RECEIVED 

FEOERAL ELECTION 

COMMISSION 

SECRETARIAT 

S FEDERAL ELECTION COMMISSION 2812 AUG -3 PM I|: k9 

WASHINGTON. D.C. 20463 

August 2, 2012 

MEMORANDUM 

To: The Commission 

Tfarougfa: Alec Palmer 

Staff Director 

From: Patricia C. Orrock 

Cfaief Compliance Officer 

Tom Hintermister — 

Assistant Staff Director 

Audit Division 

Marty Favin 

Audit Manager 

By: Gary Hacfae 

Lead Audito 

Subject: Audit Division Recommendation Memorandum on tfae Minnesota 

Democratic-Farmer-Labor Party (MNDFL) (A09-08) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

tfae Audit staffs recommendations are presented below and the findings are discussed in the 

attached Draft Final Audit Report (DFAR). The Office of General Counsel faas reviewed 

tfais memorandum and concurs widi tfae recommendations. 

Finding 1. Misstatement of Financial Activity 

A. In response to tfae DFAR, tfae MNDFL acknowledged filing amendments to its 

2007 - 2008 reports to correct certain items and casfa-on-faand amounts. 

However, the MNDFL did not agree witfa tfae Audit staff's conclusion tfaat tfae 

payroll account was a federal account requiring all activity (federal and nonfederal) to be disclosed. It is the MNDFL's contention tfaat tfae payroll account is 

neitfaer a federal nor non-federal account but ratfaer an "escrow account" used to 
transmit payroll from its federal and non-federal accounts similar to tfae account 

used by the Georgia Federal Elections Committee (GFEC) that was an issue in the 

2006 election cycle. 

The MNDFL states that the payroll account was establisfaed to address tfae need to 

pay employees and die Intemal Revenue Service from one account. Wfaile tfae 

MNDFL acknowledged tfaat it "apparently and inadvertently" overfimded tfae 

non-federal payroll during tfae 2008 election cycle, tfae overfunding was offset by 

tfae underfunding of tfae non-federal sfaare of overall expenses. Tfae MNDFL 

furtfaer stated that it "believes that tfaese were funds in-transit, and were ultimately 

used only for non-federal activity" and none of tfae funds "were used to subsidize 

any federal activity." 

Tfae Audit staff maintains tfaat die payroll account was used by tfae MNDFL in a 

manner similar to an "allocation account." Altfaougfa tfae MNDFL did not report 

any allocated salary and payroll tax expenditures on Scfaedule H4', wfaen viewed 

from a global perspective eacfa pay period involved an allocation of federal and 

non-federal salaries and taxes paid from one account. Tfae payroll account was 

funded by transfers from federal and non-federal accounts. As stated in Finding 2 

below, tfae MNDFL did not overfund tfae non-federal sfaare of overall expenses, 

but an analysis of tfae receipts and disbursements from tfae payroll account sfaowed 

tihat tfaere were insufficient federal funds in tfae payroll account to pay for tfae total 

reported federal expenditures resulting in an overfunding of tfae federal sfaare of 

salaries and taxes by tfae non-federal accounts. 

Tfae Audit staff recommends tfaat tfae Commission find tfaat die MNDFL misstated 

2007 - 2008 activity and failed to report non-federal salaries and taxes paid from 

tfaeir payroll account. 

B. At tfae 2008 Democratic National Convention, die MNDFL faad an event or events 

at tfae Sfaeraton Four Points Denver Southeast hotel. The catering bill for tfais 

event or events totaled $36,943. The MNDFL faad already paid a deposit of 

$17,634 to die Sfaeraton Four Points, wfaicfa was applied to tfae bill, leaving a 

balance due of $19,309. 

Subsequentiy, die Sfaeraton Four Points applied an unexplained $10,000 credit to 

the remaining bill, reducing the remaining balance to $9,309. Tfae invoice 

sfaowing die credit was accompanied by a copy of a $10,000 check to die 

Sheraton Four Points from Soudi Clinton Street Investments, LLC (SCSI). Tfae 

MNDFL paid tfae remaining balance, and reported tfaat payment, but did not report 

tfae receipt of or application of tfae $10,000 credit. 

In tfae Interim Audit Report (IAR), die Audit staff recommended tfaat die MNDFL 

provide documentation to sfaow tfaat tfae $10,000 received from SCSI was a 

Federal and non-federal employee benefits were paid from a federal administrative account and reported 

on Schedule H4, Disbursements for Federal/Nonfederal Activity. 
permissible in-kind contribution, hi response to die IAR. tfae MNDFL provided 

documentation from SCSI purporting to sfaow tfaat tfae funds were not an in-kind 

contribution - at least, not from SCSI. SCSI is tfae owner/operator of a different 

Denver-area Sfaeraton hotel, the Sfaeraton Denver Tecfa Center. SCSI's statement 

asserted that tfae Sfaeraton Denver Tecfa Center received and deposited tfae funds in 

error, and subsequently forwarded tfaem by SCSI's cfaeck to tfae Sheraton Four 

Points, which applied die funds to die MNDFL's catering bill. However. SCSI 

did not identify from whom it received the funds, nor did it describe the nature of 

die error diat led it to receive and deposit tfae funds. Neitfaer SCSI nor die 

Sfaeraton Denver Tecfa Center ever received any funds from the MNDFL. 

Audit staff examined information in tfae Commission's possession, including 

disclosure reports, and discovered tfaat tfae Denver 2008 Convention Host 

Committee (Denver Host) faad reported a $10,000 disbursement for "sponsor 

benefit fulfillment" to die Sfaeraton Tecfa Center. In die DFAR, the Audit staff 

concluded diat the in-kind contribution was received from tfae Denver Host ratfaer 

dian SCSI. 

In response to die DFAR, tfae MNDFL acknowledged diat wfaile tfae funds applied 

to tfae MNDFL's catering bill "may faave derived from funds diat were paid by tfae 

Denver 2008 Convention Host Committee to tfae hotel, it is not clear, and in 

[tfaeir] view, unlikely, tfaat tfais payment was, in fact, an in-kind contribution." 

Based on oral discussions witfa tfae representatives of die Denver Host (wfaicfa faas 

terminated) and odier information gatfaered, die MNDFL believes diat die funds 

most likely represented a refund (altfaougfa no details or documentation was 

provided by die MNDFL in its response) for a cancelled event faonoring die 

Minnesota delegation tfaat was to be paid by die Denver Host. Tfae supposed 

refund, through a series of transactions, wound up credited to the MNDFL's 

catering bill at the Sfaeraton Four Points Denver Soudieast. Tfae MNDFL stated 

diat it could not determine if die credit to tfaeir account was intentional or 

accidental, nor could tfae original source of tfae funds be determined. 

Tfae Audit staff concludes diat tfae MNDFL received an in-kind contribution from 

an unknown source tfaat was not reported nor disgorged to tfae U.S. Treasury wfaen 

tfae permissibility of die funds could not be confirmed. 

Tfae Audit staff recommends tfaat die Commission find that die MNDFL misstated 

activity in 2008 and failed to report an in-kind contribution in the amount of $10,000. 

Since the source and permissibility of the contribution remains in question, the Audit 

staff further recommends that the Commission request that the MNDFL disgorge 

$10,000 to die U.S. Treasury. 

Finding 2. Overfunding of Federal Accounts by Non-federal Accounts 

In the DFAR, die Audit staff concluded that die MNDFL sufficiently demonstrated that it 

did not overfund its federal accounts widi funds from its non-federal accounts. Tfae Audit 
staff recommends that the Conunission find that the MNDFL has demonstrated that its 

non-federal accounts did not overfimd its federal accounts. 

The Committee did not request an audit hearing. 

If this memorandum is approved, a Proposed Final Audit Report will be prepared witfain 

30 days of tfae Commission's vote. 

Sfaould an objection be received. Directive No. 70 states tfaat tfae Audit Division 

Recommendation Memorandum will be placed on tfae next regularly scfaeduled open 

session agenda. 

Documents related to tfais audit report can be viewed in tfae Voting Ballot Matters folder. 

Sfaould you faave any questions, please contact Gary Hacfae or Marty Favin at 694-1200. 

Attacfaments: 

- Draft Final Audit Report of tfae Audit Division on tfae Minnesota DemocraticFarmer-Labor Party 

- Legal Report Analysis (LRA835) of tfae Draft Final Audit Report on tfae 

Minnesota Democratic-Farmer-Labor Party 

cc: Office of General Counsel 
Draft Final Audit Report of the 

Audit Division on the Minnesota 

Democratic-Farmer-Labor Party 

(January 1, 2007 - December 31. 2008) 

Why the Audit 

Was Done 

Federal law permits tfae 

Commission to conduct 

audits and field 

investigations of any 

political committee tfaat 

is required to file reports 

under tfae Federal 

Election Campaign Act 

(tfae Act). Tfae 

Commission generally 

conducts sucfa audits 

wfaen a committee 

.. o 

appears not to faave met ^^1^ . ^ 

tfae tfaresfaold " 

requirements for . 

substantial compliance""^^^^ 

widi die Act.' Tfae audit 

About the Committee (p. 2) 

Tfae Minnesota Democratic-Farmer-Labor Party is a state party 

committee witfa faeadquarters in St. Paul. Minnesota. For more 

information, see tfae cfaart on tfae Committee Organization, p. 2. 

o 

o 

o 

determines wfaether the 

committee complied 

with the limitations, 

profaibitions and 

disclosure requkements 

of the Act. 

Financial Activity (p. 3) 

• Receipts 

o Individual Contributions 

Political Conunittee Conuributions 

Transfers from Affiliates 

Transfers from Non-federal 

Accounts 

Recount Fund Contributions 

Offsets and Odier Receipts 

'^Total Receipts 

^^Disbursements 

^o-^^. Operating Expenditures 

* Activity 

Transfers to Non-federal Accounts 

.^^s^Contributions to Candidates 

6;^'Coordinated Expenditures 

o Recount Expenditures 

Total Disbursements 

$ 1,839,117 

2,233,845 

5,898,356 

2,394,428 

694,850 

1,042,345 

$ 14,102,941 

$ 6,458,425 

6,398.033 

287,061 

20,000 

266,844 

660,719 

$ 14,091,082 

Future Action 

The Commission may 

initiate an enforcement 

action, at a later time, 

with respect to any of the 

matters discussed in tfais 

report. 

Findings and Recommendations (p. 4) 

• Misstatement of Financial Activity (Finding 1) 

• Over-funding of Federal Accounts by Non-federal Accounts 

(Finding 2) 

2 U.S.C. §438(b). 
Draft Final Audit Report of the 

Audit Division on the Minnesota 

Democratic-Farmer-Labor Party 

(January 1, 2007 - December 31, 2008) 
Table of Contents 

Page 

Part I. Background 

Autfaority for Audit 1 

Scope of Audit 1 

Limitations 1 

Part II. Overview of Committee 

Committee Organization 2 

Overview of Financial Activity 3 

Part III. Summaries 

Findings and Recommendations 4 

Part IV. Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 5 

Finding 2. Over-funding of Federal Accounts by Non-federal Accounts 11 
Parti 

Background 

Authority for Audit 

Tfais report is based on an audit of tfae Minnesota Democratic-Farmer-Labor Party 

(MNDFL), undertaken by tfae Audit Division of tfae Federal Election Commission (the 

Commission) in accordance with tfae Federal Election Campaign Act of 1971, as 

amended (tfae Act). Tfae Audit Division conducted tfae audit pursuant to 2 U.S.C. 

§438(b). wfaicfa permits tfae Commission to conduct audits and field investigations of any 

political committee tfaat is required to file a report under 2 U.S.C. §434. Prior to 

conducting any audit under tfais subsection, tfae Commission must perform an intemal 

review of reports filed by selected committees to determine if tfae reports filed by a 

particular committee meet tfae tfaresfaold 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, this audit examined: 

1. die receipt of excessive contributions and loans; 

2. the receipt of contributions from prohibited sources; 

3. die disclosure of contributions received; 

4. the disclosure of disbursements, debts and obligations; 

5. tfae disclosure of expenses allocated between federal and non-federal accounts; 

6. tfae consistency between reported figures and bank records; 

7. tfae completeness of records; and 

8. otfaer committee operations necessary to die review. 
Part II 

Overview of Committee 

Committee Organization 

Important Dates 

• Date of Registration July 15.1975' 

• Audit Coverage January 1. 2007 - December 31,2008 

Headquarters St. Paul, Minnesota 

Bank Information 

• Bank Depositories Tfaree 

• Bank Accounts 13 Federal Accounts 

Five Non-federal Accounts 

Treasurer 

• Treasurer Wfaen Audit Was Conducted Lori Sellner [dun Febmary 8,2011] 

Tfaomas Hamilton [as of Febmary 9, 2011] 

• Treasurer During Period Covered by Audit William J. Davis [thm Febmary 18, 2009] 

Management Information 

• Attended FEC Campaign Finance Seminar Yes 

• Wfao Handled Accounting and 

Recordkeeping Tasks 

Paid Staff 

^ The committee registered with the Secretary of the Senate as the Minnesota Dollars for Democrats (a federal 

committee of the Minnesota Democratic-Farmer-Labor State Party). In 1980, die committee filed an Amended 

Statement of Organization, changing the name of the committee to the Minnesota Democratic-Farmer-Labor Party. 
Overview of Financial Activity 

(Audited Amoimts) 

Cash-on-hand @ January 1,2007 $ 225,904 

Receipts 

o Individual Contributions $ 1,839,117 

o Political Committee Contributions 2,233,845 

o Transfers from Affiliates 5.898.356 

o Transfers from Non-federal Accounts 2,394,428 

o Recount Fund Contributions 694,850 

o Offsets and Other Receipts 1,042,345 

Total Receipts $ 14,102,941 

Disbursements 

o Operating Expenditures $ 6.458,425 

o Federal Election Activity 6,398,033 

o Transfers to Non-federal Accounts 287,061 

o Contributions to Candidates 20.000 

o Coordinated Expenditures 266,844 

o Recount Expenditures 660,719 

Total Disbursements $ 14,091,082 

Cash-on-hand @ December 31,2008 $ 237,763 
Part in 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

During audit fieldwork, a comparison of tfae MNDFL's reported financial activity witfa its 

bank records revealed a misstatement of receipts and disbursements in calendar years 

2007 and 2008. Tfae misstatements were due mainly to unreported transfers from tfae 

non-federal accounts to tfae Payroll account and unreported receipts and operating 

expenditures. For 2007, die MNDFL understated receipts by $441,228 and 

disbursements by $469,230. For 2008, tfae MNDFL understated receipts by $1,303,611 

and disbursements by $1,205,799. fai response to the Interim Audit Report 

recommendation, the MNDFL amended its reports to materially correct tfae 

misstatements noted above except for tfae reporting of tfae Payroll account transactions 

related to tfae 100% non-federal employees. 

Also, tfae MNDFL submitted documentation to sfaow tfaat an apparent profaibited 

contribution it received was, in fact, permissible. However, tfae MNDFL did not include 

tfais contribution in its amended reports. (For more detail, see p. 5) 

Finding 2. Over-funding of Federal Accounts by Nonfederal Accounts 

During audit fieldwork, an analysis of die MNDFL's transfers from its non-federal 

accounts indicated tfaat tfae MNDFL may faave overfunded its federal accounts by as 

mucfa as $277,103. Tfae overfunding resulted from unsupported transfers from tfae nonfederal accounts to the federal accounts, an overfunding of the Payroll account for tfae 

non-federal portion of payroll, and reported federal activity paid from die non-federal 

accounts. 

In response to tfae Interim Audit Report recommendation, tfae MNDFL submitted 

additional documentation, in conjunction witfa its amended reports, wfaicfa sfaowed tfaat 

the committee did not overfund its federal account. (For more detail, see p. 11) 
Part IV 

Findings and Reconmiendations 

I Finding 1. Misstatement of Financial Activity 

Summary 

During audit fieldwork, a comparison of the MNDFL's reported financial activity with its 

bank records revealed a misstatement of receipts and disbursements in calendar years 

2007 and 2008. The misstatements were due mainly to unreported transfers from tfae 

non-federal accounts to tfae Payroll account and unreported receipts and operating 

expenditures. For 2007, die MNDFL understated receipts by $441,228 and 

disbursements by $469,230. For 2008, die MNDFL understated receipts by $1,303,611 

and disbursements by $1,205,799. In response to tfae Interim Audit Report 

recommendation, the MNDFL amended its reports to materially correct the 

misstatements noted above except for the reporting of die Payroll account transactions 

related to the 100% non-federal employees. 

Also, the MNDFL submitted documentation to show that an apparent prohibited 

contribution it received was. in fact, permissible. However, the MNDFL did not include 

this contribution in its amended reports. 

Legal Standard 

A. Contents of Reports. Each report must disclose: 

• the amount of casfa-on-faand at tfae beginning and end of tfae reporting period; 

• die total amount of receipts for die reporting period and for die calendar year; 

• tfae total amount of disbursements for tfae reporting period and for tfae calendar 

year; and 

• certain transactions tfaat require itemization on Scfaedule A (Itemized Receipts) or 

Schedule B (Itemized Disbursements). 2 U.S.C. §434(b)(l), (2). (3). (4) and (5). 

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

committees may not accept contributions (in the form of money, in-kind contributions or 

loans) from tfae treasury funds of the following prohibited sources: 

• corporations (this means any incorporated organization, including a non-stock 

corporation, an incorporated membership organization, and an incorporated 

cooperative); 

• labor organizations; or 

• national banks. 2 U.S.C. §441b. 

C. Contributions by Limited Liability Companies (LLC). A limited liability 

company is a business entity that is recognized as same under the laws of the state in 

whicfa it is establisfaed. An LLC dial elects to be treated as a corporation by tfae Intemal 

Revenue Service under 26 CFR 301.7701-3 sfaall be considered a corporation pursuant to 

11 CFR Part 114. An LLC diat makes a contribution to a candidate or committee shall 
provide information as to how die contribution is to be attributed and affirm diat it is 

eligible to make die contribution. 11 CFR § 110.1(g). 

Facts and Analsrsis 

A. Facts 

During audit fieldwork, the Audit staff reconciled the MNDFL's reported activity with its 

bank records and identified a misstatement of receipts and disbursements for calendar 

years 2007 and 2008. The following charts detail the discrepancies between the totals on 

the MNDFL's disclosure reports and bank records. Succeeding paragraphs explain why 

tfae discrepancies occurred. 

2007Activity 

Reported Bank Records Discrepancy 

Beginning Casfa Balance 

@ January 1,2007 

$212,947 $225,904 $12,957 

Understated 

Receipts $1,381,869 $1,823,097 $441,228 

Understated 

Disbursements $1,409,884 $1,879,114 $469,230 

Understated 

Ending Casfa Balance @ 

December 31.2007 

$184,932 $169,887 $15,045 

Overstated 

Tfae $12,957 understatement of tfae beginning casfa balance was likely due to prior period 

reporting discrepancies. 

Tfae understatement of receipts was tfae result of tfae following: 

• Transfers from tfae non-federal accounts to die Payroll Account $ 395,072 

for 100 percent non-federal payroll and benefits not reported 

• Non-payroll transfers from tfae non-federal accounts not 46.040 

reported 

• Non-federal sfaare of vendor refunds reported as a negative 24.261 

receipt on Scfaedule H-3^ 

• Transfer from tfae non-federal account reported twice (5.000) 

• Unexplained difference (19.145) 

Net Understatement of Receipts $ 441.228 

Tfae understatement of disbursements was tfae result of tfae following: 

• 100 percent non-federal salaries, taxes and benefits paid from 

die Payroll account and federal accounts not reported 

$ 431,292 

^ A refund of the federal and non-federal share of allocable activity may be disclosed either as negative 

entries on Schedule H-4 or as a receipt on Line 15 of Schedule A and a disbursement to the non-federal 

account for the non-federal share on Schedule H-4. 
Transfer to tfae non-federal account not reported 

Non-federal sfaare of vendor refunds reported as a negative 

receipt on Scfaedule H-3 

Operating expenditures not reported 

Reported disbursements subsequently voided witfa no 

adjustment made to reports 

Reported disbursements not supported by a cancelled cfaeck 

Unexplained difference 

Net Understatement of Disbursements 

7,000 

24.261 

12,630 

(1.392) 

(4,173) 

(388) 

$ 469.230 

Tfae $15,045 overstatement of tfae ending casfa balance resulted from tfae reporting 

discrepancies noted above. 

2008 Activity 

Reported Bank Records Discrepancy 

Beginning Casfa Balance 

©January 1,2008 

$184,932 $169,887 $15,045 

Overstated 

Receipts $10,976,233 $12,279,844 $1,303,611 

Understated 

Disbursements $11,006,169 $12,211,968 $1,205,799 

Understated 

Ending Casfa Balance @ 

December 31,2008 

$154,996 $237,763 $82,767 

Understated 

Tfae understatement of receipts was tfae result of the following: 

• Transfers from tfae non-federal accounts to tfae Payroll Account 

for 100 percent non-federal payroll and benefits not reported 

• Non-payroll transfers from tfae non-federal accounts not 

reported 

• Non-federal sfaare of vendor refunds reported as a negative 

receipt on Scfaedule H-3 

• Receipts not reported^ 

• In-kind contributions not reported 

• Reported receipt deposited in tfae non-federal account 

• Reported receipts tfaat did not clear tfae federal accounts 

• Unexplained difference 

Net Understatement of Receipts 

Tfae understatement of disbursements was tfae result of tfae following: 

• 100 percent non-federal salaries, taxes and benefits paid from 

tfae Payroll account and federal accounts not reported 

$ 827.853 

108.975 

2.716 

402,186 

13,127 

(14,627) 

(21,243) 

(15.376) 

S 1.303.611 

$ 591,524 

* Includes a $150,000 non-federal receipt deposited into the federal account in error (funds were transferred 

to the non-federal account), an $81,000 reimbursement from the non-federal account for a non-federal 

expenditure paid by the federal account in error, a $61,000 transfer from a national party committee and a 

$16,000 transfer from an authorized committee. 
• Non-federal sfaare of vendor refunds reported as a negative 2.716 

receipt on Schedule H-3 

• Operating expenditures not reported 406.312 

• Bank and credit card fees not reported 38,345 

• Transfers to non-federal accounts not reported 251,450 

• Reported disbursements paid from the non-federal accounts (51,105) 

• In-kind contributions not reported 16,111 

• Reported disbursements subsequentiy voided with no (33,666) 

adjustment made to reports 

• Reported disbursements not supported by a cancelled check (24,356) 

• Unexplained difference 8,468 

Net Understatement of Disbursements $ 1.205.799 

The $82,767 understatement of the ending cash balance resulted from the reporting 

discrepancies noted above. 

The discrepancies in financial activity noted above occurred primarily because the 

MNDFL did not report certain payroll transactions involving the Payroll account and tfae 

federal administrative accounts. Tfae MNDFL separated its employees into two classes: 

100 percent federal and 100 percent non-federal. A MNDFL representative stated tfaat 

tfae MNDFL establisfaed the system to ease the administrative burden of payroll 

processing. If an employee spent any time working on federal activity during the pay 

period, he or she was paid 100 percent from federal fimds transferred to tfae Payroll 

account and tfae MNDFL disclosed tfae salary payments on Schedule B. If an employee 

spent die pay period working solely on non-federal activity, the MNDFL paid diem 100 

percent from non-federal funds transferred to tfae Payroll account and did not report tfae 

salary and related costs. 

Tfae MNDFL paid all salaries and related employee taxes from one Payroll account 

administered by MNDFL staff and paid employee faealtfa insurance and retirement 

benefits from the federal administrative accounts. Transfers from tfae federal and nonfederal accounts funded the Payroll account. Tfae Audit staff included tfae Payroll 

account as a federal account.^ Tfae MNDFL disclosed only tfae federal activity paid out of 

tfae Payroll account and tfae portion of benefits relating to federal employees paid from 

the federal administrative accounts. An analysis of the salaries paid to all employees 

during the audit period showed diat die MNDFL paid $3,176,793 (81 percent) of die 

salaries as 100 percent federal and $756,744 (19 percent) as 100 percent non-federal. 

Subsequent to the period under audit, the MNDFL established a separate non-federal 

Payroll account. 

The MNDFL also processed the payroll costs for the employees of three federal 

candidate committees and included them in die payroll amounts above. The candidate 

^ There was no allocated payroll. 

' A federal account means an account at a campaign depository that contains funds to be used in connection 

with a Federal election. 11 CFR §300.2(f). 
committees reimbursed the MNDFL to offset tfae payroll costs for tfaeir employees. Tfae 

MNDFL and tfae candidate committees properly disclosed tfae salary payments and 

reimbursements. Tfae MNDFL made expenditures for salary payments totaling $731,449 

and die candidate committees reimbursed die MNDFL $705,734. Tfae salary payments in 

excess of tfae reimbursement amount ($25,715) resulted in an in-kind contribution to tfae 

candidates from die MNDFL.^ 

A $10,000 contribution from Soudi Clinton Street Investments. LLC (SCSI) was included 

among tfae 2008 unreported in-kind contributions. During tfae 2008 Democratic National 

Convention faeld in Denver, Colorado, die MNDFL contracted witfa die Four Points by 

Sfaeraton Denver Soutfaeast to provide catering services for the Minnesota State 

delegation. On August 24. 2008, tfae committee paid tfae faotel a deposit of $17,634. Tfae 

faotel provided catering services on August 25 - 29,2008, totaling $36,943. leaving a 

balance due of $19,309. On September 22,2008, die faotel applied a $10,000 check 

drawn on die operating account of SCSI to the MNDFL's account. Tfae MNDFL did not 

report tfais in-kind contribution and during fieldwork tfae Audit staff did not find any 

documentation in die MNDFL's files to sfaow tfaat SCSI was permitted to make tfae 

contribution. 

B. Interim Audit Report & Audit Division Recommendation 

At die exit conference, tfae Audit staff provided tfae MNDFL representatives witfa 

workpapers detailing tfae misstatements of financial activity, including die apparent 

profaibited contribution. Regarding tfae Payroll account, counsel for tfae MNDFL stated 

tfaat tfae Payroll account was neitfaer a federal nor a non-federal account, but merely a 

pass-tfarougfa account establisfaed to reduce tfae administrative workload of tfae MNDFL, 

and only tfae expenditures related to federal activity needed to be reported.^ 

Tfae Audit staff and tfae MNDFL representatives discussed tfae contribution from SCSI 

before and at tfae exit conference. Tfae Audit staff requested tfaat MNDFL provide 

information and/or documentation to sfaow tfaat the payment was either not a contribution 

or that SCSI was permitted to make a contribution. Tfae MNDFL faad not submitted any 

additional documentation conceming tfais matter, as of tfae transmittal of tfae Interim 

Audit Reporl to die MNDFL. 

The Interim Audit Report recommended lhat the MNDFL: 

• amend ils reports to correct the misstatements for 2007 and 2008 as noted above; 

• amend ils most recent report lo correci die casfa-on-faand balance witfa an 

explanation tfaat tfae cfaange resulted from a prior period audit adjustment; 

^ The Audit staff concluded that the excess salary payments made on behalf of two ofthe candidates were 

permissible because they did not exceed the contribution limit for a state party committee to a federal 

candidate. For the remaining candidate, the in-kind contribution exceeded the contribution limit by 

$11,368. Since the MNDFL had not exceeded its limit for coordinated expenditures for this candidate, the 

Audit staff concluded that the excess payments were permissible. 

^ In the Final Audit Report ofthe Commission on the Georgia Federal Elections Committee (2006), where 

funds were transferred from federal and non-federal accounts to a payroll escrow account at the request of a 

third party payroll vendor that could not draw funds from two different accounts, the Commission 

concluded that the committee did not have to further amend its reports in relation to transactions involving 

the payroll escrow account. 
10 

• reconcile tfae casfa balance of its most recent report to identify any subsequent 

discrepancies tfaat may affect tfae adjustment reconunended by tfae Audit staff; and 

• provide evidence lo sfaow tfaat tfae unreported in-kind paymenl made by SCSI was 

eitfaer nol a contribution or tfaat SCSI was permitted lo make a contribution. 

Absent sucfa evidence, tfae Audit staff recommended tfaat tfae MNDFL report tfae 

in-kind contribution and refund $10,000 lo SCSI. 

C. Committee Response to Interim Audit Report 

In response to tfae Interim Audit Repon recommendation relating to tfae misstatement of 

financial aciivity, die MNDFL amended its reports to materially correct tfae 

misstatements noted above except for tfae reporting of tfae Payroll account transactions 

related to tfae 100 percent non-federal employees. Based on tfae amended reports filed in 

response to Interim Audit Report, receipts are understated by $395,072 for 2007 and 

$857,747 for 2008. Disbursements are understated by $433,311 for 2007 and $701,688 

for 2008. 

Tfae MNDFL stated tfaat it will not be amending its reports to include tfae non-federal 

Payroll account activity at tfais time because it believes tfae account is not a federal 

account but radier a "pass tfarougfa account" not intended to pay any expenses otfaer tfaan 

tfae payroll expenses wfaicfa are faandled in-faouse by tfae committee. Tfae MNDFL 

believes tfaat to require disclosure of tfaese amounts would result in an artificial increase 

of its federal activity and be confusing to tfae readers of tfaeir disclosure reports. Tfae 

MNDFL referenced tfae Commission's action previously taken in regard to tfae Georgia 

Federal Elections Committee (GFEC) in wfaich it was determined that die GFEC did not 

have to report the non-federal payroll activity. 

In tfae case of tfae GFEC. a separate payroll accoimt was created for die purpose of 

facilitating a single payment to a payroll processing vendor. In approving tfae motion tfaat 

die GFEC did not faave to report the non-federal activity, die Commissioners advanced 

different rationales. Some Commissioners indicated agreement with tfae GFEC's 

argument tfaat a payroll escrow account is neidier a federal nor non-federal account, nor 

tfae "functional equivalent" of an allocation account. Otfaer Commissioners indicated tfaat 

because tfae GFEC audit noted diat tfae committee did not overfund federal payroll 

transactions by tfae non-federal accounts, tfae payroll account was permissible in tfais 

context. Conversely, die audit of tfae MNDFL identified an overfunding of die payroll 

account by tfae non-federal accounts totaling $102,663 (Finding 2). 

Tfae Audit staff maintains diat die MNDFL's Payroll account is a federal account because 

die MNDFL utilized tfae account in a manner similar to an "allocation account." Unlike 

die payroll escrow account establisfaed by tfae GFEC. tfae MNDFL account was not 

created at tfae request of a tfaird party vendor. Aldiougfa die MNDFL did not allocate any 

payroll disbursements between federal and non-federal funds (employees were identified 

as eidier 100 percent federal or 100 percent non-federal), funds were transferred from its 

federal and non-federal accounts to tfae Payroll account to pay salaries and taxes. 
11 

In addition, funds were transferred from tfae MNDFL's non-federal accounts to its federal 

administrative account to pay for tfae non-federal sfaare of employee benefits. Tfaese 

transfers were initially not reported and were included in tfae misstatement of financial 

activity presented in die Interim Audit Report. However, in response to tfae Interim Audit 

Report, tfae MNDFL amended its reports to include tfaese transfers and to report tfae nonfederal sfaare of tfae benefits paid from its federal administrative account. The Audit staff 

believes there is no distinction in tfae requirement to report tfae non-federal activity 

associated witfa tfae MNDFL's federal administrative account or its Payroll account. 

Tfaerefore. non-federal salaries and taxes from tfae MNDFL's Payroll account also require 

reporting. 

In response to tfae Interim Audit Report recommendation, tfae MNDFL submitted 

documentation to sfaow tfaat an apparent profaibited contribution it received was. in fact, 

permissible. Tfae documentation supports tfaat tfae MNDFL received a permissible 

$10,000 in-kind contribution from the Denver 2008 Convention Host Committee 

(DCHC). However, it is noted that the MNDFL's amended reports filed in response to 

tfae Interim Audit Report did not include tfais in-kind contribution. 

Finding 2. Over-funding of Federal Accoimts by Nonfederal Accounts 

Summary 

During audit fieldwork, an analysis of die MNDFL's transfers from its non-federal 

accounts indicated diat tfae MNDFL may faave overfunded its federal accounts by as 

mucfa as $277,103. Tfae overfunding resulted from unsupported transfers from the nonfederal accounts to the federal accounts, an overfunding of tfae Payroll account for tfae 

non-federal portion of payroll, and reported federal activity paid from tfae non-federal 

accounts. 

In response to tfae Interim Audit Report recommendation, tfae MNDFL submitted 

additional documentation, in conjunction witfa its amended reports, whicfa sfaowed tfaat 

tfae MNDFL did not overfund its federal account. 

Legal Standard 

A. Accounts for Federal and Non-federal Activity. A party conunittee that finances 

political activity in connection witfa bodi federal and non-federal elections may establisfa 

two accounts (federal and non-federal) and allocate sfaared expenses - expenses tfaat 

simultaneously support federal and non-federal election activity - between tfae two 

accounts. Altematively. tfae committee may conduct botfa federal and non-federal activity 

from one bank account, wfaicfa is considered a federal account. 11 CFR §102.5(a)(l)(i). 

B. Federal v. Non-federal Account Tfae federal account may contain only tfaose funds 

tfaat are permissible under tfae federal election law. Tfae non-federal account may contain 

funds tfaat are not permitted under tfae federal law (but are legal under state law), sucfa as 

contributions tfaat exceed die limits of tfae federal law and contributions from otfaerwise 
12 

profaibited sources, sucfa as corporations and labor organizations. 11 CFR §102.5(a)(l)(i) 

and (a)(3). 

C. Transfers. Generally, a political committee may not transfer funds from its nonfederal account to its federal account, except wfaen tfae committee follows specific mles 

for paying for sfaared federal/non-federal election activity. 11 CFR §§102.5(a)(l)(i) and 

106.5(g). 

D. Paying for Allocable Expenses. Tfae Commission regulations offer party committees 

two ways to pay for allocable, sfaared federal/non-federal expenses. 

• Tfaey may pay tfae entire amount of tfae sfaared expense from tfae federal account 

and transfer funds from tfae non-federal account to tfae federal account to cover tfae 

non-federal sfaare of tfaat expense; or 

• Tfaey may establisfa a separate allocation account into wfaich the committee 

deposits funds from both its federal and non-federal accounts solely for tfae 

purpose of paying tfae allocable expenses of shared federal/non-federal activities. 

11 CFR §106.5(g)(l)(i) and (ii)(A). 

E. Reporting Allocable Expenses. A political committee that allocates federal/nonfederal expenses must report eacfa disbursement it makes from its federal account (or 

separate allocation account) to pay for a sfaared federal/non-federal expense. Committees 

report tfaese kinds of disbursements on Scfaedule H-4. 11 CFR §104.17(b). 

F. Salaries and Wages. Committees must keep a monthly log of the percentage of time 

eacfa employee spends in connection witfa a Federal election. Employees wfao spend 25 

percent or less of tfaeir compensated time in a given montfa on Federal election activity or 

on activities in connection witfa a Federal election must eitfaer be paid only from tfae 

Federal account or be allocated as an administrative cost. 11 CFR § 106.7(d)(1). 

Facts and Analjrsis 

A. Facts 

During audit fieldwork, tfae Audit staff identified a possible overfunding of MNDFL's 

federal activity widi funds from its non-federal accounts. Tfae overfunding was 

calculated to be $277,103 and was based on tfae following:^ 

1. Underfunding of tfae non-federal portion of sfaared activity -

Tfae MNDFL reported a total of $1,055,437 as die non-federal sfaare of allocated 

activity and reported $1,041,688 in transfers from tfae non-federal accounts to tfae 

federal accounts, resulting in an underfunding of $13,748. 

2. Overfunding of non-federal payroll -

Tfae MNDFL used a single Payroll account to pay employee salaries (botfa 100 

percent federal and 100 percent non-federal - no employee salaries were 

^ The Audit staffs review of the transfer activity between the committee's federal and non-federal accounts 

was initially limited because the MNDFL did not maintain adequate records to support the transfers. 
13 

allocated) and related taxes. Tfae MNDFL paid employee benefits out of a federal 

administrative account and transferred funds from tfae federal and non-federal 

accounts to tfae Payroll account to pay salaries and taxes. Tfae MNDFL did not 

report any of tfae non-federal payroll activity. Tfae MNDFL's total non-federal 

payroll expenditures of $1,129,157 includes $756,744 for salaries, $226,155 for 

taxes and $146,257 for benefits. Tfae MNDFL transferred a total of $1,215,520 

from tfae non-federal accounts to tfae Payroll account for tfae non-federal sfaare of 

payroll, resulting in an overfimding of $86,363 ($1,215,520 - $1,129,157) for die 

non-federal portion.'° 

3. Reported federal activity paid from non-federal accounts -

Tfae MNDFL reported $51,105 as federal activity paid from tfae non-federal 

accounts. Due to tfae lack of supporting documentation available during audit 

fieldwork, tfae Audit staff was initially unable to determine if tfae MNDFL 

reimbursed tfae non-federal accounts for any of tfais reported federal activity. 

4. Unsupported transfers from non-federal accounts -

The MNDFL made unsupported transfers from the non-federal accounts to the 

federal accounts totaling $38,263 for 2007 and $115.120 for 2008. Due to die 

lack of supporting documentation available during audit fieldwork, die Audit staff 

was unable to determine if the transfers from the non-federal account were for the 

non-federal portion of shared activity. 

It is noted that tfae Audit staff identified a total of $103,450 m transfers from die federal 

accounts to non-federal accounts tfaat lacked adequate supporting documentation 

detailing tfae purpose of tfae transfer. If supported by documentation tfaat sfaows tfae 

transfers were related to any of tfae activity noted above, tfae amount of overfunding by 

tfae non-federal accounts may be reduced. 

In summary, tfae apparent overfimding by tfae non-federal accounts identified in fieldwork 

was calculated as follows: 

Underfunding of non-federal portion of sfaared activity ($ 13,748) 

Overfunding of non-federal payroll 86,363 

Unsupported transfers from non-federal accounts 153,383 

Reported federal activity paid from non-federal accounts 51.105 

Total over-funding by the non-federal account $ 277.103 

B. Interim Audit Report & Audit Division Recommendation 

At die exit conference, the Audit staff provided die MNDFL representatives widi 

workpapers detailing die transfer activity noted above. The MNDFL representatives 

provided no additional comments. 

The Audit staff reconunended diat tfae MNDFL provide documentation that showed: 

10 See committee statement conceming die Payroll account on page 8. 
14 

• tfae MNDFL did not make disbursements from tfae non-federal accounts for tfae 

purpose of financing federal activity; 

• reported federal activity paid from tfae non-federal accounts was reimbursed by 

tfae federal accounts; and 

• tfae unsupported transfers from tfae non-federal accounts were made for purposes 

otfaer tfaan federal activity. 

In addition, tfae Audit staff recommended tfaat tfae MNDFL provide any additional 

comments and/or documentation tfaat detailed tfae purpose of tfae transfers of $103,450 

made from tfae federal accounts to tfae non-federal accounts. 

If tfae MNDFL was unable to provide any documentation to reduce tfae amount of 

overfunding noted above, tfae Audit staff recommended tfaat tfae MNDFL reimburse 

$277,103 to die non-federal account. 

C. Committee Response to Interim Audit Report 

In response to tfae Interim Audit Report recommendation for Finding 1. tfae MNDI^ filed 

amended reports wfaicfa included tfae transfers from tfae non-federal account to tfae federal 

account for tfae non-federal sfaare of employee benefits payments. Additional 

documentation was submitted wfaicfa addressed tfae overfunding of tfae Payroll account for 

tfae non-federal portion of tfae payroll, tfae unsupported transfers from tfae non-federal 

accounts and tfae apparent payment of federal activity by tfae non-federal account. Tfae 

following details the changes resulting from the M^n3FL's response: 

1. The underfunding of the non-federal share of allocable activity increased from 

$13,748 to $120,960 because of the disclosure of previously unreported payments 

for allocable activity, including tfae non-federal sfaare of employee benefits, and 

transfers from die non-federal account to die federal account for die non-federal 

sfaare of employee benefits payments. Tfae non-federal sfaare of allocable activity 

increased from $1,055,437 to $1,252,561 and tfae transfers from tfae non-federal 

account for diis activity increased from $1,(K1,688 to $1,131,601. 

2. Tfae overfunding of the Payroll account for tfae non-federal portion of tfae payroll 

increased from $86,363 to $102,663. The increase was due to tfae removal of a 

transfer from tfae non-federal account of $20,000 wfaicfa was listed twice and tfae 

addition of $36,300 for a transfer tfaat was deposited into a federal account in 

error, dien subsequently transferred from tfae federal account to tfae Payroll 

account. 

3. Tfae unsupported transfers of $153,383 from tfae non-federal account were cleared 

by tfae submission of additional documentation and tfae amended disclosure 

reports filed by tfae MNDFL in response to Finding 1 and tfae increase in die 

overfunding of tfae non-federal sfaare of allocable activity discussed above. 

4. Tfae apparent payment of federal activity by tfae non-federal account was 

decreased from $51,105 to $8,833. Tfae MNDFL demonstrated diat $31,529 was 
15 

properiy paid for by die non-federal account, $16,785 was allocable activity 

($6,042 is die federal sfaare - 36 percent) and $2,791 is 100 percent federal 

activity. Tfae amended reports filed by tfae MNDFL corrected die misstatement of 

tfais activity. 

In summary, tfae response to die Interim Audit Report resulted in tfae following: 

Underfunding of non-federal portion of sfaared activity ($ 120.960) 

Overfunding of non-federal payroll 102.663 

Unsupported transfers from non-federal accounts -0-

Reported federal activity paid from non-federal accounts 8.833 

Total under-funding by the non-federal account fS 9.464) 

As a result of its response to die Interim Audit Report Recommendation, the MNDFL 

sufficiently demonstrated tfaat it did not overfund its federal accounts witfa funds from its 

non-federal accounts.