17

Identification. In the case of an individual, his or her full na
name or initial (if available), and last name: mailin
her employer. 11 CFR §100.12.

me, including: First name, middle
g address; occupation; and the name of his or

Facts and Analysis

RRFC received three transfers from The Leadership Com
is listed on RRFC’s Statement of Organization as an affi
joint fundraising representative. None of the transfers w
(Transfers from Other Authorized Committees). Furthermore, memo entries disclosing
individuals who gave in excess of $200. or political committees that contributed any amount,
were not provided for any of the three transfers as Tequired. Rather, RRFC reported the

individual and political committee contributions that made up the transfers on Schedules A for
Line 11.

mittee (TLC) totaling $134,495. TLC
liated committee with a relationship as a
ere disclosed on Schedule A, Line 12

At the exit conference, the Audit staff discussed this mat
provided a schedule detailing the transfers from TLC tha
errors, RRFC representatives agreed to amend Schedul
transfers from an authorized committee

ter with RRFC representatives and
were not disclosed. To correct these
es A for Line 12 to properly disclose these

Interim Audit Report Recommendation and
The Audit staff recommended that RRFC fi
transfers from its authorized committee. T
amount on Schedule A, Line 12 and include memo entries for each individual, whose
contribution(s) aggregated in excess of $200, and for each contribution from a political
committee comprising the transfer. In response to the interim audit report, RRFC filed the
necessary reports for 2002 that correctly disclosed these transfers.

Committee Response
le amended reports to accurately disclose the
he amendments should disclose the entire transfer

| Finding 5. Disclosure of Occupation and Name of Employer |

Summary

RRFC did not adequately disclose occupation and name of employer information for 200
contributions from individuals totaling $132,811. No “best efforts” to obtain, maintain and
submit this information was demonstrated by RRFC. In response to the interim audit report,

RRFC materially complied by filing amended reports disclosing 69% of the missing contributor
information.

Legal Standards
Required Information for Contributions from Individuals. For each itemized contribution
from an individual, the committee must provide the following information:

¢ The contributor’s full name and address (including zip code);

¢ The contributor’s occupation and the name of his or her employer;

¢ The date of receipt (the date the committee received the contribution);

¢ The amount of the contribution; and

© The election-to-date (or election cycle-to-date in the case of authorized candidate

committees) total of all contributions from the same individual. 2 U.S.C. §434(b)(3)(A)
and 11 CFR §§100.12 and 104.3(a)(4).


1]

the Candidate, totaling $394,500, represent repayments of these loans. RRFC concludes
that these loan repayments therefore represent personal funds of the Candidate. The
Audit staff agrees that the repayment of loans made by the Candidate from his personal
funds to the corporation represent the Candidate’s personal funds. However, while some
of the documentation made available to the Audit staff suggests that the payments to the
Candidate represent loan repayments, other materials suggest that the funds deposited
into Renzi & Co., Inc. accounts may have been in pamtial satisfaction of loans that the

Candidate received from the business and that the money paid to the Candidate represents
additional borrowing.

In support of its position, RRFC presented heavily redacted Printouts from Renzi and Co.,
Inc.’s accounting system show ing that $323,015 was either recorded by Renzi & Co., Inc.

as loans from the Candidate or had associated memos that suggest that the amounts were
loans by the Candidate.

Documentation provided by
RRFC indicated that, during 2001, payments totaling $394,500 were made to the

Candidate and recorded as loan Tepayments. Based on these transactions, at the end of

2001, Renzi & Co., Inc. had made loan Tepayments that exceeded the amount loaned by
$71,485 ($394,500 - $323,015"').

among the assets shown on the Balance Sheet are notes receivable from
the Candidate that shows the Candidate owed Renzi & Co. considerably more than the
amounts at issue here. In 2001, the amount owed by the Candidate increased by
approximately $186,000; and, in 2002, decreased by about $19,000. Thus rather than the
tax returns supporting the representation that the Candidate loaned Renzi & Co., Inc.
money during 2001 and received repayments, it appears that the Candidate had previously
borrowed money from the corporation and borrowed additional amounts during 2001.

"' The $65,000 transferred from Fountain Real:
no documentation to show it was recorded as
between amounts from the Candidate deposit

'y & Development is not included in this figure since RRFC provided
a loan from the Candidate. If it were included, the difference
ed and amounts paid to the Candidate would be only $6,485.


Rick Renzi for Congress (A03-13)

Audit Staff Flowchart of Funds Relative to Candidate Loans

$35,000 on 12-27-01; recorded as
“Othertne: Proceeds” downpayment
from sale.

$35,000 on 1228/01, -
recorded as “Loan

Recorded as “Other
Inc:Proceeds” memo notes

2TM Mortgage
on
Candidate's
Home

'5100,000 on 10-11-01 recorded as other

proceeds
525,000 on 10-25-01

Recorded as loan from Candidave

vn
Sale of 50%
Interest in

Fountain Realty

$50,000 on 10-3-01
& Development

315,000 oa 10-10-01
No Doc on bow recorded

$30,006 00 10-3.05

525,000 on 10-10-01
Recorded 1 loss from

Repaymeau/Rick”

ATTACHMENT 2 (one page)
Created By: A. Boniewicz

‘535,000 on 12-28-01

Renzi & S
ELGIN ;
PROPERTY Company Candidate’s
Bank
$163,015 on 8-29-01 - Account

RRFC

37,500 00 12-10-01 “Loan RepaymeaRick” per
ledger; G/L memo “REF#6021425 w/BO Prem
(Sharon)”

$330,000 o0 12-11-01 “Loan Repay geav/RickTM per
ledger; G/L memo “Transfer fund t0 personal
account” .

$50,000 on 12-20.01 "Loan Repayment Rick” per
Sedger; G/L memo “Transfer fund to personal
account”

$272,000 oa 12-28-01 “Loan RepaymeaU/Rick” per
ledger; G/. meeo “Transfer fund to personal
account”

$70,000 02 3-28.02 “Personal Expease” per
ledger; G/L nemo “wansfer 10 ‘ick pgronal”,
ARRPC says it sa dissibution.

Fountain Realty & Develop

ment (formerly Renzi Investments)

$6,090 on 12-11-01

RRFC repays,
Canditiate. $70,900
00 1/30/02; whoiin
tum-loans funda:
Fouptain. As:noted
iniParas-page 133,
the source.ofthe
38{000 & 3257000

331,000 09 12-18-01

$10,000 00 12-19-01

$50,000 00 12-20-01

$272,000 00 12-28-01

$33,000
$325,000 al on 3-28-02

$511000,¢8 6-28-02

3100 ta 19:18-05 “Personal Expense” por
edger RREC saysien 8 disatbugion.
POO HoMAS- 18-02 no badger provided tod this

+02 bo
$1005 00:60:07 00 ed tis
. Net provided:


Part II

Overview of Campaign

Campaign Organization

Important Dates

Rick Renzi for Congress

e Date of Registration

December 28, 2001

e Audit Coverage

December 18, 2001 through December 31, 2002

Headquarters

Flagstaff, Anzona

Bank Information

e Bank Depositores

1

e Bank Accounts

1 Checking, 1 Money Market Savings

Treasurer

Treasurer When Audit Was Conducted

David W. Dickman

«Treasurer During Period Covered by Audit

Wilham Constantine (through June 30, 2002);
David W. Dickman (from July 1, 2002)

Management Information

© Attended FEC Campaign Finance Seminar

No

® Used Commonly Available Campaign
Management Software Package

Yes

Who Handled Accounting, Recordkeeping
Tasks and Other Day-to-Day Operations

Joe Galh until October 2002, after which volunteer
staff assumed these tasks

Overview of Financial Activity
(Audited Amounts)

Cash on hand @ December 18, 2001

so
Receipts
© From Individuals $362,736
© From Political Committees 527,605
© Candidate Loans { 763,090
o Other Receipts | 3,163
Total Receipts | $ 1,656,594
Disbursements
© Operating & Other Disbursements | $1,658,213
Total Disbursements | $ 1,658,213
Cash on hand @ December 31, 2002 | (S 1,619)"

oo
2 The RRFC’s reported cash balance on 12/31/02 was significantly musstated, see Finding 2.
balance represents a “book” balance; its bank account balances were never negative.

The negative


18

Best Efforts Ensures Compliance. When the treasurer of a political committee shows that the
committee used best efforts (see below) to obtain, maintain, and submit the information required

by the Act, the committee’s reports and records will be considered in compliance with the Act. 2
U.S.C. §432(h)(2)(i).

Definition of Best Efforts. The treasurer and the committee will be considered to have used
“best efforts” if the committee satisfied all of the following criteria:
¢ All written solicitations for contributions included
o Aclear request for the contributor's full name, mailing address, occupation, and
name of employer; and
oA statement that such reporting is required by Federal law.
¢ Within 30 days after the receipt of the contribution, the treasurer made at least one effort
to obtain the missing information, in either a wntten request or a documented oral
request.
The treasurer reported any contributor information that, although not initially provided by
the contributor, was obtained in a follow-up communication or was contained in the

committee's records or in prior reports that the committee filed dunng the same two-

year
election cycle. 1] CFR §104.7(b)

Facts and Analysis

After reviewing all contributions from individuals in amounts aggregating over $200, the Audit
staff identified 200 contributions totaling $132,811 (42% of contributions from individuals) from
159 contributors that did not have an occupation and/or name of employer reported properly. Of
the 200 errors identified, 174 (87%) were either blank or “requested” was disclosed. The
remaining errors (13%) consisted of incomplete disclosures (for example, an employer was
disclosed but no occupation). In addition, the records provided to the Audit staff did not contain
any solicitation material or follow-up requests for missing contributor information.

At the exit conference, the Audit staff presented this matter to RRFC representatives. No
questions were posed or comments offered by the representatives. In response to the exit
conference, RRFC representatives submitted documentation suggesting that they had complied
with the “best efforts” requirements for obtaining occupation and name of employer information.
RRFC stated that each wntten solicitation for a contribution included a clear request for the
occupation and name of employer information. Also. a follow-up request for the missing
information was made if the information was not provided with the contribution. As additional
support, representatives also provided a copy of one letter sent to a contributor lacking this
information, who was not one of the individuals included as an error.

The response submitted by RRFC did not demonstrate “best efforts” were made to obtain,
maintain and submit missing occupation and name of employer information. The response did
not establish that

. Follow-up requests were sent to all contributors lacking the occupation and name of

employer information; or,

Responses were received from contributors and the contributor information was
updated in the disclosure repons


Rick Kenzi [Or CONE ss LAU In boy
Audit Staff Analysis of Loans Based on Response to the IAR

Audit Staff Position on Source of Funds for Loan

Permissible | impermissib

Count Source of Date Funds Date Funds Loan RRFC Position H

Funds Transterred Loanedto Amount on Source of Loan per | Loan per

to Candidate ARFC Funds for Loan . |} Audit Staff ; Audit Staft

1 Renzi & Co., 12-10-01 12-11-2001 $6,090 Loan . : ' $6,090
Inc. Repayment to 1
Candidate . H
Candidate Is borrowing additional amounts. Therefore, ; |
the source is Renz! & Co. andloan impermissible. ee
2 Renzi & Co., 12-10-01 12-18-2001 $31,000 Loan ; $31,000
Inc. 12-11-01 Repayment to : {
Candidate Le :
Candidate is borrowing additional amounts. Therefore, |
the source is Renzi & Co. and loan impermissible. ; .
3 Renzi & Co., 12-20-01 12-20-2001 $50,000 Loan } : $50,000
Inc. Repayment to '
Candidate '
Candidate is borrowing additional amounts. Therefore, ©
the source is Renzi & Co. and loan impermissible.

4 Renzi & Co., 12-28-01 12-28-2001 $35,000 Loan Elgin Property Funds flow through Renzi & Co; $35,000

Inc. Repayment to funds appear *
Candidate to be permissible.

5 Renzi & Co., 12-28-01 12-28-2001 $272,000 Loan $272,000
Inc. Repayment to :

Candidate . :
The source is Renzi & Co and therefore, the funds
impermissible

6 Renzi & Co., 3-28-02 3-28-2002 $70,000 Distribution to . $70,000
Inc. Candidate appears permissible. H ’

7 Fountain 12-18-01 12-19-2001 $10,000 Distribution to ' $10,000
Really & Candidate .
Development Source is Fountain, therefore, funds are i

impermissible. :

8 Fountain 3-14-02 9-28-2002 $35,000 » Loan AAFC repaid Candidate $70,000; who in turn loaned; $35,000 ,

Really & - Repayment to funds to Fountain. This is a repayment of those funds |
“Development Candidate and excluded as duplicative, to :
9 Fountain 3-14-02 3-28-2002 $25,000 Loan AAFC repaid Candidate $70,000; who in turn loaned \ $25,000:
Realty & Repayment to funds to Fountain. This is a repayment of those funds :
Development Candidate and excluded as duplicative _ coe en | _
10 Fountain 6-28-02 6-28-2002 $51,000 Loan Although no detailed documentation on original loan; $51,000
Really & Repayment to \ H
' :
Development andidate Itis likely funds are permissible ! i
Talal $505,090 $216,000 $369,091



2002 Campaign Activity
Reported Bank Records Discrepancy
Cash on Hand at 01/01/02 $396,887 $396,887 $0
Receipts $1,214,965 $1,252,504 $37,539
Understated
Disbursements $1,549,905 $1,651,010 $101,105
i Understated
Cash on Hand at 12/31/02 $61,947 ($1,619) $63,566
Overstated
The understatement of receipts was the net result of the following:
e Failure to report contributions $38,875
¢ Reporting contribution twice (500)
e Unexplained differences (__ 836)
$37,539
The understatement of disbursements was the net result of the following:
«Failure to report disbursements $123,734
e Reporting disbursements without supporting bank records ( 22,344)
¢ Unexplained differences ( 285)
$101,105

The overstatement of the closing cash on hand was the net result of the misstatements described
above.

The Audit staff discussed this matter with RRFC Tepresentatives at the exit conference and

supplied them with schedules detailing the discrepancies noted above. RRFC representatives
Stated that they would amend the appropriate schedules as necessary.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that RRFC amend its Teporis to correct the misstatements noted

above. In response to the interim audit report, RRFC amended its Teports to materially correct
the misstatements noted above.

Finding 3. Reporting of Contributions from Political
Committees

Summary
RRFC did not itemize thirteen contributions from political committees totaling $20,745. In

response to the interim audit report, RRFC filed amended reports which materially disclosed the
receipts noted above.


evolving characterization of the source of the funds necessitated the Audit staffs requests for
additional documentation.

Interim Audit Report Recommendation
The Audit staff recommended that RRFC provide evidence demonstrating that the loans to
RRFC ($585,090) were made from the Candidate’s Personal funds. Complete copies of the 2001
and 2002 tax retums, including supporting schedules, for the Candidate and each of the
corporations that transferred funds to the Candidate were requested. Also, copies of bank

statements for the Candidate and each corporation for the period June 1, 2001 to December 3 1,
2002 were requested. In addition, any other evidence needed to:

¢ Demonstrate how the disbursements made to the Candidate from the subchapter S
corporations (except salary payments) were recorded in the accounting records of the
corporations.

¢ Demonstrate how each payment (except salary payments) from the subchapter S
Corporations to the Candidate during calendar years 2001 and 2002 were accounted for
by the Candidate on his tax returns.

¢ Demonstrate the monthly financial Position (i.e. net earings statements, balance sheets,
etc.) of each corporation from August 2001 through June 2002.

¢ Demonstrate that any payments from the subchapter S corporations to the Candidate, that
are not included on the Candidate’s tax return as income, represent the retum of invested
capital, the distributions of previously taxed but undistributed eamings, or the repayment
of loans made by the Candidate.

¢ Demonstrate the sale of his interest in any of the corporations including the purchaser, the
price and how the value of the interest sold was determined.

Absent such evidence, the Audit staff further recommended that RRFC repay the outstanding
balance of the loans and provide evidence of al] Tepayments (copies of the front and back of the

negotiated repayment checks); and, amend its Teports to correctly disclose the source of these
loans as the corporations.

Prior to the response to the Interim Audit Report, RRFC requested a meeting with the Audit staff
to discuss the issues presented in the repon. That meeting occurred on February 25, 2004. At
that meeting additional documentation was provided, most significantly, the tax returns filed for
each of the corporations and the Candidate for the years 2001 and 2002. After reviewing that

material, additional questions were raised and on February 27, 2004, additional records were
requested. Those records included:

¢ Documentation to support that the owner of the 26 acres sold in Elgin, AZ was the
Candidate rather than Renzi Vino, Inc., an Arizona corporation, as indicated by the

documentation supplied (The sale of this Property was listed as the source of some of the
funds supplied by the Candidate);

A general ledger transaction report for each corporate entity that lists all transactions,
between January 1, 2001 and June 30, 2002, involving transfers of funds to the Candidate
and transfers of funds from the Candidate, or a reconciliation of these transactions to the


Part IV
Findings and Recommendations

| Finding 1. Apparent Corporate Contributions

Summary

During the campaign, the Candidate made 11 loans to RRFC totaling $585,090 which appeared
to have originated from corporate accounts. In response to the interim audit report, RRFC
maintained that all loans from the Candidate were made utilizing personal funds. RRFC
submitted various documents in support of its position. Based on the documentation submitted,
it appears that loans of $369,090 were made using impermissible corporate funds.

Legal Standard

A. Corporate Contributions Impermissible. A corporation is prohibited from making any
contribution in connection with a federal election. 2 U.S.C. §441b(a).

B. Receipt of Prohibited Contributions - General Prohibition. Candidates and committees

may not accept contributions (in the form of money, in-kind contributions or loans):
1. Inthe name of another; or

2. From the treasury funds of the following prohibited sources:

« Corporations (this means any incorporated organization, including a non-stock

corporation, an incorporated membership organization, and an incorporated
cooperative);

« Labor Organizations;

e National Banks;

Federal Government Contractors (including partnerships, individuals, and sole

proprietors who have contracts with the federal government); and

e Foreign Nationals (including individuals who are not USS. citizens and not
lawfully admitted for permanent residence, foreign governments and foreign
political parties: and groups organized under the laws of a foreign country or

groups whose principal place of business is in a foreign country, as defined in 22
U.S.C. §611(b)). 2 U.S.C. §§441b, 441c, 44]e, and 441f.

C. Definition of Personal Funds. Personal funds include salary and other earned income from

bona fide employment and dividends and proceeds from the sale of the candidate’s stock or other
investments. 11 CFR §110.10(b)(2).

Facts and Analysis

The Audit staff reviewed $763,090 in loans reported by RRFC as made by the Candidate. The

Candidate loaned RRFC $404,090 during December of 2001, and the remaining $359,000 was
loaned throughout 2002


Part III
Summaries

Findings and Recommendations

Finding 1. Apparent Corporate Contributions
During the campaign, the Candidate made 11 loans to RRFC totaling $585,090 which appeared
to have originated from corporate accounts. In response to the interim audit report, RRFC

maintained that all loans from the Candidate were made utilizing personal funds. RRFC

submitted various documents in support of its position. Based on the documentation submitted,

it appears that loans of $369,090 were made using impermissible corporate funds. (For more
detail, see p. 4)

Finding 2. Misstatement of Financial Activity
When RRFC’s reported activity was compared to its bank records, the Audit staff found that, for
calendar year 2002, receipts, disbursements and cash on hand at 12/31/02 had been misstated. In

Tesponse to the interim audit report, RRFC filed amended reports which materially corrected the
misstatements noted above. (For more detail, see p. 14)

Finding 3. Reporting of Contributions from Political Committees
RRFC did not itemize thirteen contributions from Political committees totaling $20,745. In

response to the interim audit report, RRFC filed amended reports which materially disclosed the
receipts noted above. (For more detail, see p. 15)

Finding 4. Disclosure of Transfers fr
RRFC did not disclose transfers of joint fundraisin

the interim audit report, RRFC filed amended Tepoi
more detail, see p. 16)

om Authorized Committees
8 proceeds totaling $134,495. In Tesponse to
T1s to disclose these receipts correctly. (For

Finding 5. Disclosure of Occupation and Name of Employer
RRFC did not adequately disclose occupation and name of employer information for 200
contributions from individuals totaling $132,811. No “best efforts” to obtain, maintain and
submit this information was demonstrated by RRFC. In response to the interim audif report,

RRFC materially complied by filing amended Teports disclosing 69% of the missing contributor
information. (For more detail, see p. 17)


16

Legal Standard
A. When to Itemize. Political committees must itemize:
e Every contribution from any political committee, regardless of the amount.

e Every transfer from another political party committee, regardless of whether the
committees are affiliated. 2 U.S.C. §434(b)(3)(A), (B) and (D).

B. Definition of Itemization. Itemization of contributions received means that the recipient
committee discloses, on a separate schedule, the following information:

The amount of the contribution;

The date of receipt (the date the committee received the contribution);

The full name and address of the contributor; and

e The election-to-date (or election cycle-to-date in the case of authorized candidate

committees) total of all contributions from the same contributor. 11 CFR §§100.12 and
104.3(a)(4) and 2 U.S.C. §434(b)(3)(A) and (B).

Facts and Analysis

The Audit staff reviewed all contributions from political committees. From this review, it was
determined that RRFC did not itemize thirteen contributions totaling $20,745. Of these thirteen
contributions, seven were received during the Year-End 2002 reporting period (November 26,

2002 — December 31, 2002). The Audit staff could not determine, nor could RRFC
representatives explain, why these contributions were not itemized.

The Audit staff discussed this matter with RRFC representatives at the exit conference and

provided them with schedules detailing the contributions not reported. RRFC representatives
stated they would amend the appropriate schedules as necessary.

Interim Audit Report Recommendation and Committee Response

The Audit staff recommended that RRFC amend its reports to disclose the contributions from
political committees discussed above. In response to the interim audit report, RRFC filed
amended reports that materially corrected the omissions noted by the Audit staff.

| Finding 4. Disclosure of Transfers from Authorized Committees

Summary

RRFC did not disclose transfers of joint fundraising proceeds totaling $134,495. In response to
the interim audit report, RRFC filed amended reports to disclose these receipts correctly.

Legal Standard

Reporting of Receipts. After receiving proceeds of a joint fundraiser, each participating
committee must report:

e Its share of net proceeds received as a transfer-in from the fundraising representative;

and

e Its share of gross receipts from each contributor as memo entnes. 11 CFR
§102.17(c)(8)(i)(B).


paid to the Candidate and subsequently loaned to RRFC relate to profit
distributions.
Although RRFC representatives indicated that the sale of 50% of the Candidate’s
interest in Fountain Realty & Development, Inc. was a source of funds for some
of the loans’, the documentation available at that time did not support that
representation.

however, the loans were made in December 2001, more
than three months after the sale. Bank records for the Candidate, Renzi & Co.,
Inc. and Fountain Realty & Development, Inc. were provided only for December
2001, and did not establish how and when the proceeds of the sale were received
by the Candidate. Other documents detailed the sale of the interest to two

individuals; however, no infonnation concerning how the purchase price was
determined was provided

At the exit conference, the Audit staff presented this matter to RRFC representatives. They
maintained that the funds in question were generated through the sale of various business assets.
They argued that these business entities were owned solely or in majonty by the Candidate;
therefore, profits from the sale of these business assets, were funds of the Candidate.

RRFC representatives also contended that subchapter S corporations are synonymous with sole
proprietorships, and the earnings of the subchapter S corporations are income to the Candidate.
Therefore, RRFC representatives argue that these corporate eamings represent personal income
of the Candidate. Subsequently, RFCC Counsel stated that the Candidate’s loans to RRFC were

funded by the repayment of loans made by the Candidate to the corporations. No documentation
to support that statement was provided at that time.

In Matters Under Review (MUR) 3119 involving a similar matter, the Commission maintained
that subchapter S corporations are not differentiated from other corporations under the Act. The
Commission adopted the position that “although [the corporation] is treated as an S corporation
for tax purposes, it remains a corporation for purposes of the Federal Election Campaign Act
(“the Act”). The tax ramifications of an S corporation do not remove the funds from corporate
control.” The Commission concluded that “to view the [corporation] funds as personal rather
than corporate funds...solely based on tax consequences to the shareholder — would erode the
clear meaning of the statute at Section 441b and go far beyond the Commission’s consistent
application of Section 441b to all corporations regardless of their structure and purpose.”

Prior to issuance of the Interim Audit Report, the Audit staff met with RRFC representatives on
several occasions in an effort to resolve this matter as well as to clarify the documentation
needed. To further assist RRFC representatives, all meetings were conducted at their legal
counsel’s office. During this process, RRFC representatives revised their characterization of the
source of the Candidate’s funds for many of these transactions. Many of the transactions
previously described as “distributions” from the subchapter S corporations or “proceeds” from
the sale of business assets are now characterized as loan repayments to the Candidate. This

> The sale price for the 50% interest in the business was approximately one-half the amount loaned to the RRFC

during 2001.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

December 13, 2004

MEMORANDUM
TO: ROBERT W. BIERSACK
PRESS OFFICER
PRESS OFFICE
,
FROM: JOSEPH F, STOLTZ UG
ASSISTANT STAFF DIRECTOR

AUDIT DIVISION °

SUBJECT: PUBLIC ISSUANCE OF THE AUDIT REPORT ON RICK RENZI FOR
CONGRESS

Attached please find a copy of the audit report on Rick Renzi for Congress, which
was approved by the Commission on October 19, 2004. The report has been redacted to
eliminate references to confidential corporate and personal tax information.

The report may be released to the public on December 13, 2004.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
Web Manager


[the candidate] was required to Satisfy,

thus evidencing that these funds were controlled by [the
corporation] and not [the candidate].”

In summation, the response notes that the loans were made using the Candidate’s personal funds
as defined under Commission regulations and Precedents, not corporate funds. RRFC
maintained that the Candidate either used: distributions from the S corporations, loan repayments
received from the S corporations or the proceeds from the sale of assets to make loans during the
campaign period. All these monies satisfied the standards cited in the above-noted MURs for
determining source of funds were personal funds of the Candidate. The Candidate retained sole
interest in the funds; the corporations did not retain any interest in or otherwise control the funds.
As a result, the Candidate was not required to Tepay the monies to the corporations. The
response concludes that Mr. Renzi’s personal assets were the original source of funds arising
from the second mortgage and the sale of 50% equity in Fountain Realty & Development, Inc.

RRFC maintained that he Candidate, in his Capacity as a small

business owner, used his personal assets to make loans to his companies that were eventually
repaid to him.

Audit Staff's Assessment of Committee Response

The interim audit report questioned the permissibility of the funds used by the Candidate to make
loans totaling $585,090 to RRFC. In its response to the interim report, RRFC provides an
explanation that concludes that the entire amount represents the Candidate’s personal funds.
Some is characterized as profit distributions, some as the repayment of loans made to the
corporations with personal funds, and some as the sale of personal assets. A thorough review of
all available documentation lead the Audit staff to conclude that loans to RRFC totaling

$216,000 likely were made with permissible funds, while loans totaling $369,090 were made
using impermissible corporate funds.

As noted above, part of RRFC’s response relies on several MURs. In those MURs where the

funds used by the candidate were the distribution of previously taxed but undistributed earings,
the Commission found no violation. In other cases where the funds used were determined to be
corporate treasury funds, a violation was found. With respect to $369,090 discussed below, the

Audit Staff concludes that the situation is analogous to those instances where the Commission
found violations.

Our detailed analysis of the documentation Provided by RRFC is presented below. The
transactions are discussed, grouped by year and by the entity that was the source of the funds:
Renzi & Co., Inc. [$464,090 ($394,090 in 2001 and $70,000 in 2002)); and Fountain Realty &
Development, Inc. [$121,000 ($10,000 in 2001 and $11 1,000 in 2002)).


lines on which they appear on each corporate tax retum

and,

Bank statements and copies of deposits and checks that support those entries provided on
the transaction reports requested above, for which this documentation has not been
provided. If copies of specific deposit items and checks were not readily available, they

should be submitted as soon as possible after the response to the Interim Audit Report is
due.

Committee Response to Interim Audit Report

In its response to the Interim Audit Report, RRFC details the documentation that has been made
available for the Audit staff's review; or, for which copies were provided to address the source of
the Candidate loans. The response emphasizes RRFC’s commitment to working with the Audit
staff in resolving this matter and states that they are continuing to search for the additional
documentation requested by the Audit staff. It should be noted that only a portion of the

documentation requested in the Interim Audit Report was provided and none that was included in
the follow-up request.

The response notes that a federal candidate 1s permitted to make unlimited contributions and

loans from personal funds to his authorized committee. It cites 11 CFR §110.10(b) which
defines personal funds as:

Any assets which, under applicable state law, at the time he or she became a candidate,
the candidate had a legal right of access to or control over, and with respect to which the
candidate had either; legal and nghtful title, or an equitable interest; and,

Salary and other earned income from a bona fide employment and dividends and
proceeds from the sale of the candidate’s stocks or other investments.

The response continues by citing Title 26, Subtitle A. Chapter 1, Subchapter S of the Internal
Revenue Code. This chapter states that a small business corporation, including one owned by a
single shareholder may elect to have its income or loss passed through and taxed to its
shareholder as ordinary income to avoid double taxation.

RRFC’s response also cites MURs 5283 and 5285 to demonstrate that the Commission found no
violation where loans were made by a candidate from the proceeds of distributions to the
Candidate from a subchapter S corporation. In that case, the distributions to the Candidate were
authorized by the corporate board of directors and the funds consisted of previously taxed
earnings that had been left with the corporation for working capital. The response also cites
MURs 3119 and 3191 as examples where funds borrowed from the general treasury of the
corporation were the source of funds for campaign loans made by the Candidate. In reaching its
conclusion, the Commission noted that “the money provided to [the candidate] in this matter
originated directly from [the corporation’s] general treasury funds in the forms of loans which


5

The Audit staff reviewed the source of funds for all the Candidate loans and determined that
$585,090° appezred to have been funded with monies from the following corporations:
* Renzi & Co., Inc.*, a subchapter S corporation’ in which the Candidate held a
90% interest; and
e Fountain Realty and Development, Inc. (formerly Renzi Investments, Inc.®), a
subchapter S corporation in which the Candidate held a 50% controlling interest.

During the audit fieldwork, the Audit staff reviewed selected bank statements, canceled checks,
and other documents provided by RRFC, the Candidate, and the corporations. In addition,
portions of the 2001 tax returns for the Candidate and the corporations’ were reviewed. Our
analysis of the documents available when the interim audit report was prepared indicated:
¢ The loans were made by check drawn on the corporate accounts, deposited into
the Candidate’s personal bank account, and then transferred by wire or check to
RRFC’s bank account

¢ None of the checks drawn by the corporations to the Candidate indicated they
were distributions of income to the Candidate.

In
addition, documentation was not provided to establish how, if at all, the amounts

Two additional loans ($178,000) arose when RRFC made Tepayments to the Candidate for some of the corporate
loans during October, 2002. The Candidate deposited those funds into his personal bank account and then loaned
those funds back to RRFC. Since the original source of the loans was the corporations, adding these loans to the
total would constitute a double count. Therefore, these loans ($178,000) are not considered.

Renzi & Co., Inc. is now known as Patriot Insurance Agency, Inc

A subchapter S corporation (also called S corporation) 1s a general Corporation that has elected a special tax status
with the IRS. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who
prefer to be taxed as if they were still sole proprietors or parmers Subchapter S corporations avoid “double
taxation” (once at the corporate level and again at the personal level) because all income or loss is reported only
once on the personal tax returns of the stockholders. Subchapter S corporations are separate legal entities from its
stockholders.

Renzi Investments, Inc., was a subchapter S corporation wholly owned by the Candidate. When the Candidate
sold a 50% interest in this entity, the name became Fountain Realty & Development, Inc.; which is how the Audit
staff will refer to it in this report.

Corporate tax returns were provided for Renzi & Co.. Inc. (now Patmot Insurance Agency, Inc.), Renzi
Investments, Inc. (now Fountain Realty & Development, Inc ), and Fountain Hills Estates Realty & Construction,

Inc. (now Renzi Vino, Inc.). However, documentation was not presented to link Fountain Hills Estates Realty &
Construction, Inc. to any of the Candidate loans


19

Interim Audit Report Recommendati
The Audit staff recommended that RRFC take t

on and Committee Response

he following action:

Provide documentation such as the initial solicitation devices, phone logs, retumed
contributor letters, completed contributor contact information sheets or other materials
which demonstrated that best efforts were used to obtain, maintain, and submit the
required disclosure information; or

Absent such a demonstration, make an effort to contact those individuals for whom

required information is missing or incomplete, provide documentation of such contacts
(such as copies of letters to the contributors and/or phone logs), and file complete
amended reports to disclose any information obtained from those contacts.

In response to the interim audit report, RRFC filed an amended report with updated contributor

information for most of the omissions noted above. In addition, RRFC submitted a sample of
letters sent to contributors to obtain the missing information.


Part I
Background

Authority for Audit

This report is based on an audit of Rick Renzi for Congress (RRFC), undertaken by the Audit
Division of the Federal Election Commission (the Commission) in accordance with the Federal
Election Campaign Act of 1971, as amended (the Act). The Audit Division conducted the audit
pursuant to 2 U.S.C. §438(b), which permits the Commission to conduct audits and field
investigations of any political committee that is required to file a report under 2 U.S.C. §434.
Prior to conducting any audit under this subsection, the Commission must perform an intemal
review of reports filed by selected committees to determine if the Teports filed by a particular

committee meet the threshold requirements for substantial compliance with the Act. 2 U.S.C.
§438(b).

Scope of Audit

Following Commission approved procedures, the Audit staff evaluated various factors and as a
result, this audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The consistency between reported figures and bank records.
The completeness of records.

Other committee operations necessary to the review.

Syawnn

Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act of
2002 (BCRA). The BCRA contains many substantial and technical changes to the federal
campaign finance law. Most of the changes became effective November 6, 2002. Except for
November 7, 2002 through December 31, 2002, the penod covered by this audit pre-dates these

changes. Therefore, the statutory and regulatory requirements cited in this Teport are primarily
those that were in effect prior to November 7, 2002.


12

The records presented to date do not establish that $359,090 of the $394,090 in loans

arising in 2001 represent the Candidate’s personal funds. The remaining $35,000, from
the sale of the land appears permissible.

RRFC disclosure reports indicate that with respect to the $35,000 loan, $25,000 was
repaid on November 4, 2002 and the balance ($10,000) remained outstanding through
August 18, 2004. The remaining loans during 2001 ($359,090) were reduced by: $70,000
on January 30, 2002; $140,000 on October 7, 2002; $64,000 on October 17, 2002; $2,500

on December 20, 2002; and $12,500 during 2003. The balance of $70,090 remains
outstanding as of August 18, 2004.

¢ Fountain Realty & Development, Inc. (formerly Renzi Investments, Inc.) 2001
As noted above, a total of $75,000 was deposited into the account of Fountain Realty &
Development, Inc. on October 3, 2001 ($50,000) and October 10, 2001 ($25,000). Also
as noted above, the deposits were recorded differently, but each had an associated memo
that states the amounts were loans from the Candidate and that the funds were associated
with the Candidate’s sale of part of his interest in the business.

Of the $75,000
loaned to Fountain Realty & Development, Inc., $65,000 was immediately transferred to

Renzi & Co., Inc. and is part of the funds discussed above. The remaining $10,000
arising from this sale remained with Fountain Realty & Development, Inc.

RRFC’s response states that the Candidate also received a $10,000 distribution from
Fountain Realty & Development, Inc. Although RRFC states the $10,000 distribution

was the source of funds for a loan to RRFC, the documentation presented by RRFC does
not support this transfer of funds as a “distribution”.
]

this transaction was recorded
by Fountain Realty & Development, Inc. as a “Personal Expense”. The records presented

to date do not establish that the $10,000 payment to the Candidate represents his personal
funds. This $10,000 loan was repaid October 17, 2002

¢ Renzi & Co., Inc. 2002 (now Patriot Insurance Agency, Inc.)
During 2002, RRFC states that the Candidate received a $70,000 distribution from Renzi
& Co., Inc. on March 28, 2002, which was recorded as “Transfer to Rick Personal”.
RRFC once again references the line on the Candidate’s tax return that is used to Teport
his portion of the business income but does not reflect cash distributions. However,


14

Audit Staff's Conclusion
The Audit staff concludes that, with respect to the $464,090 in loans to RRFC arising from Renzi
& Co., Inc.:
¢ The $70,000 loan made during 2002 and $35,000 loaned to RRFC during 2001 from the
sale of real estate were likely made with permissible funds; and

The remaining $359,090 in loans ansing during 2001 was made with impermissible
funds.

e

The Audit staff concludes that, with respect to the loans of $121,000 to RRFC arising from
Fountain Reality and Development, Inc.:

The $51,000 loaned in 2002 was made with permissible funds and the remaining $60,000

loaned during 2002 has been excluded from the analysis for the reasons stated above;
and,
.

The $10,000 loan made during 2001 was made with impermissible funds.
In summation, of the $585,090 in loans from the Candidate:

e Loans totaling $156,000 appear to have been made with permissible funds,
e Loans totaling $60,000 have been excluded as duplicative; and

e Loans totaling $369,090 were made using impermissible corporate funds.

| Finding 2. Misstatement of Financial Activity

Summary
When RRFC’s reported activity was compared to its bank records, the Audit staff found that, for

calendar year 2002, receipts, disbursements and cash on hand at 12/31/02 had been misstated. In

response to the interim audit report, RRFC filed amended reports which materially corrected the
misstatements noted above.

Legal Standard

Contents of Reports. Each report must disclose

e The amount of cash on hand at the beginning and end of the reporting period;

The total amount of receipts for the reporting penod and for the election cycle; and

The total amount of disbursements for the reporting period and for the election cycle.
2 U.S.C. §434(b)(1), (2) and (4)

Facts and Analysis

The following chart details the discrepancies between RRFC’s reported activity and its bank
records. Succeeding paragraphs explain why the discrepancies occurred.


Table of Contents

Part I. Background
Authority for Audit
Scope of Audit
Changes to the Law

Part II. Overview of Campaign
Campaign Organization
Overview of Financial Activity

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Apparent Corporate Contributions
Finding 2. Misstatement of Financial Activity
Finding 3. Reporting of Contributions from Political Committees
Finding 4. Disclosure of Transfers from Authorized Committees
Finding 5. Disclosure of Occupation and Name of Employer

Page

NN

14
15
16
17


Report of the Audit Division on

Rick Renzi for Congress
December 18, 2001 - December 31, 2002

Why the Audit
Was Done

Federal law permits the
Commission to conduct
audits and field
investigations of any
political committee that is
required to file reports
under the Federal Election
Campaign Act (the Act).
The Commission
generally conducts such
audits when a committee
appears not to have met
the threshold
requirements for
substantial compliance
with the Act.' The audit
determines whether the
committee complied with
the limitations,
prohibitions and
disclosure requirements of
the Act.

Future Action
The Commission may
initiate an enforcement
action, at a later time,
with respect to any of the
matters discussed in this
report.

" 2 U.S.C. §438(b)

About the Campaign (p. 2)

Rick Renzi for Congress (RRFC) is the principal campaign
committee for Richard G. Renzi, Republican candidate for the
U.S. House of Representatives from the state of Arizona, First
District. RRFC is headquartered in Flagstaff, Arizona. For more
information, see chart on the Campaign Organization, p. 2.

Financial Activity (p. 2)
+ Receipts

o From Individuals $ 362,736
o From Political Committees 527,605
o Candidate Loans 763,090
© Other Receipts 3,163
o Total Receipts

$ 1,656,594
+ Disbursements

© Operating & Other Disbursements

$ 1,658,213
© Total Disbursements

$1,658,213

Findings and Recommendations (p. 3)
¢ Apparent Corporate Contributions (Finding 1)
¢ Maisstatement of Financial Activity (Finding 2)

¢ Reporting of Contributions from Political Committees
(Finding 3)

¢ Disclosure of Transfers from Authorized Committees
(Finding 4)

* Disclosure of Occupation and Name of Employer (Finding 5)


e Renzi & Co., Inc. 2001
The Audit staff's review of the documentation provided by RRFC indicates that the
Candidate deposited a total of $388,015 into an account of Renzi & Co., Inc. during 2001.
No similar transactions are shown in 2002. The deposited monies consisted of:

- a 2"¢ mortgage on the Candidate's home ($163,015) deposited August 29, 2001
and recorded as “Other Inc:Proceeds” with a memo indicating that the amount
was a loan from the Candidate;

a portion of the proceeds from the sale of the Candidate’s 50% interest in
Fountain Realty & Development, Inc.. On October 11, 2001, $100,000 was
deposited and recorded as “Other Inc:Proceeds”and on October 25, 2001,
$25,000 was deposited and recorded as “Personal Loan From Rick”. Both
entries have memo notations that state the amounts are loans from the Candidate
and are associated with the sale of his interest in Fountain Realty and
Development, Inc.. In addition, proceeds from this sale, originally deposited to
Fountain Realty & Development, Inc. were transferred the same day as the
deposits to Renzi & Co., Inc. ($50,000 on October 3, 2001 and $15,000 on
October 10, 2001). In Fountain Realty and Development, Inc.’s accounting
records the amounts are recorded as “Otherlnc:Proceeds” with memos stating
that the amounts were loans from the Candidate and are associated with the sale.
RRFC provided no documentation to support how the transferred amounts are

recorded in Renzi & Co., Inc.’s accounting records or why the transfers were
made.

monies from the sale of the 26 acres in Elgin, Arizona ($35,000) deposited on
December 27, 2001. Although, settlement records and local land records show
that this property was held in the name of Renzi Vino, Inc. an Arizona
corporation,

The deposit of the $35,000 is recorded in the Renzi & Co., Inc. accountng
records a “Other Inc:Proceeds” with a memo that explains that it is the down
payment from the sale. The payment to the Candidate the next day is recorded
as “Loan RepaymenvRick”. According to RRFC, the $35,000 was simply
deposited in the Renzi & Co., Inc. account to earn interest at a higher rate, and
then transferred to the Candidate’s account the next day (December 28, 2001).
The difference in interest eamed on $35,000 for one day would be negligible.

Although the Audit staff agrees that the monies deposited with Renzi & Co., Inc., as
discussed above, represent the Candidate’s personal funds, it is not clear that the funds
represent loans to Renzi &Co. RRFC has asserted that these monies represent loans from
the Candidate to Renzi & Co., Inc.; and that, the payments made by Renzi & Co., Inc. to



13

It is therefore accepted that the
distributions in 2002 represent the Candidate's personal funds'*, This $70,000 was part
of $130,000 in loans made by the Candidate to RRFC on March 28, 2002. The remaining
$60,000 is discussed below. This loan ($70,000) remained outstanding through August
18, 2004, based on the latest disclosure report filed by RRFC.

e Fountain Realty & Development, Inc. 2002
In response to the Interim Audit Report, RRFC explains that in late January 2002, RRFC
repaid the Candidate $70,000 that it had borrowed in 2001. The Candidate, in tum,
loaned Fountain Realty & Development, Inc. $70,000 to cover business obligations. On
March 14, 2002, Fountain Realty and Development, Inc. repaid the $70,000 to the
Candidate. An affidavit from the Vice President of Fountain Realty & Development,
Inc., attesting to these transactions, was provided as evidence. In addition, bank
statements for the Candidate and Fountain Realty and Development, Inc. are provided
along with some of the associated checks and deposit tickets. When the $130,000 in
loans was made on March 28, 2002, much of this money was still in the Candidate’s
personal account.'* It is therefore concluded that the source of $60,000 (of the $130,000
loaned on March 28, 2002) was the repayment from Fountain Realty and Development,
Inc. However, since the permissibility of much of the money loaned to RRFC in 2001
remains in question, having RRFC Tepay a portion of those funds, having the Candidate
loan it to one of the businesses, having the business Tepay the Candidate and then return
the money to RRFC does not render the funds permissible. However, to include these
funds in the impermissible funds in both years would constitute a double count.

RRFC also characterizes a $51,000 payment to the Candidate on June 28, 2002 as a “loan
repayment”. Although no detailed documentation was provided that established the

original loan from the Candidate to Fountain Realty and Development, Inc., the corporate
tax returns indicate

It
should be noted again that, prior to RRFC’s submission of their response to the Interim
Audit Report, the Audit staff requested a Separate general ledger transaction report for
each corporate entity that lists all transactions involving transfers of funds to and from the
Candidate. RRFC still has not complied with this Tequest. Nonetheless, it is accepted

that the $51,000 payment from Fountain Reality and Development, Inc. represents the
personal funds of the Candidate.

These loans ($130,000) remained outstanding through August 18, 2004, based on the
latest disclosure report filed by RRFC.

‘4 Without additional corporate records it ts not possible to determune if the $70,000 1s a portion of the cash
distributions for the year or was made for another purpose.

'* There were no other deposits between March 14, 2002 and March 28, 2002 when the $70,000 from Renzi & Co.,

Inc. discussed above was deposited. The balance in the account prior to the Renzi & Co., Inc. deposit was
approximately $63,000.