\

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• FEDERAL ELECTION COMMISSION

WASHINGTON,D.C. 204&3

TO:

FROM:

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MEMORANDUM

February 11, 1988

Fred Eiland

Chief, Press Office

Kim L. Bright-Coleman Special Assistant General Counsel

SUBJECT: Public Issuance of the Statement of Reasons

for the Final Repayment Determination for

Reagan-Bush '84 (Primary Committee)

Attached please find a copy of the above mentioned Statement

of Reasons which the Commission approved on February 9, 1988.

The attachments to this document are the same as those in Agenda

Document 187-118 with the exception of Attachment 15 which is

attached.

Informational copies of the Statement of Reasons have been

received by all parties involved and the document may be released

to the public.

Attachment as stated

cc: Audit Division

FEC Library . /

Public Disclosure

Reports Analysis Division
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• FEDERAL ELECTION COMMISSION

WASHINCTON.DC. 204&3

February 10, 1988

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John J. Duffy, Esquire Pierson, Ball' Dowd

1200 18th Street, N.W.

Washington, D.C. 20036

Dear Mr. Duffy:

The Commission has considered the responses filed on behalf

of the Reagan-Bush '84 Primary Committee to the Commission's

initial repayment determination contained within the Report of

the Audit Division on Reagan-Bush '84 issued on July 6, 1986. On

February 9, 1988, the Commission made a final determination that

President Ronald Reagan and Reagan-Bush '84 must repay an

additional $58,193.25 to the United States Treasury.

Enclosed is a Statement of Reasons in support of the

Commission's final determination as required by 11 C.F.R.

S 9038.2(c) (4). JUdical review of the Commission's determination

is available pursuant to 26 U.S.C. S 9041.

Please note that, under 11 C.F.R. S 9038.2(d) (2), repayment

must be made within thirty (30) days from the date of receipt of

this notice. The payment should be sent to the Commission, but

made payable to the United States Treasury.

/,e~~f% Thomas J. Josefiak

Chairman

Enclosure

Statement of Reasons
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BEFORE THE FEDERAL ELECTION COMMISSION

In the Matter of )

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President Ronald Reagan and ) Reagan-Bush '84 ) Final Repayment Determination )

STA'l'BMB1ft' OP RlASOtiS

On February 9, 1988, the Commission made a final

determination that President Ronald Reagan and Reagan-Bush '84

("Primary Committee") repay an additional $58,193.25 to the U.S.

Treasury pursuant to 26 U.S.C. S 9038(b) (3), representing the

pro-rata portion of the Committee's surplus of funds attributable

to the public funds received. Therefore, the Committee is

ordered to repay this amount within 30 days of receipt of this

determination pursuant to 11 C.F.R. S 9038.2(d) (2). This

Statement sets forth the legal and factual basis for the

Commission's determination in accordance with 11 C.F.R.

S 9038.2(c) (4).

,... I. BACJ{GROOND

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Reagan-Bush '84 ("Primary Committee") is the principal

campaign committee of President Ronald Reagan and Vice President

George Bush, candidates for the RepUblican nomination for

president and vice president in 1984. The Treasurer of the

Committee is Angela M. Buchanan Jackson and the Deputy Treasurer

is Scott B. Mackenzie. Reagan-Bush '84 General Election

Committee ("GEC") is the principal campaign committee of

President Reagan and Vice President Bush as candidates in the

1984 presidential general election. Mrs. Buchanan Jackson and

Mr. Mackenzie also served as Treasurer and Deputy Treasurer of

the GEC.
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~e Priaary Committee received $10.1 million in pUblic funds

pursuant to the Presidential Primary Matching Payment Account

Act, 26 U.S.C. 5§ 9031-9042, ("Matching Payment Act") to defray

President Reagan's "qualified campaign expenses," ~.e., payments

made "in e~nnection with his campaign ~or nomination." 26 U.S.C.

59032(9). The Matching Payment Act directs that a candidate who

ends t~e nomination campaign wit~ a surplus of funds must r.pay

to the Treasury the portion of the surplus attributable to the

public funds received. 26 U.S.C. 5 9038(b) (3).

The GEC received $40.4 million in public funds under the

Presidential Election Campaign Fund Act, 26 u.s.c 55 9001-9013,

("Fund Act") to defray expenses "incurred by the candidate of a

political party for the office of President to further his

election to such office." 26 'l.S.C. §§ 9002(11) (Al (i) 1

9004(c) (1). In or~er to establish their eligibility for funds

under t~e Fund Act, President Reagan and Vice President Bush both

certified t~at t~eir campaign for election would abide by a

spending limit equal to the amount of the public funds grant.

Se~ 26 u. s. C. § 9003 (b) (1) •

The Matching Payment Act and t,e Fund Act require the

Commission to "conduct a thorough examination and audit of the

qualif.ied campaign expenses· of publicly funded campaigns.

26 U.S.C. §§ 9038(a) and 9007(3). The Commission issued an Audit

Report on the Primary Committee, Attachment 1, ~inding first that

the Primary Committee had a surplus of funds, and second that
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certain pay..nts by the Primary Committee necessitated

ceallocation between the Primary Committee and the GEe wit~ a

corresponding payment by the GEC to the Primary Committee. The

effect of t~is finding was to increase the amount of t~e Pri~ary

Committee's surplus, thus increasing the amount of the

Committee's surplus repayment under 26 U.S.C. S 9038(b) (3).11

Pursuant to 11 C.P.R. § 9038.2(c) (1), the report contained an

initial determination that t~e Primary Committee must r~pay

$244,242.16, the unpaid pro-rata portion of the Committee's

increased surplus of $1,569,320.32 representing the public funds

received.!/

Undet 11 C.F.R. S 9038.2(c) (2), the Committee submitted a

response disputing this determination. Atta~hment 2. Further,

on June 2, 1987, t~e Commission granted the Committee's request

to make an oral presentation pursuant to 11 C.F.R. §9038.2(c) (3)

as part of its response to the init{a1 repayment determination.

Prior to the presentation, the General Counsel's Office

circulated to the Commission and to counsel for the Primary

Committee a memorandum summarizing the issues presented.

~/ Corresponding findings were inCluded in the ~o~~ission's

~ud it Report on the GEC i.ssued on May 7, 1987. Attachment 3.

~/ The formula f~r calculation of the repayment ratio is set out

at section 9038(b) (3) of the statute and at 11 C.F.R.

§ 9038.3(c). The Committee does not dispute the Audit Report's

calculation that the ratio of matohing funds received to the ~ommittee's total deposits is .375408. See Attachment 1, at pp. 3, 9. ---
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Attach••nt 4. Attached was the PBe Audit Division's analysis of

the Pri.ary Co..ittee's response. Attaehment S.

on July 29, 1987, John J. Duffy, counsel to the Committee,

appeared ~efore the Commission urging reversal of the

Commission's initial determination. The commission prepared a

transcript o~ this presentation and provided counsel wtth a copy.

Attachment 6. At the conclusion of the meeting, counsel was

advised t~at t,e Commission would consider any additional factual

and legal materials he wished to submit. Counsel submitted

addit;onal information for Commission consideration in letters

dated August 5, 1987, and August 12, 1987. Attachments 7 and 8.

Counsel also responded to the related findings in the Audit

Report on the GEC on August 7, 1987. Attachment 9. After

consideration of counsel's various argumenti, the Commission

modifies its initial determination in three ~espects, and makes a

final d~terminat;on that t~e Primary Committ~e is required to

make an additional surplUS repayment in the amount of $58,193.25.

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II. THE INITIAL DBTERMINATION

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The Commission's audit of the Primary Committee revealed

that the Primary Committee and the GEC shared the services of a

media consultant firm, Tuesday Team, Inc. ("TTl" or "Tuesday

Team W), for commercials which aired during both the primary and

general election campaigns. Specifically, t~e audit revealed

t~at TTl ~ad no existence prior to the 1984 election campaign and

was not an ongoing business firm, but rather was formed for the

purpose of prOViding services to the two Reagan-Bush '84
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committees, 1I TTl terminated its operations upon the

conclusion of the general election campaign. AI part 0' lts

servlee. for the Primary Committee and the GIC, TTl developed the

advertising campaign for President Reagan's reelection, pro~uced

the commercial advertisements, and arranged for their placement

in the various television and radio markets.

The committees made separate payments to TUesday Team for

direct production costs, purchases of advertising time (i.e. time

buys) and a fee for its services. It appears that the committees

~ad intended that most if not all of the commercials produced for

the primary would also be used in the general election period.

Later, the committees decided to use only roughly half of the

primary-produced commercials in the general election period. The

Deputy Treasurer allocated the production costs of the shared

advertisements between the two committees on a 50/50 basis.

Finally, by separate contracts with TUesday Team the committees

allocated the fee for Tuesday Team's services between the primary

and general election campaigns, $1 million and $1.3 million

respectively.

~e ~ommission's review raised questio~s ~oncerning the

allocation of the production costs for the advertisements between

t~e campaign commi.ttees. Furthermore, th~ Commission questioned

whether the fee paid for the media firm's services was allocated

!/ Tuesday Team provided services to only one ot~er client, the ~publican National Committee, which used TTl's services only to

film President Reagan and the t~ite Rouse for party building commercials.
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properly between the Primary Committee and the GEC. As noted,

t~e Primary Co.-ittee paid a fee to TTI of $1 million, while the

GEe paid TTl $1.3 million. However, the GEC used approximately

si.x (6) t~mes as many commercials as did t"te Primary Committee,

and spent more than eleven (11) times as much purchasing

advertising time for the commercials as did the Primary

Committee.!/ Since the media activity by the GEC appeared to

greatly exceed that of the Primary Committee, the relat\onship of

the amount of the fees paid by the two committees seemed

disproportionate. The Commission auditors t~erefore questioned

whether in effect the GEe's media expenses were subsidized by the

Primary Committee.

As a consequence, t~e Commission initially det~rmined that

the Primary Committee was required to bill the GEC for the amount

($792,066.60) of the allocable portion of t~e fee paid by the

Primary Committee, which it appeared shoUld ~ave been borne by

the GEC. On verification of the Commi.ttee's allocation of direct

production costs, the Commission also initially determined that

the Prtmary Committee seek from t~e GEe an amount ($55,429.55) of

allocable production costs still found owing.

if Tuesday ~am produced nine commercials for the Primary

Committee of which eight were actually used during the primary

period. According to a schedUle of commercials air.ed includin9

additional commercials identified by the Audit staff, it appears

that at least fifty commercials were produced by TTl for the

general election campaign and that four additional commercials

produced €or the Primary were used in the general. ~~ile the

Primary Committee paid Tuesday Team approximately $1.9 million

for time buys during the primary period, the GEC paid

approximately $22.6 million for time buys during the general

election campaign.
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The Audit Report details the Commi~tee's Statement of Net

Outstanding Caapaign Obligations ("NOCO Statement"), showing the

Committee to have been 1n a substantial surplus position as of

the nomination date. The effect of the two allocations was to

increase the Primary Committee's surplus. The Committee made an

estimated repayment of the pUblic funds portion, on its own

calculation of the surplus, on September 21, 1984, in accordance

with 11 C.P.R. S 9038.3(c) (1). Thus, the net effect of the Audit

Report's findings was to require an additional surplus repayment

of $244,242.16. The Audit Report accordingly contained the

Commission's initial determination that the Primary Committee

repay an additional $244,242.16 to the Treasury under 26 U.S.C.

S 9038 (b) (3) •

III. OISCUSSIOR

A. Introduction

Under the Matching Payment Act and t~e Fund Act, candidates

are limited to using public funds only to defray qualified

campaign expenses. For purposes of a primary Presidential

candidate, the Matching Payment Act defines the term "qualified

campaign expense" as a purchase, payment, advance, or gift of

money or anything of value incurred by a candidate or his

authorized committee, i~ connection with ~is nomination for

election. 26 U.S.C. § 9032(9). The Fund Act defines the term

"qualtfied campaign expense" for a Presidential candidate in the

general election as an expense incurred by an authorized

committee of t~e candidates of a political party for t~e offices
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of President and Vice Presi~ent to further the election of either

or both sucb candidates. 26 U.S.C. S 9002(11) (A) (iii).

A candl~ate receiving funding under both statutes is thus subject

to the specific provisions of each statute a~d must separate

those expenses for the primary election from those for the

general election campaign.

In this case, the candidate received public funds under two

separate programs, the Matching Payment Act for conducting his

campaign for the nomination, and the Fund Act fot ~is campaign

for reelection. However, according to the Audit Division's

review, certain expenses related to the media campaign used in

the general election campaign were paid by the Primary Committee.

The Commission, thus, made an i.nit; a1 determination that the

Primary Committee must seek reimbursement fr~m the General

Election Committee for these payments. Upon review of the

Committee's responses to the initial determination, the

Commission now modifies its initial determination and makes a

final determination that the Primary Committee must seek

~eimbursement from the General Election Committee for the

allocable amount of production costs for shared advertisements

only and is not required to see~ reimbursement for any amount of

the media consultant fee paid to Tuesday Team.

B. ~llocat i.on of! the Production Costs

The audit revealed that the Primary Committee had allocated

an amount of production costs to the GEC, on an aS3umption that

certain commercials were to be shared by both committees, calculating the total production costs for each commercial and using a
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50/50 allocation basis. on September 7, 1984, the GEe originally

reimbursed the Committee $304,389.50 as its share of the

p~oductlon costs for these advertisements. The Committe~

in~icated that this amount represented 50' of total production

costs associated with certain advertisements~ The Committee's

Deputy Treasurer stated that this allocation was based on the

fact that the same commercials were produced for use in both the

primary and general election campaigns and t~at t~e allocation

percentage was developed in early 1984 based on planning and

estimated usage of production pieces.

In Pebruary 1985, however, based on a new calculation of

which advertisements were actually shared, the Primary Committee

returned to the GEe the net amount of $161,955. Thus, the amount

paid ~y the GEC ~or the commercials was $142,434.

Upon review of the bases for the commit~ees' allocation of

the production costs, the Commission's audit indicated that the

committees had not allocated these expenses properly between

them. The auditors verified the amount of direct production

costs and the amount of production costs allocated to each

committee was adjusted accord;.ngly. The appropriate amount of.

production costs allocable to each committee was then calculated

using the adjusted figures. First, the costs of t~ose

commercials used only by the Primary Committee were subtracted

from t;e production costs o~ all t~e commercials as to which

there was some question. The reSUlting net costs were divided
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between the two committees on the SO/SO basis.21 To the

resulting amount allocable to the GEe was added the amount of

costs of the commercial produced by the Primary Committee, but

used only in the general election campaign.

Also added to the production cost of the GEC was a mark-up

representing a small portion of the Tuesday Team fee paid by the

Primary Committee. In an informal response to the Audit staff's

initial questioning of the fee, the Committee explained that the

fee was in lieu of the ordinary media firm commission. This

commission, according to the Committee, would ordinarily take the

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form of a percentage mark-up on the amount of time bUyS,

production costs, and other creative costs. Attachment 14 at

p. 1. Since a portion of the fee was in lieu of mark-up on costs

related to specific commercials, the amount of production costs

allocated to the GEe in the Audit Report included a portion of

the Primary Committee's $1 million media fee.

Last, the amount already reimbursed by the GEe ($142,434)

was subtracted from its share of the production costs, yielding a

total still owed of $55,429.55. The Audit Report thus contained

a finding that the Primary Committee seek a reimbursement of this

amount from the GEC.

5/ On verification of the 50% allocation rate used by the

Committee, the auditors examined the relative usage of the shared

commercials between the primary and the general elections, and

suggested an allocation weighted by ~~~ relative usage costs of

the shared commercials. This wouJ ~esulted in an increased

allocation to the GEe. Upon revi ,mmission declined to

follow the recommendation to use · ghted allocation, and

approved the 50% allocation used ~ittee. Attachment 1

at p. 17.
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~e Co.-ittee accepts the Commission's initial determination

relating to allocation of the production COlts for shared

commercials, with two exceptions- First, the Committee contends

that a Spanish lan9uag~ version of the ·Statue of Liberty"

television commercial produced by the Primary Committee was not

used by the GEC and that production costs of $34,193 were

associated with that version. Therefore, the Committee asserts

that this amount should be excluded from the total production

costs required to be split between the Primary Committee and the

GEe. Attachment 2 at p. 11.

Second, the Committee disagrees with the amount included in

the production costs as a portion of the $1 million fee paid to

'TTl by the Primary Committee for creative and other costs

associated with the shared commerctals. Assuming thdt any

portion of the fee should be included in these costs, the

Committee asserts that a higher amount should be included than

t~at set €orth in the Audit Report. Attachment 2 at p. 11.

The Committee's factual assertion as to use of the Spanish

language commercial is unsupported. The auditors ~eviewed both

committees' advertising time charges, determined that the

commercial In question was ai.red repeatedly during the general

election campaign, and provided clear documentation of this fact

to the Deputy Treasurer. Attachment 5 at p. 12. A sample

invoice from a Spanish language television station showing the

commercial was used ~n the general election campaign is attached.

Attachment 11. At the oral presentation, counsel was asked to
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clarify the basis for the Committee's assertion. Since none of

counsel's poet-presentation submissions addt••••• this issue, the

Commission rejects the assertion that costs for the commercial

should only be allocated to the primary campa19n.

As to the portion of the consulting fee included 1n the

production costs allocation, the Commission concludes that since

the allocation of the media fee has been treated separately 1n

this document, no additional portion of the fee need be included

in the production costs allocation. Accordingly, the Commission

has deleted the additional amount allocated to the GEe, and has

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reduced the additional reimbursement required by a corresponding

amount. Thus, the Primary Committee is required to seek

reimbursement from the GEC in the amount of $39,443.55.

Attachment 5 at p. 13.

o c. The Allocation of the Media Fee

The Audit Report concluded that the Primary Committee had

C paid more than its allocable share of the media fees. The Audit

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Report thus contained a separate finding allocating a portion of

the media fee paid by the Primary Committee to the GEe, which

would have required that the Committee seek a reimbursement from

the GEC. The fee allocation question was initially raised when

the Audit Division indicated that, under normal industry practice

for advertising contracts, the client pays a fee to a media firm

"that is calculated by a particular percentage (~. 17.65') of

the cost of the time buys. (Attachment 14 at p.l) By this

standard, the $1 million fee paid by the Primary Committee when

compared~with the total time buys during the primary period ($1.9
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million) va•••ce••ive. In an informal response to the Audit

Itaff, the Committ.e submitted a .ampl. media firm contract and

aSlerted that ordinarily media firma charge the mark-up not only

on time bUy., but al.o on production COlts and other servic•• in

the cr£ti.Y.wx...... and .. that the $1 million fee paid TTl was in

lieu of mark-up on more than limply time buys. (Attachment 14).

The fee allocation question was further developed in the

audit of the GIC, when the auditors examined the approximately

$1.3 million fee the GEC paid Tuesday Team for the more than $22

million in time bUyS and more than $2 million in production

costs. Uling the explanation provided by the Primary Committee,

the interim report on the GEe contained a finding that the GEC

had apparently paid a disproportionally small fee based on the

amount of time buys and production costs made on its behalf. The

interim report on the GEC suggested the possibility of a

prohibited in-kind contribution by TTl to the GEC.

In response to the interim report, the GEC argued that the

fee fully compensated TTl for the market value of its services.

Attachment 10 at pp. 5-7. Articles submitted in support of this

contention Itated that advertisers sometimes negotiated set fees

in lieu of a Itandard commission on time buys. The articles

indicated that advertising firms would accept less than the

standard commission when budgets are large, the client is

prestigious, and opportunity for growth is present, and that in

appropriate situations advertising firms might accept a gross

profit of only 7.St to lOt of gross billings.
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The ag41tor. then evaluated the total media fee in view of

the GBC'S r••pon.e. The auditors discovered that with the

combined media activity of the two Reagan-Bush '84 committees,

TUesday Team's gross profit was 8.336\, an amount within the

range cited tn one of the articles. The Audit Report therefore

concluded that TTl received a commercial return only when the

media activiti•• of the two commit~ees were viewed as a whole.

Using the 8.336' figure from the combined activity, the Audit

Report calculated the fee amount each committee should have paid.

Pirst, the total gross billings, (~ production costs plus

time buys) for each committee was determined using figures taken

from TTl'S financial statements.!/ Next, these totals were

multiplied by 8.336' to determine TTl'S return between the two

committees. This calculation resulted in the Audit Report's

conclusion that the GEe owed t~e Primary Committee an additional

$792,066.60, further adding to the Primary Committee's surplUS.

The Committee raises Lts most strenuous objections to the

allocation to the GEe of a portion of the fee paid by the Primary

Committee. In its responses to the init~al determination on

6/ The Audit Staff used t~e figures from TTl'S financial

reports to calculate the amount of production costs allocable to

each committe.. These ftgures differed from those verified by the Audit staff from bank records and other records. Counsel

prOVided an explanation for this discrepancy in t~e response to

the Audit Report on the GEe (Attachment 9 at pp. 13-14) and as

expla!.ned infra, the Commission has modified its calculati.on and

its initial determination accordingly •
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allocation of the media fee, the Committee and its accounting

firm argue that no reimbursement is due from the GEe to the

Primary Committee for the media fee paid to TTl. Attachments

2,7, ana 8. They contend first that section 106.1(a) of the

Commission's regulations is inapplicable and does not require

allocation in the situation presented. The Committee also makes

the legal argument that the Primary Committee's payments to TTl

for services rendered prior to the nomination would not be

qualified campaign expenses of the GEe and, thus, the GEe cannot

be required to reimburse the Committee for any of these expenses.

Moreover, the Committee presents several challenges to the method

used by the Commission's audit staff to determine the amount

allocable to each committee.

Upon further consideration of the media fee allocation, the

Commission determined that while there are valid arguments for

both allocation methods, the Committee's allocation of the fee in

this instance was reasonable. The Commission, thus, has made a

final determination that the Primary Committee is not required to

seek reimbursement from the GEC for an allocable amount of the

media fee paid to Tuesday Team.

D. Revisions to NOCO Statement

The Commission has also modified the final repayment amount,

based upon revisions to the Primary Committee's statement of net

outstanding campaign obligations ("NOCO Statement") .1/

7/ The Final Audit Report noted that since certain expenses

were estimated in the NaCO Statement, the repayment amount could

change based upon the Audit Division's review of the Committee's

actual costs. Attachment 1 at p. 9 n.f.
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These revisions include the ad~ltion to the

Committee's receivables of the amount of dupl~cate payments and

contributions received after the candidate's date of

ineligibility but dated prior to that date. The winding down

costs stated in the NOCO Statement have also been updated to

replace estimates wit~ actual expenses. Pinally, th~ amount of

accounts payable has been reduced to deduct certain payments for

w~ich no documentation was provide1. These revisions increase

eo the Committee's surplus, requiring an additional pro-rata

repayment.

IV. PINAL RBPAYMBRT DB'l'ERMINATION

Pursuant to 26 U.S.C.S 9038(b) (1) and 11 C.FsR.

S 9038.2 (c) (4), the Commission has made a fi~al determination

that for the forgoing reasons President Ronald Reagan and ReaganBush '84 must repay an additional $58,193.25 to the United States

Treasury pursuant to 26 u. S.C. S 9038 (b) (3) •

t t ac '"men t s

1. Report Qf the Audit Division on Reagan-Bush '84.

2. Response of Reagan-Bush '84 to the Audit Report.

3. leport of the Audit Oivision on Reagan-Bush '84 General

Election Committee.

4. Memorandum to the Comm~ssion Regarding Oral

Presentation. (Attachments omitted)

s. ~~alysis of Reagan-Bush '84 response ~y the Audit

Division.

6. Transcript of Oral Presenta~ion

• 7. Letter dated August 5, 1987 from Jo~n nUffy.
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13.

~tter dated August 12, 1987 from John Duffy.

.._ponse of ~agan-Bush '84 General Election Committee

to the Audit Report.

Responge- of Reagan-BuBh '84 to General Election

Committee Intertm Au41t Report.

Sample Televiston Station Invoice (Statute of Liberty Co_eretal).

Aud~t Division Explanation o~ Modification of the

Initial Determination.

Response Qf Reagan-Bush '84 to t~e tnterim Audit

Report.

14. ~emorandum ~rom Ron Robertson to Rick Halter RE:

Reagan-Bush '84 Primary Campaign Media Costs.

12.

10.

11.

8.

9.

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Memorandum Re: NOCO update - Reagan-Bush '84

(Primary), and attached NOCO statement, dated

January 28, 1988.

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MEMORANDUM

TO:

THROUGH:

FROM:

SUBJECT:

RB84!012888

FEDERAL ELECTION COMMISSION

WASHINCTON. 0 C 2CM6J

January 29, 1988

LAl't1mNCE M. NO

GEtm RAL COUNS~~.......

ROBER!' J. COST

ASSISTANT STAr DIRECTOR

AUDIT DIVISION

REAGAN-BUSH '84 (PRIMARY) -

REVISED NOCO STATEMENT

. ~.

On December 17, 1987, the Commission directed the Audit

staff to prepare a revised NOCO statement after contacting

Reagan-Bush '84 (Wthe Committee W ) to update figures regarding

undocumented account payables and winding down expenses.

On December 31, 1987, a letter was sent to the Committee

explaining the Commission's actions at the December 17, 1987

meeting. The letter provided the Committee until January 15,

1988 to submit documentation regarding undocumented payables and

additional wind down costs which would support a reduction in the

Committee's final repayment amount. On January 15, 1988, Mr.

John Duffy, counsel for the Committee, provided invoices which

documented four previously undocumented payables totaling

$60,446.11. In a telephone conversation on January 21, 1988,

with Ray Lisi of my staff, Mr. Duffy stated that he was confident

that no other documentation would be forthcoming.

Based on the documentation provided and Mr. Duffy's

comments, the Audit staff has prepared the attached revised NOCO

for use in preparation of the Statement of Reasons. If you have

any questions regarding this matter, please contact Ray Lisi at

376-5320.

Attachment as stated
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ASSETS

RB84/0128ea

REAGAN-BUSH '84

Audit Analysis of Committee's NOCO Statement

As of August 22, 1984 !/

Cash in Bank

Accounts Receivable

Contributions received post 8/22/84.2/

Accrued Interest

Reimbursements due from GEC

-Allocable amount of production

costs for shared commercials

Duplicate Payments

TOTAL ASSETS

OBLIGATIONS

C"

~ccounts Payable 't-ncome Taxes

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AL WINDING DOWN

S (1/15/85 - 9/30(87)

""OTAL OBLIGATIONS

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NET OUTSTANDING CA~~IGN

rQBLIGATIONS - SURPLUS AS

OF AUGUST 22, 1984

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$2,656,049.92

924,953.01

51,473.94

21,975.12

39,443.55

2,942.63

$2,161,109.23

222,129.34

239,870.50

$3,696,83e.17

2,623,109.07

$ 1, 073 , 729. 10

,AMOUNT REPAYABLE,

"'(SURPLUS MULTIPLIED BY

cltEPAYMENT RATIO)

$ 403,086.49

Less: 9/21/84 repayment made

Repayment Amount Due

(344,893.24)

$__5_8-..,__1_9_3....,;.....2.... 5

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August 22, 1984, is the date determined by the Commission to be the

Candidate's date of ineligibility for purposes of incurring qualified campaign expenses.

Includes contributions received after 8/22/84 but dated prior to

8/23/84 •
AGENDA DOC~T 187-118

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87 OE~ I0 ?~ 1I: 50

FEDERA,l ELECTION COMMISSION

WASHINCTON. 0 C. 20463

December 10, 1987

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TO: The Commissi

THROUGH: John C. Sur n

Staff Dire to

FROM: Lawrence M. N l-~ General Couns 1 rKim L. Bright Coleman 'li?c, Special Assis ant General Counsel

Jonathan Bernstein~Z?

Attorney Advisor (J

SUBJECT: Final Repayment Determination-President Ronald Reagan and Reagan-Bush '84 (Primary C~ittee)

MEMORANDUM

I. Introduction

On July 7, 1986, the Commission issued the Report of the

Audit Division on Reagan-Bush '84 ("Primary Committee"). In that

report, the Commission made an initial determination that the

Primary Committee must make a surplus repayment of $244,242.16 to

the United States Treasury pursuant to 26 U.S.C. S 9038(b) (3).

The Committee submitted its response to the audit report on

November 3, 1986. In addition, counsel for the Committee made an

oral presentation to the Commission on July 29, 1987. Following this presentation, the Committee made subsequent submissions

addressing points raised in the oral presentation.

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Based on our review of the Committee's various submissions

and consideration of the oral presentation testimony, the Office

of General Counsel has prepared the attached draft Statement of

Reasons supporting a final determination by the Commission that

President Ronald Reagan and Reagan-Bush '84 must repa; an

additional $373,555.08 to the United States Treasury._1

!/ The Commlttee made an estimated repayment of the public

funds portion, on its own calculation of the surplus, on

September 21,1984, in accordance with 11 K.S0E"Nsn9i3lf<fyllo

Far Maetina of: /7 - L1-8'1 ..

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Ca.altt•••• surplus, requiring an additional pro-rata repayment of

$",077.78

RBCOMMBIDATIOHS

~b. Office of General Coun8el recommends that the

COllUli88ion:

1. Determine that the Reagan-Bush '84 Primary Committee is

required to bill the Reagan-Bush '84 General Election Committee

for the amount, $792,066.60, of the allocable portion of the fee

paid by the Primary committee which should have been borne by the G~neral Election Committee,

2. Determine that the Reagan-Bush '84 Primary Committee seek

reimbursement from the Reagan-Bush '84 General Election Committee

for the amount of allocable production costs still found owing, $39,443.55,

3. Determine that pursuant to 26 U.S.C. S 9038(b) (3) and

11 C.P.R. S 9038.2(b) (4) President Ronald Reagan and Reagan-Bush '84 must repay an additional $373,555.08 to the United States

Treasury in accordance with this final repayment determinationJ

4. Approve the attached draft Statement of Reasons in support of the final repayment determination; and

5. Approve the attached letter notifying the Committee of the

Commission's decision.

Attachments

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1.

2. Proposed Statement of Reasons

Letter
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II. SummarY of Draft Statement of Reasons

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The attached draft Statement of Reasons recommends that the

Commission make a final determination that the Primary Committee

must repay $373,555.08 to the United States Treasury. This

amount was calculated using two allocations representing reimbursements due from the Reagan-Bush '84 General Election

Committee for costs related to advertisements used by both the

Primary Committee and the General Election Committee.

Specifically, the draft concludes that the Primary Committee

should seek from the General Election Committee the amount, $39,443.55, of allocable production costs owing for shared

advertisements. The draft statement also concludes that the

Primary Committee is required to bill the General Election

Committee for the amount, $779,604.78, of the allocable portion

of the fee paid by the Primary Committee which it appears should

T have been borne by the General Election Committee.

The final repayment amount contains modifications in three

areas from the amount of the initial determination. First, the

Commission's initial determination included a portion of the

consulting fee in the production costs allocation. Since the

media fee has been treated in a separate allocation, no

additional portion of the fee need be included in the production

costs allocation. Accordingly, the amount of the fee has been

deducted from the allocable production costs and a corresponding

amount deducted from the reimbursement due from the General

Election Committee.

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The second modification stems from a discrepancy in the

production cost figures used to calculate the fee allocation. In

determining the media fee allocation, the Audit staff used

figures from TTl's financial statements. The Committee has now

explained that those figures were early projections and not the

final figures. Accordingly, the fee has been recalculated using the final figures resulting in a reduction in the amount due from

the General Election Committee.

Finally the final repayment amount has been modified based

upon revisions to the Primary Committee's statement of net

outstanding campaign obligations (NOCO statement") made by the

Audit Division. See Attachment 15 to draft Statement of Reasons.

These revisions include the addition to the Committee's

receivables of the amount of duplicate payments and contributions

received after the candidate's date of ineligibility but dated

prior to that date. The winding down costs stated in the NOCO

statement have also been updated to replace estimates with actual

expenses. The final revision to the NOCO statement reduces the

accounts payable to deduct certain payments for which no • documentation was prOVided. These revisions increase the
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BEPORE THE FEDERAL ELECTION COMMISSION

In the Matter of )

)

President Ronald Reagan and )

Reagan-Bush 'S4 )

Pinal Repayment Determination )

SB'I'DiBiff 01' RBISOlIS

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On , 1987, the Commission made a final

determination that President Ronald Reagan and Reagan-Bush '84

(WPrimary CommitteeW) repay an additional $373,555.08 to the u.s.

Treasury pursuant to 26 U.S.C. S 9038{b) (3), representing the

pro-rata portion of the Committee's surplus of funds attributable

~~ to the public funds received. Therefore, the Committee is

ordered to repay this amount within 30 days of receipt of this

determination pursuant to 11 C.P.R. S 9038.2(d) (2). This

Statement sets forth the legal and factual basis for the

Commission's determination in accordance with 11 C.F.R. §

9038.2 (c) (4) •

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I. BACKGROUND

Reagan-Bush '84 ("Primary Committee") is the principal

campaign committee of President Ronald Reagan and Vice President

George Bush, candidates for the Republican nomination for

president and vice president in 1984. The Treasurer of the

Committee is Angela M. Buchanan Jackson and the Deputy Treasurer

is Scott B. Mackenzie. Reagan-Bush '84 General Election

Committee ("GEC") is the principal campaign committee of

President Reagan and Vice President Bush as candidates in the

1984 presidential general election. Mrs. Buchanan Jackson and

Mr. Mackenzie also served as Treasurer and Deputy Treasurer of

the GEe.

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The Primary Committee received $10.1 million in public funds

pursuant to the Presidential Primary Matching Payment Account

Act, 26 U.S.C. 55 9031-9042, (-Matching Payment Act") to defray

President Reagan's -qualified campaign expenses,w i.e., payments

made win connection with his campaign for nomination." 26 U.S.C.

59032(9). The Matching Payment Act directs that a candidate who

ends the nomination campaign with a surplus of funds must repay

to the Treasury the portion of the surplus attributable to the

public funds received. 26 U.S.C. S 9038(b) (3).

The GEC received $40.4 million in public funds under the

Presidential Election Campaign Fund Act, 26 u.s.c 55 9001-9013,

(WPund ActW) to defray expenses "incurred by the candidate of a

political party for the office of President to further his

election to such office." 26 U.S.C. 5S 9002(11) (A) (i);

9004(c) (1). In order to establish their eligibility for funds

under the Fund Act, President Reagan and Vice President Bush both

certified that their campaign for election would abide by a

spending limit equal to the amount of the public funds grant.

See 26 U.S.C. 5 9003(b) (1).

The Matching Payment Act and the Fund Act require the

Commission to "conduct a thorough examination and audit of the

qualified campaign expenses" of publicly funded campaigns.

26 U.S.C. S§ 9038(a) and 9007(a). The Commission issued an Audit

Report on the Primary Committee, Attachment 1, finding first that

the Primary Committee had a surplus of funds, and second that
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certain payments by the Primary Committee neceslitated

reallocation between the Primary Committee and the GEC with a

corresponding payment by the GEC to the Primary Committee. The

effect of this finding was to increase the amount of the Primary

Committee's surplus, thus increasing the amount of the

Committee's surplus repayment under 26 U.S.C. S 9038(b) (3).11

Pursuant to 11 C.P.R. S 9038.2(c) (1), the report contained an

initial determination that the Primary Committee must repay

$244,242.16, the unpaid pro-rata portion of the Committee's

increased surplus of $1,569,320.32 representing the public funds

received.~1

Under 11 C.F.R. S 9038.2(c) (2), the Committee submitted a

response disputing this determination. Attachment 2. Further,

on June 2, 1987, the Commission granted the Committee's request

to make an oral presentation pursuant to 11 C.F.R. S9038.2(c) (3)

as part of its response to the initial repayment determination.

Prior to the presentation, the General Counsel's Office

circulated to the Commission and to counsel for the Primary

Committee a memorandum summarizing the issues presented.

Attachment 4. Attached was the FEe Audit Division's analysis of

the Primary Committee's response. Attachment 5.

!/ Corresponding findings were included in the Commission's

Audit Report on the GEC issued on May 7, 1987. Attachment 3.

£/ The formula for calculation of the repayment ratio is set out

at section 9038(b) (3) of the statute and at 11 C.P.R.

§ 9038.3(c). The Committee does not dispute the Audit Report's calculation that the ratio of matching funds received to the

Committee's total deposits is .375408. See Attachment 1, at pp.

3, 9.

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On July 29, 1987, John J. Duffy, counsel to the Committee,

appeared before the Commission urging reversal of the

Commission's initial determination. The Commission prepared a

transcript of this presentation and provided counsel with a copy.

Attachment 6. At the conclusion of the meeting, counsel was

advised that the Commission would consider any additional factual

and legal materials he wished to submit. Counsel submitted

additional information for Commission consideration in letters

dated August 5, 1987, and August 12, 1987. Attachments 7 and 8.

Counsel also responded to the related findings in the Audit

~t Report on the GEe on August 7, 1987. Attachment 9. After

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consideration of counsel's various arguments the Commission

modifies its initial determination in three respects, but

otherwise adheres to its preliminary view.

II. ftB IBI'l'IAL DBIBBIIIlIAlfXCKI

The Commission's audit of the Primary Committee revealed

that the Primary Committee and the GEC shared the services of a

media consultant firm, Tuesday Team, Inc. ("TTl" or "Tuesday

Team"), for commercials which aired during both the primary and

general election campaigns. Specifically, the audit revealed

that TTl had no existence prior to the 1984 election campaign and

was not an ongoing business firm, but rather was formed for the

purpose of providing services to the two Reagan-Bush '84

committees, 1/ TTl terminated its operations upon the

1/ Tuesday Team provided services to only one other client, the

RepUblican National Committee, which used TTl'S services only to

film President Reagan and the White House for party building commercials.
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conclusion of the general election campaign. As part of its

services for the Primary Cammittee and the GEe, TTl developed the

advertising campaign for President Reagan's reelection, produced

the commercial advertisements, and arranged for their placement

1n the various television and radio markets.

The committees made separate payments to Tuesday Team for

direct production costs, purchases of advertising time (i.e. time

buys), and a fee for its services. It appears that the committees

had intended that most if not all of the commercials produced for

the primary would also be used in the general election period.

Later, the committees decided to use only roughly half of the

primary-produced commercials in the general election period. The

Deputy Treasurer allocated the production costs of the shared

advertisements between the two committees on a SO/SO basis.

Finally, by separate contracts with Tuesday Team the committees

allocated the fee for Tuesday Team's services between the primary

and general election campaigns, $1 million and $1.3 million

respectively.

The Commission's review raised questions concerning the

allocation of the production costs for the advertisements between

the campaign committees. Furthermore, the Commission questioned

whether the fee paid for the media firm's services was allocated

properly between the Primary Committee and the GEe. As noted,

the Primary Committee paid a fee to TTl of $1 million, while the

GEC paid TTl $1.3 million. Bowever, the GEC used approximately

six (6) times as many commercials as did the Primary Committee,

and spent more than eleven (11) times as much purchasing

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advertising tim. for the coma.reials a8 did the Primary

Committee.!/ Since the media activity by the GIC appeared to

greatly exceed that of the Primary Committe., the relationship of

the amount of the fees paid by the two committees seemed

disproportionate. The Commission auditors therefore questioned

whether in effect the GBC's media expenses were subsidized by the

Primary Committee.

As a consequence, the Commission initially determined that

the Primary Committee was required to bill the GBC for the amount

($792,066.60) of the allocable portion of the fee paid by the

Primary Committee, which it appeared should have been borne by

the GEC. On verification of the CaBmittee's allocation of direct

production costs, the Commission also initially determined that

the Primary Committee seek from the GEC an amount ($55,429.55) of

allocable production costs-still found owing.

The Audit Report details the Committee's Statement of Net

Outstanding Campaign Obligations (-NOCO Statement"), showing the

Committee to have been in a substantial surplus position as of

!/ Tuesday Team produced nine commercials for the Primary

Committee of which eight were actually used during the primary period. According to a schedUle of commercials aired including additional commercials identified by the Audit staff, it appears that at least fifty commercials were produced by TTl for the

general election campaign and that four additional commercials

produced for the Primary were used in the general. While the

Primary Committee paid Tuesday Team approximately $1.9 million

for time bUyS during the primary period, the GEe paid approximately $22.6 million for time buys during the general election campaign •.
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the nomination date. The effect of the two allocations was to

increase the Primary Committee's surplus. The Committee made an

estimated repayment of the pUblic funds portion, on its own

calculation of the surplus, on September 21, 1984, in accordance

with 11 C.P.R. S 9038.3(c) (1). Thus, the net effect of the Audit

Report's findings was to require an additional surplus repayment

of $244,242.16. The Audit Report accordingly contained the

Commission's initial determination that the Primary Committee

repay an additional $244,242.16 to the Treasury under 26 U.S.C.

S 9038(b) (3).

III. DISCUSSIOB

~. Introduction

Under the Matching Payment Act and the Fund Act candidates

are limited to using public funds only to defray qualified

campaign expenses. For purposes of a primary Presidential

candidate, the Matching Payment Act defines the term "qualified

campaign expense" as a purchase, payment, advance, or gift of

money or anything of value incurred by a candidate or his

authorized committee, in connection with his nomination for

election. 26 u.s.c. S 9032(9). The Fund Act defines the term

"qualified campaign expense" for a Presidential candidate in the

general election as an expense incurred by an authorized

committee of the candidates of a political party for the offices

of President and Vice President to further the election of either

or both such candidates. 26 U.S.C. § 9002(11) (A) (iii).

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A candidate receiving funding under both statutes is thus

subject to the specific provisions of each statute and must

separate those expenses for the primary election from .those for

the general election campaign. Purthermore, such a candidate

must allocate expenditures that benefit both campaigns pursuant

to the Commission's regulations which require that expenditures

made on behalf of more than one candidate be attributed to each

candidate in proportion to the benefit reasonably expected to be

derived. 11 C.P.R. S 106.l(a). See also Financial Control and

Compliance Manual for General Election Candidates, pp. IV-51, S2

(1983).

In this case, the candidate received public funds under two

separate programs, the Matching Payment Act for conducting his

campaign for the nomination, and the Fund Act for his campaign

for reelection. However, according to the Audit Division's

review, his renomination campaign had no substantial opposition

and thus the media campaign for both the primary election and the

general election was developed during the primary campaign. See

Attach~ent 5 pp 14-24. The Primary Committee's activities in

this regard present novel issues relating to the administration

of the separate public funding statutes. The Commission made an

initial repayment determination on a finding that the Primary

Committee's payments to the media firm which also provided

services to the GEC blurred the statutorily mandated separation

of the two campaigns. Since Primary Committee subsidization of

the general election campaign is not a qualified campaign expense

of the primary committee, the Commission affirms, with

modifications, its initial determination.
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B. Allocation of the Production Costs

The audit revealed that the Primary Committee had allocated

an amount of production costs to the GEC, on an assumption that

certain commercials were to be shared by both committees, calculating the total production costs for each commercial and using a

SO/SO allocation basis. On September 7, 1984, the GEC originally

reimbursed the Committee $304,389.50 as its share of the

production costs for these advertisements. The Committee

indicated that this amount represented 501 of total production

costs associated with certain advertisements. The Committee's

Deputy Treasurer stated that this allocation was based on the

fact that the same commercials were produced for use in both the

primary and general election campaigns and that the allocation

percentage was developed in early 1984 based on planning and

estimated usage of production pieces.

In Pebruary 1985, however, based on a new calculation of

which advertisements- were actual~y shared, the Primary Committee

returned to the GEe the net amount of $161,955. Thus, the amount

paid by the GEe for the commercials was $142,434.

Upon review of the bases for the committees' allocation of

the production costs, the Commission's audit indicated that the

committees had not allocated these expenses properly between

them. The auditors verified the amount of direct production

costs and the amount of production costs allocated to each

committee was adjusted accordingly. The appropriate amount of

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production costs allocable to each committee was then calculated

using the adjusted figures. Pirst, the costs of those

commercials used only by the Primary Committee were subtracted

from the production costs of all the commercials as to which

there was some question. The resulting net costs were divided

between the two committees on the 50/50 basis.i / To the

resulting amount allocable to the GEe was added the amount of

costs of the commercial produced by the Primary Committee, but

used only in the general election campaign.

Also added to the production cost of the GEC was a mark-up

representing a small portion of the Tuesday Team fee paid by the

Primary Committee. In an informal response to the Audit staff's

initial questioning of the fee, the Committee explained that the

fee was in lieu of the ordinary media firm commission. This

commission, according to the Committee, would ordinarily take the

form of a percentage mark-up on the amount of time buys,

cr production costs, and other creative costs. Attachment 14 at

p. 1. Since a portion of the fee was in lieu of mark-up on costs

related to specific commercials, the amount of production costs

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~/ On verification of the 50% allocation rate used by the

Committee, the auditors examined the relative usage of the shared

commercials between the primary and the general elections, and

computed an allocation weighted by the relative usage costs of

the shared commercials. This resulted in an increased allocation

to the GEC. Upon review, the Commission declined to follow the

recommendation to use such a weighted allocation, and approved

the 50% allocation used by the Committee. Attachment 1 at p. 17 •
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allocated to the GEe in the Audit Report included a portion of

the Primary Committee's $1 million media fee.

Last, the amount already reimbursed by the GEe ($142,434)

was subtracted from its share of the production costs, yielding a

total still owed of $55,429.55. The Audit Report thus contained

a finding that the Primary Committee seek a reimbursement of this

amount from the GEC.

The Committee accepts the Commission's initial determination

relating to allocation of the production costs for shared

commercials, with two exceptions. First, the Committee contends

that a Spanish language version of the ·Statue of Liberty·

television commercial produced by the Primary Committee was not

used by the GEe and that production costs of $34,193 were

associated with that version. Therefore, the Committee asserts

that this amount should be excluded from the total production

costs required to be split· between the Primary Committee and the

GEe. Attachment 2 at p. 11.

Second, the Committee disagrees with the amount included in

the production costs as a portion of the $1 million fee paid to

TTl by the Plimary Committee for creative and other costs

associated with the shared commercials. Assuming that any

portion of the fee should be included in these costs, the

Committee asserts that a higher amount should be included than

that set forth in the Audit Report. Attachment 2 at page 11.
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The Committee's factual assertion as to use of the Spanish

language commercial 1s unsupported. The auditors reviewed both

committees' advertising time charges, determined that the

commercial in question was aired repeatedly during the general

election campaign, and provided clear documentation of this fact

to the Deputy Treasurer. Attachment 5 at p. 12. A sample

invoice from a Spanish language television station showing the

commercial was used in the general election campaign is attached.

Attachment 11. At the oral presentation, counsel was asked to

clarify the basis for the Committee's assertion. Since none of

counsel's post-presentation submissions addresses this issue, the

Commission rejects the assertion that costs for the commercial

should only be allocated to the primary campaign •

As to the portion of the consulting fee included in the

production costs allocation, the Commission concludes that since

the allocation of the media fee has been treated separately in

this document, no additional portion of the fee need be included

in the production costs allocation. Accordingly, the Commission

has deleted the additional amount allocated to the GEe, and has

reduced the additional reimb~rsement required by a corresponding

amount. Thus, the Primary Committee is required to seek

reimbursement from the GEC in the amount of $39,443.55.

Attachment 5 at p. 13 •
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C. The Allocation of the Media Pee

The Audit Report concluded that the Primary Committee had

paid more than its allocable share of the media fees. The Audit

Report thus contained a separate finding allocating a portion of

the media fee paid by the Primary Committee to the GEC, requiring

that the Committee seek a reimbursement from the GEe. The fee

allocation question was initially raised when the Audit Division

indicated that, under normal industry practice for advertising

contracts, the Client pays a fee to a media firm that is

calculated by a particular percentage (17.651) of the cost of the

time buys. (Attachment 14 p.l) By this standard, the $1 million

fee paid by the Primary Committee when compared with the total

time buys during the primary period ($1.9 million) was

excessive. In an informal response to the Audit staff, the

Committee submitted a sample media firm contract and asserted

that ordinarily media firms charge the mark-up not only on time

buys, but also on production costs and other services in the

creative area, and that the $1 million fee paid TTl was in lieu

of mark-up on more than simply time buys. (Attachment 14).

The fee allocation question was further developed in the

audit of the GEC, when the auditors examined the approximately

$1.3 million fee the GEe paid Tuesday Team for the more than $22

million in time buys and more than $2 million in production

costs. Using the explanation provided by the Primary Committee,

the interim report on the GEC contained a finding that the GEC

had apparently paid. a disproportionally small fee based on

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the amount of time buys and production costs made on its behalf.

The interim report on the GBC suggested the possibility of a

prohibited in-kind contribution by TTl to the GBC.

In response to the interim report, the GEC argued that the

fee fully compensated TTl for the market value of its services.

Attachment 10 at pp. 5-7. Articles submitted in support of this

contention stated that advertisers sometimes negotiated set fees

in lieu of a standard co~ission on time buys. The articles

indicated that advertising firms would accept less than the

standard commission when budgets are large, the client is

prestigious, and opportunity for growth is present, and that in

appropriate situations advertising firms might accept a gross

profit of only 7.5' to 10' of gross billings.

The auditors then evaluated the total media fee in view of

the GEe's response. The auditors discovered that with the

combined media activity of-the two Reagan-Bush '84 committees,

Tuesday Team's gross profit was 8.336%, an amount within the

range cited in one of the articles. The Audit Report therefore

concluded that TTl received a commercial return only when the

media activities of the two committees were viewed as a whole.

Using the 8.336% figure from the combined activity, the Audit

Report calculated the fee amount each committee should have paid.

First, the total gross billings, (i.e. production costs plus

time buys) for each committee was determined using figures taken

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from TTl's financial statements.!/ Next, these totals were

multiplied by 8.336' to determine TTl's return between the two

co.-itteea. This calculation resulted in the Audit Report's

conclusion that the GBC owed the Primary Committee an additional

$792,066.60, further adding to the Primary Committee's surplus.

The Committee raises its most strenuous objections to the

allocation to the GBC of a portion of the fee paid by the Primary

Committee. In its responses to the initial determination on

allocation of the media fee, the Committee and its accounting

firm argue that no reimbursement is due from the GEe to the

~~ Primary Committee for the media fee paid to TTl. Attachments

0' 2,7,8. They contend first that section 106.1(a) of the

Commission's regulations is inapplicable and does not require

allocation in the situation presented. The Committee also makes

the legal argument that the Primary Committee's payments to TTl

for services rendered prior to the nomination would not be

qualified campaign expenses of the GEC and, thus, the GEC cannot

be required to reimburse the Committee for any of these expenses.

Moreover, the Committee presents several challenges to the method

used by the Commission's audit staff to determine the amount

allocable to each committee.

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!/ The Audit Staff used the figures from TTl's financial

reports to calculate the amount of production costs allocable to

each committee. These figures differed from those verified by the Audit staff from bank records and other records. Counsel

prOVided an explanation for this discrepancy in the response to

the Audit Report on the GEC (Attachment 9, pp. 13-14) and as

explained infra, the Commission has modified its calculation and • its initial determination accordingly.
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Application of section 106.1(a)

There are two bases for the Committee's criticism of the

Commission's reliance on 11 C.P.R. S 106.1 which requires

allocation of expenses between more than one candidate on the

basis of the benefit derived. First, the Committee argues that

the fee payment conferred no benefit on the GEC. The second

argument the Committee raises is that section 106.1(a) does not

apply to the facts involved here where there is one candidate

running in two elections, but applies only when two candidates

are running i~ separate elections.

The Committee's initial assertion that there has been no

"threshold showing that any of the services rendered by TTl prior

to nomination conferred any benefit on the general election

campaign," Attachment 2 at 10 n.8, is contradicted by the facts

involved in this matter. It is conceded that advertisements

produced during the primary campaign were used by the GEe.

Indeed, it appears that the media campaign for the entire

campaign, primary and general, was developed by TTl during the

primary campaign. The Audit Division's analysis notes that the

"general election strategy was set in place" during the primary

election phase of the campaign. Attachment 5 at 6.

The Committee's arguments concede as much. Specifically,

the Committee's response states that Tuesday Team's development

of the advertising campaign to help reelect President Reagan,

with the associated market research, creative, and other costs,

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thus justifying a comparatively larger fee paid by the Primary

Committee. The Committee's response includes a letter from its

accountant which states that "(a]n advertising campaign involves

a large amount of initial fixed costs. Advertising textbooks

note that much of an agency's work deals with assisting in the

development of the advertising plan, market research, and

creation of the advertisements." (footnote omitted).

Attachment 2 at p. 13 (Touche Ross letter at 1). The Touche Ross

letter also notes that "(tlhe fact that Tuesday Team, Inc. was

organized specifically to provide services to the Election

Committees, and was charged with developing an advertising

campaign, as well as overseeing production and media time

acquisitions, would lead us to expect that start-up costs to

develop an advertising campaign would be significant in relation

to continuing costs to monitor the program." Attachment 2 at

p. 15. (Touche Ross letter at 3).

Thus, since the Primary Committee paid for the most

substantial start-up costs of developing the campaign and

creating the advertisment themes, while the GEC evidently was

required only to defray the "continuing costs to monitor the

(medial program," id., the Primary Committee quite clearly and

effectively subsidized the GEC's media campaign. Any argument,

therefore, that the GEC did not benefit in a tangible and

substantial way from this subsidy is simply untenable. Tuesday

Team obviously treated its services to the two committees as part

of a single advertising campaign, to reelect President Reagan •

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In such a campaign it is not surprising that the majority of the

creative and planning services in developing the media campaign

for both the primary and general elections were rendered by TTl

during the primary election.

Following the oral presentation, the Committee raised a

second objection ·to the application of section 106.1, arguing

that it was not required to allocate expenses providing

significant and tangible benefit to the GEe under any

circumstances since the cited regulation only applies in the case

of more than one candidate running in separate elections. The

Committee misapprehends the application of section 106.1, which

applies to the separate candidacies of one individual as well as

situations involving two or more candidates running in separate

elections. Based upon the allocation principles set forth in

that section, for example, the Commission has long required that

assets transferred by publicly funded presidential primary

committees to general election committees, and shared expenses of

campaign workers in the transition period from primary to general

election campaign be allocated between the two committees. Thus,

the Commission's Financial Control and Compliance Manual for

General Election Candidates Receiving Public Financing IV-51-52

(1983) anticipates, for example, the allocation for overhead

expenses between primary and general election campaigns for

shared office space and support.

The separate public funding schemes under which President

Reagan received public funds first as a primary candidate, and

then as a general election candidate, require the careful

allocation of expenses benefitting both campaigns. Otherwise;
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for example, a primary committee could in part obviate the

spending limits the candidate has agreed to in order to receive

full general election funding. Obviously, this problem is

greatest in the situation presented here, where the candidate is

running in a substantially uncontested nom·ination campaign, which

has received the maximum amount of matchin9 funds and has a

substantial surplus. Therefore, the Primary Committee may not

subsidize in·a tangible and substantial way the GEe's commercial

advertising campaign by alone absorbing the significant costs of

putting that campaign into place. Rather, such expenses must be

allocated between the committees.

2. Pre-nomination Expenses of the GEC

The Committee further argues that as a matter of law,

payments to TTl by the Primary Committee for services rendered

prior to the nomination would not be qualified campaign expenses

of the GEC. Thus, the Committee contends that the GEC may not be

required to reimburse the Primary Committee for any portion of

the fee payments.

Contrary to the Committee's assertions, allocating a portion

of the fee charged to the Primary Committee to the GEe would not

be prohibited as a matter of law because the fee was for services

rendered during the primary campaign. The Fund Act defines

qualified campaign expenses of the general election campaign as

expenses incurred by a Presidential candidate ftto further his

election to such office" and incurred "within the expenditure

report period [i.e. after the nomination] ••• or incurred

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before the beginning of such period to the extent such expense is

for property, services, or facilities used during such period.-

26 U.S.C. S 9002(11). Tbe Commission's regulations flesh out the

nature of permissible expenditures prior to the nomination,

providing that -(e]xamples of such expenditures include but are

not limited to: Expenditures for establishing financial

accounting systems, expenditures for organizational planning and

expenditures for polling.- 11 C.F.R. S 9003.4(a) (1). Thus, the

statute and regulations permit a general election candidate to

incur a relatively narrow class of expenses prior to nomination

that are in preparation for, and in anticipation of, campaign

activity directly furthering his or her election.

Bere the substantial start-up costs incurred by Tuesday

Team, according to the Committee's response, represented the

costs for such services as developing an advertising campaign and

market research relative to planning a media campa1gn for not

only the primary election, but the general election as well.

These expenses seem to be the type of planning expenses that the

statute and regulations intend to permit a general election

candidate to make prior to his or her nomination. Furthermore,

the Committee's argument in this regard is undercut by other

activities of Tuesday Team concededly on behalf of the GEe. TTl

commenced its work for the GEC before the start of the

expenditure report period pursuant to a contract dated as of

July 3, 1984. Under that contract, TTl had received payments

toward the GEe's $1~3 million fee and expended funds on the GEe's
behalf prior to the candidate's August 22, 1984

nomination. 1/

3. Allocation Method

Finally, the Committee challenges the method used to

allocate the media fee payments between the primary and general

election campaigns. The Committee and its accounting firm

explain that with the increase in advertising rates for network

television, there is less connection between commissions based on

~~ the amount of air time purchased and the media firms' costs for

the services provided. Articles in trade journals are cited for

the assertion that the trend in the industry is away from high

standard commissions based on time buys and toward negotiated

fees for services rendered. Attachment 10 at p. 28. Further,

is contended that the Primary Committee negotiated such a set

fee, of $1 million, with Toesday Team in an arms length

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transaction. Accordingly, they assert that the allocation method

utilizing in part the relative amount of time buys is arbitrary

and unsupported, and that actual agreements between Tuesday Team

and the Reagan-Bush '84 committees should have been used as the

allocation basis.

1/ The Committee overstates the Commission's decision declining

to further pursue in the Audit Report a finding that other pre- nomination expenses were not qualified campaign expenses of the

Primary Committee. The Commission's decision established no

general rule that payments for services rendered prior to the

nomination are E!! !! qualified campaign expenses of the Primary • Committee as the Committee contends.
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The use of time buys as part of the allocation formula was

not a creation of the Commission. Rather, it reflects the

practice of the advertising industry which generally bases the

fees charged to the client on a commission basis. Even the

materials submitted by the Committee indicate that while there is

movement away from use of a standard commission, nearly twothirds of major advertisers still use some form of a commission

in determining the fee charged t~ a client. Attachment 10 at p.

28. Thus, the Committee's assertion of a trend toward flat fees

as opposed to commissions on time buys does not negate that the

Commission's allocation method involves use of the still dominant

industry practice.

The Commission rejects the argument that the amounts paid

TTl by the Primary Committee and the GEC are 2!! !! reasonable

merely because the amounts are specified in separate written

~. contracts the two committees had with Tuesday Team. First, where

it is conceded that the Tuesday Team had no previous existence,

but was formed to run the media campaign for the Reagan-Bush '84

committees, the Commission finds that TTl and the Committee did

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not have an arms length relationship which would justify such

deference to the agreement of the parties. Second, the Committee

essentially admits the disproportionate nature of the fees by

asserting that the Primary Committee was paying up front the

substantial start-up and creative costs of the advertising firm,

while the GEC was only required to pay the ·continuing costs to

monitor the program". Attachment 2 at p. 15.
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Thus, the Committee has perhaps explained why the payments were

structured as they were, but it has also plainly demonstrated

that this structure is a subsidy of the GEC. In absence of any

reasonable allocation put forward by the Committee, the

Commission relies on the only verifiable figures its auditors

could uncover, which the industry traditionally uses as tbe base

for media firm compensation.

The Commission concludes that the Primary Committee bas

failed to persuasively support the appropriateness of its fee

payment compared to that of the GEC. Essentially, the Primary

Committee argues that because the Commission's allocation is

imprecise, it is unsupportable. Not only does this approach not

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help the Commission in its attempt to best resolve the issue, but

it fails to satisfy the Committee's burden of showing its method •

is reasonable.!1 The Committee has not put forward an

alternative allocation method which is more appropriate for this

type of allocation. The Committee's accounting firm, Touche

Ross, suggests that the provisions of the Cost Accounting

Standards (CAS) 4 C.P.R. S 418.50 be applied in the instant

situation. Attachments 2 at p.13. (Touche Ross Letter at 1) and

8 at p.4,

8/ Both the Matching Payment Act and the Fund Act require the

candidate to agree in exchange for receiving public funds, to

provide the Commission "with any evidence it may request of

qualified campaign expenses." 26 U.S.C. S 9003(a) (1)126 U.SeC.

S 9033(a) (1). The candidate also has the burden of proving the

campaign's disbursements are qualified campaign expenses. 11 C.F.R. S9033.11(a).

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(Touche Ross Letter at 1.). While these standards are useful by

analogy to the method utilized by the Audit staff to calculate

the media fee allocation, they are not binding upon the

Commission.!/ In any event, the allocation method applied in the

instant matter is consistent with the standards set forth in

4 C.P.R. S 4l8.S0(d) and (e). Specifically, the Audit

Division's allocation is supported by section 4l8.50(d) (3) (i),

which allocates based upon final cost objectives. In this

instance, the media activities of the two campaigns were the

final cost objectiveso Section 418.50(d) applies to allocations

which include a material amount of the costs of management or

supervision of activities involving direct labor or direct

material costs. This standard is analogous to the method used to

determine the media fee allocation because there is evidence that

the TTl fee included the costs of management and superVision.

(Attachment 5 at p. 37.) Moreover, 4 C.P.R. S 418.509(e) (3)

leads to the same result as the Audit Division's analysis of the

media fee. lO/ The approach contained in that section requires

that the allocation be based upon a ·surrogate." Rather than

allocating

~/ The Cost Accounting Standards cited by Touche Ross govern defense contractors and do not even purport to apply to matters

within the Commission's jurisdiction.

10/ Section 4l8.50(e) delineates various methods of allocation

in descending order of preference. The first two types of

allocation, based on resource consumption and output, cannot be

applied in this case because there is insufficient information

concerning TTl'S operations•

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based upon the output or resources of the entity supplying the

services, this approach bases the allocation on the activity of

the entity receiving the services. Application of this method in

the instant case is analogous to allocating the fee based on the

relative media and production activity of the campaign, which is

essentially what was done as the media fee allocation is based on

a percentage of tot~l media and production expenditures.

Touche Ross also appears to rely upon the Financial

Accounting Standards Board (FASB) Statement of Financial

Accounting Concepts No.3. Attachment 8 at p. 5-6. (Touche Ross

Letter at 2-3). According to the FASB opinion, uncertain

0' expenses, such as advertising costs, should not be allocated, but

may be expensed based on the time when such costs are paid •

Under this theory, certain initial start-up costs may be paid

first and not allocated over time. This analysis is not

applicable here because the PASB opinion assumes an ongoing

r business entity with continuing advertising expenses. Here, TTl

~. was a finite entity that existed for a limited time period, which

was based on the length of the campaign. Thus, the advertising

campaign start-up costs, which might reasonably be expensed at an

ongoing advertising agency, should be allocated because the time

frame and results are definite, not uncertain. Moreover, the use

of the FASB opinion relies upon Touche Ross' assertion that the

primary and general campaigns were separate accounting periods,

divided at the date of the convention, and that costs from one

period could not be carried forward to the next. However, the

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Reagan-Bush primary and general campaigns were actually separate

accounting entities with overlapping accounting periods. Some of

the activities of both entities occurred at the same time, and

many of TTl's activities benefitted both entities simultaneously.

Thus, TOuche Ross' assertion that the costs could not be pooled

because there were two separate, sequential accounting periods is

flawed.

As noted, aside from the assertion that the Commission must

simply accept ·the agreement of the parties· Attachment 2, p.1S,

(Touche Ross letter, p.3), the only representation made to

affirmatively support the Committees' view that TTl incurred

substantial start-up costs to develop the advertising campaign

cuts strongly against the Committee. Moreover, the Committee has

not come forward with information that would be a basis for

making a more refined allocation of the media fee. The Audit

Division, for example, has· indicated that access to TTl's

corporate records and CPA workpapers may enable it to determine

what portion of the fee paid to TTl relates to commercial

production, media placement or indirect overhead and make a more

sophisticated allocation of the fee between the Primary Committee

and the GEe. It was also requested at the oral presentation that

the Committee provide a description of the actual services that

Tuesday Team provided to the campaign committees. See Attachment

6 at 55. The Committee, having neither facilitated access to

these records nor provided a description of TTl's services,

cannot now complain because the method used resulted in a less

sophiscated allocation of the fee •.
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The Commission thus affirms its initial determination that

the GEC must reimburse the Primary Committee for the allocable

portion of the media fee paid by the Primary Committee that

should have been borne by the GEC. The Commission does modify

its initial determination in one respect, however. An

explanation for the discrepancy in the production cost figures

used to calculate the fee allocation has been provided. !!!

Attachment 9 at 13-14. The Commission accepts the new figures

provided and has recalculated the amount owed by the GEe to the

Primary Committee. !!! Attachment 12. The net effect of this

recalculation is to reduce the amount of the reimbursement due

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from the GEC by $12,461.78 to $779,604.78.

D. Revisions to NacO Statement

The Commission has modified the final repayment amount,

based upon revisions to the Primary Committee's statement of net

outstanding campaign obligations (NOCO statement").ll/ Attachment

15. These revisions include the addition to the Committee's

receivables of the amount of duplicate payments and contributions

~~ received after the candidate's date of ineligibility but dated

prior to that date. The winding down costs stated in the NOCO

statement have also been updated to replace estimates with actual

expenses. Finally, the amount of accounts payable has been

reduced to deduct certain payments for which no documentation was

provided. These revisions increase the Committee's surplus,

11/ The Final Audi.t Report noted that since certain expenses

were estimated in the NOCO statement, the repayment amount could

change based upon the Audit Division's review of the Committee's

actual costs. Attachment 1 ae p. 9 n.f.

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requiring an additional pro-rata repayment of $66,077.78.

IV. PDIAL DPADBIft' DBI""I_"I08

Pursuant to 26 U.S.C.S 9038(b) (1) and 11 C.P.R.

S 9038.2(c) (4) the Commission has made a final determination that

for the forgoing reasons President Ronald Reagan and Reagan-Bush

'84 must repay an additional $373,555.08 to the United States

Treasury pursuant to 26 U.S.C. S 9038(b) (3).

Attachments

1. Report of the Audit Division on Reagan-Bush '84.

4. Memorandum to the Cammission Regarding Oral

Presentation. (Attachments omitted)

5. Analysis of Reagan-Bush '84 response by the Audit • Division.

2.

3.

Response of Reagan-Bush '84 to the Audit Report.

Report of the Audit Division on Reagan-Bush '84 General

Blection Committee.

9.

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6. Transcript of Oral Presentation

7. Letter dated August 5, 1987 from John Duffy.

8. Letter dated August 12, 1987 from John Duffy.

Response of Reagan-Bush '84 General Election Committee

to the audit report.

10. Response of Reagan-Bush '84 to General Eelection

Committee Interim Audit Report.

11. Sample Television Station Invoice (Statute of Liberty Commercial).

12. Audit Division Explanation of Modification of the

Initial Determination.

13. Response of Reagan-Bush '84 to the Interim Audit

Report •
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14. Memoranda from Ron Robertson to Rick Balter RE:

Reagan-Bush '84 Primary Campaign Media Costs.

1S. Memorandum Re: NOCO update - Reagan-Bush '84

(Primary), and attached NacO statement, dated

December 9, 1987.

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COPIES OF ATTACHMENTS ARE AVAILABLE

FROM THE FEe PRESS OFFICE OR THE

PUBLIC RECORDS OFFICE UPON REQUEST •
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FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 204&3

July 10, 1986

MEMORANDUM

,

TO:

PROM:

SUBJECT:

FRED EILAND

CHIEF, PRESS OFFICE

ROBERT J. COSTA -/'

ASSISTANT STAFF D[~~ AUDIT DIVISION

PUBLIC ISSUANCE OF FINAL AUDIT REPORT - REAGAN-BUSH '84 (THE CANDIDATE'S

PRIMARY COMMITTEE)

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Attached please find a copy of the above mentioned Final

Audit Report which was approved by the Commission on July 7,

1986 •

It should be noted that Agenda Document '86-57, considered

by the Commission in the Open Session of June 26, 1986, contains

the analysis prepared by the Commission's Office of General

Counsel, as well as the Primary Committee's response to the

interim report. These documents and possibly the report considered by the Commission on June 26, 1986 may be of interest

to anyone reviewing the attached report. Therefore, it is

suggested that persons requesting the final report be made aware

of the contents of Agenda Document 186-57.

Informational copies of the report have been received by all

parties involved and the report may be released to the public.

Attachment as stated

cc: FEe Libr.ary

RAD

Office of General Counsel

Public Record
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fEDERAL ELECTION COMMISSION

WASHINC10N. DC. 204ft3

q

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J. .ackgrounc!

A. Overview

REPORT or !HI AUDIT DIVISION

ON

DAGAN-BUSB '84

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Thia report la b••ed on an audit of ••agan-Bush '84 (Wthe Committee· or Wthe Primary Committe.W) to determine wbether there

ba. been compliance with the provilions of the rederal Election

Campaign Act of 1971, as amended (·the ActW) and the Presidential

Primary Matching Payment Account Act. The audit wal conducted

pur.uant to 26 U.S.C. S 9038(a) which statel that -After each

.atching payment perioa, the Commi••lon .ball conduct a thorough examination and audit of the qualified campaign expenses of every candidate and hi. authorized committe•• who received payments under

Section 9037.·

In aadition, 26 U.S.C. S 9039(b) and 11 C.P.R. S

'038.1(8)(2) state, In relevant part, that the Commis.ion may conduct other examinations and audits from time to time al it de.ms

nece••sary.

~he Committee regiltered with the rederal Election

Commission on October 17, 1983. The Committee maintalnl ita

headquarters in Washington, D.C.

The audit covered the period from the Committee'.

inception, October 17, 1983, through Augult 31, 1984, the last day covered by the most recent report filed with the Commi••ion at the

time of the audit. In addition, certain financial activity va.

reviewed through January 15, 1985. The Committ.e reported an

opening cash balance of $-0-, total receipts of $27,682,289.68, total disbursementl of $25,817,114.96 and a closing ca.h balance of

$1,865,174.72 on Augu.t 31, 1984. Under 11 c.r... S 903S.1(e) (4) additional.audit work .ay be conduct.d ana addenda to this report i.aued a. n.c••••ry.

This report Is baaed upon document. and working papers Which 8upport each of the factual statement.. They for. part of

the record upon which the Commission baaed ita d.elalon. on tbe

.attera in the report and were available to Commilsloners and

appropriate Jtaff for review•
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•• .I'Y '.rlonn.l

~h. ~r.a.ur.r of the Committ•• I. Anv.la M. Buchanan

ilaoklon.

c. 8pop....

The audit included luch telt. a. vlrificatlon of total r.~rt.d r.ceiptl, dilburl.menta and individual tranlaetlons, revi.w of requir.d lupporting documentation, analylil of Committee

d.btl and obligationl' review of contribution and expenditure limitationl' and lucb oth.r audit proc.dure••1 d••med n.c•••ary under the circumltane'l.

Pindinl and Recommendation Related to

TItle of the United Stat•• cOdi

A. Matt.r ••ferred to the OfficI of G.n.ral Couns.l

A c.rtain .att.r noted during the audit .a. r.f.rred to

the Commll.ion'l Offic. of Gen.ral Coun••l.

III. Plndlng8 and Recommendations Related to ~itl, 26

of the United Stat•• Cod.

A. Appar.nt Ron-Qualified Campaign .xpenl"

S.ctlon 9038(b) (2) CAl of Titl. 26, United State. Cod.

Itat.. that if the Commie.ion det.rmin'l that any amount of any

payment mad. to a candidat. from the ••tching payment account was uI.a for any purpose other than to d.fray the qualifiea campaign

exp.n.es with re.pect to which luch paym.nt wa••ade, It .ball

notify luch candidate of the amount 10 u••a, and the canalaate Ih~ll pay to the S.cretary an amount equal to luch amount.

The Commll.lon, In a Notic. of Propo••a Rul.making pUbllshea in the Pederal R!X1£ter on June 28, 1984, set forth a

pro-rata formula Which wou a•• repaym.ntl for non-qualified campaign expen••• on the proportion of f.deral fund. to total funds

rec.ived by the candidate. The text of the regulation along with

the Explanation and ~u.tific.tlon were pUbll'bed in the Federal

aeallter on August 22, 1'84 and transmitted to Congr.... On March 5, IleS-the.revisea regulation. were re.ubmitted for publication. The propo.ed regulation. were before the Congr... foc 30

legislatlv. day••• of May 20, 1185, and approv.a by the Commi••ion

for publication In final form on June 11, 1"5.

Th. formula and tbe appropriate calculation with re.pect

to the Committe.'1 ree.lpt activity il •• follo...
3

,10,100,09Q • .37540e

'26,904,06'.30

~hu., the repayment ratio for non-qualiflea campaign ••pen.es i. 37.5loel.

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1. Apparent Payment of General Blection Bxpens••

The term -qualified campaign expensew. Is defined at

26 Vel.C. S 9032(9) a•• purchase, payment, advance, or gift of

money or anything of value incurred by • candidate or by hie

authoriled committee, in connection with hi8 nomination for

election (emph••is added).

The Committee aade expenditures for voter

registration and other political activities totaling $2,136,898.83

which appeared to benefit the candidate's general election campaign only, and were not maae In connection with hi. campaign for

nomination for election. Included in this amount Is '64,615 in

Committee expenditures which were reimbursed by the Reagan-Bush '84

General Blection Committee (Wthe GBCW). (See footnotes AI and lIon

pages 3, 5 and e of Attachment 1). The expense authorization

request forms prepared for three (3) of these expenditures indicate

that the amounts are to be charged to the general election budget.

a. Voter Registration

Voter registration expenses totaling $1,847,776.54 were identified by the Audit .taff during a review of

expenditures (See Attachment 1). 'ayments were made to computer firms, list 8uppliers, .alling firms, consultants, phone companies, communications firms, telemarketing companies, and individuals.

According to documents contained in Committee files, these vendors

provided lists of individual. and performed services related to the

identification and regi8tration of individuals who indicated

8upport for the candidate. The amount. identified by the Audit

staff represent only payments for goods and services used in a

state after the date of that atate's primary or caucus. Payments for voter registration services used In a state prior to the caucus

or primary were not included.

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!I ~he Candidate'. date of ineligibility was determined in

accordance with 11 C.P.R. S 9033.5(c) •
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. Ixpenditures made by the Committee, totaling $289,122.29, were identified by the Audit staff a. apparently related to the general election campalgn (See Attachment 2) • According to documentation reviewed by the Audit staff, most of

these expenditures represent polling expenses for surveys which

began after most, if not all, of the primaries and caucuses had

been held. The remainder of the amount represents political consulting work performed with respect to a specific state after

the respective primary or caucus.

The Treasurer responded that the Committee was

aware these expenditures would be questioned but felt that the

expenditures were clearly made for the purpose of influencing the

candidate's nomination. The expenditures were incurred prior to

the nomination date and were made to demonstrate the candidate's

continuing support and leadership role in his party and the nation. ~he expenditures were also made to show that the candidate could

represent the party in the general election and convince convention

delegates to support the candidate.

In the Commis.ion approved interim report, the

Aualt staff recommended that within 30 days of receipt of the

report, the Committee submit evidence to demonstrate that the

$2,136,898.83 in expenses for voter registration and other

political activities were made in connection with the candidate'a

nomination and are therefore qualified campaign expenses. ~h.

interim report further atated that absent such a showing the Audit

ataff intended to recommend that the Commission make an initial

A portion of this amount ($182,'68.1')

represents the non-fundralaing portion of expen••••aae In

connection with a nationwide voter registration drlv. on Saturday, June 23, 1984. The drive was held In .everal hundred locations

around the country. Volunteers were a.sembled in .ach location and

.hown a videotape of the candidate urging the volunt••r. to 90 out

and register vote«s for the general election. The volunte.rs then

canvassed neighborhoods to identify unregistered 8upportera of the

candidate. The focus of the effort (a. reflected In a manual given

to organizer., circulars given to participants, a .ample pre•• relea.e prepared for the meaia, and a videotaped pep talk by the

candidate sent to each location) was the maS8 registration of new

votera who 8upported the candidate. Bowever, the drive did include

a fundralsing appeal as ••econdary purpose. Aa. result, the

Committee charged 25' or $60,989.39 of the event cost to the

fundraising exemption pursuant to 11 C.P.R. S 100.8(21). The Audit

ataff noted that the Committee had received $58,477.27 in

contributions solicited during the drive.

b. Other Political Activities

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determination that the amount ($2,136,898.83) representing the

..la. of ,eneral election expenses be viewed a8 non-qualified

c••palgn expens.s and a pro-rata portion, $802,208.92

('2,136,898.83 x .375408) be repaid to the D.S. ~rea.ury pursuant

to 21 v.s.c. S '038 (b) (2).

~he Committee's response argues that expen.e. incurred after t~e date of delegate selection in a atate ••rit no

cl0••r examination than expenses incurred prior to that date. In

.apport of this position the Committee presents three arguments as

follows.

1. ~he Statutory Definition of Qualified Campaign Expense Requires Only That the Bxpense Be Incurred Prior To the

Date of tbe Candidate's Homlnation.

~he Committee contends that Congress did not intend -to

require more than that the expense be incurred prior to the date of

nomination or that Congress intended to authorize the Commission to

evaluate the 8ufficiency of the nexus between the expenses and the

campaign for nomination.- The Committee cites legislative history wherein it is stated -that candidates are permitted full

flexibility and discretion in their election efforts, 8ubject only

to limitation on the dollar amounts of expenditures and

contributions.- While the Audit staff acknowledges the concerns

voiced in the legislative bistory cited by the Committee as well.,

the Commission's accordance of wide discretion to candidates in how· - to conduct their pUblicly-funded campaigns, the Commission also bas . the responsibility to insure that compliance with the Act'.

spending limitations is achieved. ~o permit candidates to exercise

such wide discretion that primary election funds could be spent to

further the candidate'. general electon would nullify the very limits established by Congress (see 26 U.S.C. SS 9003(b) (1) , 9035(a) and 2 U.S.C. SS 441a(b) (1) (A) and (B».

~he Staff's Request Conflicts With The Commission's

Polley of Restraint In Its Review of Candidates'

Spending Decisions

The Committee a180 contends that the Audit staff's

request (that the Committee demonstrate that the expenses in

question are not general election expenses) is in conflict with the

Commission's policy of restraint in its review of candidates'

spending decisions. Although as discussed above, the Commission

has accordea wide discretion to candidates in how they conduct ~belr pUblicly-funded campaigns, the Commission i8 required by the

Act to ·conduct a thorough examination and audit of the qualified campaign expenses of every candidate and his authorized committees

who receive payments under section 9037 (26 U.S.C. S 9038(a».-

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In addition, the Commis.ion'. zegulatiofts at 11

C.P.R. S 9033.11(a) .tates that -Bach candidate shall have the

burden of proving that disbursement••ade by the candidate or bis

or her authorized commltteeCs) or persons authorized to .ake

.xpenditures on behalf of the candidate or committee(.) are

qu.l1fled campaign expen••• a. defined in 11 C.P.R. S '032.9.-

Purther, the candidate -shall obtain and furnish to the Commi••ion

on request any e.idence regarding qualified campaign expen••• made

by the candidate or hi. or her authorized committeeC.).- ~be

Committee's comments In this area are not persuasive.

3. Expenditure. Made After ~he Delegate Selection Process

Bas Been Completed Are Bntitled To The Same Deference

Aa ThoBe Made Before

The Committee has provided a lengthy discus8ion conc~rning the nomination process in an attempt to show that

expenditures made after the delegate selection process in a state

has been completed are entitled to the same deference as those made

before. In essence, the Committee sets forth, In support of its

position, an overview of the various provisions of State law

regarding the amount of discretion accorded to delegates to the

national nominating convention in voting for their choice for the

nominee of the party. The Committee contends that. large portion of the delegates at any convention are not bound to any particular candidate. Bence, their selectlon at the conclusion of a state's

primary caucus or convention cannot have the importance that the

Audit staff seeks to accord it.

Pinally, the Audit staff considered additional

documentation and explanations further detailing the purposes of

tbe four (4) expenditures totaling $64,615.00 which were reimbursed

by the GEe. (See footnotes 21 and 31 on pages 3, 5 and 8 of

Attachment 1). The informatIon revIewed indicates that these are

tbe type of start-up and polling expenses properly reimbursable by the GEC in accordance with 11 C.P.R. S 9003.4(b)C4)(i).

Summary

It appears that rather than addressing the reasoning contained in the interim audit report, the Committee has elected to

argue only that expenses incurred after a state's primary election

or caucus is completed are not per 8e non-qualified campaign

expenses. The Audit staff does not disagree. Rowever, tbe interim

report's di.cuss1on was focused on What appeared to be expenses which benefitted the candidate'. general election campaign since

tbe registration of voters in states where the primary/caucus had
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occurred could only result in their votes being cast with respect

to the general election with little, if any, benefit accruing to

the primary campaign. Deference was accorded to the Committee in

that expenses f~r activities (some of which were identified .s

voter registration) incurred prior to the date of the

primary/caucus in a state were viewed by the Commis.ion .8

qualified campaig~ expenses.

The Committee has argued that the expenses in question

were qualified campaign expenses for the primary campaign since

incurred prior to the date of nomination. The Audit staff

acknowledges that with few exceptions the expenses in question were

incurred prior to the date of nomination, however, in our opinion the Committee has not demonstrated that these expenses were

incurred in connection with the candidate's primary election

campaign. Rather, the expenses incurred with respect to ~he

registration of voters in states where the primary/caucus had

already occurred can only influence the election in which the

voters may exercise their franchise which, in this case, is the

general election.

Conclusion

On June 26, 1986, the Commission considered the matters

noted above and made a determination that the $2,072,283.83 ($2,136,898.83 less $64,615.00 properly reimbursed by the GEC) in

expenses for voter registration and other political activities were

made in connection with the candidate's campaign for nomination for

election and are therefore qualified campaign expenses. No further

action is necessary.

B. Statement of Net Outstanding Campaign Obligations

•

Section 9034.5(a) of Title 11, Code of Federal

Regulations requires that the candidate submit a Statement of Net

Outstanding Campaign Obligations (NOCO) which contains, among other

items, the total of all outstanding obligations for qualified campaign expenses and an estimate of necessary winding down costs

within 15 days of the candidate's date of ineligibility.

In addition, 11 C.P.R. S 9038.3(c) (1) requires a

candidate whose net outstanding campaign obligations reflect a

surplus on the date of ineligibility to repay to the Secretary within 30 calendar days of the ineligibility date an amount which

represents ~he amount of matching funds contained in the surplus•
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Pinal1y, 26 U.S.C. S 9038 (b) (3) states that amounts

recelvea from the matching payment account may be retained for the

liquidation of all obligations to pay qualifiea campaign expenses incurred for a period not exceeding 6 months after tbe end of tbe

.etcbing paymen~period. After all obligations have been

liquidated, that portion of any unexpended balance remaining In the

candidate's accounts which bears the same ratio to the total

unexpended balance as the total amount received from the matching

payment account bears to the total of all deposits made into the

candidate's accounts ahall be promptly repaid to the matching

payment account.

On September 21, 1984, the Committee repaid $344,893.24

to the u.s. Treasury representing a pro-rata ahare of the estimated

8urplus on the Candidate's date of ineligibility (August 22, 1984). ~he Audit staff reviewed records and documentation supporting the

Committee's calculations. Depicted on page 9 is a NOCO statement

prepared by the Audit staff, which reflects certain adjustments to

the original BOCO filed by the Committee (these adjustments are

baBed on the Audit staff's review of actual financial activity through "alauery 15, 1985 and Commission action taken with respect

to Pinding 111.8.2.). On Pebruary 6,1985, the Committee's Deputy Treasurer agreed that the audited NOCO statement accurately reflected the Committee's financial position as of August 22, 1984.

It should be noted that ~he adjustments explained below

at items 8.1. and 2. were not developed during the initial phase of

audit fieldwork and thus, the Deputy Treasurer's comments of

Pebruary 6, 1985 regarding the NOCO do not extend to these

adjustments, nor to the additional riPayment determination

resulting therefrom.

The NOCO statement on page 9 depicts a calculated surplus of $1,569,320.32. Although the Committee made a repayment on

September 21, 1984 in the amount of $344,893.24, an additional

amount of $244,242.16 appears to be repayable, as shown on the Noeo

below.

t •
•

............

ADal,.I. of ee..ltt•••• lOCO 't.~at

aa of A.....' 22, 1.1. 1/

'300,000.00 15,000.00

25,000.00

10,9"·P9

, '.

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o

"

o

' .. " .

y'ljI

C••h 1ft ••at

Account. aec.I••ble

ContrlbutJon. ..I." POlt

1/22/ltJV

Accru.a Int.r••t

.et.bur....nt. du. fra. lie

-Allocabl. DOunt of _&1la Ie. II

-Allocable uount 01 prOltuotlon COlt. for .har.4 ~rcl.l. j/

TOTAL M''"

OBLIMUCIII

Account. ..,.bl. Jncoee .,••••

• ''1'IMDD WXllD%RC; _

ISlMffilD

Legal •••• Accounting .... ••nt ana Itor.,. Gen.ral •.,en•••

!'OTAL U'rIMDR_

WINDING PN.-cosp

JOTAL OILICMTIO!S

1m'1' OU'l'S'rMDllIG CUltAI.

OBLIGA'1'IORS - 'UlPL~ AI

OF AUGUS'l 22, 1... J/

AMOUNT ItDADBLB,

(SURPLUS IIDL'II'LDQ ay UPAYMlII'I M'IIO) 1/

Leaa. ./21/.. r.,a,..nt ....

aepl,..nt AIIoUnt

.2,.S.,•••.'2

.53,.11.41

11,101.'2

11,t'I.12

'.2,•••••0

",.a',55

'2,321,215." 222,12'.34

.00,000,09

'.,517,'45.32

2,'48,425.00

• 1,"',320.32

1344,"3.24)

• 244,242.16

•

!I Auguat 22, 1••• i. the date a.t.r.ln.a by the Commi••lon to be the

e.naldat.·. aat. of in.liglbility for purpo••• of Incurring qualified c.-palin .apen••••

!V Inclua•• contributions r.cel.ea aft.r ./22/'. but dat.a prior to

./23/•••

sf fbi••ajD.~nt I••~l.IDei ful17 at Pindinl JII.801.

j/ tbl. aaja.~Dt I••~l.lftel fa117 at .Indlag 111.8.2.

V An .a'astMntC.) to ••tl_tea Wlnal... Do.. Coats (1/15/15 to '/31/15)

.111 be ..a., •••ect••arr, to account for any chang•• due to

.xtendlnl the proj.cted t.r.lnatlon date beyoad 7/31/85, •• vell •• th••erlfic.tloD of lb••atl..t•• a••••

!I Iinc. certain .atl_t....r. a••d ift ea-patlng thl. amount, the Audit

.taff will r.vl•• the co..ltt•••• r.porta .na lecord. to co_pare the

.ctual fllur.a wltb tbe .atl.at•• ana pr.par. aaju.t..nt. If

n.c••••r'. I'or .....1., the a80Unt could change ba••d on our r.vl•• of the eo..ltt••'. actual winding down coeta. 1ft addition, other aaju.~nt. to thl• .-ount .., be n.c••••r' •• • r••ult of certain

.att.r. DOt.a In I'lnllng. JII•••l. and 2.

JI .or calculation of tbo r.pa,..nt ratio a•• di.eu••lon of apparent RonQualified Cupal,n _apen••• ulM1.r I'lndlng III.A. on pa,•• 2-3.
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The two adjustment. to tbe HOCO which form the b••i. for the

additional repayment ..ount are discu••ed below.

'ackgr:oune! .. ~he Prlmar~Committee and the GEe contracted with ~uesday

~eam, Inc. (TTl) to handle the production and ti.e buying for

commercials to be airee! during both the primary and general .lection campaigns. A separate contract vas negotiated for .ach

election campaign. Por these services, the Primary Committee

paid. con8ultant fee of $1,000,000 to ~I, and TTl received a

consultant fee of $1,315,000.29 for its 8ervice8 with respect to

the general election campaign.

The committees wired funds to TTl which with the exception of the consultant fee8 were either deposited in the ~I

production accounts or the media (ti.e buying) account.

established by TTl to transact the business relative to the

contracts with each committee. TTl In turn .ade payments to

vendors for the expen8es related to production of commercials and

the purchace of advertising apace.

1. Pee Payment to Media Pil1D

Por a primary Presidential candidate, the term

-qualified campaign expense- is. defined at 26 U.S.C. S 9032(9) as • purchase, payment, advance, or gift of money or anything of

value incurred by a candidate or by bis authorized committee, !n

connection with his nomination for election (empha.is added).

Por a General Blection Presidential candidate, the ~erm -qualified campaign expense- is defined at 26 U.S.C. , 9002(11) (A) (iii) as an expense incurred by an authorized

committee of the candidates of a political party for the offices

of President and Vice President to further tbe election of either

or both of 8uch candidates to such offices.

~he Regulations at 11 C.P.R. S ·106.1(8) require that expenditures made on behalf of more than one candidate shall

be attributed to each candidate In proportion to the benefit

reasonably expected to be derived•

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In the Interim Report of the Audit Division on the

GBC, the Audit ataff cited 2 U.S.C. S 441b and sala it appeared the consultant ree paid by the GEC to its media firm was too low

ana a possible in-kind corporate contribution had been ••ae by the.firm. Our analysie was based on the application of • • tanaard 17.65' mark-up on media time buys and production COlt.

nor.ally chargea~y meaia rirms. (In fact, initially the Primary Committee referred to this etandard mark-up rate to explain. portion of the $1,000,000 fee it paid to TTl.) Since the GBC

Incurred $25,278,001.03 in media buys and production expenses, the $1,315,000.29 fee appeared much too low in light of the

normal 17.65' mark-up.

At the exit conference, GEe officials responded that the ree paid for tbe general election period was negotiated when the market was -soft.- ~hey also said that their contract

vas similar to media contracts with other ·prestigious· firms

that purchase a large volume of media time.

In the interim report, the Audit staff recommended

that the GEC submit evidence demonstrating an in-kind

contribution had not been receivea from the corporate aedia

consulting firm. The Audit staff aaded that based on a review of

that documentation, additional recommendations could be

forthcoming.

In its response to the interim report, the GEe

dismissed the Audit staff's interpretation of the Primary Committee'. justification for the fee paid TTl during the

nomination perioa. ~he GEC simply stated that it sought and

obtained a flat fee arrangement through arms length negotiations.

The GEe concluded that the fee was substantial

When considering the time frame W(a)nd there Is absolutely no

evidence whatever that the fee did not compensate Tuesday Team

for tbe market value of its services. w The response did not

elaborate on this point, but instead contained documentation

supporting the contention that the media firm was compensated for

tbe market value of its services in accordance" with normal

advertising business practices. The documentation consists of

articles from trade journals and a letter from an advertising firm stating that negotiations often result in a set fee instead

of the standard 17.65' commission on media buys. The articles

indicate that in lieu of the standard commission, advertising firms will accept less when the budgets are large, the clients

are prestigious, and tbe opportunity for growth i8 present. One

article quotes an industry official as stating -as long .s tbe

advertiser recognizes our right to have a decent profit, 1.5' to

10' of gross billings, you can project profit and manpower

usage.-

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~h. Audit ataf! agr••• that the documentation

.appl!ed 8upport. the contention that TTl vas compen••ted for the ••rket value of Its .ervlces to both the .ri••ry Co.-itte. and

tbe GBC in .cc~tdance with normal Industry practice.. ~his

conclusion 1. ba.ed on the Audit ataff'. analysi. of com~ined

activity of both the 'rlmary Committe. and Gle. ~h. analy.is indicates that ~I received an average gross profit of 8.336' for

itl .ervices to both committees. ~hia rate of return 1.

eonaiatent with normal advertising firm practice. as outlined in

tbe articles 8upplied in the respons.. ~herefor., it no longer

appears that the media firm ha. made an In-kind contribution to

the GEC. Rather, it appears that the fees negotiated by both

committees were not allocated properly between them. Our

analysis indicate8 that the GEe should reimburle the 'rimary Committee $792,066.60 to reflect the proper allocation of the fee

paid TTl in accordance with 11 C.P.R. S 106.1(a).

~his amount is arrived at by applying the 8.336'

rate to the $25,278,001.03 paid by the GEC for production

expenses and media time buys and re8ults In an appropriate fee of

'2,107,066.89 or $792,066.60 .ore than tbe $1,315,000.29 actually paid. Conversely, application of the 8.33" gro.8 profit rate to

the Primary Committee's buys for time and production of

$2,494,543.58 re8u1ts In an appropriate fee of $207,933.40 or

$792,066.60 1es8 than the $1,000,000.00 actually paid. Therefore, tbe GEC should reimburse the Primary Committee

$792,066.60 for appropriate allocation of the media fee.

Conclusion

On June 26, 1986, the Commission determinea that within ~O

days of receipt of this report, the Primary Committee 18 to bill

the GEC for the amount ($792,066.60) of the allocable portion of

the fee paid by the Primary Committee, which appears should have

been borne by the GEC.

2. Media Production Cost.

The Regulations, at 11 C.P.R. , 106.1(a) require that expenditures made on behalf of more than one candidate shall

be attributed to each candidate In proportion to the benefit

reasonably expected to be derived•
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Certain production coste, ldentifiea by tbe

eo.mltt.e as relating to comm.rcial. to be airea durin, both the

prl.ary and ,eneral election campaign., were vi.wea by tbe

Committ•• a. allocabl. between the prl_ary ana general election

campaigns. On Septe.ber 7, 1'.4, the GEe reimbur••d '304,389.50

to tbe Committe~ ~h. Committee indicated that tbia .-ount ~e~e••ntea 50' of total production costs aSBociatea with certain

comm.rclals. ~he Committee's Deputy ~rea8ur.r atated that this

allocation vas ba.ed on the fact that the .ame co..erclal. were

produced for uee in both the primary and general election

campaigns and that the allocation percentage was developed in

.arly 1984 ba.ed on planning and estimatea usage of production prices.

(2)

(1) Verification that some TV spots were produced for

the primary campaign only.

Justification for allocating production costs (of

spots produced for both campaigns) between the

primary and general election campaigns on a SO, basis.

(3) Check copies, pai~ bills, and invoices to support production costs by commercial as listed on page 3

of Attachment 3•

The auditors .ade numerous requests for

documentation 8upporting the SO, allocation before, during, and

after our review of TTl media records in New York City on

December 18 - 19, 1984, however, such information va. not made

available. During the Pebruary 12, 1985 exit conference, the

Deputy Treasurer informed the auditor. that on tbe previous day, the Committee had refunded $162,807 to the GEC baaed on a further

\ analy.is of production costs and us. of campaign c~.rcials.

~hi8 amount 18 included in the Noeo Statement under Accounts

Payable. The Deputy Treasurer .aid be would supply information

.upportlng his calculations in a few days. On February 25, 1985, the Deputy Treasurer 8upplied the Audit staff with Bchedules

(Attachment 3) indicating that some commercials were not used in

the general election campaign. The schedules did not provide the

following information necessary to verify the $304,389.50

reimbursement by tbe GEC or the $162,807 refunds

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A. noted above, In .aai~lon to paying production

coat. and tbe cost of tbe aedla time purcha.ed, tbe Committe.

al.o paid the ••dia fira a $1,000,000 consulting f... ~b.

Committee baa Initially indlcatea that the flat f •• it paid to l~...dia firm was in lieu of cost plus 17.15' not only on ..dla

tl.. buy. but a180 on production cost. and a number of other

.ervlc•• and facilitie. furnlahed by the firm. The Deputy ~r.a8urer did not agree that any portion of the flat fee 8hould

be included in the total of allocable production costs. Bowever, it Is the Audit ataff's opinion tbat to the extent that a portion of the fee 1. attributable to the coat of producing .dv.rti••••nt. used by the GlC a. well a. by tbe Committee, the

amount should be Included in the total of allocable production

coats.

Interim Report Recommendation. ana Committee Respona.

In the Interim audit report, the Audit staff

recommended tbat tbe Committee .ake available for our review

documentation to 8upport the allocation of media production costs

to the primary and general election campaign.. ~he documentation

requested was to include check copies, paid bills, and invoices

to support production costa by commercial a8 listed on Attachment

3, evidence of how the flat consulting fee relate. to the total

of allocable production costs, jU8tification for the SOt

allocation of production costs between tbe primary campaign and

general election campaign for spots aired in both.campaigns, and

verification for the Committee's contention that certain spots

were used in the pri.ary campaign only.

As part of their September 16, 1985 response to

the interim audit report, tbe Committee made available for our

review, documentation to support costs for commercials listed on

Attachment 3. In .ddition, the Committee offered a justification for their 50t/50' allocation of production costs with tbe GEC and

an explanation of how the $1,000,000 fee paid to ~I relates to

this allocation. In its December 9, 1985, response to the

Interim Report of the Audit Division on the Reagan-Bush '84

General Election Committee, the GEC supplied documentation

regarding the consulting fees paid TTl. The Audit staff

performed follow-up fieldwork to review this inform.tion•
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Pollow-up Fieldwork

During follow-up fieldwork completed October 18, 1985, the Audit ataff attempted to obtain traffic reporta or other

documentation necea.ary to verify the re.sonab1en••• of the 50'

rate. of a11ocatibn. ~he Deputy Treasurer responded that the Commlttee~could not locat. tbeae records, if tbey [indeed] existed. ~herefore, the Audit staff could not, at that time,

verify that the 50' allocation ~ate wa. reasonable.

During tbe courae of fieldwork relative to the GEC'.

December, 1985 response to the interim report, the Audit .taff

was In contact with • ~epre8entative of the entity that purcha.ed

TV time on local stations. In February 1986, this representative indicated that if the firm did not have the documentation

nece••ary (scheduling instructions to TV stations/networks on

which commercial to broadcast) to calculate usage of the shared

commercials, the Committee had those documents.

Therefor., on March 25, 1986, the Commis.ion formally requested that the Committee .ake available for our review,

documentation showing the extent of the shared advertisements'

usage by both the Primary Committee and the GEC.

In a letter dated April 24, 1986, Counsel for Committee

responded that material related to media purchases, including

some scheduling instruction forms were located, however, the

search of Committee records did not locate a significant number

of these forms. Counsel then concluded that, in accordance with

the media buyer'. usual procedure, the forms must have been

destroyed. Finally, Counsel stated that the Committee is willing

to give the Audit staff direct access to the records In storage and if upon examination any records are found that the Audit

staff wishes to examine more closely, the Committee will arrange

to have them retrieved from storage and maae available for Audit

staff inspection along with the records already located as a

result of Committee efforts. On April 30, 1986, the Audit staff

visited the warehouse in Springfield, Virginia and located

several boxes which contained background information on meaia

purchases for both campaigns. ~his information, coupled with

that found by the Committee, and in conjunction with documents

made available in October 1985, appeared sufficient to proceed with an analysis of the shared commercials. Therefore, in May 1986, the Audit staff conducted additional follow-up fieldwork to

review this data•
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Summary of Pollow-up Pleldwork ••rfor••d

~he firat atep In tbe re.iew wa. to verlfy total

produetion coat. for each commercial •• li.ted on pag_ 3 of

Attachment 3. The Audit ataff reviewed Invoice. and other

recorda .aa. avatl.bl. relating to payment••ad. from the ~I

'raductlon account. Our review lndicatea tbat the di8tributlon

of production costs by commercial.. li.ted on page 3 of

Attachment 3 vas accurate except for the amount a••oeiated with

the co~mercial entitled -Statue of Liberty.- A. a r••u1t of our

review of production account record., we identified '64,6t1.36 In

expenses related to the ·Statue of Liberty· or '34,193.36 .ore

than the amount listea by tbe Committe.. Se. li8ting of the•• • xpen~iture. at Attach.ent 4. ~he Deputy Tr.a.urer could not

explain the difference.

The next .tep in the review wa. to analy.e all tv

network/local .tation involcel and .ffidavlt. for both the

Primary Committee ana GlC. ~he Audit .taff e.amined

approximately $23,000,000 in documentation related to the

purchase of TV broadca.t time for the pri_ary ana ,eneral election campaigns and .cheduled the frequency (number of times

the commercial ran) ana gros. ti•• cost of .11 commercial.

produced by the Primary Committee. aecauae time coata vary wlaely depending on .arket. and the dlaparltie. in tl.e ooata

between network, cable, and local bUY., the Audit ataff

calculated relative usage between the 'ri.ary Commltt•• and GEC

ba.ed on time coste instead of frequency. Our review reve.led

that Primary Committe. produced commercials entitled ·Spring of

84:30,· ·Spring of 84160,· -America'. aackI30,· wAmerlc.-.

BackaGO,· and -Ronald ••a,an 5 minute 11- were u.ed e.clual.ely by the Primary Committee. ~he commercial entitled -The Bear,· a180 produced by the 'rimary Committee, .a. ueed excluaively by the GEe, and Primary Committee produced commercials entitled

·Prouder, Stronger, aetterI30,· ·Prouder, Stronger, .etterI60·

and ·Statue of Liberty· were ahared by both campaign••

Our review further revealed that 55.25' of the bUy. for

·Statue of Liberty· were .ade by the 'rlmary Committe. and .4.75'

were made by the GlC. On the other hand, 43.10t of the buy. for

·Prouder, Stronger, .etter.30· wa. Primary related and 56.'0' wa.

GEe related. The ratio for -'rouder, Stronger, BetterlaO· ... 29.75' 'rlmary and 70.25' GBC. ~h••• percentage. were appliea to

the verified production coat.. ~h. auditea r••ulta a. ahown Oft

Attachment 5 Indicated that the GBC portion of the production cOlta for the three abarea commercial. total '166,131.44 or

$50,574.44 more than allocated ,by the Committe••
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In addition, the Committee allocated only 50' of the

coat for -The Bearw which wa. produced by the Primary Committe.

at a cost of $53,754.00 but was used exclusively by the GIC. ~h.r.fore, the Audit staff allocated the entire coat of -The ••ar- to the GEC. Purther, the GBC paid .everal bill. related to

the May, 1984 prOduction of wAmerica's Backt30- and -Americ.'s

.acks"SO· (used exclu8ively by the Primary Committe.), the amount

paid ($9,893.13) .ay be offset against any amounts determined 'to

be owed by the GEe to the Primary Committee (see Attachment 5, line 10).

As noted on Attachment 5, we have calculated that the

GBC'. ahare of the direct production costs paid by the'ri.ary Committee is $219,885.44. Based on our analysis of the fee

payment to the media firm discussed at B.l., it appears that the

Audit ataff .hould add a markup of 8.336' (V8 17.65') to the

GBC's share ($219,885.44) of the direct production costs.

aecause the Primary Committee i8 to be reimbursed for the.e

production costs by the GEC, the Primary Committee must aleo be

reimbursed for the related portion ($18,329.65 ($219,885.44 x

8.3361») of the production COlts inclu~.d 1n the fee paid to TTl.

To Bummarize, the au~it analysis at Attachment 5, shoWI

that given the 8.336' markup is reflective of the value of the

production expenses contained in the fee paid to TTl, the

allocable amo~nt Is further increased resulting in a

reimbursement due the Primary Committee (over and above the

$-142,434 already reimbursed by the GBC) of $85,887.96.

Conclusion

On June 26, 1986, the Commission determined that the

audit analysis at Attachment 5 should be adjusted to reflect

Commission approval of the Committee's SO/SO formula for

allocating production costs between the two campaigns. The

Commission further determined that within 30 days of receipt of

this report, the Primary Committee is to seek from the GEC the

amount ($55,429.55) of allocable production costs still owing.

Initial Repayment Determination on NOCO Surplus

On July 7, 1986, the Commi8sion made an initial

determinafion that the pro rata portion ($589,135.40) of the

Committee's surplus as calculated by the Audit staff, i.

repayable to the U.S. Treasury pursuant to 26 U.S.C. , '038(b) (3). After applying the $344,893.24 repaid by the

Committee on September 21, 1984, the amount to be repaid totals

$244,242.16 which i8 to be repaid to the U.S. Treasury within 90

calendar days of receipt of this report in accordance with 11

C.P.R. S 9038.2(d).
. .'

.. . \

' ..

•

•

18

If the candidate doe. not di.pute thi. aetermination

within 30 calendar day. of receipt of tbi. report under 11 C.P.R.

I '038.2(0)(1), tbe initial aeter.ination will be con.ia.red

final.

..payment Amount. '244,242.11
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torAL '.122.21
•

',' ~'.

•

ft. Pre.lelen". Auc"orl.~cICamp.'lft.Commlll•• Attac:!lDe.nt 3 Fma1Aud1t~

MEMOAANDUM ~Cl-Bush '84 ' •• 10f3

•• .At aUCHARAR

hOM, SCO'n' MACKENZIE ·~1~.l aUIJE.C1'. ALLOCA,.IOH OF CA:·SPAIGlf COSTS

•• ..

"")

• 0'

•

C)

'"

trer

•

•

Att.cb.~ i •• eOP1 of tbe 7u••••1 ••••• ·Al1oe.~1.· P~odYct~ COlt. expena.4 in the .rl••zy Campi lin. Ori,in.l1~, it wa ••ntie~

pated t~.t the General Election Cossitt•• would UI. all of the co~.rci.l••xcept -%he ••ar-. 7herefor., tbe following .11oe.tf~

w.a c=puto&l.

70tal al1o~.~1. 'roductlon CD8ta , "2,533

I·•••• -fh. ..ar- c53,7S4. -- ProauctSon Coat to '- .pllt , 608,'" Allocation ••zcenta.e 50' .

Allocation to ~he a~ , 3D4,389

Bow.v.~. prSD~ to the .tart of tbe General El.ctlc~ C.~pIS,n

teel.Soft v.. •••• to .tl11a. on11 th. following commercial. in tht

General Eleetloal .

(1) -n.•.•••~.

· (2) n. Itatae of LS~.zt,

II) 8priDI 01 •••• 10

,(4) • 1tzoua.~••tron•• •••tt.~. 60 •••

•

~OFirll Sarttl N.W..\\\shi"II..D.C.20:01 (202)383·1. " .."... 't.•" ......... ...,......It.a.......AItIf'. M, .4IC~.ft."J.c, .....Trtl."
J. . £

.. , .

"

t:n=1ft&£

'''. 2 of 3

~.r.'o~., oar .11...'1... .h••lt ~.y. ~e.ft .e~u.\.a ••

follow•• ..

• ~.t.l Al1oc.~1. ~zoayetloft. C••,. , 662,53: ....11 -.~t..~, Onll- Co...~ct.l•

Iprlnt ., • 4 • ao , ~'.206 a.erl.. S••••,. ID 14',154 A.erl.a t. aa.k. 10 ... .~ou.e~, .t~Oftl.~, ••t,.~, ",S" JD 14,5'7 .

•

.oft-Alloc.~le eGaDerel.l. C3", '6~

••

.- 284,8" • ~oluctSoft Co.t. t. '- .pl!t Allocation '.r.en'.,. se

Allocation to ~. GEC , 1.2.43~

~o dat., '~e followln, ... oecur~e•••tv••n the 'ziaary and Goneral Election Cosaltt••••

-------

'--1._42....,...4_3_4_

GENERAL

-0-

104,1"

cl'2,~

, 141,S12

152

'JtJ~1tY

"12,111 ., CJ04,JI'•..

112,10'_ ..

, 120,ISl ciSI•

, 520,0"

-----

Al1oea~1. 'roluetlon Co.t.

CODsitt•• Allocation t/07

Allocation Adju.t••nt.lll1

Curreftt a.lance 2/22 ••,uir.~ Adjult••n'.

Arv~oprl.t. allocatS...

•

,

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It
Attachm.nt 4

Pinal Aualt -.port ••agan-Bulh '84

.ag8 1 of 2

• • ".gan-Buah •14 Icbeaule of .roductlon eo8t8 il ~.rci.l Bntitl.a -Statu. of Ll erty·

Check "D' ...lumber lat. Mount ,urpo••

IfIn' .roc!uctlon. .87 5/3/'. '17,'35.00 50' of 'raduction Contract

'1'JI'I ProcSuctiona 1128 5/14/84 1','35.00 50' of Production Contract

Broaaca.t ~rafflc 1134 5/2C/•• 321.75 P.rfor..r'. 1.I.lonl

Broade••t ~r.fflc

• a••laual. 1141 ./1/1. 1,111.17 ..rform.ra I •••lonl r•••

.rlftcsko • rCMSuctloft. 1144 ./1/1• 1,"'.13 Bditlng

·0

cr

Manbattan ~r.ft.f.EI

Bait U41 '/1/14 "2.'1 CODver.lon of '11m to tap'

0' ••• v•• Soand 1148 1/1/1• t18.3' Aual0 'roductlon

• P1n1., .botograpblc.,

IDC. 114. ./1/14 C4." Lin. Matter • G101.y Stat.

--- '1'JI'I 'roductloft. U54 ./1/84 1,500.00 'rocSuctlon '-

"'- Broadca.t ~r.fflc

rI a••ldaal. UI. ././8. ',328.21 'erfor.er'. S•••lons

t::':" Peaeral .apr••• l11t ./U/,. '.07 Deliv.rie.

'r I'lnl.y 'botographlca, 1185 '/11/84 15.0' Glo•• Stat., Beproduction IDe.

Plec. of Cate 11•• ./11/'. 12,'7'.25 Music 'roduction

.eU .oaal 111' ./U/I. 1,350.31 Editing I Dubbing

Auc110 VI". ·. a••ODE•• .. 11•• 1/12/•• 1'3.13 ••-a.aoreSlag

Ogll., ana ••theE 11.5 ./12/•• 4'.33 Ihlpplag

8111 ••r~.

• 'botograpb, 11•• ./12/1. 217.73 'hotograph,

I

L--_
z i '~. <

,- .

•

Attach••nt • Pinal Aualt a.port •••,an-.uah '84 ••g. 2 of 2

lyrpo••

~ltl•••t I .tatl

.panllh ~ran.latlon

Vitl.ol

."ltorl.l

'roduction

lIu.ie

10.00

13."

501.'1

13&.12

..w...u

1/2&/84

./2'/84

7/2/84

7/2/84

'/30/84

1208

1210

1211

a••gan-Bu." '1.

8cb.aul. of traduction COlt. 1/

ca.a.rcial Bntltl.4 -'tatu. of Llierty·

Cb.ct

,umber Ill! Mpyn\

11.8 ./12/1., 2.45

Differ.ftc.

'1.l.tronle.

.rodactlon

,m'

Allpen Grapbic. .boto

.aEI Lou Cb.~.n 1202

~.l.tronlc. 1206

n-- Cor.lll ~.cob.

... "cor4Ing.

e WDL

••E committ•• (Att.3, p.3)

A copy of an Audit workpaper containing thi. information ... pre••nt.a to the Committe,'. Deputy ~r•••gr.r on October 18,

1.85.

. .

•

e
,)A

,>

. •I: Attachment 5 II t

III, '

Pinal Audit ••port .eagan-Juab '84

,. ••98 1 of 1

Reagan-Buah '84

Calculation of Allocable Production Coat.

AucSlt Audit Analysis Committee An.ly_1.! .a adiu.ted ... 1. lfotal Allocable

Production Costs $662,533.00 $696,'2&.36 8696,726.36

2. Less: Primary Only Commercials:

Spring of 84:30 (49,206.00) (49,20&.00) (49,206.00) Spring of 84:60 (73,810.00) (13,810.00) America'. Back:30 (146,354.00) (146,354.00) (146,354.00)

America's Back:50 (97,569.00) (97,56'.00) (",569.00) Prouder Stronger Better:30 (84,537.00)

2)

3. Less: General Only

cr Commercials The Bear ( 53,754.00) ( 53,754,00) ( 53,754.00)

a- 4. Ret Production Coats

to be 8plit 231,113.00 276,033,31 276,033.36

•• Allocation to GEC

of ahared Commercials $115,557.00 $166,131.44 $138,016.68

6. Aad: General Only Commercial The Bear 26,877.00 53,'54,00 53,754.00

'" 7. Ret Amount Allocable 142,434.00 219,885.44 191,770.68

r8. Add: Media agency markup (.08336.) 1/ -0- 18,329,65 15,986.00

ty ,. Gross Amount Allocable 142,434-.00 238,215.09 207,756.68

10. LeBS: GEC payments for

Primary Only Commercials:

America's Back.50 -0- (7,012.10) (7,012,10) America'. Back:30 -0- (2,881.03) (2,881.03) . 3.1. Amount Reimbur••a (142,434,00) (142,434.00) (142,434.00)

12. Amount yet ~o be

Reimbursed by GBC $ -0- $ 85,887.96 , 55,429,55

A.sumes 8.336' aarkup is reasonable.
•

•

MEMORANDUM

TO:

THROUGH:

FROM:

SUBJECT:

'ED,..~It~~e~.~:; ~Q'~ as APR ". ~1f 10: sa

FEDERAL ELECTION COMMISSION

WASHINCTON, 0 C 204&3

. April 12, 1988

JOHN C. SUR A

STAFF DIRE,-.-...J~'

ROBERT J. COS A

ASSISTANT ST F DIRECTOR

AUDIT DIVIS! N

REAGAN-BOSH • 84 PRIMARY

CAMPAI GN REP YMENT

•

Attached please find a copy of the receipt from Treasury concerning a repayment in the amount of $58,193.25 received from

the Reagan-Bush '84 Primary Campaign. This repayment represents

the balance due relative to the final repayment determination.

Attachment as stated

"

...'

.

Approved .e submitted

April 29, 1986 •

AGENDA DOCUMENT 'X86-0 33'

MINUTES OF AN EXECt~.:i:. oW SESSION

OF THE

FEDERAL ELECTION COMMISSION

TUESDAY, MARCH 18, 1986

",

PRESF..HT: Joan D. Aikens, Chairman, Presiding

John Warren McGarry, Vice Chairman

Lee Ann Elliott, Commissioner

Thomas E. Barris, Commissioner

Thomas J. Josefiak, Commissioner

Danny L. McDonald, Commissioner

Special Deputy Scott E. Morgan,

representing the Secretary of

the Senate, Jo-Anne L. Coe,

Commissioner Ex Officio

Special Deputy Douglas Patton,

representing the Clerk of the

House, Benjamin J. Guthrie,

Commissioner Ex Officio

John C. Surina, Staff Director

Charles N. Steele, General Counsel

Marjorie W. Emmons, Secretary of

the Commission
....

,

Federal .l~ion Coaai••ion

Maua. of an ax.cutive Sesslon

Tuesday, March 18, 1986

r'

Pag8 2

"'"

..'

c

Chairman Joan D. Aiken. called the Federal

Election Ca-ai••ion to order in .xecutive ••••1on at

10:00 a.m. on Tuesday, March 18, 1!486. A quorwa vas

present.
• •

.-

Pederal .l.~ion Commission MiDa~ of an axecutive S•••ion

Tuesday, March 18, 1986

VII. AUDIT MATTERS (continued)

Page 20

c

B. Reagan-Bush' 84 (Primary) (con~inued)

Cha..wan Aikens noted that there were

two issues before the COBBission at this ti.llle, C

and the other having to do w1th the Reagan-Bush

Committee·s allocation of med1a production costs

relative to commerc1als used both 1n the pr~ry and

general ~lection campa1qns.

ate M;L fluMP-dII C.I:!? g~. Y(9)
•

•

Pederal Blection Commission

Minutes of an Bxecutive session

'!""esday, March 18, 1986

VII. AUDIT MA'l'TBRS (continued)

Paqe 21

o

-.

~4~'

(

B. Reagan-Bush' 84 (primarY) (continued)
•

Pad.ral Blection Commission

Minutes of an Executive Session

Tuesday, March 18, 1986

Page 22

VII. AUDIT MATTERS (continued)

-",'

.... -.

B. Reagan-Bush' 84 (PrUaary) (continued)

Chairman Aikens stated that the next

issue before the Comm~ss10n was the matter of the

allocation of medla costs, and recognized General

Counsel Charles N. Steele to com.ent. Mr. Steele

noted that the Comm~ssion had three options, as

follows: 1) Obtain the information the staff needed

to determine 1.£ the Committee's allocation vas

appropriate; 2) Determ1ne the allocation on the

baS1S of the facts now known; or 3) Move to I1tiqation

to enforce the Cand1date Agreements under the provisions

of T1.tle 26.

Chairman Aikens recoqnized Comm1ssioner

Josefiak, who stated he d1d not think the Comm1ssion

should make a percentage determ1.nat1.on on the allocation

at this tLme, as that should be done 1.n an open meet1.ng.

Mr. Steele agreed, but noted aga1n the alternat1ve to

move to I1t1gat10n.
Pederal B1ection Comaission

Minute. of an Executive Session

Tuesday, March 18, 1986

Page 23

l,

VII. AUDIT MATTERS (cont1nued)

B. Reagan-Bush '84 (Primary) (continued)

c

c.

Commiss1oner Josefiak stated that he.

was against going to l~tigation before asking the

Committee in writing for the needed information,

noting that 1£ eventually litigation was determined to

be necessary, that th1s would strengthen the

commiss10n's case.

The Commission discussed the alternatives

detailed by the staff, dur1ng wh1ch Comm1ssioner Josefiak

reiterated his position that the Committee should be

sent a letter asking them for the spec1f1c information we

need, g1v1nq them a defin1te t~e 1n which to respond,

and including 1n the letter the Comm1ssion's options

should th~ Com.1ttee fa11 to prov1de the 1nformation.

Chairman A~ens recognized Commissioner

Elliott, who 1nqulred when the F1nal Aud1t Report would

be before the Comm1SS1on. Mr. Robert Costa of the

Aud1t 01V1S10n responded that 1t would probably be before

the Comm1SS1on 1n about two weeks.
·:, -_.-. ·';·-··-·-'~""..:""~~~~~~·~·:-,Pt"-b'~~Y.:'e.~:-~,-::'-_"-~-'-'v-~.-~~-t--- _ _

,

..

•

aq

Federal .lection Commission

Minute. of an Executive Session ~~sday, March 18, 1986

Page 24

VII. AUDIT MATTERS (continued)

B. Reagan-Bush '84 (Primary) (continued)

c·

During the ensuing discussion, Mr. Stephen

Sanford, Mr. Howard Halter, and Mr. Robert Costa of

the Audit D1v1sion responded to questions.

Mr. Costa stated he thouCJht there

should be a 100% allocation of the expenses of the

shared advertisements to the General Election Campaign

and that an init1al repayment determ1nation could be

made on that basis in the final audit report, it being

his view that such an action m~~ht ~nduce the Committee

to come forward with the information wanted by the

FEC. He noted that the final audit report could be

processed for public release ~n a shorter time span

by taking this course.
•

Pederal Election Canaission

Minutes of an Executive Session

Tuesday, March lS, 1986

Page 2 5

VII. AUDIT MATTERS (continued)

B. Rea9an-Bu~h 'S4 (Pri!arX) (continued)

c

!~

Chairman Aikens recognized Mr. Rick

Halter of the Audit Division who responded to

Commissioner Harris' questions pertaining to the

meaning of the word, usage, in the draft letter to

the Committee, labeled Exhibit I in the staff report.

It was agreed that the term shouln be clarified if a

letter is sent to the Committee.

Chairman Aikens recognized Commissioner

Josefiak, who

MOVED to direct the staff of the

Audit Division to prepare a letter,

in consultation with the Office of

General Counsel, asking the Reagan- B~sh '84 (Primary) Committee for

specific as well as general information on the Spot Television

Scheduling Instructions, in order

for the Commission to verify the

reasonableness of the Primary

Committee's SO/50 allocation of

production costs for shared

commercials.
,.

Pederal Election Commission

Minutes of an Executive Session

Tuesday, March 18, 1986

VII. AUDIT MATTERS (continued)

Page 27

B. Reagan-Bush '84 (Primary) (continued)

...,...

. -

c

c

The original motion carried on a vote

of 5-1 with Commissioners Aikens, Elliott, Barris,

Josefiak, and McGarry voting affirmatively and

Commissioner McDonald dissenting.

Chairman Aikens recognized Mr. Rick

Halter who stated that the draft letter would be

circulated for Commission approval. He then outlined

the timetable for finalizing this audit.
••

Federal Ilection Commission

Minutes of an Executive Session

Tuesday, March 18, 1986

Paqe 28

VIII. MAT'l'ERS NO LONGER ENTITLED TO EXEMPTION

c

Chairman Aikens recognized General counsel

Charles Steele, who stated that none of the matters

before the Commfss10n on th1s date had lost their

exempt~on under the Sunshine requlat10ns at this time,

but that the staff would reV1ew the cons1deration

of the Reagan-Bush '84 (PrLmary) matter and might

have a recommendat~on en whether port~ons of ~t

might no lonqer be exempt.

The meet~ng adjourned at 3:20 p.m.

S1gned:

~~.~ r

~oan D. AJ.kens

ChaJ.rman of the Commiss10n

Attest:

(0

ln~~L- '0. ~./?'}l4-1U!- Marj r e W. EmmOns

Secre ary of the Comm1SSJ.on
1i
UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

COMMON CAUSE, )

)

Plaintiff, )

)

v. )

)

FEDERAL ELECTION COMMISSION, )

)

De fendan t. )

Civil Action No. 86-3465(JHP)

NOTICE OF CASE ACTIVITY

o

f'.,.

o

DEPENDANT PEOERAL ELBCTIOR COMMISSION'S

NOTICB OP CASE ACTIVITY

On June 15, 1988, the Court remanded plaintiff Common

Cc'lse's administrative complaint to the defendant Federal

Election Commission (the ·Commission· or "FEC") for further

proceedings consistent with the Court's memorandum opinion.

This is to notify the Court and counsel for plaintiff that,

on June 28, 1988, the Commission determined to reopen

consideration of the matter under review initiated by plaintiff's

complaint for the purpose of issuing new statements of reasons in

accordance with the Court's order. Copies of the statements of

reasons subsequently prepared by three of the four Commissioners

who previously voted to dismiss that complaint are attached.~/

~espectfully submitted,

~~~ General Counsel

(D.C. Bar 1244434)

~/ Frank Reiche, the Commissioner who cast the fourth vote to

dismiss the administrative complaint, is no longer a member of

the Commission.
,

l'iJ( . _....", ",~ . .. ..

r:!..... '. "'-~k~' RIc ara B• ....r··'

A.aoclat. Geft.ral eoan••l

-

•

c:e"eral Coun.el

Robert w. Bo"ba., III

Attorney

(D.C. Bar '397859)

POR THE DEPENDANT

FEDERAL ELecTION COMMISSION

999E Street, N.W• •••bington, D.C. 20.'3

(202) 376-5690

o"o

July 15, 1988

.-" '1--, ,- :. :-'

... .~
tr.~~:';I~?t~~~.~.~!~{-~~~tf-tl1!~~:r:~~~~~t:;~~tt:~::f~!f?,j~~P ~i¥1!·:~l\·'~~~~~~f';'i1:1~!.~ifk~~.

;;!!~t7

I n the Matter or

Reagan-Bush '84;

Angela M. Buchanan Jackson,

as Treasurer

)

)

)

)

)

)

)

MUR 1190

STATfMENT OF REASONS

Commissioner Joan D. Aikens

Commissioner John Warren McGarry

I") I . INTRODUCTION

CO

In MUR 1790, the Commission considered allegations that

'0 Reagan-Bush '84, and Angela M. Buchanan Jackson, as treasurer,

violated 2 U.S.C. §434 and 11 C.F.R. §§9003.1 and 9004.7 by

o

........

o

failing to pay for expenses and reporting payments relating to a

trip made by President Reagan to Chicago on August 24, 1988 to

address the National Convention of the Veterans of Foreign Wars.

The complaint alleged that the trip was campaign-related and not

official government business and that the expenses of the trip

should have been charged to Reagan-Bush '84. President Reagan's

authorized campaign committee, rather than to the United States

Gove r nme nt .

1
o

f'.

o

We disagreed with the complainant that the trip was

campaign-related within the meaning of the Act and regulations.

We voted to reject the General Counsel's recommendations and

voted instead to find no reason to believe that the alleged

violations occurred and to close the file. We reached our

conclusion upon application of a "totality of the circumstances"

test which. as demonstrated by the discussion below. was fUlly

consistent with relevant prior Commission decisions. We remain

convinced that use of that legal standard was appropriate and

that our conclusion based upon it was wholly justified by the

facts of this case.

II. APPLICABLE STATUTES AND REGULATIONS

The Federal Election Campaign Act requires political

committees, including political committees authorized by

Presidential candidates, to report "expenditures made to meet

candidate or committee operating expenses." 2 U.S.C.

§434(b)(4)(A). The Presidential Election Campaign Fund Act

incorporates that reporting requirement as it applies to publicly

funded Presidential candidates and their committees through its

implementing regulations. Those regulations provide that major

party Presidential candidates must agree to comply with the

2
requirement, among many others. to report "qualified campaign

expenses" pursuant to t he provisions of t he Federal Elect ion

Campaign Act in order to be eligible to receive payments from

t he Fund. 11 C.F.R. §9003.1. The term "qualified campaign

expense" includes any expense incurred by a Presidential

candidate or the candidate's authorized committee to further his

or her elect ion. 26 U.S.C. §9002(l1). The Commission's

o

'"

o

regulations state that travel costs relating to a Presidential

11

candidate's campaign are qualified campaign expenses.-

11 11 C.F.R. §9004.7(a) provides:

Notwithstanding the provisions of 11 C.F.R. Part 106,

expenditures for travel relating to a Presidential or

Vice Presidential candidate's campaign by any

individual, inclUding a candidate, shall, pursuant to

the provisions of 11 C.F.R. §9004.7(b), be qualified

campaign expenses and be reported by the candidate's

authorized committee(s) as expenditures.

3
o

'"

o

III. STATEMENT OF FACTS

The Veterans of Foreign Wars is a non-profit non-partisan

membership organization committed to addressing the concerns of

almost two million veterans of military service to the United

States. Its constitution and by-laws expressly preclude

endorsements of political candidates.

In early 1984, the V.F.W. made plans to hold a National

Convent ion. which has been an annual event for t he last 84 years.

On March 1, 1984. six months before the convention was to be

held. Cl ifford G. Olson. Jr.• the Nat ional Commander of the

V.F.W. extended an invitation to President Reagan to address the

membership gathered in Chir1go, Illinois at the 1984 National

Convention. This invitation has been traditionally extended by

the V.F.W. to the sitting President of the United States.

President Reagan had been the recipient of similar speaking

invitations. the last as recently as 1983. The V.F.W. invitation

specified that President Reagan should express his views on

national security and foreign policy matters. topics of great

concern to veterans. MUR 1790, Respondent's Reply to the

Complaint at Exhibit B.

4
President Reagan agreed to and did appear to address

a p pro x i mat ely 7. 00 0 me mbe r s 0 f the V. F. W. 0 n Aug us t 2 4 , 1984 •

almost six months after the invitation was extended. In his

remarks, President Reagan clearly focussed on matters of concern

to V. F. W. me mbe r s mil ita r y rea dine s sand mil ita r y s t r en gt h

during a period in history marked by political unrest and

uncertainty in Iran and in Grenada and the military response to

those situations by the United States. He emphasized the need

co for, and his Administration's commitment to, maintaining the

""1" readiness and strength of our military forces to demonstrate that

'0 the United States is a leader in peace, not an instigator of

o

........

o

war. In his address to the V.F.W., the President defended the

position taken by his Administration in the area of foreign

policy and national security matters.

At no time before, during or after President Reagan's speech

did he or any of his staff mention his candidacy or any other

candidacy, his election or any election activity. At no time did

President Reagan or any member of his staff advocate the election

or defeat of any candidate for Federal office nor did President

Re.:..san or his staff solicit anyone present at this event for

contributions in support of any candidate for Federal office.

5
~.~~~

. "...

5>~{~.f~~~~V~7.~4~~,\~'0;. ·"'./ijJ};;~"iJfl';V,~,,,,,,,~,,";:-.;cr.;?:)'.~'f\i"'~i:'~~·-' '"3;,'''; ;.:tuiJ~1'i'tll~~/~:£'''··' 'i~

,

i

President Reagan concluded his address by complimenting and

honoring the membership and leadership of the V.F.W. for their

continuing commitment to the interests and concerns of veterans

to this country.

IV. I SSUE PRESENTED

The sole question presented by the complaint was whether

President Reagan's trip to Chicago to address the National

Convention of the Veterans of Foreign Wars was campaign-related

and. thus. should have been paid for with campaign funds and

reported by Reagan-Bush '84. or was. instead. undert aken in

o performance of President Reagan's official duties as an incumbent

f',. President and. thus payable with appropriated funds of the

c) United States Government.

V. APPLI CABLE LmAL STANDARD

During the course of its thirteen year history. the

Commission has frequently been called upon to determine whether

specific activity of a Federal officeholder is related to

performance of official duties or is campaign-related. In

making these difficult determinations. the Commission has

6
consistently applied a legal standard that has been described as

a "totality of circumstances" test, involving examination of

severa I fact ors.

The first factor to be examined is whether the factual

situation involves activity "expressly advocating" any candidacy

2/

for Federal office.- The second factor to be examined is

whether the factual situation involves any communication that

communications constituting express advocacy or solicitations

can be sa i d to sol i cit

federal office.

contributions for a candidate for

After an examination for the presence of

for contributions, the Commission has considered the timing,

setting and purpose of an event in conjunction with other

o activity that may be occurring. All of these factors are

reviewed by the Commission as relevant and important factors

o within the "totality of circumstances" standard.

2/ 11 C.F.R. l09.1(b)(2) provides that "expressly advocating"

means "any communication containing a message advocating

election or defeat, inclUding but not limited to th, name of

the candidate, or expressions such as 'vote for', 'elect',

'support', 'cast your ballot for', and 'Smith for Congress',

or 'vote against', 'defeat' or 'reject'."

7
VI • FACTUAL AND LIDAL ANALYSI S

We believe that a full and fair review of the facts and

circumstances presented by this case leads to the conclusion that

President Reagan's appearance at the 85th Annual Convention of

the Veterans of Foreign Wars was part of his official duties as

President and was not "related" to his campaign for re-election

properly recognizes the President's role as a ceremonial and

symbolic leader. It thus rejects the apparent notion that all

wit hi n the meani ng of t he Act and regulat ions. This conclusion

'0 actions taken after a nominating convention by a President

whether it be as Head of State. Commander-in-Chief. Minister of

o

'"

o

Foreign Affairs. Chief Law Enforcer or one of the many other

roles filled by the President -- should be automa~ically viewed

as campaign-related and paid for by his campaign committee.

Indeed. the facts indicate that the President's appearance

be for e the V. F. W. Conve n t ion a national organization with a

keen interest in military and foreign policy affairs -- was

consistent with the duties and responsibilities of an incumbent

Presi dent. The Preside nt was s imp1y pe r forming the i mpo r tant

runc t ion 0 fany Pre side nt whie his topr 0 v ide me mbe r s 0 f the

8
',~1lJ~1~'t~4r:"'%\'<~'''':~;t~'f~~~i;~:r:Wf~~~~~~I~~~~{?2:t~:r~t11t~1~~~@?~?{~~~(:i;r~~1};1~~{~~ltFi;';W.~~~'~S~~~%?t'~~~\)'~k~~t~:~iit~~;~~?:;:~~;{~!f~~~~~~~~:~~i~

<

public with information on significant matters. In so doing, he

was addressing the concerns and fears of a large segment of the

population which had served in the United States military forces

in wartime and in peacetime. This is particularly important with

respect to foreign affairs where the President has long been

viewed as "the sole organ of the nation in its external

relations, and its sole representative with foreign nations."

10 Annals of Congo 596, 613-614 (1800) (Remarks of thenRepresentative John Marshall).

In applying the "totality of circumstances" test to this

case, we first examined the evidence presented to determine

whether any part of the event contained any clear express

o advocacy of President Reagan's re-elect ion or of his opponent's

defeat, and fO..lnd that t he President's remarks contai ned no such

o expres s advocacy. Nowhere in the t ext of Pres i dent Reagan's

remarks was there any "communication containing a message

advocating election or defeat" of any candidate for any office.

11 C.F.R. §109.l(b)(2).

The General Counsel acknowledged that the event involved no

express advocacy, but stated "whi Ie t he President· did not

expressly advocate his re-election, certain sections of his

9
speech may have been designed 1£ create! campaign atmosphere in

light of the fact that he had just arrived from the Republican

National Convention." (emphasis added). MUR 1790, First General

Counsel's Report at 2. To support the statement relating to the

creation of a "campaign atmosphere," the General Counsel

is a

co

-qco

o

'"

o

excerpted the folloWing segments of the address:

The honor of meeting th the VFW

great way to wind up a terrific week.

Four years ago, right here in Chicago, I stood

before your convention, and when you think

back to 1980, it's hard to forget the mess

America was in, hard to forget the foolish

talk of a malaise, the unfairness of runaway

price increases, 21 1/2-percent interest

rates, weakened defenses, Americans held

hostage, and the loss of respect for our

nation abroad. It seemed that we yoke up

every morni ng wonderi ng what new humi I iat ion

our country had suffered overseas, what

disappointing economic news lay waiting for us

on the front page.

... Well, I think we've come a long way

together. In fact, I believe we've closed the

books on that dismal chapter of failed

policies and self-doubt.

As I said last night in Dallas

Our military forces are back on their feet,

substantially stronger lind better able to

protect the peace today than they were 4 years

ago.

Now, some may insist they're just as committed

to a strong deterrent even as they would

caneel the B-1 bo mbe rand the Pea c eke e per

10
~·~~~;;r-i''il~'·''t..,V.u~.

~~)~~i;;·~(.;·!,";"::-' ~~.- -

;f

missile. They may deny that a nuclear freeze

would preserve today's high. unequal. and

unstable levels of nuclear weapons, and they

may deny a freeze would reduce any incent ive

for the So vie t s tor e t urn tot hene go t i at i ng

table and resume the search for equitable and

fair reductions.

MUR 1790, First General Counsel's Report at 2-3.

The General Counsel conceded that t here was a total

absence of express advocacy in these remarks. Every sentence

excerpted by the General Counsel relates to the stated policies

and concerns of President Reagan's Administration with respect to

maintaining a strong military position, not to his re-election

campa i gn. We rejected the General Counsel's reasoning that

references to past publ ic concern over t he weakening economy.

o inflation, rising interest rates and reduced military budgets

r-.... converted this appearance into a campaign event. We rejected

o the General Counsel's characterization of those remarks as an

attempt to create a "campaign atmosphere." The remarks by this

incumbent President should properly be viewed as an accounting

for Administration policies and actions in the critical area of

military readiness.

Next, we exami ned the fact s present ed for any ev. ;ence of

sol i cit at ion 0 f cont ributi 0 nson be hal f 0 f Pre side nt Rea ga n I s

11
campaign by the President, his staff or anyone associated with

the Veterans of Foreign Wars and found no such solicitations.

o

If)

CO

"'3'"

'0

o

'"

o

Some Commissioners have suggested that upon finding no

express advocacy nor any solicitation for contributions, the

inquiry should then cease with the conclusion that the event was

not campaign-related. While we would agree that these are

important and potentially determinative factors if present, we

believed we must look further to the timing, the setting and the

purpose of the event as integral components of the "totality of

circumstances" test and as necessary to the ultimate

determination that certain activity is or is not campaignrelated.

With respect to timing, it is true that President Reagan

made his appearance at this particular V.F.W. Convention one day

after he was formally renominated by the Republican Party at its

nominating convention in Dallas. However, it is also true that

the National Convention of the V.F.W. is an annual fall event,

and that the invitation to President Reagan was extended six

months before the Republican National Convention. There is

absolutely no evidence to suggest that the V.F.W. calcuhted its

national convention to coincide with the timing of President

12
Reagan's possible renomination. To argue that the timing of this

appearance makes it a campaign event would mean that no incumbent

President could make an official appearance to perform

officeholder duties after the date of renomination. This

approach would cripple a sitting President who must continuously

explain and champion his Administration's policies to the public.

Indeed, it is well-recognized that "the White House is first and

foremost a place of pUblic leadership." J. Barber, The

Presidential Character 5 (1974.) We rejected the argument that

co the timing of President Reagan's appearance in close proximity to

his renomination at the Republican National Convention converted

the appearance into a campaign event.

o We then examined the setting of President Reagan's

appearance in Chicago. His speech was part of a series of events

o planned for the annual national convention of this' non-partisan,

non-profit organization. This appearance before an important

segment of the general pUblic was no different in terms of

setting and audience from hundreds of other appearances

President Reagan has made during his tenure as President. In

fact, President Reagan had spoken to the same group in the same

tone on the same topics on prior occasions. Members of Congress

continually must meet with constituent groups with specific

13
concerns in their Congressional districts; similarly, the

President must meet frequently with and address the concorns of

3/

larger constituent groups.- Upon reviewing the setting of this

event. we concluded it was an appearance in furtherance of a

President's official duties and not "campaign-related."

Finally, we considered the purp of the appearance in the

context of the V.F.W. National Convention. The evidence

N

1..0

presented indicated that the V.F.W. has a past history of

inviting incumbent Presidents to address its membership on issues

co of great concern to veterans of military service. Invitations

extended and accepted by those Presidents enhance the stature and

o

dignity of this membership organization and encourage its

membership to continue to fund and support its goals. Again,

3/ This Commission has acknowledged in many advisory opinions

dealing with similar factual situations, that officeholders

make frequent appearances in performance of official

officeholder duties before the very people who will vote on

the officeholder's re-election without the event being

campaign-related. See AO 1980-22. I Fed. flee. Camp. Fin.

ou i de (CCH) '154 7 9 (A p r i I I 5, 19 80); A0 I 98 I - 3 7. I Fed. fie c .

Camp. Fin. Guide (CCHH15623 (Oct. 13. 1981); AO 1982-56, I

Fed. flee. Camp. Fin. Guide (CCH)'f5694 (Oct. 29, 1982).

14
o

""'"

o

there was no evidence to suggest that the V.F.W.'s invitation was

calculated to be a campaign opportunity for President Reagan. At

no time before, during or after the event did President Reagan or

his staff meet with V.F.W. representatives. The evidence is

overwhelming that the purpose of President Reagan's address was

to inform and defend his Administration's actions and policies

before an audience that was particularly attuned to and concerned

about foreign policy and national security matters.

After considering all of these element.-: within the totality

of circumstances test inclUding the presence or absence of

express advocacy, the presence or absence of solicitation of

cont ri but ions, the t imi ng. set t i ng and purpose of t he event -- we

concluded that reasonable persons would conclude that the

appearance was made in performance of President Reagan's official

duties. We, therefore, voted to reject the General Counsel's

recommendations to find reason to believe that respondents had

violated 2 U.S.C. §434{b)(4) and 11 C.F.R. §§9003.1 and 9004.7

and to close the file.

15
~l~Jf:~~?}~i~>-

'l

VI I. DI SCUSSI ON OF COMMI SSI ON PRECEDENT

Our approach in analyzing this case is not new or novel.

Our con sidera t ion 0 f the tot a lit Y 0 f c i r c um s tanc e sis tot all y

consistent with the approach recommended by the General Counsel

in his Report in this matter and adopted by the Commission in

many advisory opinions. A brief review of those agency

precedents is instructive on the question of whether certain

activity is campaign-related.

In AO 1977-42, I Fed. Elec. Camp. Fin. Guide (CCH)~5312

( 1\o1a y 1 2, 1 9 8 8 ), the Com miss ion con sidere d the tot ali t y 0 f

circumstances and ruled that a corporation employing a radio talk

o show host, who became a candidate for lederal office, would not

'" make a contribution in violation of 2 U.S.C. §441b by continuing

o to pay him compensation during his period of candidacy. The

Commission reasoned that ~le major purpose of the salary payments

was other than to influence his nomination or election even

though his continued appearances during his candidacy on the air

mig h tind ire c t 1y be n e fit t hat candida c y. The Com miss ion not e d

that the relationship between the broadcast corporation and its

employee pre-dated the individual's candidacy. Thus. considering

the totality of circumstances. including the timing. setting and

16
,~'.

purpose of the activity, the Commission concluded that the

activity was not campaign-related. The Commission also

condit ioned it s holdi ng on t he absence of express advocacy

communications and solicitation of contributions in support of

. any candidate for federal office.

The issue of whether Federal officeholder activity during a

period of candidacy is campaign-related or in furtherance of

lJ') official duties was presented in AO 1977-54.1 Fed. Elec. Camp.

~ember of Congress, who was also a candidate, became Chairman of

a statewide petition drive to stop ratification of the Panama

Canal Treaty, necessitating many public appearances, and the use

of his name in mailings and newsletters and on media

Fin. Gu ide ( CCH HI 5 3 0 1 ( Mar c h 2 4 , 19 7 8) . I n t ha t mat t e r, a

advert isement s. In applying a "totality of circumstances" test

o

I'-.

o

in determining this Member's activity was not campaign-related.

the Commission did emphasize that the facts indicated the

communications at issue would neither contain express advocacy

messages nor solicit contributions. These two factors, however,

were not the sole basis for the Commission's ruling.

17
The Com mission a 1soc 0 n sidere d the s tat e d pur po s e 0 f the

Me mbe r 's act i v i t Y• whie h was t 0 de f eat the rat i fie a t ion 0 f a

significant treaty with a foreign country and not to influence

the nominatit. 1 or election of any candidate to Federal office.

In addition, the Commission als.o considered the setting of the

eve n tin the Mem be r 's hom est ate and was persua de d t hat the

requestor would work to minimize his efforts within his district

and would deliberately focus his attention on activity outside

the fact that the proposed activity by the Member of Congress

his congressional district. Finally, the Commission considered

o

'"

o

would occur at a time when t he Member was a candidate for reelection. In AO 1977-54, the Commission applied a "totality of

circumstances" tes' and did not rely solely on a two-prong test

consisting of an examination for the presence of express advocacy

and solicitations for contributions.

In AO 1978-4. Fed. Elec. Camp. Fin. Guide (CCH)'15293

(Feb. 24, 1978), the Commission considered the appearance of a

Federal officeholder at a dinner commemorating his long-standing

service in Congress. The Commission considered the timing of the

event in March of an election year. the setting of the dinner in •

the Congressman's home district, the non-partisan, non-profit

nature of the organizing committee and the stated purpose of the

18
~brJJ~fif;f~~T'';.~'~~' ' ,

event which was to celebrate the honoree's twenty-five years of

Congress ional servi ce and t ha t t he event woul d inc 1ude ne i t her

advocacy of any candidate nor any solicitations for

cont ri but ions. The Commission ruled that the purpose of the

event was not to influence the· honoree's re-election campaign,

even though the event was held during an election year. Although

the Commission clearly conditioned its holding on the absence of

express advocacy and solicitation for contributions, the other

factual considerations discussed show that the Commission applied

a "totality of circumstances" test.

The Commission again used the totality of circumstances

was campaign-related. The Commission took into consideration the

standard in AO 1978-15, 1 Fed. Elec. Camp. Fin. Guide (CCHH15304

Federal officeholder as the host of a charity fundraising event

o

'"

o

(March 30, 1978), to determine whether the appearance of a

fact that the officeholder's commitment to the charitable

organization pre-dated his candidacy, the fact that the major

purpose of the event was to raise funds for a legitimate

charitable cause, assurances by the requestor that there would be

no advocacy of any candidate nor any solicitation for ,campaign

contributions and the fact that the officeholder would have no

19
control over the content and distribution of literature

pUblicizing the event. Based on consideration of all of these

factors, the Commission concluded that the activity in question

was not campaign-related.

o

f'.,.

o

In AO 1980-16, 1 Fed. Elec"t. Camp. Fin. Guide (CCHHJ5474

(March 21, 1980), the Commission was presented with a situation

involving the appearance of candidates ior Federal office at a

celebrity golf tournament held to raise money for leukemia

research. In an opinion that has been cited for the proposition

that the Commission adopted a two-prong test, the Commission

considered not only the absence of express advocacy and

solicitations for contributions but also the setting of the

candidate appearances -- a well-known golf tournament; the stated

purpose of the event -- to raise funds for a legitimate

charitable cause; and the timing of the event -- at a time when

invited Federal officeholders were candidates for re-election.

Based on all of these facts, and applying a "totality of

circumstances" test. the Commission ruled that the appearances of

Members of Congress, as described. would not be campaign-related.

The Commission again adopted a "total ity of circumstancesll

approach in considering whether t he appearance of Federal

20
o

"

o

officeholders and candidates at a town meeting would be campaignrelated in AO 1980-22. I Fed. Elec. Camp. Fin. Guide (CCHH15479

(April 15, 1980). The Commission reviewed the setting of the

for um wher e the i ron and s t ... .: 1 i nd us try was f a c i ng c r i tica I

production problems. the fact th.at discussion during the forum

would be limited to these particular industry problems and

concerns, the fact that the purpose of the meetingwas other than

to influence the nomination or election of any candidate, which

fact was bolstered by the requestor's statement that neither the

introductory comments by the sponsor nor subsequent remarks by

the officeholders would relate to campaign activity but would be

strict ly limited to issues facing the steel industry. After

considering all of these factors. the Commission concluded that

the participation of the Federal officeholders. even though they

may have been candidates at the time. was not campaign-related.

The Commission recognized that Federal officeholders must make

appearances related to official duties and that these appearances

may occur during a period of candidacy without converting the

appearance into campaign activity. The Commission did caution

that there should be no express advocacy of any candidate nor any

solicitation of contributions for any candidate and con'ditioned

its approval on their absence. Although the absence of

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communications constituting "express advocacy" and solicitations

for contributions were considered critical elements by the

Commission in reaching a decision in this matter, it is apparent

that the Commission also considered the elements of timing,

setting and stated purpose of the candidate appearances which are

integral components of the "totality of circumstances" standard.

The Commission was called upon in AO 1981-37, 1 Fed. Elec.

Camp. Fin. Guide (CCH)~5623 (Oct. 13, 1981), to determine whether

appearances by an incumbent Member of Congress as moderator of a

series of public affairs forums involving prominent public

figures paid for by corporations would result in prohibited

corporate contributions to the Member's campaign for re-election.

o In concluding that the Congressman's appearances would not be

campaign-related, the Commission noted that the purpose and focus

o of the activity was not to influence the nomination or election

of any candidate for federal office, but, rather, to provide a

pub1 i c for urn for 1e g i timate dis c us s ion 0 f iss ue sand t ha t the

incumbent's participation .n the program was part of his official

duties as a Member of Congress. In addition, the Commission took

into consideration the requestor's statement that no political

advertising would be sold by the corporate sponsor during or

adjacent to the programs and further, that the sale of program

22
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tapes and transcripts would be limited. The Commission

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cautioned. however, that its conclusion was conditioned on the

absence of any communications in conjunction with the proposed

programs advocating the election or defeat of a clearly

identified candidate and the abs&nce of communications soliciting

contributlvns for any Federal candidate.

In AO 1982-15, 1 Fed. Elec. Camp. Fin. Guide (CCH)'15656

(April 19, 1982), the Commission concluded that a law firm could

continue to run advertisements promoting its services even though

one of its partners had become a candidate for Federal office.

In analyzing this factual situation to determine whether the

facts indicated that the activity was campaign-related. the

Commission considered the law firm had a past history of engaging o

f'....

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in similar advertising practices. It also noted t.hat the major

purpose of the activity was to promote the services of the law

0-. firm and not to influence the partner/candidate's nomination or

election to federal office. In addition. the frequency of the

ads in question did not increase as the election approached. and

there was no mention of the partner's candidacy in any of the

ads. The Commission recognized that an individual who hecomes a

candidate should be able to continue gainfUl employment without

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the activities of that employment being considered campaignrelated.

In AO 1982-56. 1 Fed. Elec. Camp. Fin. Guide (CCH)'15695

(Oct. 29. 1982), the Commission considered the appearance of a

Federal officeholder in an advert isement endorsing a candidate

for state office. In applying a "totality of the circumstances"

test. the Commission considered the stated purpose of the

advertisement. which was to influence a state candidacy rather

than the nomination of the Federal officeholder. the text of the

ad which mentioned only the non-federal candidacy. and made no

mention of the Federal officeholder's candidacy. the absence of

express advocacy. and the absence of solicitations for

o contributions for any candidate. Based upon application of the

'" "totality of circumstances" test. the Commission concluded that

o the Federal officeholder did not engage in campaign-related

activity. and payment of the expenses of these ads by the state

candidate did not result in an in-kind contribution to the

Federal officeholder's campaign.

Advisory Opinion 1984-13. 1 Fed. Elec. Camp. Fin. Guide

(CCH),S759 (May 17. 1984), issued to the National Assoc'iation of

Manufacturers provides perhaps the clearest illustration of the

24
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Commission's decision-making process. In that opinion, the

Commission ruled that appearances of candidates and party

representatives at an event sponsored and financed by one or more

corporations and held simultaneously with the Republican Party's

National Convention in Dallas in 1984 constituted campaignrelated activity which was impermissible under the Act. Once

again applying a totality of circumstances test to the facts

presented, the Commission concluded that even though the

corporate sponsors had agreed not to expressly advocate the

election or defeat of any candidate for Federal office or solicit

contributions for any candidate, the timing and the purpose of

the event clearly linked it to the upcoming congressional

elect ions and gave t he event part isan overtones. The clear

purpose of the event was to provide a showcase for Republican

candidates just before critical primary elections and the 1984

general election. In applying the "totality of circumstances"

test, the Commission found the activity impermissible even in the

absence of express advocacy and solicitation of contributions.

This examination of precedent demonstrates that the

Commission has consistently applied a "totality of circumstances"

test to distinguish between campaign-related activity and

activity in furtherance of oJ..icial Federal officeholder duties.

2S
took into account factors in addition to the presence of express

41

advocacy and the presence of solicitation for contributions.-

Our vote to find No Reason to Believe against Reagan-Bush

""'" '84 and its treasurer was based on a legally sound application

advisory opinions that appeared to rely on a "twoit is clear that in each instance. the Commission

CONCLUSION

pror- test,"

Even in those

VI I I •

of the "totality of circumstances" test to determine whether

o

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41 Some months after the Commission voted to close the file

with reference to MUR 1790. the Court of Appeals for the

District of Columbia Circuit issued its ruling in Orloski v.

Federal Election Commission, 795 F.2d 156 (D.C. Cir. 1986r:-

a case i nvo I vi ng corporat e fundi ng of an eve nt sponsored by

an incumbent officeholder. With respect to the legal

standard to be applied in such a determination. the Court of

Appeals stated that it would not be arbitrary, capricious

and contrary to law for the Commission to apply a two-prong

test. The Court of Appeals did not rule that the two-prong

test was the permissible interpretation of the Federal

Election CampaIgn Act with respect to the case before it.

Nothing in this Statement of Reasons is inconsist'ent with

the Court of Appeals decision in Orloski v. Federal Election

Commission. See Orloski at 165-167.

26
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specific activity involving the President of the United States

was within the realm of official duties and responsibilities of

that office. or was instead campaign-related activity. We saw

no reason to hold an incumbent President to a different or higher

standard than an incumbent Member.of Congress engaged in official

officeholder duties while a candidate. As the law does not

preclude Federal officeholders from making public appearances

before voters in their states or Congressional districts, nor

should it preclude the President of the United States. who has a

more significant public role to perform as a world leader, from

making public appearances to explain and defend his

Adm i n i s t rat ion's po lie i e s .

Although we came to a different conclusion than did the

General Counsel in applying the law to the facts of this case. we

be lievet her e sui t we rea c he d was i n f u I I ace 0 r d wit h past

agency precedents. as previously discussed. and wholly justified

by the facts before us. Furthermore. our conclusion was

certainly consistent with the result reached by those

Commissioners who may have applied the "two-prong tesL" under

which the presence of either express advocacy or solici~ation of

contributions would be conclusive as to whether the activity is

27
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campaign-related. In our view, however, the absence of both

express advocacy and solicitation of contributions does not end

the inquiry. Examination of activity for the presence or absence

of "express advocacy" communicat ions or sol ic i tat ions for

contributions represents a critical threshold inquiry in

determining whether an event is campaign-related. The presence

of either element would almost certainly decide the issue, and

preclude the need for further examination of other factors within

the "totality of circumstances". But the absence of either

element in the "two-prong test" does not, in our opinion, prevent

the Commission from reviewing other factors, such as the timing,

setting or purpose of the event, and reaching the conclusion that

the activity was campaign-related rather than within the duties

of an officeholder.

As a preliminary consideration, the "two-prong test" may

result in a finding that activity was inescapably campaignrelated. The test does not serve, however, to prove that

activity is unarguably or conclusively not campaign-related.

Such a conclusion demands examination of the "totality of the

circumstances" as applied in the present matter. 'Although

the two components of the two-prong test are critical components

28
of the "totality of circumstances" test. we cannot ignore the

purpose, timing and setting of the activity, each of which may

bear heavily on whether an event was, in fact, campaign-related.

Finally, we would again note that application of either test

or standard in this case would support our conclusion that the

event in question was not campaign-related, and would support our

finding of no Reason to Believe that respondents had violated the

Federal Election Campaign Act or Commission regulations.

co

C)

Date

Date

Joan>z:G1' D. Aikens c C ~'cCd'i C9'M1i ssioner

29
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BEFORE THE FEDERAL ELECTION COMMISSION

IN THB MATTER OF

Reagan-Bush '84

General Election Campaign

Angela M. Buchanan Jackson

as treasurer

STATEMENT OF REASONS

Commissioner Lee Ann Elliott

)

)

) MUR 1790

)

)

)

On June 15, 1988. Judge Pratt of the United States District

Court for the District of Columbia requested the Federal Election

Commission reconsider its dismissal of Matter Under Review 1790 and

provide an additional explanation for not voting to persue this administrative complaint. Common Cause v. Feaeral Election Commission.

No. 86-3465. slip Ope at ll. The court found the Commission had not

adequately addressed the needs of its first remand which sought statements explaining the legal standards applied in dismissing the complaint.

Id. at 4-6.; Common Cause V. FEC. 676 F. Supp. 286. 292 (D.D.C.

1986) .

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I. INTRODUCTION

The following statement sets out my reasons for voting against

the staff recommendation in MUR 1790 and explains why my vote is, in

fact. consistent with years of applicable Commission precedent, the

Federal Election Campaign Act and its legislative history. and tpe law

of this circuit.

II. FACTS AND ISSUES PRESENTED

On August 22, 1984. Ronald Reagan was nominated by the

Republican Party as its candidate for President of the United States.
Statement or Reasons

NUR 1710

Commissioner Lee Ann Elliott

Page 2

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On August 24th. President Reagan left the Republican Convention in

Dallas and flew to Chicago to address the 85th annual convention of

the Veterans of Foreign Wars ("VFW"). The VFW is a non-profit,

non-partisan organization whose constitution and by laws prohibit it

from endorsing political candidates. . The VFW extended its invitation

to President Reagan on March 1, 1984, six months prior to the President's

nomination, and asked him to discuss his administration's policies on

na tional security and foreign affairs.

At the VFW convention, President Reagan clearly focused his

remarks to the issues requested in the VFW's invitation. The President

discussed his administration's committment to the readiness and strength

of our military and addressed interna tional issues of concern to American

veterans. President Reagan did not expressly advocate his candidacy

during his speech. did not mention his opponent or the upcoming election,

and did not solicit contributions from the audience. This speech was

considered part of President Reagan's official duties as head-of-state.

Accordingly, the speech's costs were paid from fu nds appropriated for

the official functioning of the office of the President.

On September 20. 1984. Common Cause filed a complaint with

the Federal Election Commission alleging the August 24. 1984 speech by

President Reagan was "campaign-related" and should be paid by the

President's authorized re-election committee and reported to the

Commission as a "qualified campaign expense." 2 U.S. C. §434; 11

C.F.R. §§9003.1. 9004.7.

The Presidential Election Campaign Fund Act requires publicly

financed presidential candidates to pay for all "qualified campaign

expenses" from fu nds made available under 26 U.S. C. §9001 et. seq.
The Federal Election Campaign Act ("Act") requires presidential

candidates to regularly report these qualified campaign expenses to the

Commission. 2 U.S.C. §434(b).

Statement or Reasons Page 3

MUR 1,.

Commissioner Lee Ann Elliott

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Commission regulations define a . 1 ualified campaign expense" as

an expense incurred during a reporting period "to further a candidate's

election to the office of President." 11 C.F.R. §9002.11(a) Travel

costs "relating to a presidential candidate's campaign" are specifically

included in the definition of qualified campaign expenses at 11 C.F.R.

§9004. 7(a). Commission regulations further provide that "if any campaign

activity. other than incidental contacts, is conducted at a stop, the

stop shall be considered campaign-related." 11 C.F.R. §9004.7(b).

See also 11 C.F.R. §106.3. The only issue in this case, therefore. is

whether President Reagan's August 24, 1984 speech to the VFW was

"campaign-related" requiring the President's committee to pay for and

report this expenditure as a qualified campaign expense.

In support of its allegation that President Reagan's speech was

campaign related, Common Cause complained the President "reiterated

several themes" of his campaign and that the audience and press reacted

as if the remarks were a campaign speech. Citing one Advisory Opinion,

Common Cause stated the "FEC has made clear that whether a speech

or other activity is campaign-related depends on its purposes" and

that the "·evident purpose" of the President's speech "was partisan

activity." Complaint at 4-6.

In response to the complaint, the Reagan-Bush '84 Committee

stated that the Department of Justice and the Comptroller General of

the United States have analyzed when the President's travel is "political"

or "official." These departmen ts recognize that:

--------------------... -
Statement of Reasons

MOR 1710

Commissioner Lee Ann Elliott

appearing at party functions, fundraising and

campaigning for specific candidates are the

principal examples of travel which should be

considered political. On the other hand, travel

for inspections, meetings., non-partisan addresses

and the like ordinarily should not be considered

'political' travel even though they may have partisan

consequences.

Page 4

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Response at 3-4 quoting affidavit of Asst. Atty. Gen. Olson.

Accordingly, the departments concluded that travel expenses for official

appearances by the President to explain his administration's policies

are legitimately paid from official funds. Response at 4 quoting Memo.

of Comptroller General.

The Reagan-Bush Committee also analyzed four of the Commission's

Advisory Opinions in which the Commission held events were not

campaign-related "based on (1) the absence of any communication

expressly advocating the election or defeat of Federal candidates, and

(2) avoidance of any solicitation, making or acceptance of campaign

contributions for federal candidates." The Committee concluded that

since no advocacy or solicitation occurred during the speech, the Commission should find no reason to believe the Campaign Act had been

violated. Response at 7-8, 11.

On December 21, 1984, the FEC's General Counsel recommended

the Commission find reason to believe Reagan-Bush '84 violated 2 U.S. C.

§434(b)(4) and 11 C.F.R. §§9003.1 and 9004.7 in connection with the

VFW speech. The General Counsel conceded the President did not

expressly advocate his re-election but that his speech was "designed

to create a campaign atmosphere" and "nurtured the campaign spirit."
Statement of Reasons

MUR 1790

Commissioner Lee Ann Elliott

. ' ...... , ,

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Counsel urged the Commission look past the words "campaign-related"

in our regulations and instead use a broader inquiry that "supports

the spirit om the Explanation and Justification to our presidential

regulations. See 45 Fed. Reg. 43377 (1980); MUR 1790, 1st Gen.

Cnst Rept. ("Report"), Dec. 24, 1984, at 2, 3, 6, 10.

Counsel did not directly analyze the Advisory Opinions cited by

the Reagan-Bush Committee in which the Commission applied a "two-prong

test" in evaluating political speech. Instead, Counsel advocated that

the Commission consider "many factors and circumstances of varing

significance" including "the setting in which the remarks are made, the

timing of the event at which the remarks are made, the reaction that

. the remarks evoke, as well as the remarks themselves." On this

"totality of circumstances" approach, Counsel recommend the Commission

find reason to believe the cited violations occurred. Report at 8-9.

In considering the General Counsel's Report and using applicable

Commission precedent in this area, I voted with the majority to reject

the General Counsel's recommendation and find no reason to believe the

Act had been violated. In my opinion, President Reagan was invited

to and appeared at the VFW convention as President of the United

States, and not as the Republican Party's nominee in the 1984 general

election.

III. DISCUSSION

The following discussion sets out my reasons for using a "twoprong" test for evaluating an officeholder's speech and states how I

applied that test to the facts of this case. This discussion will sort
Statement of Reasons

MUR 1.,.

Commissioner Lee Ann BWott

Page 6

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out what appears to be. but is not, conflicting precedent and will

comment on Counsel's suggestion to use a "totality of circumstances"

approach for this case. Lastly, 1 will discuss when a "totality of

circumstances" approach is appropriate in evaluating a candidate's

speech.

1. Background or the "two-prong" test.

An officeholder's speech will be considered campaignrelated only if it expressly advocates the election or defeat of a clearly

identified candidate or solicits contributions on behalf of federal

candidate. This "two-prong" test is sensible and workable Commission

precedent and has repeatedly been held a permissible construction of

the Act. Further, the "two-prong" test avoids subjective or imponderable

considerations when evaluating an officeholder's speech.

In using the "two-prong" test, 1 have properly followed

the Supreme Court's guidance that the Act does not apply to an

incumbent's non-campaign appearances as an officeholder. Buckley v.

Valeo, 424 U.S. I, 84 n. 112 (1976) (recognizing that legislators have

a duty to "communicate with their constitutients" and have an "other

role as politicans" to win elections.) In accepting that officeholders

have a continuing responsibility to report to their various constituencies.

even while they are candidates for re-election, 1 consistently apply the

Court's guidance that the Act is not intended to regUlate speech by • officeholders in their role as officeholders.

To determine when an officeholder is speaking in a

"campaign-related" manner that is regulated by the Act, I have joined

the Commission's examination of whether 1) there are communications

expressly advocating the election of the officeholder as a candidate or
Statement of Reasons

MUR 1790

Commissioner Lee Ann Elliott

Page 7

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the defeat oi his opponent; or 2) whether contributions to the candidate's

campaign are solicited or accepted. See.!.:.i.:... Advisory Opinion ("AO")

1977-42. 1 Fed. Elec. Camp. Fin. Guide (CCH) " 5313; AO 1977-54. 1

Fed. Elec. Camp. Fin. Guide (CCH) 11 5301; AO 1978-4. 1 Fed. Elec.

Camp. Fin. Guide (CCH) 11 5293; ·AO 1979-25. 1 Fee. Elec. Camp.

Guide (CCH) 11 5410; AO 1980-16. 1 Fed. Elec. Camp. Fin. Guide

(CCH) 5474; AO 1980-22. 1 Fed. Elec. Camp. Fin. Guide (CCH) 11

5479; AO 1980-89. 1 Fed. Elec. Camp. Fin. Guide (CCH) , 5537; AO

1981-37. 1 Fed. Elec. Camp. Fin. Guide (CCH) 5623; See also Matter

Under Review (MUR) Exp. 1st. Gen. Cnsl. Rept .• Oct. 29. 1982;

MUR 1555. Gen. Cnsl. Rept.. Oct. 6. 1983; Pre-MUll 123-MUR 1699.

1st Gen. Cnsl. Rept.. June 27. 1984 (citing MUR 1458. Gen. Cnsl.

Brief. Dec. 7. 1982); See generally AO 1984-48. 1 Fed. Elec. Camp.

Fin. Guide (CCH) 11 5789 (approving cost guidelines for campaign-related

use of state-owned aircraft); MUlt 1729. Gen. Cnsl. Rept., Jan. 3,

1985 (reason to believe was found since dinner proceeds were forwarded

to campaign committee, but see statements of Commissioners Elliott.

Aikens and Reiche asking "the record reflect that they had· disassociated

themselves from the [totality of circumstances] standards. on page 3 of

the staff report." Federal Election Commission minutes of an Executive

Session. Tuesday. January 15, 1985, Agenda item E.• page 10); MUR

1686, Gen. Cnsl. Rept., Jan. 15. 1985 (attending a fundraiser is

campaign-related trip).

These precedents stretching over 11 years of the

Commission's 13 year history confirm a consistent application 'of the

"two-prong" test to determine if an officeholder's speech is campaignrelated. The necessity for this statement of reasons, however, requires

an examination of a few of these precedents in some detail.
Statement of Reasons

MOR 1790

Commissioner Lee Ann EWott

Page 8

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In AO 1977-54, the Commission was asked whether an

officeholder's participation in an issue-related petition drive would be

considered "campaign-related" activity subject to the Act. The

Commission's answer represents a seminal use of the "two-prong" test

and clearly recognizes the continuing responsibilities of officeholders:

expenses of th e petition drive .•. would not be

considered as contributions to or expenditures by

Mr. Gingrich's campaign. However. the Commission

assumes that such activity (i) will not occur in

circumstances involving the solicitation, making or

accepting of campaign contributions for

Mr. Gingrich's campaign committee, and (ii) will

not include any communication expressly advocating

his nomination or election to Federal office or the

defeat of another candidate for Federal office.

(C CH) at 11 5302.

In AO 1980-16, the Commission was asked whether

"corporations may contribute transportation, lodging and meals" to

Congressmen and Senators for their participation in a charitable event

without making a prohibited contribution. The Commission's answer

was simple and unanimous:

so long as the event does not involve any solicitation of campaign contributions to candidates for

Federal office participating in the event, Qr any
;.

Statement of Reasons

MUR 1710

Commissioner Lee Ann EWott

advocacy in support of their election, corporations

may provide transportation. lodging and meals to

celebrities that include candidates for Federal office

and not be in violation of the Act.

(CCH) at , 5475.

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In AO 1980-22, the Commission was asked whether an

incorporated trade association could invite federal officeholders, who

may also be candidates. to a "series of 'town meetings' to discuss the

future of the steel industry." The Commission concluded that officeholders could be invited to address the forum. but the Commission . specifically "conditions its conclusion on the avoidance of any campaign

contribution solicitations. or advocacy supporting or opposing any

candidate for Federal Of.fice." (CCH) at 5479-80 citing AO 1978-56.

AO 1978-15. AO 1977-54. and AO 1977-42.

Lastly. in AO 1981-37. the Commission was asked

whethsr a Congressman could participate in a series of "public affairs

programs" without violating any provision of the Act. While the Commission noted that the Congressman's "involvement in the 9ublic affairs

program may indirectly benefit future campaigns." the Commission found

no violation of the Act "conditioned. however, on (i) the absence of

any communication expressly advocating your nomination or election or

the defeat of any other candidate. and (ii) the avoidance of any solicitation, making or acceptance of campaign contributions in connection

with this activity. n (CCH) at 11 5623.

Although AO 1981-37 went on to "note" other facts.

the Commission expressly overruled:
.~ -~.~.:.\.{..,!i.~~~~ "1~;\!~~~

"

Statement or Reasons

MUR 1'1.

ComlDiBsioner Lee Ann ElUott

those portions of Advisory Opinions 1975-8,

1975-13, 1975-20, and 1975-108 which hold that all

speeches of a candidate for Federal office made

before a substantial number of people, who comprise

a part of the electorate. with respect to which the

individual is a candidate, are presumably made for

the purpose of enhancing the individual's

candidacy. In addition this opinion qualifies

Advisory Opinion 1977-31 where the Commission held

that a corporation's employment of a candidate as

an announcer for a series of corporate sponsored

radio announcements constituted something of value,

and therefore, a contribution of the candidate.

Page 10

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Id.

Although, these are only four examples of the many

years of reliance on the "two-prong" test, it is clear that the "two-prong"

test decided every case where an officeholder, as an officeholder, was

appearing at an event. Different characterizations of these opinions

may now exist, placing new emphasis on the opinion's statement of

facts. While it is true each of these opinions also described the facts

of the request in its answer, as every Advisory Opinion ever issued

by the Commission has, there is no indication the Commission's recital

of the facts acted as a substitute for its legal application of the

"two-pron gil test.

The "two-prong" test has been and continues to be

sensible and workable Commission precedent. It is a clear, objective

and understandable method for evaluating the speech of an officeholder
who may also be a candidate for election. The "two-prong" test

recognizes that officeholders have a continuing responsibility to comment

on the issues of the day. See Buckley at 42. This test clearly

divides when an officeholder is speaking to his constituency from when

a candidate is speaking to the electorate. The "two-prong" test is the

precedent of this Commission and shall continue to be until a majority

overrules these prior decisions or the jUdiciary finds it an impermissible

interpretation of the statute.

Statement or Reasons

MOR 1790

Commissioner Lee Ann Elliott

Page 11

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The federal courts have repeatedly held or acknowledged

the "two-prong" test to be a "permissible construction" of the Act.

Orloski v. FEC, 795 F.2d 156, 161-67 (D.C. Cir. 1986) aff'g Orloski

. v. FEC, No. 83-3513 (D. D. C. Dec. 6. 1984): Common Cause v. FEC,

No. 86-3465 slip op. at 3; Common Cause v. FEC, 676. F. Supp. 286,

290 (D. D. C. 1986) . In fact, th e "two-pron g" test "represents a

reasonable accommodation between the Act's objectives and administrative

exigencies" and "is sufficiently reasonable to be entitled to judical

deference." Orloski at 165, 167.11

1/ In my opinion, Orloski is not "arguably distinct" because it involves

"corporate dona tions for congressional incumbents." At issue is whether

its rationale applies to this case. I find its rationale quite applicable

since we are applying the legal standard of "campaign-related" not the

prohibitions of 2 V.S. C. §441b. "Campaign-related" stands as a legal

threshold not only for corporate donations to an incumbent's activities,

but also governs the allocation of party committee overhead and certain

political party expenditures on behalf of candidates, 11 C.F .R. §l06.2,

See also 2 V.S. C. §441a(d): congressional and senatorial travel .with or

without use of government conveyance, 11 C.F.R. §106.3; partisan and

non-partisan appearances, 11 C.F .R. §114.3-4: the possible making of

contributions or expenditures. AO 1977-54; is relevant in determining

"candidacy" under 2 V.S.C. §433 and guiding the reporting under

2 V. S. C. §434; is helpful in determining state-by-state expenditure

(Footnote continued on next page)
Statement ot Reasons

MUR 17.

Commissioner Lee Ann EWott

Page 12

The most attractive aspect of the "two -prong" test is

its equitable and objective application for distinguishing between "official"

and "campaign-related" speech. This objective test allows officeholders

to understand the law before making a speech and conform their conduct

to clearly articulated standards. The objective "two-prong" test also

does not unduly compromise the Act's purposes. There is nothing 1n

the Act's legislative history indicating the Commission's application of

the "two-prong" test is contrary to any expressed intention of Congress.

See Orloski at 165-66. Quite the opposite, Congress has expressly left

" it to the Commission in matters such as these to "formulate policy with

CO respect the the Act." 2 U.S.C. §437c(b)(l).

There is also no legislative history indicating Congress

intended the Commission's policy to include officeholder's speech within

the definition of "expenditure." Further, there is "no legislative history

C)

1/ Continued

allocations under the Presidential Primary Matching Payment Account

Act, 2 U.S.C. §9031 et. seq.; and obviously can determine whether an

incumbent President must use campaign money for use of government

conveyance in delivering a spef3ch. Accordingly, "campaign-related" is

more than just a method of analyzing corporate donations or travel. It

is a legal prefix that applies in many of the Act's factual settings.

Even if the view is taken that "campaign-related" does not have

universal application but is limited to corporate expenditures, its use

is still perfectly analogized to this case since corporate expenditures

are held to be prohibited. even if an officeholder is appearing as an

officeholder, when those expenditures "expressly advocate" a federal

candidate's election or defeat. Orloski at 166-67. This holding was

recently adopted by the Supreme Court when it stated, U[ w)e therefore

hold an expenditure must constitute 'express advocacy' in order to be

sUbject to the prohibition of §441b." FEC v. Massachusetts Citizens

for Life, Inc .• ("MCFL") 107 S. Ct. 616. 623 (1986). See also AO

1978-46. Accordingly, the "express advocacy" threshold for prohibitrng

a corporate expenditure is the same "express advocacy" threshold for

regulating an officeholder's speech.
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Statement of Reasons

MUR 17"

Commissioner Lee Ann Elliott

Page 13 I

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to guide us in determining the scope of the critical phrase 'for the

purpose of influencing any election'." Buckley at 77. Accordingly,

the Commission's interpretation of the Act continues to be judically

deferrable, and "logical, reasonable and consistent with the overall

statutory framework." Orloski at l67. The reasonableness of this

policy is enhanced when viewed against 11 years of even-handed

application.

Complainant disagrees with the Commission's long

standing policy and apparently believes that any officeholder's speech

that appears to have a "purpose" to "further" his election should be

"campaign-related." Complaint at 6-7.

I specifically reject the complainant's suggestion that

the Commission conduct a subjective inquiry into "purpose" and make a

legal determination based on a speaker's or listener's "state of mind"

rather than on what is actually said. First, complainant points to

nothing in the Act or its legislative history that promotes a subjectivepurpose approach over our objective test for defining when a speech is

campaign-related.

Second, if "intent" is what the complainant seeks to

uncover, then complainant should understand the "two-prong" test does

not ignore intent since "it is common legal practice to infer intent from

underlying circumstances." Orloski at 162. With a "two-prong" test,

the Commission can infer the probable intent of the speaker by obj~ctively

focusing on what is said.
;;...

Statement of Reasons

MUR 1790

Commissioner Lee Ann Elliott

Page 14

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Third. a purpose approach that conditions liability for

remarks on the subjective basis of "intending" to have an "effect or

impact" on an election swings far wide of the permissible reach of the

statute. The Federal Election Campaign Act does not regulate "intending

effects or impacts." it regulates ca.mpaign contributions to prevent

corruption or the appearance of corruption. Buckley at 23-29. Grasping

at "impacts" takes the Commission away from its assigned role. As the

Supreme Court cautioned in Buckley. "the distinction between discussion

of issues and candidates and advocacy of election or defeat may often

dissolve in practical application. Candidates. especially incumbents.

are intimately tied to pUblic issues involving legislative proposals and

governmental actions." Id. at 42. Further. even though the discussion

uf public issues by officeholders may "tend naturally and inexorably to

exert some influence on voting at elections." Id. at 42 n.50, that

influence alone will not bring remarks within the regulated area of

campaign finance.

Accordingly. the Commission must not imply "campaignrelated" intent to every speech by an officeholder. even while a

candidate. or speculate on the possible impact his or her speech may

have on voting. The Commission must objectively look at the words of

a speech and apply settled factors of the "two-prong" test. To do

otherwise replaces an objective review of the message itself with a

subjective critique of the motivation of the speaker. See FEC v.

Furgatch. 807 F.2d 857. 863 (9th Cir.) ("to fathom [the speaker's)

mental state would distract us unnecessarily from the speech itself")

cert. denied. 108 S. Ct. 151 (1987).
In enforcing the Act. regulating an officeholder's speech

on a "purpose" basis would produce an incomprehensible trail of

standardless decisions contrary to the goals of the Act and inconsistent

with an officeholder's right to speak. "Purpose" analysis is wholly

subjective and promotes ad-hoc. after-the-fact decision making. An

ever-shifting majority of Commissioners would review each speech and

decide whether it conveyed a "campaign-related purpose" to them. in

their own individual hearing or reading. This approach would destroy

the legal status of "campaign-related" messages and encourage the

Commission to abandon its reasoned application of precedent in favor of

an entirely subjective and arbitrary review of the facts. This approach

must not be followed since officeholders must know in advance of making

a speech whether it contains a regulated "campaign-related" appeal.

See Buckely at 41 n.48 quoting Grayned v. City of Rockford. 408

U.S. 104. 108-109 (1972) (vague laws not only "trap the innocent by

not providing fair warning." they foster "arbitrary and discriminatory

appliation" and inhibit protected expression by inducing citizens to

"steer far wider of the unlawful zone" than necessary); Orloski at 165

(a "subjective test based on the totality of the circumstances would

inevitably curtail permissible conduct. II)

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Statement of Rusons

MUR 1710

Commissioner Lee Ann Elliott

Page 15

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Lastly. a purpose analysis that considers "the reaction

the remarks evoke" abandons all objective review of speech and subjects

officeholders to the wildly divergent views of their listeners. It is

unthinkable to hold an officeholder subject to campaign finance laws
Statement or Reasons

MUR 1'190

Commissioner Lee Ann Elllott

"~"\.<;'·R·'i,l ... '~'k-' ~' "' .. ·-v·....~l~:~~·:,." .. ".

Page 16

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just because of what a listener, in his own individual hearing, might

deduce from a message. Speech is subject to the Act depending on

what it says, not the varied understanding potential recipients may

have. Further, the complainant is inducing the Commission to consider

press commentary and reaction to a speech in deciding whether a speech

is "campaign-related." It is bad enough the Commission is urged to

use its own subjectivity in these matters, but to discharge our statutory

responsibility on the basis of another's subjective beliefs is an abdication

of our authority. A few well-placed "listeners" or reporters could

convert legitimate constituent-related speech into campaign-related

advocacy. There is no reason the Commission should bring otherwise

permissible speech within the government's control on the basis of

another's subjective beliefs or commentary. Simply put, speakers cannot

be placed at the mercy of their listeners or the press. Such an

analysis "offers no security for free discussion ....and compels the

speaker to hedge and trim." Buckley at 42-43 quoting Thomas v.

Collins, 323 U.S. 516.535 (1945); see also United Stated v. United

Auto Workers, 352 U.S. 567, 595-96, (Douglas J., dissenting).

Nothing in the Act or the Commission's history compels

me to adopt the complainant's vague and shifting subjective inquiry for

this case. Complainant's invitation to entertain some purpose disembodied

from the Act is a sure way to frustrate the statute rather than implement

it. See Walton v. United Consumers Club, Inc., 786 F. 2d 303, 310
.:;.:'~ .,;:-..- ~~i

Statement or Reasons

MOR 1790

Commissioner Lee Ann EWott

Page 17

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(7th Cir. 1986). The clear and equitably applied objective criteria of

the "two-prong" test are, and continue to be, the standards properly

applied to this case.!/

2. Application or the "two-prong" test.

Applying the "two-prong" test to President Reagan's

remarks at the VFW convention yields no "campaign-related" message

since the President did not expressly advocate his election or his

opponent's defeat, nor did he solicit or receive any campaign contributions. No solicitations were made, obviously, since the Reagan-Bush

Committee was operating under The Presidential Election Campaign Fund

-Act. 26 U.S.C. §9001 et.~. The inquiry into "express advocacy"

however, requires a little more detail.

2/ Disagreement with the General Counsel is of no significance for the

Commissioners are not "required to accept the advice of some members

of [its] legal staff," since "[t]he Commissioners are appOinted by the

President to administer the agency, the agency's staff is not." San

Luis Obispo Mothers for Peace v. NRC. 751 F.2d. 1287. 1327 (DT

Cir. 1984) <language from Section IV of opinion. the court later vacated

Section II1-B of the decision for en bane consideration. 760 F .2d.

1320) See also Stark v. FEC. Civil Action No. 87-1700. Slip op. at 10.

(Opinionfiled February 8. 1988) (Jackson. J.) ("This court reads

Democratic Congressional Campaign Committee v. FEC to require that

the same deference be accorded the reasoning of "dissenting" Commissioners who prevent Commission action ...as is given the reasoning of

the Commission when it acts affirmatively.")
Statement of Reasona

MOR 1710

Commissioner Lee Ann Elliott

Page 18

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In Buckley v. Valeo. the Supreme Court narrowed the

scope of §608(e) of The Federal Election Campaign Act to words of

"express advocacy" to salvage the statute from its constitutional

deficiencies of vagueness and overbreath. Buckley at 42-45. The

Court stated:

in order to preserve the provIsIon against

invalidation on vagueness grounds, §608(e)( 1) must

be construed to apply only to expenditures for

communications that in express terms advocate the

election or defeat of a clearly identified candidate

for federal office.

Id. at 44.

This narrowing was also necessary to bring the statute

to the level of the governmental interests advanced for its passage and

satisfy the exacting scrutiny applicable to limitations on core first amendment rights. Id. at 44-45. Accordingly. the Court put forth a list of

words of advocacy of election or defeat, such as "vote for." "elect,"

"support," "cast your ballot for," "Smith for Congress." "vote against,"

"defeat," "reject." Id. at 44 n.52.

Courts have begun to look beyond communications

containing these key phrases in finding "express advocacy." Furgatch

at 863; FEC v. Central Long Island Tax Reform Immediately Committee,

("CLITRIM") 616 F.2d 45 (2d Cir. 1980). While "express advocacy"

does not mean "implied" advocacy, CLITRIM at 53. it does recognize

that the "short list of words included in the Supreme Court's opinion

in Buckley does not exhaust the capacity ...to expressly advocate."

Furgatch at 863.
Statement ot Reasons

MUB 1790

Commissioner Lee Ann Elliott

Page 19

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In order to fully understand and apply "express

advocacy" without problematic inquiry into effect. purpose or subjective

intent, it is important to make reference to some objective circumstances. Id. While inquiry into the context of speech invites difficult

first amendment questions, "context. remains a consideration, but an

ancillary one. peripheral to the words themselves." Id. Importantly,

an inquiry into context must fit within the legal definition of express

advocacy, and not become its own separate factor, since context cannot

become its own standard "supply[ingl a meaning that is incompatible

with, or simply unrelated to, the clear import of the words." Id. at

864.

Bringing context within the definition of "express

advocacy" means according limited legal significance to external factors

to round out the words listed in Buckley. When this is done carefUlly,

"express advocacy" preserves the efficacy of the Act while not treading

upon the responsibilities of officeholders.

Even when referring to external factors, the speech

itself must still be "susceptible of no other reasonable interpretation

but as an exhortation to vote for or against a specific candidate" in

order to constitute "express advocacy. II Furgatch at 864. Including

the context of speech within an analysis of "express advocacy" properly

expands our inquiry to find no express advocacy "when reasonable

minds could differ as to whether (the speech) encourages a vote for or

against a candidate." Id.

Applying the legal standard of "express advocacy, II

while including contextual facts within it. is necessary to prevent a
Statement of Reasons

MUR 1790

Commissioner Lee Ann Elliott

Page 20

chill on protected forms of officeholder speech. Applying "express

advocacy" as the law discourages complainants from merely or pejoratively

describing a set of facts and declaring "therefore a violation exists."

By using "express advocacy." the regulated community will know the

Commission applies legal standards alld does not propel facts !! facts

into legal conclusions. but will use facts to help define "express

advocacy. " This avoids the distracting. subjective and ungovernable

notions of purpose and effect. and allows officeholders to know the law

'" of campaign finance before speaking to the;" constituencies.

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In looking for "express advocacy" in President Reagan's

remarks to the VFW. I first read the text of his speech for words of

advocacy such as those listed in Buckley. Finding none. I next examined

the speech. with limited reference to external factors. to determine if

it could be interpreted as other than an exhortation to vote for or

against a specific candidate. I concluded that the speech does not

advocate the re-election of the President or the defeat of his opponent.

Although others disagree. when reasonable minds differ over whether

remarks exhort listeners to take action. then "express advocacy." by

definition. does not exist.

I agree with the conclusion that no "express advocacy"

exists knowing that President Reagan was invited to address the

convention as President of the United States and not as the Republican

nominee in the 1984 general election. His appearance was that of

head-of-state and his remarks were on issues of importance to America's

veterans. In addressing the VFW membership, President Reagan was

fulfilling a responsibility that executive and legislative officeholders

perform everyday: reporting to their various constituencies on topics

of government and governance. Just because the President also happened
Statement or Reasons

MUR 1190

Commissioner Lee Ann Elliott

Page 21

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to be a candidate for re-election did not prevent him from continuing

to act as an officeholder or speak as one. Lastly, I was not presented

with a factor as in Furgatch where the "timing of the advertisement

less than a week before the election left no doubt" that the ad was "an

express call to action." Furgatch at.865.

In summary t application of the "two-prong" test to

determine if President Reagan's speech to the VFW was "campaign-related"

proved to be a sensible and workable application of Commission precedent.

Objectively jUdging his speech, as opposed to SUbjectively judging his

appearance, preserved the goals and prohibitions of the Act without

treading upon an officeholder's responsibilities or entangling the Commission in subjective considerations.

The totality of circumstances approach is described in

many ways since any case attempting to apply it contains a variety of

new circumstances needing to be included. Over time, phrases such

as "purpose." "intent," "setting," "timing." "desired effect." "intended

impact, It "u nderlying design," "speaker's motivation," "what a listener

should." and "press commentary" have been used to characterize circumstances as violations. Each of these factors has no authoritative or

precedential weight on its own. Only when all these "circumstances of

varying significance" are included does a totality of circumstances

approach yield a violation.

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3. Rejection of a "totality of circumstances" approach for

officeholder speech.

Even when a case is successfully made "in consideration

oi the totality of circumstances." no true precedent has been created
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Statement or Reasons

MUR 17.

Commissioner Lee Ann EWott

Page 22

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since no one factor can be considered exculpative or dispostive. With

this. an officeholder will not know what factor should be avoided in

their next speech or appearance. Instead of providing precedent. a

totality of circumstances approach appears to be legal argument by the

pound: when all the circumstances are added and the scale tips toward

a violation. then the Commission must act.

Advocates of the totality of circumstances approach

claim it contains two types of considerations apart from the "two-prong"

test. First. the totality of circumstances includes a consideration of

the objective elements of "time" and "place." Second. the totality of

circumstances includes the more subjective elements of "purpose."

"intent." "audience reaction." "press coverage," atmosphere" and

"campaign spirit." Complaint at 6-7i Report at 3-4, 8-10.

If viewed closely, it is clear that the totality of

circumstance's objective elements are already included within the "twoprong" test's definition of "express advocacy." See supra at 18-19.

Objective criterion already support whether the speech, itself, is

"express advocacy." Idi Furgatch at 863-64. Advocates of a totality

of circumstances approach do not have to worry, therefore. that the

"two-prong" test does not consider objective elements of speech. Quite

the opposite, context is already subsumed within the definition of

"express advocacy" and, importantly is part of a legal framework for

analysis and not just part of a loosely connected review of facts.

This leaves the subjective elements of the totality of

circumstances approach outside the "two-prong" test and, in my opinion.

that is exactly where they should stay. The subjective considerations

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Statement of Reasons

MUR 1110

Commissioner Lee Ann Elliott

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Page 23

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of "purpose," "intent," and "effect" should not be part of any inquiry

into campaign-related speech. These factors are too subjective and

ungovernable, and their use attempts to characterize an officeholder's

appearance at an event rather than analyze what is actually said. It

is unthinkable to hold an officeholder continually subject to campaign

finance laws on the basis of "press reaction." "effect" or what others

deduce as some "underlying intent." Further. the totality of circumstances recognizes "campaign atmosphere" and remarks that "nurtured

the campaign spirit" as factors in regulating speech. Report at 2, 3.

The Commission must regulate campaign finance within the Act, not

"atmospheres" and "nurtured spirits." We must continually look to the

settled. objective. and judically endorsed criterion of the "two-prong"

. test. We must not advocate a view that goes past our Act to "support

the spirit" of the Explanation 1& Justification to our regulations. Id.

at 6.

Accordingly. the totality of circumstances approach for

analyzing officeholder speech is really not applicable for officeholders.

Its objective elements are already part of the "two-prong" test's legal

inquiry into "express advocacy" and its subjective elements are too

vaporous upon which to rest a legal conclusion.

4. Appropriate use of a totality of circumstances approach.

It has been asserted that the Commission has. on

occasion. applied a totality of circumstances approach to other cases

which renders the application of the "two-prong" test to this case

arbitrary. capricious or contrary to law. While it is true the Commission
fir~tl~?:'~~ . .....' .

Statement of Reasons

MUR 1710

Commissioner Lee Ann EWott

Page 24

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has entertained a totality of circumstances in some opinions.,!/ that

does not mean our precedent is not in order. The Commission has

rightly applied a totality of circumstances approach in cases where 1)

candidates. who are not officeholders. may be engaging in "campaignrelated" activity. ~!.:.K:... AO 1977-42. 1 Fed. Elec. Camp. Fin.

Guide (CCH) , 5315. AO 1978-15. 1 Fed. Elec. Camp. Guide (CCH) "

5304. AO 1982-15. 1 Fed. Elec. Camp. Fin. Guide (CCH) , 5656. AO

1984-13. 1 Fed. Elec. Camp. Fin. Guide (CCH) '5759; or 2) when

officeholders engage in activity that is not normally part of their

continuing responsibilities as officeholders. See !.:.!.:... AO 1982-56. 1

Fed. Elec. Camp. Fin. Guide (CCH) , 5695; and 3) when a group

invites candidates. some of whom may also be officeholders. !!candidates

to appear at a function. See~. AO 1986-26. 1 Fed. Elec. Camp.

Fin. Guide (CCH) , 5866. AO 1986-37. 1 Fed. £lee. Camp. Fin. Guide

(CCH) 11 5875; AO 1988-22. issued July 5. 1988.

The first four Advisory Opinions describe activity by

candidates who are not officeholders. For example. AO 1977-42 involves

a non-officeholder candidate appearing in a series of weekly radio

programs!/. AO 1978-15 involves a non-officeholder candidate appearance

in advertisements for a charitable fundraiser and AO 1982-15 involves

a non-officeholder candidate appearing in advertisements for his law

3/ It has been argued that other opinions. such as AO 1977-42. AO

1980-16. AO 1980-22 and AO 1981-37. See supra at 8-10. also ,useef8

totality of circumstances approach. That is a revision of what those

opinions actually say.

4/ Although this opinion is routinely cited as part of the "two-prong"

line of precedent. it can be mentioned as a totality of circumstances

case since the opinion does once refer to "purpose" in its answer.
Statement of Reasons

MOR 17to

Commissioner Lee Ann Elliott

Page 25

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firm. In all of these cases, no officeholders or officeholder activity is

present. The very necessity for a "two-prong" test is absent since

there is no danger of treading upon the official responsibilities of the

officeholders. See supra at 10-13; Buckley at 84 n .112.

In AO 1984-13 an incorporated association sought to

invite candidates as speakers to an afternoon conference. The requestor

stated that:

its invitations to potential speakers for the afternoon

session will be based on their status as congressional candidates and not on any other basis, such

as a Federal or state officeholder. In fact, you

indicate that all potential invitees will be

"challengers in congressional races." You do not

intend to invite any incumbent Federal officeholder

to speak at the session. [emphasis added].

(CCH) at 11 5759.

The Commission held that this event is linked by its

"timing and purpose" to elections and "the appearances of these

candidates in these circumstances will inevitably be campaign-related."

Id. Once again, there are no officeholders speaking to their constituencies so there is no reason to apply a "two-prong" test. These

individual speakers were invited to this event in only one capacity, as

candidates for federal office. When candidates qua candidates speak at

an event, it is appropriate to use a totality of circumstances approach.

It is necessary to distinguish this approach from the inquiry into
1 .kr~ltl~1~~~~/!J:*;;;",:,<t'"'t";;:3Vt;c±~~t~~1~~!:~~~~~~'):~~f.:~l:1~J£~~;~;§:{;0f.;:';:~'~:;" t;:;~1t~;~il(~':,::~:;'\"ij~:i ~:.-Y~~o, .

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Statement of Reasons

MUR 1790

Commissioner Lee Ann Elliott

Page 26

officeholder speech as the opinion did in footnote three where it said

this "event is distinguished from ... Advisory Opinions 1983-23. 1980-22.

1980-16. 1978-15. and 1978-4." Id. See supra at 7-10. In my

concurrence to this opinion. I agreed "with the results reached in

Advisory Opinion 1984-13...these ifldividuals were intended to appear

within their capacity as candidates. " (CCH) at 11 5759 (Concurrence of

Commissioner Elliott. disagreeing with partis~"1. non-partisan analysis

and application of 11 C.F.R. §§114.3. 114.4).

In Advisory Opinion 1982-56. the Commission was

presen ted with an officeholder appearing in a series of local advertisements endorsing candidates for local office. Because endorsing

candidates is not part of the continuing responsibility of an officeholder.

that speech may be subject to a totality of circumstances approach.

Lastly is a series of OpInIOnS that use a totality of

circumstances approach in evaluating candidates' speeches at various

conventions or meetings. In AO 1986-37 for example. the Commission

was asked whether a foundation's invitations to individuals "on the

basis of their candidacy or potential candidacy" for the "presidency in

1988" would be considered "campaign-related" activity governed by the

Act. The Commission answered that it would, saying that the absence

of "express advocacy" on the solicitation of contributions does not

preclUde the event from being "campaign-related." Again, this is the

right result since inviting candidates as candidates, even if some of

them are officeholders. allows a totality of circumstances approach.
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Statement of Reaaons

MUR 1710

Commisaioner Lee Ann EWott

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Hopefully. this review has sorted out what appears to

be. but is not. conflicting advisnry precedent. On the one hand.

there is consistent application of the "two-prong" test for officeholders

speech for the important reasons stated in Buckley. Orloski and in

recognition of the goals and limits .of the Act. On the other hand.

there is the totality inquiry for candidates as candidates. that clearly

distinguishes itself from officeholder precedent yet remains compatible

with the "two-prong" test and the purposes of the Act.

III. CONCLUSION

The Supreme Court has stated that the Commission cannot

constitutionally regulate the discussion of all public issues even if the

discussion "draws in candidates and their positions. their voting records

and other official conduct." Buckley at 42 n .50 (emphasis added).

Although an officeholder's discussion of issues may "naturally and

inexorably...exert some influence on voting at elections." Id .• the Commission may only regulate an officeholder's remarks if ·they contain

"express advocacy" or the solicitation of contributions. Limiting an

officeholder's speech on any other basis conflicts with decisions that

clearly divide the regulated advocacy of campaigns and elections from

an officeholder's free discussion of issues. Buckley at 42-45; CLITRIM

at 53.

I rejected the General Counsel's recommendation to apply a totality

of circumstances approach to MUR 1790 because it was not the correct

Commission precedent. It had never been applied to officeholder speech

and hopefully never will. Therefore. following Counsel's recommendation

in this case would not have been following Commission precedent.

Accordingly. I have acted "in conformity with FEC precedent" by voting

there is no "reason to believe" this speech was "campaign-related."
Statement of RUlIOns

MUR 1710

Commissioner Lee Ann EWott

Pale 28

Lastly. I want to assure that no offense was intended

when I prepared my first statement for this case. I prepared that

statement as an elaboration of the very comments I made when voting

on this matter with my coUegues. After years of working closely in a

collegial body. I feel it is important to put forward positive statements

of one's own opinions rather than a detailed criticism of the positions

and opinions of fellow Commissioners.

This was also the Commission's first attempt to comply

with a new and difficult procedure to aid in the review of our work.

Hopefully. this public procedure will not polarize or create schisms

among the Commissioners or create inflexible published positions such

that change cannot occur. The Federal Election Commission is an

even-numbered. bi-partisan agency that decides difficult questions in

an evolving and politically-charged area. See Orloski at 161. We are

often at our best when we reach concensus agreement for a plurality

of reasons.

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July 14. 1988 ~-E-lli-.-o-tt-------- ~~

Commissioner