3115 WfT-PHL x ,.... MHT-A'IP-PHL 2."5.50 1011Q115 21,. 3.105.00 1Q1D7115 PHL-PSM-PHL 5....00

''''PHL-PlT4IH-1KL-PIT-DCA 4.551.50

10112115 2132 1.017.00 10111115 DCA-MHT 2.521.10

1011M5 21. 1.112.00 10111115 PHL..QD.DCA 8.585.00

1Q127. 2110 1.1S2.oo 10tZ3115 PHL-DII- DCA 1.223.37

11lOIII5 2211 1.171.00 1013Df15 PHL.fIGR~ 4"'" 11110tI5 2220 di.GO 11I04Il5 PHL-IGR-PHL 3.IIUD

SUB-TOTAL 11.780.11

LESS CREDIT 1M.1.I5

TOTAL 13 7M • mmze x see page 3 for .........

IM3565.VYK4

page 19
Attachment

page 2 of3 ,,-....

ARLEN SPECTER '96

Koro Flights Paid by Candidate'. AmeriC8n Express Credit Card

Check Amount Paid Trip Itinerary Koro's

.By Committee Date Charter Cost

12109194 4,192.00 11/14/94 PHL-MHT-DSM 6.720.00

12122194 2,025.00 11/17/94 MHT-DCA-MHT 1.820.00

12122194 1,215.00 11/18/94 MHT-PHL 2.520.00

01105195 2,173.40 11/16/94 BRL-MHT 4,060.00

1,541.00 12106194 PHL-MHT-PHL 4,099.06 0

CJ 12106/94 MHT-DCA X

... 1,764.00 12/12/94 PHL-QMA-SUX-eGX 4,692.24 0

G 02101195 4,988.00 01106J95 DCA-TUS 26,930.48 7 01107195 TUS-PRC-PHX X

• 01108195 PHX-TUS-PHX X e 01109195 PHX-TUS-PHX-DCA X 2 02127195 11,513.70 01/16195 PHL-DMs-MCW 27,746.12 5 01/16195 OMS-MDT X

• 01/17195 MDT-DCA X 1

4 01/22/95 PHL-MHT-PHL X

{1 02106195 PHL-PBI-RSW-PHL X

1 02113195 PHL-MHT-PVVM-DCA x

02105195 DCA-eLE-PHL 5,172.64 #

04/07195 6,792.45 02117195 PHL-DCA-CGX-AVP 19,586.67

02119195 PHL-MHT x

02123195 DCA-PIT-DCA x

02125195 PHL-OSM·PHL x

03103195 DCA-ACY x

03106195 PHL·PIT·DCA 1,726.07 #

04128195 1 74300 03/19195 PHL·MHT·PHl 2636 04

TOTAL 3794755 107 70s 32

Hazleton Av18t1on Flights Paid by the Committee

05/11195 748.00 05112195 DCA-eGX 1,989.68 0

09/14195 1,004.00 09/10195 PHL-FSD 2,670.64 0

09/14195 1,431.00 09111/95 FSD-DSM 3,806.46 0

09/14195 1.048.00 09/11/95 DSM·DCA 2,787.68 0

10106J95 66400 10lO5I95 PHL-MHT 1.766 24 0

TOTAL 4.00 1302070

• Date Committee paid directly American Express.

x. oor# See page 3 for explanation.

IM8611.WK4

Page 20 "
Attachment 1

page 3 of 3

ARLEN SPECTER '96

Recap of Chartered Air Cost

Korols Amount Paid Amount of In-kind

Charter Cost By Committee Contribution

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Koro chartered flights paid directly

by Committee check (page 1)

Koro chartered flights paid by the Candidatels

American Express Credit Card (page 2)

Hazleton Aviation flights paid directly

by Committee check (page 2)

TOTAL PROHIBITED IN-KIND CONTRIBUTION

Legend

239.679.76

107.709.32

13.020.70

83.798.96

37,947.55

4.895.00

155.880.80

69.761.77

8,12570

23376827

o Koro did not provide the actual charter cost for Koro flights occurring on

December 6 and December 12. 1994 and all Hazleton Aviation flights, As

stated in Finding II. A.• the amount was estimated using a factor of 2.66 times

the amount paid by the Committee.

# The flight leg was omitted on the schedule provided by Koro for flights

occurring on February 5.1995 and March 6.1995. Based on the documentation

provided by Koro. the Audit staff could not determine if the actual charter cost

for that leg was included in the amount calculated by Koro. Accordingly. the

Audit staff used a factor of 2.66 times the amount paid by the Committee.

Adjustments will be made if these estimates are proved to be duplicative.

x Kora's charter cost is included in the figure directly above.

IM3935,WK4

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FEDEnAl fL~CTlori

COHfef!: c;fOrf ~:I[lr~ U:".r ::;rnfi

\., - FEDERAL ELECTION COMMISSION H4t·13 111 PH '97

WASHINCTON. D.C. 20463

May 13, 1997

MEMORANDUM

Oble/.

General Co I

Kim Bright oleman\~ Associate eral Counsel

Lorenzo Holloway 1.../~ Assistant General Counsel

TO: Robert J. Costa

Assistant Staff ·

Audit Divisi

THROUGH: John C. S ·

StaffDu·"'W~

FROM:

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Susan L. Kay ~~.;( ?

Attorney

SUBJECf: Audit Report on Arlen Specter '96 (LRA #475)

I. INTRODUCTION

The proposed Audit Report on Arlen Specter '96 ("the Committee") was submitted to the

Office ofGeneral Counsel on April 2. 1997. The following memorandum summarizes our

comments on the proposed reportI We concur with the fmdings in the Audit Report which are

Dot discussed separately in the following memorandum. Ifyou have any questions. please

contact Susan Kayt the attorney assigned to this audit.

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

Repon does not include matters exempt from public disclosure. See II C.F.R. § 2.4.

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Mcmonndwn to Robert J. Costa

LepI Comments to Audit Report on Arlen Specter &96

Paac 2

II. APPARENT IN-KIND CONTRIBUTIONS ( IleA. )

A. AUDIT DIVISION FINDINGS

The proposed Audit Report recommends that the Committee make a payment of

$233,768 to the United States Treasury. According to the Audit staff, this figure represents the

value ofa prohibited in-kind contribution received by Arlen Specter '96 from Koro Aviation

Incorporated ("Koro"), a charter air service. According to the Report, the Committee paid Koro

based on a ftrSt class rate pursuant to 11 C.F.R. § 114.9(e), and not based on the usual and

normal charter rate required by 11 C.F.R. § IOO.7(a)(1)(iii)(B).

The Audit Report notes that the Candidate/Committee used Koro's charter air service for

a majority ofits campaign-related travel.2 Koro was fanned in 1984 and was incorporated in the

state ofDelaware on September 26, 1988. Koro has an Air Camer Certificate and is authorized

to o~rate an aircraft charter business which serves the general public and commercial concerns.3

Since Koro is a commercial air service and has established charter rates, the Audit staff

concluded that the Committee should have paid according to those charter rates. See 11 C.F.R.

§100.7(a)(1)(iii)(B).

The Committee had an arrangement with Koro whereby the Committee maintained a

deposit of$3,500 with Koro. Prior to each flight, Committee personnel detennined the cost of

first class commercial airfare for the flight leg(s) in question and informed Koro ofthe amount.

Koro would then apply the amount to the Committee's deposit. The Committee would then

reimburse their account in order to maintain a 3,500 balance. According to the Audit staff, the

Committee was basically paying Koro in advance for the flights.

The Audit staffidentified an in-kind contribution in the amount ofS233,768 by

calculating the difference between the usual and nonnal charge for Koro's services and the

amount the Committee was actually charged. The Audit Report found that from March 22, 1995

through November 10, 1995, the Committee paid $83,799 directly to Koro for air transportation

services, and from November 14, 1994 through March 19, 1995, the Committee paid Koro an

additional $37,948 with the Candidate's American Express card.4 In addition, Koro subcontracted three charters to Hazelton Aviation, and the Committee paid $4,895 for these flights.'

Thus, the Committee paid a total of$126,642 for these travel services.

Koro sub-conuaeted Hazekon Aviation on three occasions. The Committee also used other commercial air

services which are not a subjed ofthis Audit Report.

3 Koro maintains a hanpi' at the Hazelton Municipal Airport in Hazelton. Pennsylvania.

.. The Audit statrfound that the Committee paid this amount directly to American Express. Therefore. none

ofthis amount constituted a personal expenditure by the Candidate that is subject 10 his personal limitation of

$50.000. I J C.F.R. §90J5.2(aX2).

, The Audit staffdid not receive the night log or itinerary for these trips. TIlere(ore. it is not known if the

cost associated with these chaners was based on a first class rate or an actual chaner rate.

Page 24
Mcmonndum to RobertJ. Costa

LcpI Comments 10 Audit Report on Arlen Specter &96

Page 3

The total value ofthe charter services provided by Koro and Hazelton Aviation was

5360,410 according to the Audit staff's calculation. This calculation is based on Koro's usual

and nonnal charter rate. The Audit staffobtained the charter rate for the flights directly from

Koro.6 Koro's nonnal and usual business practice is to charge an hourly rate. The specific

hourly rate is based on the type ofplane chartered. This information is published in The Air

Charter Guide: The Worldwide Guide to Business and Individual Charter ofAircraft.' Since the

Committee should have paid 5360,410, and it only paid 5126,642, the Audit stafffound an inkind contribution in the amount of5233,768.

The Committee also looks to General Services Administration regulation and Senate

Ethics regulations in support ofits applicatio~ ofsection 114.9(e). The Committee argues that

section 114.9(e) follows GSA regulation and the Senate Ethics regulations for requiring first

class air fare.

The Committee disputes the Audit staff's finding; it contends that instead ofpaying the

Donnal and usual charter rate as required by section 100.7(a)(I)(iii)(B), it appropriately relied on

11 C.F.R. § 114.9(e) in applying fust class commercial air fare to the Koro flights. The

Co~itteecontends that the modifying phrase in section 114.9(e) "licensed to offer commercial

servicesfor travel in connection with a federal election" refers to planes that offer travel services

specifically for federal elections. Thus, the Committee argues that Koro was licensed to offer

commercial services, but was not licensed to ofTer commercial services in connection with a

federal election.

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B. COMMIt lEE ARGUMENTS

6

In addition, the Committee argues that it had an arrangement with Koro as a corporation

and not as a commercial charter service. The Committee supports this argument with affidavits

from two committee schedulers and froln the General Manager ofKoro who attest to the fact that

the arrangement between the Committee and Koro was based solely on Koro's capacity as a

corporation.•

Koro provided the Audit staffwith the value of charter services provided for all but four nights. The Audit

staffrequested the documentation from the Committee, but the auditors never received the infonnalion regarding

travel occuning on December 6, 1994, December 12, J994, February S, 1995 and March 6, 1995. In addition. no

documenwion was provided for services provided by Hazelton Aviation. The Audit staff cstilnDtccJ the value of

these services based on the documentation they had received for the majority ofOights provided by Koro. The

estimated amount calculated by the Audit staITfor these seven nights is $21,711. In light ofthe fact that the Audit

staffrequested the information, and the Committee did agree to provide the informalion,I I C.F.R. § 9033.1(bX5),

the Office ofGeneral Counsel believes that it wu appropriate for the auditors to estimate the value ofdIe services.

Ifadditional information is received, this figure will be adjusted accordingly.

7 10th Edition (1996) .

• These affidavits were provided to the Office ofGeneral Counsel following a meeting between Senator

Specter and the stafffrom the Offie?) ofOenerai Counsel held on February 14. 1997. At the meeting. Senator

Specter discussed the Committee's position with respect to the application ofsection 114.9(e).

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Memorandum to RobeI1 J. CosIa

LepI Comments to Audit Report on Arlen Specter &96

Pqe4

c. ANALYSIS

The.Committee incorrectly relied on II C.F.R. § 114.9 in paying for the flights on Koro's

airplanes. Section 114.9(e) states that:

a candidate, a candidate's agent, or person traveling on behalfof a candidate who

uses an airplane which is owned or leased by a corporation or labor organization

otherthan Q corporation or labor organizalion licensed 10 offer commercial

services(emphasis added) for travel in connection with a Federal election must, in

advance, reimburse the corporation or labor organization, ... in the case oftravel

to a city served by regularly scheduled commercial service, the first class air fare.

The applicable regulation is 11 C.F.R § IOO.7(a)(I)(iii)(B) since Koro provides commercial

charter flights and maintains a schedule ofusual and nonnal charges.' Section lOO.7(a)(I)(iii)(B)

states that:

Unless specifically exempted under 11 C.F.R. § 100.7(b), the provision ofany

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

nonna! charge for such goods. and services is a contribution ... Ifgoods and

services are provided at less than the usual and nonna! charge, the amount ofthe

in-kind contribution is the difference between the usual and normal charge for the

goods or services at the time ofthe contribution and the amount charged the

political committee.

Since Koro provided a service at a charge which is less than the usual and nonnal charge, the

Committee received an in-kind contribution and must make a payment to the U.S. Treasury

based on the difference between the usual and nonnal charge for the services and the amount

actually charged. II C.F.R. § l00.7(a)(iii)(B).

Section 114.9(e) makes a distinction between private aircraft provided by n corporation

and commercial air travel services. Since corporations not in the business of providing air travel

generally do not have established rates for the use oftheir private planes, the Commission's

regulations under section 114.9(e) detennine the appropriate payment for use ofthose planes.

Explanation and Justification for 11 C.F.R. § 114.9(e), H.R. Doc. No. 95-44, 95th Cong., 1st

Sess., 116 (1977). The regulation is not intended to impose payment rates upon commercial

airlines or airplanes licensed to offer commercial services. These entities already have usual and

Since there were time periods when the value ofservices was greater than the amount on deposit with

Koro. it appears that Koro made an extension ofcredit to the Comminee for these services. See II C.F.R.

§J 16.J(eX3). However, there is no indication that these limited extensions of credit were nol in the ordinary course

of business. See II C.F.R. § J 16.3(cXIH3);.r~ ulsu JI C.F.R. § 116.3(d) (extension ofcn:dit by regulated

industries).

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normal rates for their flights and therefore, section 100.7(a)(iii)(B),applies. Ifa different rate is

charged, other that the normal and usual rate, a benefit is provided'to the candidate that is not

provided to all customers for the same services. Such a benefit constitutes an in-kind

contribution to the Committee. 11 C.F.R. § lOO.7(a)(iii)(B). In this case9 Koro is licensed to

offer commercial service and it has an established pay schedule. lo The Audit staff used these

published rates in assessing whether the Committee paid the usual and normal charges.

The Committee argues that as a matter ofstatutory construction, the Commission must

give effect to the words "in connection with afederal election." However, these words modify

the type oftravel that is taking place, and not the type ofairline service that is offered. The

federal government does not license commercial aircraft based on whether they carry passengers

traveling in connection with a federal election. II The Committee advances an unreasonable

interpretation ofthe regulation. It is a well-established principle ofstatutory interpretation that

the law favors rational and sensible construction. A construction should not result in absurd or

unreasonable consequences. 3 NonnanJ. Singer, Sutherland Stat.Const. §45.12 (5th Ed.,1992);

see American Tobacco Co. v. Patterson, 456 U.S. 63 (1982).

In addition, the Committee's argument that section 114.9(e) follows General Services

Administration regulations and Senate Ethics regulations for requiring first class air fare is

irrelevant. As a publicly-fmanced presidential candidate, Senator Specter agreed to comply with

the Federal Election Campaign Act ("FECA"). II C.F.R. § 9033.1(b)(1 0). General Services

regulations and Senate Ethics regulations are not applicable here. Any prior relationship that

Arlen Specter had with Koro that applied the General Services regulations or the Senate Ethics

regulations is also irrelevant. As a presidential candidate, the regulations promulgated under the

FECA apply regardless ofthe prior arrangements that may have existed in the past between

Senator Specter and Koro. There is no dispute that section 114.9(e) requires first class air fare.

The issue is whether section 114.9 should be applied. Since Korn is licensed to offer commercial

service, section 114.9(e) is not applicable.

Finally, the Committee argues that it used Koro's services'solely in its capacity as a

corporation, and not as a commercial air charter service. Although circumstances may exist

where an air travel service provides the use of a private corporate airplane subject to payment

under section 114.9(e), that was not the case here. Koro is licensed as a charter service, and the

facts adduced during the audit indicate that the Committee utilized its services as a charter

company. Koro provided the Committee with the same planes it provides its other customers

who pay the nonnal and usual rate. It appears that Koro did not have any "private corporate

aircraft." All four ofKoro's planes were used for the purpose of providing charter services.

Furthermore, the Committee chartered the entire aircraft for its use in the campaign. Records

provided during the audit indicate that all ofthe passengers on the plane were Committee

personnel, and the Committee detennined the plane's destination. Therefore, Koro appears to

See The Ai, Chan. Guide

See 49 C.F.R. §§4 JJO(conceming certificates for air carriers), 411 02(charter aircraft certificates). and

4 JJ03(air cargo certificates). Generally, a license is issued based on whether the airline is a common carrier. cargo

carrier, or a passenger carrier.

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have provided charterservices similar to those it would provide oth~ customers. The affidavits

supplied by the Committee do Dot change these facts. Thus, the COmmittee should not be

allowed to circumvent the requirements of 11 C.F.R. § lOO.7(a)(iii)(B) by paying less than the

normal and usual charter rate Koro charged other customers.

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FEDERAL ELECTION COMMISSION

WASHINCTON, 0 C. 20463

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June 23, 1997

Mr. Paul Diamond. Treasurer

-·Arlen Specter '96

III South 15th St., 21 st floor

Philadelphia, PA 19102

Dear Mr. Diamond:

Attached, please find the Audit Report on Arlen Specter '96. The Commission

approved this report on June 12, 1997. As noted on page three ofthe Audit Report, the

Commission may pursue any ofthe matters discussed in an enforcement action.

The Commission determined that a payment to the U.S. Treasury in the amount of

$321,079 representing the value ofa prohibited inaokind contribution ($233.768).

unresolved excessive contributions ($83,749) and Committee issued checks that were

never cashed ($3,562) was required. The Committee has paid $87,311 ($83,749 +

53,562) to the U.S. Treasury.

The Commission approved Audit Report will be placed on the public record on

June 30, 1997. Should you have any questions regarding the public release ofthis report,

please contact Ron Harris ofthe Commission's Press Office at (202) 2194155.

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

report should be addressed to Lorenzo David or Tom Nurthen ofthe Audit Division at

(202) 219-3720 or toll free at (800) 424-9530.

Sincerely,

H::t HLI..rL:'}-

~oNtobert J. Costa

Assistant StaffDirector

Audit Division

Attachment as stated

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FEDERAL ELECTION COMMISSION

WASHINCTON. D.C 20463

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June 23, 1997

~The Honorable Arlen Specter

Arlen Specter '96

III South 15th St., 21st floor

Philadelphia, PA ~19102

Dear Senator Specter:

Attached, please find the Audit Report on Arlen Specter '96. The Commission

approved this report on June 12, 1997. As noted on page three ofthe Audit Report~ the

Commission may pursue any ofthe matters discussed in an enforcement action.

The Commission detennined that a payment to the U.S. Treasury in the amount of

$321,079 representing the value ofa prohibited in-kind contribution ($233,768),

unresolved excessive contributions ($83,749) and Committee issued checks that were

never cashed (53,562) was required. The Committee has paid 587,311 (583,749 +

53,562) to the U.S. Treasury.

The Commission approved Audit Report will be placed on the public record on

June 30, 1997. Should you have any questions regarding the public release ofthis report~

ple8$e contact Ron Hanis ofthe Commission's Press Office at (202) 219-4155.

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

report should be addressed to Lorenzo David or Tom Nurthen ofthe Audit Division at

(202) 219-3720 or toll free at (800) 424-9530. .

Sincerely,

'fi.'P.. Robert J. Costa

Assistant StaffDirector

Audit Division

Attachment as stated

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CHRONOLOGY

ARLEN SPECTER '96

" Pre-audit Fieldwork Commenced 05128196

...

0 Audit Fieldwork 05128/96 - 08/16/96

7

it Exit Conference Memorandum {1 to the Committee 11126/96 2

5 Response Received to the ..

1 Exit Conference Memorandum 02111/97

4

1 Audit Report Approved 06/12197

4

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