2005 Activity
Reported Bank Records _| Discrepancy

Beginning Cash Balance ($4,317) ($11,225) $6,908
01/01/2005 Overstated
Receipts $637,474 $631,951 $5,523
Overstated
Disbursements ~ $330,949 $392,058 $61,109
Understated
Ending Cash Balance $302,208 $228,668 $73,540
12/31/2005 Overstated

The overstatement of the beginning cash balance on January 1, 2005, could not be

explained but most likely occurred due to prior period errors.

The overstatement of receipts resulted from the following:

e Unreported deposit to the legal defense fund $ 3,640
© Receipts reported not supported by check or credit (6,000)
© Deposit adjustments (2,100)
¢ Unexplained difference (1,063)

Net overstatement of receipts ($5,523)

The understatement of disbursements resulted from the following:

¢ Disbursements reported not supported by check or bank debit ($ 5,509)
« Unreported disbursements 43,075
¢ Unreported disbursement — legal defense fund 25,260
¢ Unitemized disbursements underreported 2,194
© Unexplained difference (3,911)

Net understatement of disbursements $61,109

The $73,540 overstatement of ending cash on hand resulted from the misstatements noted

above.

2006 Activity
Reported Bank Records | Discrepancy
Beginning Cash Balance $302,208 $228,668 $73,540
01/01/2006 Overstated
Receipts $1,081,283 $1,166,323 $85,040
Understated
Disbursements $1,343,288 $1,384,610 $41,322
Understated
Ending Cash Balance $40,202 $10,381 29,821
12/31/2006 Overstated



Part I
Background

Authority for Audit

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

Scope of Audit

Following Commission-approved procedures, the Audit staff evaluated various risk
factors and as a result, the scope of this audit was limited to the following:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

AMARYNS


Facts and Analysis

THC received excessive contributions totaling $36,300. Many of these excessive
contributions arose from a review of the “legal defense fund*” account, which had not
been reported (See Finding 3). Of this amount, there were excessive contributions from
twelve individuals totaling $35,400 and from one partnership for $900. Excessive
contributions from ten of the contributors totaling $14,000 could have been resolved,
provided the necessary notification letter was sent to the contributor advising of the
presumptive reattribution or redesignation action taken by THC. The remainder of the
excessive contributions, $22,300 ($36,300 - $14,000), appeared to require refunds. THC
did not maintain sufficient funds in its bank accounts to make the necessary refunds.

At the exit conference, the Audit staff presented to the THC representatives their finding
of excessive contributions and provided a schedule detailing the contributions in
question. Additional excessive contributions (included above) were identified as a result
of documentation submitted subsequent to the exit conference and THC was provided an
updated schedule detailing all excessive contributions.

Interim Audit Report Recommendation and Committee Response

The Audit staff recommended that THC:

e Absent evidence the contributions were not excessive, send notices to those
contributors that were eligible for presumptive redesignation and/or reattribution
($14,000) to inform those contributors how the contribution was designated and/or
attributed and offer a refund of the excessive portion. Absent a request for a refund
by the contributors, these notices would have obviated the need for a refund or
payments to the United States Treasury. For notices sent to contributors, it was also
recommended that THC provide a copy of each notice and evidence that it was sent.
Such notices must demonstrate that both the contributor and the individual to whom
the contribution was reattributed were notified; and

© Provide evidence demonstrating that the remaining contributions totaling $22,300
were not excessive. Such evidence could have included documentation that the
contributions were reattributed and/or redesignated in a timely manner or that the
excessive contributions were timely refunded; or

« Absent such evidence, refund $22,300 to the contributors and provide evidence of
such refunds (copies of the front and back of negotiated refund checks), or pay the
amount to the United States Treasury; or

e If funds were not available to make the necessary refunds, disclose the contributions
requiring refunds on Schedule D (Debt and Obligations) until funds became available
to make such refunds.

In response to the interim audit report, THC provided copies of seven non-negotiated
refund checks totaling $22,300 and copies of the presumptive redesignation and/or
reattribution letters sent to contributors.

Subsequent to the final audit report’s submission to the Commission, THC submitted
copies of negotiated refund checks and bank statements to document that requested
refunds had been made.

3 The legal defense fund was begun as a recount fund following the March 2004 primary election which
had been subject to a recount. THC apparently maintained this fund throughout the audit period and
apparently used it as a campaign account.


Part III
Summaries

Findings and Recommendations

Finding 1. Receipt of Contributions that Exceed Limits
THC received $36,300 in excessive contributions from twelve individuals and one
partnership. Some of these excessive contributions resulted from improper election
designations and/or contributor attributions. Excessive contributions totaling $14,000
from ten contributors lacked the requisite contributor notifications of the presumptive
redesignations/reattributions. The remaining $22,300 appeared to require refunds. In
response to the interim audit report, THC provided copies of seven non-negotiated refund
checks totaling $22,300 and redesignation/reattribution letters sent to the contributors for
the remainder. Subsequent to the final audit report’s submission to the Commission,
THC submitted copies of negotiated refund checks and bank statements to document that
requested refunds had been made. (For more detail, see page 4.)

Finding 2. Receipt of Contributions from Prohibited

Sources

A review of contributions identified two contribution checks, totaling $13,000, which,
without additional information from the contributor were treated as having been received
from corporate sources. If the contributions are from permissible sources, portions of
each, totaling $10,500, would be added to the excessive contributions in Finding 1. Of
the $10,500 added to the excessive finding, $2,100 could have been resolved provided
the necessary notification letter was sent to the contributor advising of the presumptive
action taken by THC. In response to the interim audit report, THC provided copies of
two non-negotiated refund checks totaling $8,800. THC failed to establish the remaining
contributions were from permissible sources. Subsequent to the final audit report’s
submission to the Commission, THC submitted copies of negotiated refund checks and
bank statements to document that requested refunds had been made. (For more detail, see

page 7.)

Finding 3. Misstatement of Financial Activity

A comparison of THC’s reported activity to bank records revealed a misstatement of
receipts, disbursements, and cash on hand in both 2005 and 2006. For 2005, THC
overstated beginning cash on hand by $6,908, overstated receipts by $5,523, understated
disbursements by $61,109 and overstated ending cash on hand by $73,540. In 2006,
receipts were overstated by $85,040, disbursements were understated by $41,322 and the
ending cash on hand was overstated by $29,821. In response to the interim audit report,
THC filed amended disclosure reports which materially corrected the misstatements.

(For more detail, see page 9.)


Part II

Overview of Campaign
Campaign Organization

Texans for Henry Cuellar Congressional

Important Dates
Campaign
¢ Date of Registration January 10, 2002

e Audit Coverage

January 1, 2005 — December 31, 2006

Headquarters

Laredo, Texas

Bank Information

¢ Bank Depositories

One

e Bank Accounts

Two checking accounts

Treasurer

e Treasurer When Audit Was Conducted

Rosendo Carranco

¢ Treasurer During Period Covered by
Audit

Rosendo Carranco

Management Information

* Attended FEC Campaign Finance
Seminar

Yes

« Used Commonly Available Campaign
Management Software Package

Yes

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

Paid and volunteer staff

Overview of Financial Activity
(Audited Amounts)

Cash on hand @ January 1, 2005

$ (11,225)?

Receipts
o From Individuals $ 1,217,986
o__From Other Political Committees 580,288
o Total Receipts $ 1,798,274
Disbursements
o Operating Expenditures & Other
Disbursements $_ 1,776,668
o Total Disbursements $ 1,776,668
Cash on hand @ December 31, 2006 $ 10,381

? THC overdrew this account and the bank charged interest on the overdrawn balance.


D. Presumptive Redesignation of Excessive Contributions. When an authorized
political committee receives an excessive contribution from an individual or a non-multi-
candidate committee, the committee may presumptively redesignate the excessive portion
to the general election if the contribution:

+ Is made before that candidate’s primary election;

+ Is not designated in writing for a particular election;

* Would be excessive if treated as a primary election contribution; and

+ As redesignated, does not cause the contributor to exceed any other contribution

limit.

Also, the excessive portion of an undesignated contribution made after the primary, but
before the general election may be automatically applied to the primary if the campaign’s
net debts outstanding from the primary equal or exceed the amount redesignated.

The committee is required to notify the contributor in writing of the redesignation within
60 days of the treasurer’s receipt of the contribution and must offer the contributor the
option to receive a refund instead. For this action to be valid, the committee must retain
copies of the notices sent as required. Presumptive redesignations apply only within the
same election cycle. 11 CFR §110.1(b)(5)(ii)(B) & (C) and (1)(4)(ii).

E. Reattribution of Excessive Contributions. When an authorized committee receives
an excessive contribution, the committee may ask the contributor if the contribution was
intended to be a joint contribution from more than one person.
« The committee must, within 60 days of receipt of the contribution, obtain and
retain a reattribution letter signed by all contributors; or
¢ Refund the excessive contribution. 11 CFR §§110.1(k)(3), 110.1()(3) and

103.3(b)(3).

Notwithstanding the above, any excessive contribution that was made on a written
instrument that is imprinted with the names of more than one individual may be attributed
among the individuals listed unless instructed otherwise by the contributor(s). The
committee must inform each contributor:

e¢ How the contribution was attributed;.and .

¢ The contributor may instead request a refund of the excessive amount. 11 CFR

§110.1(K)(3)Gi)(B).
For this action to be valid, the committee must retain copies of the notices sent. 11 CFR
§110.1(1)(4)(ii).

F. Refund or Disgorge Questionable Contributions. If the identity of the original
contributor is known, the committee should either refund the funds to the source of the
original contribution or pay the funds to the U.S. Treasury. AO 1996-5.


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C. 20463

January 5, 2009
MEMORANDUM
To: Robert W. Biersack
Press Officer
From: Wanda J. Thomas af
Acting Assistant Si irector
Audit Division
Subject: Public Issuance of the Audit Report on Texans for Henry Cuellar
Congressional Campaign

Attached please find a copy of the audit report on Texans for Henry Cuellar
Congressional Campaign, which was approved by the Commission on December 18, 2008.

All parties involved have received informational copies of the report and the report
may be released to the public on January 5, 2009.

Attachment as stated

cc: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library

DSDD Website


3. LLC with Single Member. The contribution is considered a contribution from a
single individual if the LLC is a single-member LLC that has not chosen to be
treated as a corporation under IRS rules. 11 CFR §110.1(g)(4).

4. AnLLC that makes a contribution shall, at the time of the contribution, affirm
that it is eligible to make the contribution. 11 CFR §110.1(g)(5).

Facts and Analysis
A review of contributions from individuals identified two contribution checks, totaling

$13,000, on which was imprinted the reference L.P. or Ltd. According to the Texas
Secretary of State, each entity, though not incorporated, was registered with the state of
Texas as a Domestic Limited Partnership. Since such entities may elect tax treatment as
corporations, pending the receipt of a written statement from each entity explaining how
it elects to be taxed, the contributions were treated as being from a prohibited source.

If the contributions were from permissible sources, portions of two, totaling $10,500,
would be added to the excessive contributions in Finding 1., as follows:

o A $10,500 contribution would be excessive by $8,400 and appeared resolvable
only by refund; and,

o A $2,500 contribution would be excessive in its entirety; however, $2,100 could
have been resolved provided the necessary notification letter was sent to the
contributor advising of the presumptive redesignation action taken by THC and
the remaining $400 appeared resolvable only by refund.

The Audit staff advised THC’s representatives of this matter by phone and e-mail
following the receipt of documentation from a previously undisclosed account. To
address this issue, documentation was requested from each entity stating how each elects
to file its taxes. THC representatives said that they would obtain the requested

documentation.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that THC:

* Provide evidence demonstrating that the contributions in question were made
with permissible funds (a statement from the contributing entity explaining its tax
treatment or a copy of IRS Form 8832 entity classification election) and were not
excessive; or

e Refund the impermissible funds and/or refund/resolve the excessive contributions
as noted above and provide evidence of such refunds (copies of the front and back
of the negotiated refund checks); or

¢ — If funds were not available to make the necessary refunds, disclose the refunds
due on Schedule D (Debts and Obligations) until funds became available to make

the refunds.

In response to the interim audit report, THC provided copies of two non-negotiated
refund checks totaling $8,800. THC failed to establish the contributions are from
permissible sources. Therefore, the entire amount should have been refunded. However,
it appears that THC treated each contribution as permissible and attempted to refund the

excessive portion.


Finding 2. Receipt of Contributions from Prohibited
Sources

Summary
A review of contributions identified two contribution checks, totaling $13,000, which,

without additional information from the contributor were treated as having been received
from corporate sources. If the contributions are from permissible sources, portions of
each, totaling $10,500, would be added to the excessive contributions in Finding 1. Of
the $10,500 added to the excessive finding, $2,100 could have been resolved provided the
necessary notification letter was sent to the contributor advising of the presumptive action
taken by THC. In response to the interim audit report, THC provided copies of two non-
negotiated refund checks totaling $8,800. THC failed to establish the remaining
contributions were from permissible sources. Subsequent to the final audit report’s
submission to the Commission, THC submitted copies of negotiated refund checks and
bank statements to document that requested refunds had been made.

Legal Standard
A. Receipt of Prohibited Corporate Contributions. Political campaigns may not

accept contributions made from the general treasury funds of corporations. This
prohibition applies to any type of corporation including a non-stock corporation, an
incorporated membership organization, and an incorporated cooperative. 2 U.S.C.
$441b.

B. Definition of Limited Liability Company. A limited liability company (LLC) is a
business entity recognized as an LLC under the laws of the state in which it was
established. 11 CFR §110.1(g)(1).4

C. Application of Limits and Prohibitions to LLC Contributions. A contribution
from an LLC is subject to contribution limits and prohibitions, depending on several
factors, as explained below:
1, LLC as Partnership. The contribution is considered a contribution from a
partnership if the LLC chooses to be treated as a partnership under Internal
- Revenue Service (IRS) tax rules, or if it makes no clioice at all about its tax status.
A partnership contribution for the 2006 election may not exceed $2,100 (as
adjusted by the consumer price index) per candidate, per election, and it must be
attributed to each lawful partner. 11 CFR §110.1(a), (b), (e) and (g)(2).
2, LLC as Corporation. The contribution is considered a corporate contribution—
and is barred under the Act—if the LLC chooses to be treated as a corporation
under IRS rules, or if its shares are traded publicly. 11 CFR §110.1(g)(3).

* In July 2008, the Commission responded to an advisory opinion request from an LLP organized under the laws of
Florida, which elected corporate tax treatment for Federal tax purposes and, although taxed as a corporation in other
states, would be taxed as a partnership in the states of Florida and Massachusetts. This LLP wanted to know whether
the Commission considered it a corporation or partnership under the Act and Commission regulations and would it be
permitted to support a separate segregated fund (SSF). The Commission determined that it would consider the LLP to
bea partnership. This suggests that contributions from such entities should be treated in a manner similar to LLCs,
requiring the Audit staff to determine tax filing status of an LLP with the appropriate state.


Part IV
Findings and Recommendations

|Finding 1. Receipt of Contributions that Exceed Limits

Summary
THC received $36,300 in excessive contributions from twelve individuals and one

partnership. Some of these excessive contributions resulted from improper election
designations and/or contributor attributions. Excessive contributions totaling $14,000
from ten contributors lacked the requisite contributor notifications of the presumptive
redesignations/reattributions. The remaining $22,300 appeared to require refunds. In
response to the interim audit report, THC provided copies of seven non-negotiated refund
checks totaling $22,300 and redesignation/reattribution letters sent to the contributors for
the remainder. Subsequent to the final audit report’s submission to the Commission,
THC submitted copies of negotiated refund checks and bank statements to document that
requested refunds had been made.

Legal Standard
A. Authorized Committee Limits. An authorized committee may not receive more

than a total of $2,000 per election from any one person as adjusted by the Consumer
Price Index (CPI). 2 U.S.C. §441a(a)(1)(A), (c) and (f); 11 CFR §§110.1(a) and (b) and
110.9(a).

Based on the respective CPIs, the contribution limit for any one person for the 2006
election cycle was $2,100 and $2,300 for the 2008 election cycle.

B. Contributions by Partnerships. A contribution by a partnership is attributable to the
partnership and proportionally to each partner. The contribution shall not exceed the
limitations at 11 CFR 110.1(b), (c) and (d). 11 CFR §110.1(e).

C. Handling Contributions That Appear Excessive. If a committee receives a
contribution that appears to be excessive, the committee must either:

e Return the questionable check to the donor; or

¢ Deposit the check and:

0 Keep enough money in the account to cover all potential refunds;

o Keep a written record explaining why the contribution may be illegal;

o Include this explanation on schedule A if the contribution has to be itemized
before its legality is established;

o Seek a reattribution or a redesignation of the excessive portion, following the
instructions provided in Commission regulations (see below for explanations
of reattribution and redesignation); and

o Ifthe committee does not receive a proper reattribution or redesignation
within 60 days after receiving the excessive contribution, refund the excessive
portion to the donor. 11 CFR §§103.3(b)(3), (4) and (5) and
110.1(k)(3)Gi)(B).


Table of Contents

Part I. Background
Authority for Audit
Scope of Audit

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

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Receipt of Contributions that Exceed Limits
Finding 2. Receipt of Contributions from Prohibited Sources
Finding 3. Misstatement of Financial Activity

Page

NN

_


1}

The understatement of receipts resulted from the following:

© Unreported receipts — legal defense fund $ 56,474
e Unreported in-kind contributions 5,201
e Unexplained difference 23,365

Understatement of receipts $85,040

The volume and condition of THC records did not allow for the unexplained difference to
be specifically identified. However, THC receipts consisted solely of contributions from
individuals or contributions from other political committees. All contributions from other
political committees were reviewed and all were reported. Therefore, it can be inferred
that these unreported receipts were all contributions from individuals.

The understatement of disbursements resulted from the following:

¢ Prior period reversal reported in error ($ 2,100)
« Unreported disbursements 61,692
« Unreported disbursements — legal defense fund 28,388
¢ Adjustments to unitemized disbursements 2,449
« Disbursements reported not supported by check or debit (27,488)
¢ Transactions detailed on a loan analysis reported in error (23,493)
e Unexplained difference 1,874

Net understatement of disbursements $41,322

During the audit period, payments THC made on its loan had been credited to another
non-campaign related loan incurred by the Candidate. The bank provided a detailed loan
analysis which showed that corrections had been made. As noted above, some
information from this document was incorrectly reported by TLC.

The $29,821 overstatement of ending cash on hand resulted from the misstatements noted
above.

At the exit conference, the Audit staff explained the misstatements and subsequently
provided THC representatives with schedules detailing these discrepancies. They agreed
to review the spreadsheets provided-and expressed a willingness to file amended reports.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that THC:
¢ Amend its reports to correct the misstatements noted above.
¢ In addition, the Audit staff recommended that THC amend its most recently filed
report to correct the cash on hand balance with an explanation that the change
resulted from a prior period audit adjustment. Further, THC should have
reconciled the cash balance of its most recent report to identify any subsequent
discrepancies that may have impacted on the $29,821 adjustment recommended
by the Audit staff.


Report of the Audit Division
on Texans for Henry Cuellar
Congressional Campaign

January 1, 2005 — December 31, 2006



Report of the Audit Division on
Texans for Henry Cuellar

Congressional Campaign
January 1, 2005 - December 31, 2006

Why the Audit

Was Done

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

Future Action

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

About the Campaign (p. 2)

Texans for Henry Cuellar Congressional Campaign is the principal
campaign committee for Henry Cuellar, Democratic candidate for the
U.S. House of Representatives from the state of Texas, 28" District and
is headquartered in Laredo, Texas. For more information, see the chart
on the Campaign Organization, p. 2.

Financial Activity (p. 2)

e Receipts
o From Individuals $1,217,986
o From Other Political Committees 580,288
o Total Receipts $1,798,274

e¢ Disbursements
o Operating Expenditures & Other
Disbursements $1,776,668
o Total Disbursements $1,776,668

Findings and Recommendations (p. 3)

¢ Receipt of Contributions that Exceed Limits (Finding 1)

¢ Receipt of Contributions from Prohibited Sources (Finding 2)
¢ Misstatement of Financial Activity (Finding 3)

"2 U.S.C. §438(b).


Subsequent to the final audit report’s submission to the Commission, THC submitted
copies of negotiated refund checks and bank statements to document that requested
refunds had been made.

| Finding 3. Misstatement of Financial Activity

Summary
A comparison of THC’s reported activity to bank records revealed a misstatement of
receipts, disbursements, and cash on hand in both 2005 and 2006. For 2005, THC
overstated beginning cash on hand by $6,908, overstated receipts by $5,523, understated
disbursements by $61,109 and overstated ending cash on hand by $73,540. In 2006,
receipts were overstated by $85,040, disbursements were understated by $41,322 and the
~ ending cash on hand was overstated by $29,821. In response to the interim audit report,
THC filed amended disclosure reports which materially corrected the misstatements.

Legal Standard

Contents of Reports. Each report must disclose:

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

¢ The total amount of receipts for the reporting period and for the calendar year;

¢ The total amount of disbursements for the reporting period and for the calendar year;
and

¢ Certain transactions that require itemization on Schedule A (Itemized Receipts) or
Schedule B (Itemized Disbursements). 2 U.S.C. §434(b)(1), (2), (3), (4), and (5).

Facts and Analysis

The Audit staff reconciled reported financial activity to bank records for calendar years
2005 and 2006. The following charts outline the discrepancies for the beginning cash
balance, receipts, disbursements and the ending cash balance for each year. Succeeding
paragraphs address the reasons for the misstatements.

During fieldwork, the Audit staff became aware of an additional bank account. The legal
defense fund account (fund) began as a recount fund following the March 2004 primary
election; the recount dispute ended when the opponent conceded on August 1B, 2004.
THC maintained this fund throughout the audit period. All but one of the expenditures
from this account were made for legal services. The available documentation, though
limited, indicated that the payments were made for services rendered in the audit period.
About 60% of the contribution checks deposited into this fund were payable to “Texans
for Henry Cuellar.” Therefore, for audit purposes, the Audit staff treated this fund as a
THC campaign account.


12

In response to the interim audit report, THC filed amended reports which materially
corrected the misstatements for 2005 and 2006; and, corrected cash on hand on its most
recent report.