There were six invoices totaling $1,050,000, and 75 checks issued to
broadcast stations totaling $855,392. The check amount is net of check #3961 in the
amount of $4,458 that had been voided. BC2000 stated it was continuing to search for
documentation supporting the remaining payments and will update its response
accordingly.

In the preliminary audit report the Audit staff recommended that BC2000
provide documentation supporting these transfers to Garcia. The documentation was to
include station invoices, evidence of payment for such services (copies of the front and
back of the negotiated checks and bank statements), and any associated expenses (e.g.
commissions or production costs).

In response to the preliminary audit report, BC2000 provided sufficient
documentation to support the transfers to Garcia. Such documentation included station
invoices, front and back of negotiated checks made payable to the stations, and support
for out-of-pocket expenses incurred by Garcia.

D. EXPENDITURE LIMITATION

Sections 441a(b)(1)(B) and (c) of Title 2 of the United States Code state,
in relevant part, that no candidate for the office of President of the United States who is
eligible under section 9003 of Title 26 to receive payments from the Secretary of the
Treasury may make expenditures in excess of $20,000,000 as adjusted for the increase in
the Consumer Price Index.

Section 9007(b)(2) of Title 26 of the United States Code states that if the
Commission determines that the eligible candidates of a political party and their
authorized committees incurred qualified campaign expenses in excess of the aggregate
payments to which the eligible candidates of a major party were entitled under section
9004, it shall notify such candidates of the amount of such excess and such candidates
shall pay to the Secretary of the Treasury an amount equal to such an amount.

Sections 9003.3(a)(2)(ii)(A), (B) and (D) of Title 11 of the Code of
Federal Regulations state, in part, that expenditures for payroll (including payroll taxes),
overhead and computer services, a portion of which are related to ensuring compliance
with Title 2 of the United States Code and Chapter 95 of Title 26 of the United States
Code, shall be initially paid from the candidate’s Federal fund account under 11 CFR
9005.2 and may be later reimbursed by the compliance fund. A candidate may use
contributions to the GELAC to reimburse his or her Federal fund account an amount
equal to 10% of the payroll and overhead expenditures of his or her national campaign
headquarters and state offices. Overhead expenditures include, but are not limited to rent,
utilities, office equipment, furniture, supplies and all telephone charges except for
telephone charges related to a special use such as voter registration and get out the vote
efforts. A candidate may use contributions to the GELAC to reimburse his or her Federal
fund account an amount equal to 50% of the costs (other than payroll) associated with

Page 12 of 37


FEDERAL ELECTION COMMISSION
WASHINGTON. DC 20403

January 7, 2003

David Herndon, Treasurer
Bush-Cheney 2000, Inc.
515 Congress Avenue
Suite 2300

Austin, Texas 78701-3587

Dear Mr. Herndon:

Attached please find the Report of the Audit Division on Bush-Cheney 2000, Inc.
and Bush-Cheney 2000 Compliance Committee, Inc. The Commission approved the
Teport on December 23, 2002. As noted in the report, the Commission may pursue any of
the matters discussed in an enforcement action.

In accordance with 11 CFR §§9007.2(c)(1) and (d)(1), the Commission has made a
determination that a repayment to the Secretary of the Treasury in the amount of $224,518
is required within 90 calendar days after the service of this report (April 11, 2003).

Should the Candidate dispute the Commission's determination that a Tepayment is
required, Commission regulations at 11 CFR §9007.2(c)(2)(i) provide the Candidate with
an opportunity to submit in writing, within 60 calendar days after service of the
Commission's notice (March 11, 2003), legal and factual materials to demonstrate that no
repayment, or a lesser repayment, is required. Further, 1] CFR §9007.2(c)(2)(ii) permits a
Candidate who has submitted written materials to request an opportunity to address the
Commission in open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted
within the 60-day period when deciding whether to revise the repayment determination.
Such materials may be submitted by counsel if the Candidate so elects. If the Candidate
decides to file a response to the repayment determination, please contact Greg Baker of the
Office of General Counsel at (202) 694-1650 or toll free at (800) 424-9530. Ifthe
Candidate does not dispute this determination within the 60-day period provided, it will be
considered final.

Page 33 of 37


Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 5

Opinion (“AO”) 1988-6, the Albert Gore, Jr. for President Committee requested advice
on whether a portion of the costs of a broadcast advertisement featuring the candidate
discussing trade policy along with a visual listing of the words “Vote — Volunteer —
Contribute” could be considered as an exempt fundraising expense pursuant to 11 C.F.R.
§ 100.8(b)(21). The Commission answered the question in the affirmative and agreed
that a 50% allocation of the costs was reasonable.'°

In this matter, the phone bank communication appears to have had the multiple
purpose of benefiting then-Governor Bush as well as “our great Republican team.” This
Office does not have information that suggests that the phone bank communication
exclusively benefited then-Governor Bush. This Office is not aware of the identity or the
number of candidates that were being referenced by the term “our great Republican team”
in the phone bank script. However, it appears likely that this reference in the
communication provided some benefit to the state party committees as such organizations
are generally interested in promoting the election of all federal, state, and local candidates
on the Republican ticket. Under the circumstances, this Office believes that it would be
reasonable for the Commission to recognize the apparent multiple purposes for which the
phone bank expenditures were made, and to accordingly permit allocation of the costs.
Given that the script was equally devoted in space and time to then-Governor Bush and
“our great Republican team,” this Office believes it is reasonable to allocate the costs of
the phone bank on a 50% basis. This allocation percentage is consistent with the
Commission’s treatment of other expenditures involving two purposes. See Advisory
Opinion 1988-6.

Finally, the General Committee’s argument that it did not have notice that it
would be required to pay 50% of the cost of the phone bank has no merit since, as stated
previously, the Commission’s regulatory framework does not specifically provide for
allocation of the type of expenditure at issue. Thus, the General Committee knew or
should have known that it could be held responsible for paying the entire cost of the
phone bank.

specific issue of allocation, the Commission found reason to believe that the National Abortion and
Reproductive Rights Action League PAC and the recipient federal committees violated the Act

” The Commission wrote;

Because these provisions recognize that expenditures within the purview of the Act may be made
for multiple purposes, the Commission believes that expenditures for broadcast time to run an
advertisement which includes a fundraising solicitation may be allocated on a ‘reasonable basis’ to
the fundraising exclusion for presidential candidates who accept matching funds.

AO 1988-6 at 4.

Page 29 of 37




II. AUDIT FINDINGS AND RECOMMENDATIONS - AMOUNTS DUE TO
THE UNITED STATES TREASURY (BC2000)

A. ACCEPTANCE OF CONTRIBUTIONS BY AN ELIGIBLE CANDIDATE OF A
MAJOR PARTY

1. In-Kind Contributions from State Party Committees

Section 9003(b)(2) of Title 26 of the United States Code states, in part,
that in order to be eligible to receive any payments under section 9006, the candidate of a
major party in a presidential election shall certify to the Commission that no contributions
to defray qualified campaign expenses have been or will be accepted by such candidates
or any of their authorized committees except to the extent necessary to make up any
deficiency in payments received out of the fund on account of the application of section
9006(c), and no contributions to defray expenses which would be qualified campaign
expenses but for subparagraph (C) of section 9002(11) have been or will be accepted by
such candidates or any authorized committees.

Section 9007.2(b)(5) of Title 11 of the Code of Federal Regulations states,
in part, that if the Commission determines that an eligible candidate of a major party, the
candidate’s authorized committee(s) or agent(s) accepted contributions to defray qualified
campaign expenses (other than contributions to make up deficiencies in payments from
the Fund, or to defray expenses incurred for legal and accounting services in accordance
with 11 CFR 9003.3(a)), it shall notify the candidate of the amount of contributions so
accepted, and the candidate shall pay to the United States Treasury an amount equal to
such amount.

Section 106.1(a)(1) of Title 11 of the Code of Federal Regulations states,
in part, that expenditures, including in-kind contributions made on behalf of more than
one clearly identified federal candidate shall be attributed to each such candidate
according to the benefit reasonably expected to be derived. For example, in the case of a
publication or broadcast communication, the attribution shall be determined by the
proportion of space or time devoted to each candidate as compared to the total space or
time devoted to all candidates. The methods described shall also be used to allocate
payments involving expenditures on behalf of one or more clearly identified Federal
candidates and disbursements on behalf of one or more clearly identified non-federal
candidates.

According to the vendor’s invoice, fifteen Republican state party
committees (the Party committees) and BC2000 paid $1,994,631 for a phone bank get-
out-the-vote effort. The vendor, Feather Hodges Larson & Synhorst (FHLS) apparently
conducted the phone bank within a week of the 2000 general election. The Party
committees paid 75% of the cost or $1,495,973, while BC2000 paid 25% or $498,658 of
the cost.

Page 6 of 37


during the period in question beyond the time period
during which salaries were paid by the Committee.”

Counsel’s contention ignores the payroll and other records maintained by
BC2000. Persons located in the various states where there was no recount effort
continued to be paid after November 11, 2000. Further, BC2000 continued to report the
disbursement of funds. During the period ending December 7, 2000, BC2000 issued 474
checks, totaling approximately $2,400,000, to various vendors. These disbursements
represent payment of BC2000 obligations incurred before the date of the general election.
Taken together, these facts establish that, contrary to BC2000’s contention, general
election activities continued at some level.

It cannot be argued that the primary focus of BC2000 was not the recount
effort, but as evidenced above, the campaign’s business also continued. Lacking any
better indicator, the Audit staff believes that the 24% BC2000 and 76% Recount Fund
allocation is reasonable. Finally, it is not the intent of the Audit staff for taxpayers to
“carry the costs of the campaign’s staff members who were focused on the recount.” It is
the intent of the Audit staff to ensure that the Recount Fund did not supplement the
efforts of BC2000 by making expenditures on its behalf.

Conclusion

As of September 30, 2002, BC2000 exceeded the limitation by $129,009.
However, the Audit staff identified $978,581 in expenditures, paid by BC2000 and
charged to the above limitation, which could have been paid by BCCC. Therefore, a
reimbursement by BCCC of $129,009 would bring BC2000’s spending within the
limitation.

At the exit conference, the Audit staff provided BC2000 representatives
with schedules detailing the expenditure limitation calculation as of December 31, 2001,
as well as the audited Statement of Net Outstanding Qualified Campaign Expenses.

In a statement provided subsequent to the exit conference, Counsel
disagreed with the Audit staff's calculation. Specifically, Counsel does not agree that
BC2000: 1) received in-kind contributions, totaling $498,658, from the Party committees
and 2) should be required to reimburse the Recount Fund $288,437 for salary and
overhead expenses incurred between November 11, 2000 and December 7, 2000. As
such, Counsel does not believe either amount should be charged to the expenditure
limitation.

The Audit staff recommended that BC2000 provide evidence that
demonstrated it did not exceed the expenditure limitation or provide evidence that it
received a reimbursement from BCCC (copy of the front and back of the negotiated
check).

Page 16 of 37


The Commission approved report will be placed on the public record on January
13, 2003. Should you have any questions regarding the public release of the report, please
contact the Commission's Press Office at (202) 694-1220.

Any questions you have related to matters covered during the audit or in the report
should be directed to Jeff Spilizewski or Thomas J. Nurthen of the Audit Division at (202)

694-1200 or toll free at (800) 424-9530.
incerely,
t- [f f. ..
[ AL .
Jose] vi)

F. Stoltz
Assistant Staff Director
Audit Division

Attachment as stated

ce: Keith Davis; Huckaby Davis & Associates
Benjamin L. Ginsberg; Patton Bogs LLP

Page 34 of 37



REPORT OF THE AUDIT DIVISION
ON

BUSH-CHENEY 2000, INC.
AND
BUSH-CHENEY 2000 COMPLIANCE
COMMITTEE, INC.

Approved December 23, 2002

FEDERAL ELECTION COMMISSION
999 E STREET, N.W.
WASHINGTON, D.C.



Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 3

appropriate to seek repayments for contributions from private sources and exceeding the
expenditure limitation when the private contributions are also subject to the expenditure
limitation.

Il. Funding from State Party Committees (Finding I.A.1.)

The Proposed Report notes that 15 Republican Party Committees and the General
Committee paid $1,994,631 for a phone bank that was a get-out-the-vote effort. Feather
Hodges Larson & Synhorst conducted the phone bank the week prior to the general
election. The callers requested that the individuals “get . . . families and friends... out. .
to vote for Governor George W. Bush and all of our great Republican team.” The Party
Committees paid 75% of the cost ($1,495,973) while the General Committee paid 25%
($498,658) of the cost of the solicitation effort. The Proposed Report notes that the
General Committee “could not provide documentation to support its 75%/25%
allocation.” It is this Office’s understanding that the Audit Division means the General
Committee has not provided a legal basis for its allocation.*

The Audit staff analyzed the text of the phone bank script under 11 C.F.R.
§ 106.1(a)(1) and concluded that a 50% allocation was more appropriate. Section
106.1(a)(1) provides that expenditures, including in-kind contributions, made on behalf of
more than one clearly identified federal candidate shall be attributed to each candidate
according to the benefit reasonably expected to be derived. Although the Audit staff
acknowledged that the only clearly identified candidate® was Governor George W. Bush,
they treated the reference to “our great Republican team” as another clearly identified
candidate. Thus, the Audit staff determined that an allocation of 50% for the General
Committee was reasonable given that the script was equally devoted in space and time to
the candidate and the entity.” The Audit Division’s 50% allocation results in a $498,658
contribution to the General Committee from the Party Committees.

‘ Audit staff indicated that the General Comminee provided documentation reflecting its payment of

25% of the costs of the phone bank.

6 Under the Act and the Commission's regulations. a candidate 1s clearly identified if his or her
name or likeness appears (e.g. nickname, photograph. drawing) or if his or her identity is apparent by
unambiguous reference (e.g. “the President.” “your Congressman,” “the incumbent, “the Republican

candidate for Senate in the State of Georgia”) 2 U.S.C. § 431(18): 11 C.F.R. §§ 106.1(d), 100.17.

7 The Commission's regulations provide that the attribution for publication and broadcast

communications shall be determined by the proportion of space or ume devoted to each candidate as
compared to the total space or time devoted to all candidates (emphasis added). 11 C.F.R.§ 106.1(a)(1).
Similarly, the costs for phone banks should be allocated “according to the number of questions or
statements devoted to each candidate.” Explanation and Justification for 11 C.F.R. § 106.1(a)(1), 55 Fed.
Reg. 26061 (June 26, 1990).

Page 27 of 37


computer services. Such costs include but are not limited to rental and maintenance of
computer equipment; data entry services not performed by committee personnel, and
related supplies.

Section 9004.9(b) of Title 26 of the United States Code states, in relevant
part, that each candidate shall submit a statement of net outstanding qualified campaign
expenses no later than 30 calendar days after the end of the expenditure report period.
The statement shall contain the information required by 11 CFR 9004.9(a)(1) and (2),
except that the amount of outstanding obligations under 11 CFR 9004.9(a)(1)(i) and the
amount of cash on hand, assets and receivables under 11 CFR 9004.9(a)(2) shall be
complete as of the last day of the expenditure report period.

The expenditure limitation for the 2000 general election for the office of
the President of the United States was $67,560,000. Based on information contained in
BC2000’s reports, records and the response to the preliminary audit report, the Audit staff
calculated that net operating expenditures subject to the limitation at September 30, 2002
totaled $67,311,882.

BC2000 did not file a Statement of Net Outstanding Qualified Campaign
Expenses. The Statement of Net Outstanding Qualified Campaign Expenses, prepared by
the Audit staff, can be found at Attachment 1.

6. Subsequent to the filing of the Year End 2000 disclosure report, BC2000 did not report
an amount on line 13 of FEC Form 3P, Page 1 (Expenditures Subject to the Limitation).
Therefore, the Audit staff calculated this amount.

In the preliminary audit report, the amount of net operating expenditures subject to the
limitation calculated ($66,960,154) represented activity reviewed through December 31,
2001. That amount has been updated based on BC2000’s response to the preliminary
audit report and a review of disclosure reports filed through September 30, 2002.

Page 13 of 37


as of the time payment is made or not later than 60 days after such obligation is incurred,
whichever comes first. A debt or obligation which is over $500 shall be reported as of
the date on which the debt or obligation is incurred, except that any obligation incurred
for rent, salary or other regularly reoccurring administrative expense shall not be reported
as a debt before the payment due date.

Sections 104.18(f) of Title 11 of the Code of Federal Regulations states, in
part, if a committee files an amendment to a report that was filed electronically, it shall
also submit the amendment in an electronic format. The committee shall submit a
complete version of the report as amended, rather than just those portions of the report
that are being amended.

BCCC’s disbursements were reviewed to determine if it had correctly
reported debts and obligations owed to vendors. Three vendors were identified in which
BCCC either underreported or failed to report as debts and obligations outstanding
balances totaling $353,123. The amount of unreported debt was determined by counting
each reportable obligation only once, even if the obligation was outstanding for more than
one reporting period. This amount represents 25% of the total reportable debt of
$1,406,662.

At the exit conference, the Audit staff provided BCCC representatives
with a schedule pertaining to the three vendors noted above. BCCC made no specific
comment at the exit conference but did file amended reports electronically that addressed
two vendors. The amended reports addressed $50,875 of the $353,123 identified debt.

The preliminary audit report recommended that BCCC file complete
amended electronic reports for each reporting period in which the above debts should
have been reported.

In response to the preliminary audit report, BCCC filed the necessary
amended reports that disclosed the above debts.

Page 19 of 37


Explanation of Amount Due to Recount Fund for Payroll and Overhead

During the period November 11, 2000, through December 7, 2000, (the
end of the expenditure report period) the Recount Fund paid 100% of payroll expenses,
$975,227, for individuals assigned to state offices as well as those assigned to the
national headquarters. BC2000 could not provide documentation demonstrating that
every individual was in a recount state or took part in the recount effort. In addition, the
Recount Fund paid 100% of the overhead expenses, $269,364, during the same period.

In order to evaluate BC2000’s contention that all salary and overhead for
the period was attributable to the recount effort, the Audit staff reviewed travel expense
vouchers in order to determine which individuals were in potential recount states and
which individuals were in other states. This analysis indicates that of the salary paid to
staff not located at the national headquarters, 24% was paid to staff located in non-
recount states. In order to recognize a campaign aspect of activities at the national
headquarters, this percentage was then applied to salary paid to those employees located
at the national headquarters and to overhead expenses for the period.

Based on this review, BC2000 should have paid $223,790 in payroll
expenses and $64,647 in overhead expenses for the period, net of an allowable
compliance exemption, or a total of $288,437. The remainder of the amount due to the
Recount Fund is explained at Footnote (c) to the expenditure limitation calculation at
page 14.

Subsequent to the exit conference, Counsel submitted the following
statement with respect to payroll and overhead expenses paid by the Recount Fund.

“Given this unprecedented situation, the Committee
opted to reflect the reality of where the staff’s efforts
were directed and paid salaries from the private funds
raised for the recount. Therefore, the Committee staff
tried to complete its wind down duties on an expedited
time frame. The Audit staff now wants the taxpayers to
carry the costs of the campaign’s staff members who
were focused on the recount.”

“The Audit staff is fundamentally incorrect that there
were any wind-down activities in the state offices after
November 11. The attached leases for the Committee’s
state offices demonstrate that the leases for all of the
offices expired by November 15 and that most were
shut down by November 10. As a result there were no
wind-down activities in the state offices and no support
for state wind-down activities that had to be performed

Page 15 of 37



Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 4

In response to the PAR, the General Committee argues that the Audit staff is
attempting to impose a new and incorrect standard for phone bank allocations without a
formal rulemaking process. The General Committee further argues that it did not have
notice that the proposed 50% allocation would be imposed. Finally, the General
Committee argues that its 75%/25% allocation is appropriate under both 11 C.F.R.

§ 106.1(a)(1) and 11 C.F.R. § 106.5(e). Initially, the General Committee relied ona
regulation meant to allocate the costs of exempt activities, 11 C.F.R. § 106.5(e), to justify
its allocation. The General Committee noted that Govemmor Bush was mentioned in only
two of the ten lines of the script.

The Commission’s regulations do not provide for allocation of the type of
expenditure at issue. Section 106.5(e) is not applicable because this regulation applies to
party committees allocating the cost of exempt activities. The amount paid to the vendor
for the phone bank was not for exempt activity.® Similarly, Section 106.1(a) does not
provide for allocation of the cost of the phone bank since it only applies to expenditures
made on behalf of more than one clearly identified federal candidate, and “our great
Republican team” is not a clearly identified candidate. 11 C.F.R. §§ 106.1(a) and (d).
Significantly, the Commission considered alternative approaches to the definition of
“clearly identified candidate” to include broader concepts. Explanation and Justification
for 11 C.F.R. § 100.17; 60 Fed. Reg. 35292, 35293-94 Guly 6, 1995). The definition
would have been expanded to include candidates of a clearly identified political party and
a clearly identified group of candidates (e.g. “Vote Pro-Life”). Id. However, the
Commission declined, stating it would be difficult to determine the candidates in such a
group. Jd. Thus, the Commission specifically considered and declined to broaden its
allocation provisions to encompass expenditures that refer to both specific individuals
and a description of a group of candidates.

This raises the question of whether the expenditures at issue should be allocated at
all. In the past, the Commission has permitted allocations that were not provided for in
the regulations with respect to expenditures involving multiple purposes.” In Advisory

8 Exempt activities include phone bank costs for get-out-the-vote efforts. 11 C.F.R. § 100.7(b)(17).

However, paid professionals cannot be used to operate the phone bank. 11 C.F.R. § 100.7(b)(17)(v). In
this case, paid professionals were used to operate the phone banks

° In Matter Under Review (“MUR”) 4131. the First General Counsel's Report addressed the failure
of the National Abortion and Reproductive Rights Action League PAC to properly allocate the costs of a
seven panel voter's guide as contributions to specific candidates. The publication/voter’s guide endorsed
specific candidates and also contained non-candidate specific language, including a solicitation for
contributions to a state PAC. According to the First General Counsel's Report, “neither the language of the
regulation itself nor the Commission's explanation and Jusfication of the specific rule for publications
describe how to allocate space in publications parts of which advocate the election of Federal or non-
Federal candidates and parts of which do not refer to specific candidates or elections.” The Office of
General Counsel recommended that the cost of panels not endorsing Federal candidates be subtracted “from
the total cost of the Voter’s Guide prior to making the partucular-candidate-to-all-candidates calculation
mandated by Section 106.1(a)(1).” MUR 4131, 1" Gen. Counsel's Rep., at 22. Without discussion on the

Page 28 of 37


Recommendation #1

The Audit staff recommends that the Commission make a determination that
$95,509 is repayable to the United States Treasury pursuant to 11 CFR §9007.2(b)(5).

B. INCOME RECEIVED

Section 9004.5 of Title 11 of the Code of Federal Regulations states, in
relevant part, that investment of public funds or any use of public funds that results in
income is permissible, provided that an amount equal to all net income derived from such
use, less Federal, State and local taxes paid on such income, shall be paid to the
Secretary.

Section 9007.2(b)(4) of Title 11 of the Code of Federal Regulations states
that if the Commission determines that a candidate received any income as a result of an
investment or other use of payments from the fund pursuant to 11 CFR 9004.5, it shall so
notify the candidate, and such candidate shall pay to the United States Treasury an
amount equal to the amount determined to be income, less any Federal, State or local
taxes on such income.

1. Interest Earned

BC2000 earned interest, totaling $386,730, by investing a portion
of the payment received from the Presidential Election Campaign Fund. On August 10,
2001, BC2000 paid federal taxes of $135,227 on the interest earned. No documentation
for state and local taxes has been provided. Absent documentation of additional taxes
paid, the difference, $251,503, is payable to the United States Treasury.

2. Other Income

On August 14, 2001, Red October Productions, Inc. paid $3,500
for use of film footage relative to BC2000 media ads. The Audit staff has not been
presented with evidence of any taxes paid on this income. This amount less taxes paid is
payable to the United States Treasury.

At the exit conference, the Audit staff provided BC2000 representatives
with a schedule of the income discussed above. In a statement provided subsequent to the
exit conference, Counsel indicated that BC2000’s response to the preliminary audit report
will include a payment to the United States Treasury, less any amount paid for federal,
state or local taxes.

In the preliminary audit report, the Audit staff recommended that BC2000

provide documentation that demonstrated the amount of all federal, state or local taxes
paid. Absent such a demonstration, the Audit staff would recommend the Commission

Page 10 of 37


The Audit staff recommended that the Commission make a determination that
BC2000 repay $498,658. The Commission considered a motion to accept the Staff
recommendation. The motion failed by a vote of 3 to 2.

In-Kind Contributions from Air Charter Vendors — BC2000 paid seven air charter
companies the first class unrestricted commercial airfare in lieu of the charter rate. Based
upon the documentation received from each air charter company. BC2000 should have
paid $123,227 for the flights in question. As a result, these vendors made and BC2000
received in-kind contributions totaling $95,509 ($123,227 - $27,718 paid).

The Audit staff recommended that the Commission make a determination that
$95,509 was repayable to the United States Treasury pursuant to 11 CFR §9007.2(b)(5).

INCOME RECEIVED — 11 CFR §9004.5; 11 CFR §9007.2(b)(4). BC2000 earned interest
totaling $386,730 and paid federal taxes of $135,227 on this interest. The difference
$251,503, is payable to the United States Treasury. Further, BC2000 was paid $3,500 for
use of its film footage relative to BC2000 media ads. BC2000 delivered to the Audit
Division a check payable to the United States Treasury in the amount of $255,003
($251,503 + $3,500).

APPARENT NON-QUALIFIED CAMPAIGN EXPENSES — UNDOCUMENTED MEDIA
EXPENDITURES — 11 CFR §9002.11(a)(1); 11 CFR §9003.5(a); 11 CFR
§9007.2(b)(2)(i). BC2000’s media vendor wired $1,050,000 to Garcia LKS. There was
no documentation made available which supported disbursements made by Garcia LKS.
Subsequently, BC2000 provided sufficient documentation to support the disbursements.

EXPENDITURE LIMITATION — 2 U.S.C. §441a(b)(1)(B) and (c); 26 U.S.C. §9004.9(b);
26 U.S.C. §9007(b)(2); 11 CFR §9003.3(a)(2)(ii)(A), (B) and (D). BC2000 exceeded the
expenditure limitation by $129,009. However, the Audit staff identified $978,581 in
expenditures, paid by BC2000 and charged to the limitation, which could have been paid
by BCCC. A reimbursement by BCCC of $129,009 would have brought BC2000’s
spending within the limitation.

Absent evidence that BC2000 has been reimbursed, the Audit staff recommended
that the Commission make a determination that BC2000 repay $129,009 to the United
States Treasury pursuant to 26 U.S.C. §9007(b)(2).

STALE DATED CHECKS — 11 CFR §9007.6. BC2000 and BCCC paid the United States
Treasury $7,701 and $33,415 respectively for stale-dated checks that had not been
negotiated by the payee.

DISCLOSURE OF DEBTS AND OBLIGATIONS — 2 U.S.C. §434(b)(8); 11 CFR §104.3(d);
11 CFR §104.11(a) and (b); 11 CFR §104.18(f). The Audit staff identified three vendors
in which BCCC either underreported or failed to report as debts and obligations
outstanding balances totaling $353,123. BCCC filed the necessary amended reports that
disclosed the above debts.

Page 2 of 37


FEDERAL ELECTION COMMISSION
WASHINGTON. DC 20463 202 CEC -2 A 442

December 2, 2002

MEMORANDUM

TO: Robert J. Costa
Deputy Staff Director

THROUGH: James A. Pehrkon
Staff Director

FROM: Lawrence H. Norton go
General Counsel L
fy
Gregory R. Baker L
Acting Associate eral Counsel
Lorenzo Holloway - a
Assistant General Couns
Albert R. VeldhuyzenAhY
Attomey

Tracey L. Li;
Attorney

SUBJECT: Report of the Audit Division on Bush-Cheney 2000, Inc. and
Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)

L Introduction

The Office of General Counsel has reviewed the proposed Report of the Audit
Division on Bush-Cheney 2000, Inc. (the “General Committee”) and Bush-Cheney 2000
Compliance Committee, Inc. (“BCCC”). which was submitted to this Office on October
9, 2002.' This memorandum presents our comments on the proposed Report. We concur
with any findings not specifically discussed in this memorandum. If you have any

' This Office recommends that the Commussion consider the proposed Report in open session. See
11 C.F.R. § 9007.1(e)(1).

Page 25 of 37


Page 22 of 37


TABLE OF CONTENTS

BUSH-CHENEY 2000, INC.
AND
BUSH-CHENEY 2000 COMPLIANCE COMMITTEE, INC.

Page

Executive Summary 1
Final Audit Report 3
Background 3
Findings 6
Legal Analysis 25
Transmittal to Committee 33
Transmittal to Candidate 35

Chronology 37




make a determination that $255,003 ($251,503 + $3,500) is payable to the United States
Treasury.

In response to the preliminary audit report, BC2000 did not provide
documentation of any additional taxes paid but delivered to the Audit Division a check
payable to the United States Treasury in the amount of $255,003.

Recommendation #2

The Audit staff recommends that the Commission make a determination that
$255,003 is repayable to the United States Treasury pursuant to 11 CFR §9007.2(b)(4).
As stated, BC2000 delivered to the Audit Division a check payable to the United States
Treasury.

Cc. APPARENT NON-QUALIFIED CAMPAIGN EXPENSES — UNDOCUMENTED
MEDIA EXPENDITURES

Section 9002.11(a)(1) of Title 11 of the Code of Federal Regulations states
that qualified campaign expense means any expenditure incurred to further a candidate’s
campaign for election to the office of President or Vice President of the United States.

Section 9003.5(a) of Title 11 of the Code of Federal Regulations states, in
part, that each candidate shall have the burden of proving that disbursements made by the
candidate or his authorized committee(s) are qualified campaign expenses as defined in
11 CFR 9002.11.

Section 9007.2(b)(2)(i) of Title 11 of the Code of Federal Regulations
states, in relevant part, that if the Commission determines that any amount of any
payment to an eligible candidate from the Fund was used for purposes other than to
defray qualified campaign expenses, it will notify the candidate of the amount so used,
and such candidate shall pay to the United States Treasury an amount equal to such
amount.

BC2000 authorized its media vendor, National Media, Inc. (National), to
wire transfer funds to Garcia LKS (Garcia). During the period September 14, 2000
through October 26, 2000, National wired $1,050,000 to Garcia. No documentation was
made available which supported disbursements made by Garcia.

This matter was discussed with BC2000 representatives at the exit
conference. Subsequent to the exit conference, BC2000 submitted documentation that
appeared to be invoices and checks printed on plain paper. On the plain paper copies of
the invoices, it was not possible to distinguish the billing vendor from the vendor being
billed and on the checks it was not possible to identify the account on which the checks
were drawn.

Page 11 of 37


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C. 20463

REPORT OF THE AUDIT DIVISION
ON
BUSH-CHENEY 2000, INC.
AND
BUSH-CHENEY 2000 COMPLIANCE COMMITTEE, INC.

EXECUTIVE SUMMARY

Bush-Cheney 2000, Inc. (BC2000) registered with the Federal Election
Commission (the Commission) on August 4, 2000 as the principal campaign committee
for then Governor George W. Bush, candidate for the Republican Party’s nomination for
the office of President of the United States. Bush-Cheney 2000 Compliance Committee,
Inc. (BCCC) registered with the Commission on March 24, 1999.

The audit was conducted pursuant to Section 9007(a) of Title 26 of the United
States Code, requiring that after each presidential election, the Commission conduct a
thorough examination and audit of the qualified campaign expenses of the candidates of
each political party for President and Vice President. BC2000 received federal funds
totaling $67,560,000 from the United States Treasury on August 4, 2000.

The findings of the audit were presented to BC2000 and BCCC at an exit
conference held on March 8, 2002 and in the Preliminary Audit Report. The
Committees’ responses to those findings are contained in the audit report.

The following is an overview of the findings contained in the audit report.

ACCEPTANCE OF CONTRIBUTIONS BY AN ELIGIBLE CANDIDATE OF A MAJOR PARTY —
2 U.S.C. §441b(a); 26 U.S.C. §9003(b)(2); 11CFR §100.7; 11CFR §106.1(a)(1); 11CFR
§114.9(e)(1); 11CFR §9007.2(b)(5).

In-Kind Contributions from State Party Committees — According to the vendor’s
invoice, fifteen Republican state party committees and BC2000 paid $1,994,631 for a
phone bank get-out-the-vote effort. The Party committees paid 75% of the cost or
$1,495,973, while BC2000 paid 25% or $498,658. Given that the script was equally
devoted in space and time to Governor Bush and “our great Republican team,” the Audit
staff determined that an allocation that attributes 50% of the cost to BC2000 was
reasonable. Such an allocation would have resulted in the Parties Committees making in-
kind contributions totaling $498,658 to BC2000 and require a repayment of the same
amount to the United States Treasury.

Page 1 of 37


Absent such a demonstration, the Audit staff would recommend that the
Commission make a determination that BC2000 repay the amount in excess of the
limitation to the United States Treasury pursuant to 26 U.S.C. §9007(b)(2).

In response to the preliminary audit report, Counsel for BC2000 restated
many of its previously arguments. Counsel has also misinterpreted the Audit staff's
recommendation. Counsel stated that the Audit staff says a payment from the taxpayers’
fund (BC2000) to the Recount Fund is required and that “BC2000 should be praised and
not punished for erring on the side of guaranteeing that taxpayer funds were not used on
the unqualified campaign expense of underwriting the cost of waging the recount.”

The recommendation in the preliminary audit report did not require
BC2000 to reimburse the Recount Fund; rather it noted that BC2000 had received an in-
kind contribution from Recount. The preliminary audit report concluded that BC2000
exceeded the expenditure limitation by $402,114 as of December 31, 2001. However, it
also noted that the Audit staff identified $603,958 in expenditures, paid by BC2000 and
charged to the above limitation, which could have been paid by BCCC and that a
reimbursement by BCCC of $402,114 would bring BC2000’s spending within the
limitation. Finally, the payment of recount expenditures by BC2000 would not have been
considered non-qualified campaign expenses.

As noted above, the amount in excess of limitation has decreased from
$402,114 to $129,009. This decrease is due primarily to the receipt of in-kind
contributions ($594,167) initially charged the expenditure limitation but subsequently
removed from the above calculation.

Recommendation #3

BC2000 neither demonstrated it did not exceed the expenditure limitation nor
provided evidence that it received a reimbursement of $129,009 from BCCC. Absent
evidence that BC2000 has been reimbursed, the Audit staff recommends that the
Commission make a determination that BC2000 repay $129,009 to the United States
Treasury pursuant to 26 U.S.C. §9007(b)(2).

E. STALE-DATED CHECKS

Section 9007.6 of Title 11 of the Code of Federal Regulations states that if
the committee has checks outstanding to creditors or contributors that have not been
cashed, the committee shall notify the Commission. The committee shall inform the
Commission of its efforts to locate the payees, if such 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 of such outstanding checks, payable to the United
States Treasury.

Page 17 of 37


~ Dito A

FEDERAL ELECTION COMMISSION

WASHINGTON, D.C 20463

January 14, 2003

MEMORANDUM

TO: Ron M. Harris
Press Officer
Press Office

FROM: Joseph F. Stoltz,
Assistant Staff, ‘or
Audit Divisio’

SUBJECT: Public Issuance of the Final Audit Report on Bush-Cheney 2000, Inc. and
Bush-Cheney 2000 Compliance Committee, Inc.

Attached please find a copy of the final audit report and related documents on
Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. that was
approved by the Commission on December 23, 2002.

All parties involved have received informational copies of the report 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



Cc. CAMPAIGN ORGANIZATION

BC2000 registered with the Federal Election Commission (the
Commission) on August 4, 2000 as the principal campaign committee for then Governor
George W. Bush, candidate for the Republican Party’s nomination for the office of
President of the United States. BCCC registered with the Commission on March 24,
1999. The Treasurer of both BC2000 and BCCC was David Herndon, who continues to
serve in that capacity. During the audit period, the campaign maintained its headquarters
in Austin, Texas and moved to Washington, DC in January of 2001.

BC2000 maintained depositories in Austin, Texas. To handle its financial
activity, BC2000 used 12 bank accounts. From these accounts, it made approximately
5,500 disbursements. BC2000 received $67,560,000 from the United States Treasury on
August 4, 2000. Additional receipts received through March 31, 2001 included
$9,987,344 from Press and United States Secret Service (USSS) in travel
reimbursements; transfers in from Bush for President, Inc. (the Primary Committee) of
$77,213, from BCCC of $708,289 and from the Recount Fund! of $413,486 for
reimbursement of expenses paid by BC2000; $386,730 from interest income; $369,720
from vendor refunds and rebates; $11,692 in proceeds from the sale of assets; and $6,430
from the return of petty cash.

BCCC maintained depositories in Dallas, Texas and Alexandria, Virginia.
To handle its financial activity, BCCC used 5 bank accounts. From these accounts,
BCCC made approximately 1,450 disbursements. Approximately 33,960 contributions
were received from individuals. These contributions totaled approximately $9,329,850.

D. AUDIT SCOPE AND PROCEDURES

In addition to a review of expenditures made by BC2000 to determine if
they were qualified or non-qualified campaign expenses, and expenditures made by
BCCC, the audit covered the following general categories:

1. the receipt of contributions or loans in excess of the statutory
limitations (see Finding I.A.);

2. the receipt of contributions from prohibited sources, such as those
from corporations or labor organizations;

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
of the information disclosed;

1. Subsequent to the 2000 general election, BC2000 established a Recount Fund to address
the November 7, 2000 election results.

Page 4 of 37


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C. 20463

REPORT OF THE AUDIT DIVISION
ON
BUSH-CHENEY 2000, INC.
AND
BUSH-CHENEY 2000 COMPLIANCE COMMITTEE, INC.

1. BACKGROUND
A. AUDIT AUTHORITY

This report is based on an audit of Bush-Cheney 2000, Inc. (BC2000) and
Bush-Cheney 2000 Compliance Committee, Inc. (BCCC). The audit is mandated by
Section 9007(a) of Title 26 of the United States Code. That section states “after each
presidential election, the Commission shall conduct a thorough examination and audit of
the qualified campaign expenses of the candidates of each political party for President
and Vice President.” Also, Section 9009(b) of Title 26 of the United States Code states,
in part, that the Commission may conduct other examinations and audits as it deems
necessary to carry out the functions and duties imposed on it by this chapter.

In addition to examining the receipt and use of Federal funds, the audit
seeks to determine if the campaign has materially complied with the limitations,
prohibitions, and disclosure requirements of the Federal Election Campaign Act of 1971
(FECA), as amended.

B. AUDIT COVERAGE

The audit of BC2000 covered the period from its inception, August 4,
2000, through March 31, 2001. During the audit period, BC2000 reported an opening
cash balance of $-0-, total receipts of $79,513,779, total disbursements of $79,326,276
and a closing cash balance of $187,503. In addition, the Audit staff conducted limited
reviews of reported activity through September 30, 2002.

The audit of BCCC covered the period from its inception, March 24, 1999
through March 31, 2001. During this period, BCCC reported an opening cash balance of
$-0-, total receipts of $9,451,396, total disbursements of $3,325,166 and a closing cash
balance of $6,126,230. In addition, the Audit staff conducted limited reviews of reported
activity through September 30, 2002.

Page 3 of 37


The Commission approved report will be placed on the public record on January
13, 2003. Should you have any questions regarding the public release of the report, please
contact the Commission's Press Office at (202) 694-1220.

Any questions you have related to matters covered during the audit or in the report
should be directed to Jeff Spilizewski or Thomas J. Nurthen of the Audit Division at (202)

694-1200 or toll free at (800) 424-9530.
Sincerely, Aig
Joseph F. Stoltz |

Assistant Staff Director
Audit Division

Attachment as stated

Page 36 of 37


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Shown below is the Audit staff’s analysis of expenditures subject to the

limitation.

Expenditures Subject to Limitation at September 30, 2002 $ 67,311,882

Add: Accounts Payable
Due to Primary Committee 2,736 (a)
Due to BCCC 124,450 (b)
Due to Recount Fund 382,996 (c)

Less: Accounts Receivable:

Due From Press as of 9/30/02 (68,814)
Due From Vendors as of 9/30/02 (64,241)
Adjusted Expenditure Subject to the Limitation $ 67,689,009
Less: Expenditure Limitation $ 67,560,000
Amount in Excess of the Limitation $ 129,009

(a) This amount represents the net adjustment necessary to correct misattribution of
expenses between BC2000 and the Primary Committee. BC2000 representatives
were given a detailed worksheet supporting this amount at the exit conference.

(b) This amount represents the net adjustment necessary to correct misattribution of
expenses between BC2000 and BCCC. BC2000 representatives were given a
detailed worksheet supporting this amount at the exit conference.

(c) This amount represents $288,437 due to the Recount Fund for payroll and
overhead expenses as explained below and $94,559 in net adjustments necessary
to the correct misattribution of expenses between BC2000 and the Recount Fund.
BC2000 representatives were given a detailed worksheet supporting this amount
at the exit conference.

Page 14 of 37


Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 7

Division has shown that there was at least some winding down activity after the date of
the election.'* Since winding down costs are qualified campaign expenses, the General
Committee must document the expenses. 11 C.F.R. § 9003.5(a). This documentation
issue is complicated by the fact that the winding down activity occurred at the same time
as the recount activity. However, this complicated scenario does not mean that the
General Committee is entitled to ignore its documentation requirements. 11 C.F.R.

§ 9003.5(b). Given the dual activities in which it was engaged at this point, this Office
believes that the General Committee should have been more vigilant in documenting its
qualified campaign expenses. Therefore, in the absence of documentation, we agree with
the Audit Division’s approach in using a formula to estimate the General Committee’s
winding down expenses. See John Glenn Presidential Committee v. FEC, 822 F.2d 1097,
1103 (D.C. Cir. 1987) (Commission may estimate allocation of expenses to state
expenditure limitations in the absence of documentation of the exact allocation).

IV. Repayments for Contributions from Private Sources and Exceeding
Expenditure Limitation

In the Summary of Amounts Due to the United States Treasury of the proposed
Report, the Audit Division lists $594,167 as due to the Treasury for the General
Committee’s acceptance of in-kind contributions from the Party Committees ($498,658)
and from air charter vendors ($95,509) (Finding II.A.). 26 U.S.C. § 9007(b)(3).
However, these same amounts are also included as part of Finding I.D. (Amount in
Excess of the Expenditure Limitation). 26 U.S.C. § 9007(b)(2). It is appropriate to
include these amounts in both findings for accounting purposes since in-kind
contributions are both contributions and expenditures. 11 C.F.R. §§ 100.7(a)(1)(iii) and
100.8(a)(1)(iv)(A). However, when doing so triggers a double repayment to the United
States Treasury, the Office of General Counsel believes that a repayment on both grounds
is inappropriate. 26 U.S.C. § 9007(b)(5).

As a pre-condition for the receipt of federal funds for the general election,
presidential candidates must agree not to accept contributions. 11 C.F.R. § 9003.2(a)(2).
Such a receipt of contributions to defray qualified campaign expenses triggers a
repayment of the amounts in question to the United States Treasury. 26 U.S.C.

§ 9007(b)(3). The statute provides that “no payment shall be required from the eligible
candidates of a political party under this subsection to the extent that such payment, when
added to other payments required from such candidates under this subsection, exceeds the
amount of payments received by such candidates under section 9006.” 26 U.S.C.

§ 9007(b)(5). Therefore, the basic principle in the law is that the government should not
profit from repayments under the public financing system. While this case does not

winding down or the time taken.”). Furthermore, the Commission has not required committees to have a
pre-set level of winding down expenses.

8 See supra note 11.

Page 31 of 37


Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 8

Tepresent a specific instance where the total repayments exceed the payments made to the
candidate as a part of his entitlement to public funds, this is a case where the government
would recoup two repayments from the same transaction. If the Commission seeks a
tepayment from the General Committee on both bases, the government may be placed in
a better position than it was prior to the dispensing of the funds to the General
Committee. '¢

General election public financing is an aggregate financing system, with the
premise that 100% of the candidate's funding will flow from the government. If the
candidate uses financing from any source other than the government, the government’s
share of the financing is reduced through a repayment to the Treasury in direct proportion
to the amount provided from the other source. 26 U.S.C. § 9007(b)(3). Therefore, once
the Commission recoups a repayment for private source financing, the Commission has
achieved its goal of maintaining an aggregate financing system. There is no need to seek
an additional repayment based on the fact that the General Committee received funding
from a source other than the government. Thus, the Office of General Counsel
recommends that the Audit Division revise the report to eliminate the repayment for
exceeding the expenditure limitation to the extent that such repayment is based on private
source funding.

a The regulations do provide one instance where the government may be placed in a better situation

than prior to the dispensing of public funds; namely when a candidate who invested public funds must repay
the resulting derived income. 11 C.F.R. § 9007.2(b)(4). However. this is distinguishable from a situation
of mixed public and private funds that results in a double Tepayment to the United States Treasury. In the
primary context, a committee, exceeding both the overall expenditure limitation and one or more State
expenditure limitations, is required to repay only the larger amount and not both amounts in excess of the
limit. 11 C.F.R. § 9038.2(b)(2)(v). The Explanation and Justification for this rule state that “to avoid the
possibility of double counting,” the lesser amount of expenditures exceeding either the state-by-state limit
or the overall limit are subsumed into the larger amount of expenditures exceeding either limit. Explanation
and Justification for 11 C.F.R. § 9038.2(b)\(21v). 86 Fed Reg, 35908 (July 29, 1991). In both contexts
discussed above, a double repayment would place the government in a better position than it was prior to
the dispensing of public funds. This interpretation 1s consistent with the decision in Kenned\: For President
Committee v. Federal Election Commission. The Kennedy primary committee, using a mix of federal funds
and private contributions, had exceeded campaign expenditure limits Subsequently, the Commission
ordered the Kennedy committee to repay the full amount of unqualified expenditures to the Treasury
without regard to whether the monies originated from matching funds or private contributions. Reasoning
that this could result “tin the repayment of a greater sum of money than the candidate received in federal
matching payments,” the Court found that the Commission exceeded its statutory authority by ordering a
full repayment. Kennedy For President Commutce v. Federal Election Commission, 734 F.2d 1558. 1561-
62 (D.C. Cir. 1984).

Page 32 of 37


SUMMARY OF AMOUNTS DUE TO THE UNITED STATES TREASURY

Finding I1.A.2. Acceptance of Contribution by an $ 95,509
Eligible Candidate of a Major Party

Finding I1.B. Income Received 255,003
Finding I.D. Expenditure Limitation 129,009
Finding I.E. Stale Dated Checks (BC2000) 7,701
Finding II.A. Stale-Dated Checks (BCCC) 33,415
Total 520,637
Amount Paid 296,119
Total Due United States Treasury $224,518

* As noted in Findings IL.B., IIE., and III.A., these amounts have been paid to the
United States Treasury.

Page 20 of 37




CHRONOLOGY

BUSH-CHENEY 2000, INC.
AND
BUSH-CHENEY 2000 COMPLIANCE COMMITTEE, INC.

Audit Fieldwork 03/26/01 — 03/07/02
Exit Conference 03/08/02
Preliminary Audit Report to

the Committee 06/27/02

Response to the

Preliminary Audit Report 08/29/02

Final Audit Report Approved 12/23/02

Page 37 of 37


The issue addressed was whether the costs of a phone bank get-out-the-
vote effort could have been allocated 75% to the Party Committees and 25% to BC2000.
Based on the content of the phone bank script, the Staff recommended that the cost of the
script ($1,994,631) be allocated on a 50% / 50% basis. Such an allocation would have
resulted in the Party Committees making in-kind contributions totaling $498,658 to
BC2000 and require a repayment of the same amount to the United States Treasury.

The Commission considered a motion to accept the Staff recommendation.
The motion failed by a vote of 3 to 2.

2. In-Kind Contributions from Air Charter Vendors

Section 441b(a) of Title 2 of the 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 whatever, or any labor organization, 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(e)(1) of Title 11 of the Code of Federal Regulations
states a candidate, candidate’s agent, or persons traveling on behalf of a candidate who
uses an airplane which is owned or leased by a corporation other than a corporation
licensed to offer commercial services for travel in connection with a Federal election
must, in advance, reimburse the corporation, in the case of travel to a city served by
regularly scheduled commercial service, the first class air fare; in the case of travel to a
city not served by a regularly scheduled commercial service, the usual charter rate.

Section 100.7 of Title 11 of the Code of Federal Regulations
defines the term contribution. It includes in that definition all in-kind contributions. An
in-kind contribution includes the provision of goods and services at less than the usual
and normal charge for such goods or services. If goods or services are provided at less
than the usual and normal charge, the amount of the in-kind contribution is the difference
between the usual and normal charge for the goods or services at the time of the
contribution and the amount charged the political committee. The usual and normal
charge for goods means the price of those goods in the market from which they ordinarily
would have been purchased at the time of the contribution.

BC2000 used aircraft provided by a number of corporations for
campaign-related travel. At the time the aircraft were used, five of the corporations had
valid Air Carrier Certificates’ authorizing them to operate aircraft charter businesses that

3. An Air Carrier Certificate certifies that an entity has met the requirements of the Federal
Aviation Act of 1958, as amended, and the rules, regulations, and standards prescribed
thereunder for the issuance of this certificate and is hereby authorized to operate as an air

Page 7 of 37


It is not clear what type of business entity Aquila was at the time of
the BC2000 flight. An entity named Aquila Air, Inc. was an air charter service licensed
with the Canadian Transportation Agency in 1992. However, that license was suspended
in April of 1997. On October 31, 1997, Aquila filed Articles of Organization/Domestic
Limited Liability Company with the Ohio Secretary of State, appointing 50 East
Corporation as its agent. On June 1, 2001, Portman filed a Trade Name/Original Filing
with the Ohio Secretary of State registering Aquila as an Ohio Limited Liability
Company.

The preliminary audit report contained a number of
recommendations relative to Aquila and Portman. However, BC2000 now agrees that
Portman should have been paid a charter rate. Therefore, the documentation requested is
not required.

Further, BC2000 was encouraged to provide documentation that
demonstrated the amount of the total charter cost, as calculated by the Audit staff, should
be adjusted. Such documentation was to include a statement from each vendor indicating
the actual charter costs for the respective flights. The documentation was to also include
an explanation of any charter cost that is lower than the charter cost calculated by the
Audit staff.

In response to the preliminary audit report, Counsel stated that
BC2000 agreed with the Audit staff that the seven entities were actually air charter
services and concurs that a repayment is necessary.’ However, BC2000 disagrees with
the total charter cost amount as calculated by the Audit staff.

The Audit staff has reviewed the documentation submitted by
BC2000 and agrees that certain adjustments to the calculated charter rates are necessary,
but not to the extent that BC2000 has suggested. It was noted that BC2000 calculated the
charter costs based upon current charter rates. Further, it did not consider certain
repositioning flights and overnight charges, any landing fees, taxes and other fees charged
while the aircraft was on the ground. Although BC2000 agreed that Portman should have
been paid a charter rate, it omitted such costs from its calculations, as well as the second
day’s charter provided by another charter service. As a result, the Audit staff contacted
each charter service and received, by fax transmission, a breakdown of the actual charges
had a charter rate been applied.

Based upon the documentation received, the Audit staff determined
that BC2000 should have paid $123,227 for the flights in question (see Attachment 2).
Consequently, it appears these vendors made and BC2000 received in-kind contributions
of $95,509 ($123,227 - $27,718 paid).

5. Although BC2000 did not provide any of the requested documentation from Portman and
Aquila, they now agree that Portman should have been paid a charter rate.

Page 9 of 37




va es
Memorandum to Robert J. Costa

Proposed Final Audit Report
Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 6

I. Amount Due to Recount Fund for Pavroll and Overhead (Finding II.D)

Immediately following the 2000 elections, the General Committee established the
Recount Fund to receive private funds to defray the costs associated with the challenges
to the vote count in Florida. However, at the same time the General Committee began its
campaign to defend the vote count, it is reasonable to assume that the General Committee
was also winding down its political campaign. Winding down expenses are recognized as
qualified campaign expenses at 11 C.F.R. § 9004.4(a)(4), and as such the General
Committee must document the expenses. However, the General Committee has not
provided documentation of its winding down costs to the Audit Division despite specific
evidence of winding down activity during the recount period.'' In the absence of a
winding down figure from the General Committee, the Audit Division derived a formula
to estimate the winding down expenditures’? and determined that the Recount Fund
contributed $288,437 for payroll and overhead expenditures that should have been paid
by the General Committee.

The General Committee objects to the Audit Division’s finding that it accepted an
in-kind contribution from the Recount Fund and it asserts that the Audit Division’s
formula is a “wild guess” and that the auditors are substituting their judgment in place of
what the General Committee knows its staff was doing. However, the General
Committee failed to provide its own calculation of winding down costs.

The regulations do not presume or require a minimum amount of winding down
costs by a committee."* 11 C.F.R. § 9004.4(a)(4). However, in this instance, the Audit

" The Preliminary Audit Report noted that the General Committee issued 474 checks during the

Tecount period, totaling approximately $2,400.000 to various vendors, for obligations incurred before the
date of the general election. Although the $2,400,000 is attributable as general election expenditures since
paid prior to the end of the expenditure report period, the cost of the effort to issue checks after the election
to pay vendors is an administrative cost associated with winding down the campaign. 11 C.F.R.

§ 9004.4(a)(4)(i).

R The Audit Division reviewed the General Committee's travel expense vouchers and found that
24% of the General Committee's salary was paid to individuals who were working in states where there was
no issue of recounting the general election votes, The auditors conclude that the remaining 76% of the
salary must have been related to the General Committee's recount efforts and they assigned this percentage
of the salary to the General Committee's recount effons accordingly. The auditors used the same 24% 76%
allocation formula for the overhead costs.

8 This issue is different from the prior issue on the proper allocation between the General Committee
and the Party Committees. Here, the issue 1s a factual question of how much did the General Communee
expend in winding down expenses. The prior discussion 1s a legal question of what standard determunes the
allocation of expenses between the General Committee and the Party Committees.

" The Commission repeatedly declined to adopt proposals to limit winding down expenses by time
or amount. Explanation and Justification for 11 C.F.R. § 9034.4: 48 Fed. Reg. 5228 (Feb. 4, 1983),

60 Fed. Reg. 31866 (June 16, 1995) (“the final rules contain no new restrictions on the amount spent on

Page 30 of 37


The audit identified 21 checks made payable to individuals and vendors,
totaling $7,701, which had not been negotiated by the payees. The value of the stale-
dated checks is payable to the United States Treasury.

Subsequent to the exit conference, a BC2000 representative delivered to
the Audit Division a check payable to the United States Treasury in the amount of the
$7,701.

I. AUDIT FINDINGS AND RECOMMENDATIONS — BUSH-CHENEY 2000
COMPLIANCE COMMITTEE, INC.

A. STALE-DATED CHECKS

Section 9007.6 of Title 11 of the Code of Federal Regulations states that if
the committee has checks outstanding to creditors or contributors that have not been
cashed, the committee shall notify the Commission. The committee shall inform the
Commission of its efforts to locate the payees, if such 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 of such outstanding checks, payable to the United
States Treasury.

The bank reconciliation identified 41 checks made payable to individuals
for contribution refunds totaling $33,415 that had not been negotiated by the payees. The
value of the stale-dated checks is payable to the United States Treasury.

Subsequent to the exit conference, a BCCC representative delivered to the
Audit Division a check payable to the United States Treasury in the amount of the
$33,415.

B. DISCLOSURE OF DEBTS AND OBLIGATIONS

Section 434(b)(8) of Title 2 of the United States Code states, in part, that
each report filed under this section shall disclose the amount and nature of outstanding
debts and obligations owed by or to such political committee.

Section 104.3(d) of Title 11 of the Code of Federal Regulations states, in
part, that each report filed under 11 CFR 104.1 shall, on Schedule C or D, as appropriate,
disclose the amount and nature of outstanding debts and obligations owed by or to the
reporting committee.

Sections 104.11(a) and (b) of Title 11 of the Code of Federal Regulations
state, in part, that debts and obligations owed by or to a political committee which remain
outstanding shall be continuously reported until extinguished. These debts and
obligations shall be reported on separate schedules together with a statement explaining
tne circumstances and conditions under which each debt and obligation was incurred or
extinguished. A debt or obligation, the amount of which is $500 or less, shall be reported

Page 18 of 37




Memorandum to Robert J. Costa

Proposed Final Audit Report

Bush-Cheney 2000, Inc. and Bush-Cheney 2000 Compliance Committee, Inc. (LRA #593)
Page 2

questions, please contact Albert Veldhuyzen or Tracey Ligon, the attomeys assigned to
this audit.

The proposed Audit Report includes several findings and repayment
recommendations that are intricately linked to each other. In order to place our comments
in context, we need to unravel the complex linkages. The report recommends that the
General Committee repay a total of $1,555,062 to the United States Treasury. The
repayment includes $594,167 for contributions received from private sources, $255,003
for income received on an investment and the use of the General Committee’s asset, and
$664,776 for exceeding the expenditure limitation.” The contributions Tepayment is
composed of funding from several state party committees (“Party Committees”) and
funding from the General Committee's air charter vendors. The amounts subject to the
expenditure limitation also include the funding from the private sources, plus a
reimbursement from the Bush-Cheney 2000 Recount Fund (“Recount Fund”) for winding
down expenses that should have been paid by the General Committee. Therefore, the
private source funding is the basis of two independent bases for repayment: contribution
repayment and the repayment for exceeding the expenditure limitation.

The General Committee and BCCC could have taken action to bring the General
Committee within the expenditure limitation and eliminate this basis for repayment. The
proposed Audit Report notes that there were sufficient expenses that were subject to the
expenditure limitation that BCCC could have paid to bring the General Committee within
the limitation. See 11 C.F.R. §§ 9003.3(a)(2)(i) and 9003.3(a)(2)(iii). However, this
adjustment would require BCCC to reimburse the General Committee. See 11 C.F.R.

§ 9003.3(a)(2)(ii)(G). The Preliminary Audit Report (“PAR”) recommended that BCCC
reimburse the General Committee. However, both committees elected not to
consummate the reimbursement.> Rather, the General Committee’s response to the
Preliminary Audit Report addresses certain expenses that the auditors had found subject
to the expenditure limitation. The General Committee disputes the finding that it
received a contribution from the Party Committees. The General Committee also
contends that a reimbursement to the Recount Fund is not necessary because the Recount
Fund did not incur winding down expenses on its behalf." Our comments address the two
issues that the General Committee disputes as well as the issue of whether it is

. The General Committee and BCCC also owe $41.116 to the United States Treasury: for stale-dated
checks. However, the committees already paid $296.119. Therefore. the total outstanding balance owed to
the Treasury is $1,258,943 ($1,555,062 - $296.119).

3 BCCC may still reimburse the General Commuttee prior to any repayment determunation by the
Commission pursuant to 11 C.F.R. § 9007.2. 11 C.F.R. § 9003.3(a)(2 (iG).

‘ In its cover memorandum to the Prelimunary Audit Report. the Audit Division explained that it was
not seeking a repayment of these recount contributions pursuant to 26 U.S.C. § 9007(b)(3) because the
“Recount Fund is within the Bush-Cheney organization.” The Audit Division is treating these private
contributions from the Recount Fund that defray qualified campaign expenses as misallocations.

Page 26 of 37


FEDERAL ELECTION COMMISSION
WASHINGTON. DC 20463

January 7, 2003

The Honorable George W. Bush
c/o Mr. Benjamin L. Ginsberg
Patton Boggs LLP

2550 M Street, N.W.
Washington, D.C. 20037-1350

Dear Mr. President:

Attached please find the Report of the Audit Division on Bush-Cheney 2000, Inc.
and Bush-Cheney 2000 Compliance Committee, Inc. The Commission approved the
report on December 23, 2002. As noted in the report, the Commission may pursue any of
the matters discussed in an enforcement action.

In accordance with 11 CFR §§9007.2(c)(1) and (d)(1), the Commission has made a
determination that a repayment to the Secretary of the Treasury in the amount of $224,518
is required within 90 calendar days after service of this report (April 11, 2003).

Should you dispute the Commission's determination that a repayment is required,
Commission regulations at 11 CFR §9007.2(c)(2)(i) provide you with an opportunity to
submit in writing, within 60 calendar days after service of the Commission's notice (March
11, 2003), legal and factual materials to demonstrate that no repayment, or a lesser
repayment, is required. Further, 11 CFR §9007.2(c)(2)(ii) permits a candidate who has
submitted written materials to request an opportunity to address the Commission in open
session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted
within the 60-day period when deciding whether to revise the repayment determination.
Such materials may be submitted by counsel if you so elect. If you decide to file a
response to the repayment determination. please contact Greg Baker of the Office of
General Counsel at (202) 694-1650 or toll free at (800) 424-9530. If you do not dispute
this determination within the 60-day period provided. it will be considered final.

Page 35 of 37


ATTACHMENT 1

Bush-Cheney 2000, Inc.
Statement of Net Outstanding Qualified Campaign Expenses
as of December 7, 2000
as determined through 9/30/02

Assets
Cash on Hand $ 8,780
Cash in Bank 1,585,008
Accounts Receivable
Press Travel Reimbursements $ 1,050,415
Secret Service Travel Reimbursements 1,360,785
Refunds/Rebates 395,985 2,807,185
Due from Primary Committee 37,303
Due from BCCC 64,050
Due from Recount Fund 295,036
Due from Transition Foundation 438
Capital Assets 156,952
Other Assets 26,701
Total Assets $4,981,453
Obligations
Accounts Payable through 9/30/02 $3,098,778
Due to Primary Committee
Actual Paid Between 12/8/00 and 9/30/02 $ 128,823
Due to as of 9/30/02 2,736 131,559
Due to BCCC
Actual Paid Between 12/8/00 and 9/30/02 130,901
Due to as of 9/30/02 124,450 255,351
Due to Recount Fund
Actual Paid Between 12/8/00 and 9/30/02 256,460
Due to as of 9/30/02 382,996 639,456
Payable to US Treasury - Charter Aircraft (see Finding II.A.2.) 95,509
Payable to US Treasury — Income (see Finding II.B.) 251,503
Payable to US Treasury - Stale Dated Checks (see Finding II.E.) 7,701
Actual Winding Down Costs 1/1/01 Through 9/30/02 573,862
Total Obligations 5,053,719
Net Outstanding Qualified Campaign Expenses (Deficit) $ (72,266)

Page 21 of 37


4. proper disclosure of disbursements including the itemization of
disbursements when required, as well as, the completeness and
accuracy of the information disclosed;

5. proper disclosure of debts and obligations (see Finding II.B.);

6. the accuracy of total reported receipts, disbursements and cash
balances as compared to campaign bank records;

7. adequate recordkeeping for transactions (see Finding II.C.);

8. accuracy of the Statement of Net Outstanding Qualified Campaign
Expenses to disclose its financial condition (see Attachment 1);?

9. compliance with spending limitation (see Finding II.D.); and,

10. other audit procedures that were deemed necessary in the situation (see
Findings IL.B., IIE. and III.A.).

The Primary Committee did not accept federal matching funds and was not
required to be audited. In addition, BC2000 established a Recount Fund to accept
donations and defray expenses associated with the recount of votes in a number of states.
The Audit staff reviewed certain expenditures made by the Primary Committee and the
Recount Fund in order to verify the proper attribution of expenses between the primary
and general election campaigns as well as the recount effort (see Finding II.D.).

The Audit staff did not analyze issue ads paid for by the national or state
party committees or review payments made by the national or state party committees to
media vendors utilized by BC2000.

Unless specifically discussed below, no material non-compliance was
detected. It should be noted that the Commission may pursue further any of the matters
discussed in this report in an enforcement action.

2. BC2000 did not file a Statement of Net Outstanding Qualified Campaign Expenses. The
Audit staff generated the Statement of Net Outstanding Qualified Campaign Expenses at
Attachment 1.

Page 5 of 37


served the general public and commercial concerns.‘ With respect to two additional
companies, one described itself as an air charter company on an “Aircraft Information
Sheet” submitted to BC2000, while the other appeared to have the same address as that of
an air charter company.

In the case of the company that shared an address with the charter
company, BC2000 paid the Portman Equipment Company (Portman) for use of an
aircraft. The tail number registration for this aircraft listed its owner as Aquila Air, LLC
(Aquila) at an address that was close in proximity to Portman’s address. Documentation
submitted by Portman also indicated that the aircraft was owned by Aquila. This entity
was not listed in the Air Charter Service Guide. Reports from Dunn and Bradstreet and
the Ohio Secretary of State both listed Portman and Aquila as having the same address.

Prior to each flight, BC2000 determined the cost of first class
unrestricted commercial airfare for the flight leg(s) in question and issued a check or wire
to the company. During the period August 8, 2000 through November 3, 2000, BC2000
paid $27,718 to these companies. None of these entities appear to fall under the
provisions of 11 CFR §114.9(e) and therefore should have been paid at a charter rate.

Based on the documentation generated during audit fieldwork,
BC2000 should have paid $154,129 for the flights in question. BC2000 did not maintain
a record of charter aircraft rates for the seven companies identified above; therefore, the
Audit staff applied the charter rate as published in the Air Charter Guide, 27th Edition.
Winter 2000. Consequently, it appears these vendors made and BC2000 received in-kind
contributions of at least $126,411 ($154,129 - $27,718 paid).

At the exit conference, the Audit staff provided BC2000
representatives with a schedule of the transactions and requested BC2000 provide
evidence that it did not receive in-kind contributions.

In a statement provided subsequent to the exit conference, Counsel
stated BC2000 agreed that six of the seven vendors were air charter services. With
respect to the remaining vendor, Counsel stated that Portman and another unrelated
company own Aquila. Portman paid Aquila for the use of the aircraft and BC2000 paid
Portman the required first class rate for the flight. Counsel did not provide
documentation to support their claim of Portman owning Aquila and documentation to
support the amount Portman paid Aquila for the use of the aircraft.

carrier and conduct common carriage operations in accordance with said Act and the
tules, regulations, and standards prescribed thereunder and the terms, conditions, and
limitations contained in the approved operations specifications.

4, One of the five vendors (Kleiner, Perkins, Caufield & Byers) appeared to have acted as
an intermediary between BC2000 and ACM Aviation, Inc., an air charter company.

Page 8 of 37