FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

July 6,2009 

NIEMORANDUM 

To: Judith Ingram 

Press Officer 

From: Joseph F. Stoltzd1'j, 

Assistant Staff -,a~tor

Audit Division 

Subject: Public Issuance of the Audit Report on Kuhl for Congress 

Attached please find a copy of the audit report on Kuhl for Congress, which was 

approved by the Commission on June 24, 2009. 

All parties involved have received informational copies of the report and the report 

may be released to the public. 

Attachment as stated 

cc:	 Office of General Counsel 

Office of Public Disclosure 

Reports Analysis Division 

FEC Library 

lTD Web 
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. 

Report of the 

Audit Division on 

Kuhl for Congress 

May 16, 2003 - December 31, 2004 

About the Campaign (p. 2) 

Kuhl for Congress is the principal campaign committee for 

John "Randy" Kuhl, Jr., Republican candidate for the U.S. 

House of Representatives from the state of New York, 29th 

Congressional District and is headquartered in Bath, New 

York. For more information, see the Campaign Organization 

chart, p. 2. 

Financial Activity (p. 2) 

•	 Receipts 

o Contributions from Individuals $ 493,974 

o	 Contributions from Other 524,663 

Political Committees 

o	 Candidate Loan 8,000 

o	 In-Kind Contributions 22,974 

o	 Total Receipts $ 1,049,611 

•	 Disbursements 

o	 Operating Expenditures $ 978,533 

o	 Candidate Loan Repayment 8,000 

o	 In-Kind Contributions 22,974 

o	 Total Disbursements $1,009,507 

Findings and Recommendations (p. 3) 

•	 Misstatement of Financial Activity (Finding 1) 

•	 Receipt of Apparent Prohibited In-Kind Contributions 

(Finding 2) 

I 2 U.S.c. §438(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. Misstatement of Financial Activity 

Finding 2. Receipt of Apparent Prohibited In-kind Contributions 

Page 

1
 

1
 

2
 

2
 

3
 

4
 

6
 
1 

Part I 

Background 

Authority 'for Audit 

This report is based on an audit of Kuhl for Congress (KFC), 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 

This audit examined: 

1. The receipt of excessive contributions and loans. 

2. The receipt of contributions from prohibited sources. 

3. The disclosure of contributions received. 

4. The disclosure of disbursements, debts and obligations. 

5. The consistency between reported figures and bank records. 

6. The completeness of records. 

7. Other commi ttee operations necessary to the review. 
2 

Part II 

Overview of Campaign 

Campaign Organization 

Important Dates Kuhl for Congress 

•	 Date of Registration July 2, 2003 

•	 Audit Coverage May 16, 2003 - December 31, 2004 

Headquarters Bath, NY 

Bank Information 

One •	 Bank Depositories 

Three Checking Accounts •	 Bank Accounts 

Treasurer 

Michael A. Avella •	 Treasurer When Audit Was Conducted 

Michael A. Avella •	 Treasurer During Period Covered by Audit 

Management Information 

• Attended FEC Campaign Finance Seminar No

Yes 

Management Software Package 

•	 Used Commonly Available Campaign 

•	 Who Handled Accounting and Paid Staff 

Recordkeeping Tasks 

Overview of Financial Activity 

(Audited Amounts) 

Cash on hand @ May 16,2003 $ -0­

0 Contributions from Individuals $ 493,974 

0 Contributions from Other Political Committees 524,663 

0 Candidate Loan 8,000 

0 In-kind Contributions 22,974 

Total Receipts $1,049,611 

0 Operating Expenditures $ 978,533 

0 Candidate Loan 8,000 

0 In-kind Contributions 22,974 

Total Disbursements $1,009,507 

Cash on hand @ December 31,2004 $40,104 
3 

Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

A comparison of KFC's reported figures to its bank records revealed that receipts were 

understated by $14,416 in 2003 and by $36,267 in 2004. Disbursements were 

understated by $16,323 in 2003 and $55,838 in 2004. The ending cash on hand balances 

were overstated by $1,907 in 2003 and $18,809 in 2004. Material portions of these 

differences were due to the unreported apparent prohibited in-kind contributions which 

.are the subject of Finding 2. The Audit staff recommended that KFC file amended 

reports to correct these discrepancies. In response, KFC filed amended reports which 

materially corrected the misstatements, except for the unreported prohibited in-kind 

contributions. Counsel for KFC objects to the Audit staff's conclusion that KFC 

accepted prohibited in-kind contributions. As discussed below, there were not sufficient 

votes to adopt the Audit staff's proposed allocation method regarding certain 

disbursements which underlie a portion of the apparent prohibited in-kind contributions. 

(For more detail, see p. 4) 

Finding 2. Receipt of Apparent Prohibited In-Kind 

Contributions 

Based on the documentation provided, the Audit staff found that KFC did not allocate 

disbursements made by Friends for Kuhl (the candidate's non-federal campaign 

committee; hereinafter the "State Committee") that may have benefited KFC. The Audit 

staff determined that the total share of such disbursements that KFC should have paid 

was $118,056, thus resulting in KFC's receipt of apparent prohibited in-kind 

contributions in that amount from the State Committee. In the Interim Audit Report, the 

Audit staff recommended that KFC provide evidence that the disbursements were 

allocated according to the benefit reasonably expected to be derived by each campaign, or 

that the disbursements did not benefit the federal campaign, by submitting documentation 

and information about the actual usage and benefit derived by each campaign; or, provide 

evidence that the resulting in-kind contributions were not from a prohibited source. 

Absent the provision of such evidence, the Interim Audit Report recommended that KFC 

make a payment to the U.S. Treasury for the amount of the prohibited in-kind 

contributions, since the State Committee has terminated. Counsel for KFC objects to the 

Audit staff's conclusion that KFC accepted prohibited in-kind contributions. In the draft 

Final Audit Report, the Audit staff proposed that, in the absence of such documentation, 

the Commission apply an allocation method for certain disbursements based on the ratio 

of funds received by each committee, while allocating 100% of certain other 

disbursements to KFC based on the nature and timing of such disbursements. The Audit 

staff also allocated certain other payroll expenses based on KFC's allocation of payroll 

expenses in the middle of November, 2004. There were not sufficient votes to adopt 

these alternative allocation methods that the Audit staff proposed; however, the 

Commission did agree with the allocation of certain disbursements ($22,974; "Expenses 

Allocation Based on Documentation"). 

(For more detail, see p. 6) 
4 

Part IV 

Findings and Recommendations 

IFinding 1. Misstatement of Financial Activity 

Summary 

A comparison of KFC's reported figures to its bank records revealed that receipts were
 

understated by $14,416 in 2003 and by $36,267 in 2004. Disbursements were
 

understated by $16,323 in 2003 and $55,838 in 2004. The ending cash on hand balances
 

were overstated by $1,907 in 2003 and $18,809 in 2004. Material portions of these
 

differences were due to the unreported apparent prohibited in-kind contributions which
 

are the subject of Finding 2. The Audit staff recommended that KFC file amended
 

reports to correct these discrepancies. In response, KFC filed amended reports which
 

materially corrected the misstatements, except for the unreported prohibited in-kind
 

contributions. Counsel for KFC objects to the Audit staff's conclusion that KFC
 

accepted prohibited in-kind contributions. As discussed below, there were not sufficient
 

votes to adopt the Audit staff's proposed allocation method regarding certain
 

disbursements which underlie a portion of the apparent prohibited in-kind contributions.
 

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; and 

•	 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)(l), (2) and (4). 

Facts and Analysis 

The Audit staff reconciled KFC's reported activity to bank records for calendar years 

2003 and 2004. The following charts outline the discrepancies for each year. 

Succeeding paragraphs address the reasons for the misstatements. 

2003 Activity 

Reported Bank Records Discrepancy 

Beginning Cash Balance @ 

May 16,2003 

$ -0­

$ 47,962 

$ 8,750 

$ 39,212 

$ -0­

$ 62,378 

$ 25,073 

$ 37,305 

$ -0­

$ 14,416 

Understated 

Receipts 

Disbursements $ 16,323 

Understated 

Ending Cash Balance @ 

December 31, 2003 

$ 1,907 

Overstated 
5 

The net understatement of receipts was the result of the following: 

•	 Contribution not reported $ 2,000 

•	 Contribution over-reported (900) 

•	 Contribution not traced to bank activity (500) 

•	 Unreported apparent prohibited in-kind contributions from 14,016 

the State Committee, a non-federal campaign committee (See 

Finding 2) 

•	 Unexplained difference (200) 

Net understatement $14.416 

The understatement of disbursements was the result of the following: 

•	 Operating Disbursements not reported $ 2,207 

•	 Contribution Refund not reported 100 

•	 Unreported apparent prohibited in-kind contributions 14,016 

Understatement $16.323 

As a result of the misstatements above, the ending cash balance was overstated by 

$1,907. 

2004 Activity 

Reported Bank Records Discrepancy 

Beginning Cash Balance @ 

January 1, 2004 

$ 39,212 

$ 950,966 

$ 928,596 

$ 58,913:.! 

$ 37,305 

$ 987,233 

$ 984,434 

$ 40,104 

$ 1,907 

Overstated 

Receipts $ 36,267 

Understated 

Disbursements $ 55,838 

Understated 

Ending Cash Balance @ 

December 31, 2004 

$ 18,809 

Overstated 

The net understatement of receipts was the result of the following: 

•	 Contributions from individuals not reported 

•	 Contributions from political committees not reported 

•	 Unreported apparent prohibited in-kind contributions (See 

Finding 2) 

•	 Other unreported in-kind contributions 

•	 In-kind contributions reported twice 

•	 Contributions from individuals reported twice 

•	 Contributions over reported 

•	 Contribution under reported 

•	 Disbursement reported as a contribution 

•	 Contributions reported as memo entries 

•	 Unexplained difference 

Net understatement 

2 Ending cash-on-hand does not foot due to mathematical discrepancies. 

$ 15,850 

16,000 

8,958 

1,001 

(3,964) 

(2,600) 

(8,005) 

3,000 

(462) 

700 

5,789 

$36,267 
6 

The net understatement of disbursements was the result of the following: 

• Payroll disbursements not reported	 $ 14,609 

• Operating disbursements not reported	 46,911 

• Unreported apparent prohibited in-kind contributions	 8,958 

• Other unreported in-kind contributions	 1,001 

• In-kind contributions reported twice	 (3,964) 

• Reported void and duplicate disbursements	 (10,948) 

• Disbursements over reported	 (129) 

•	 Unexplained difference (600) 

Net understatement $55,838 

The $18,809 overstatement of ending cash-on-hand was the net result of the 

misstatements described above, as well as the following: (1) a $1,169 

understatement of beginning cash-on-hand for the July Quarterly report compared 

to the closing cash on the previous report; and, (2) a similar $1,500 understatement 

of beginning cash-on-hand for the Year-End report. 

The Audit staff provided KFC representatives with a copy of the bank 

reconciliation and supporting schedules at the exit conference. In response to the 

exit conference, KFC stated it would amend all reports to correct the reporting 

discrepancies. 

Interim Audit Report Recommendation and Committee Response 

The Audit staff recommended that KFC amend its reports to correct the misstatements 

noted above. It was further recommended that the most recent report be amended to 

show the ending cash on hand balance with an explanation that it resulted from audit 

adjustments from a prior period. In response, KFC filed amended reports which 

materially corrected the misstatements, except for the unreported apparent prohibited inkind contributions which are the subject of Finding 2. Counsel for KFC objects to the 

Audit staff's conclusion that KFC accepted prohibited in-kind contributions. As a result, 

the apparent prohibited in-kind contributions in the amounts of $14,016 and $8,958 for 

2003 and 2004 respectively were not included in KFC's amended reports. 

As discussed below, the Commission agrees with the Audit staff's allocation of certain 

disbursements, but there were not sufficient votes to adopt the alternative allocation 

methods that the Audit staff proposed which underlie a portion of the apparent prohibited 

in-kind contributions. 

Finding 2. Receipt of Apparent Prohibited In-Kind 

Contributions 

Summary 

Based on the documentation provided, the Audit staff found that KFC did not allocate 

disbursements made by Friends for Kuhl (the candidate's non-federal campaign 

committee; hereinafter the "State Committee") that may have benefited KFC. The Audit 

staff determined that the total share of such disbursements that KFC should have paid 

was $118,056, thus resulting in KFC's receipt of apparent prohibited in-kind 
7 

contributions in that amount from the State Committee. In the Interim Audit Report, the 

Audit staff recommended that KFC provide evidence that the disbursements were 

allocated according to the benefit reasonably expected to be derived by each campaign, or 

that the disbursements did not benefit the federal campaign, by submitting documentation 

and information about the actual usage and benefit derived by each campaign; or, provide 

evidence that the resulting in-kind contributions were not from a prohibited source. 

Absent the provision of such evidence, theInterim Audit Report recommended that KFC 

make a payment to the U.S. Treasury for the amount of the prohibited in-kind 

contributions, since the State Committee has terminated. Counsel for KFC objects to the 

Audit staff's conclusion that KFC accepted prohibited in-kind contributions. In the draft 

Final Audit Report, the Audit staff proposed that, in the absence of such documentation, 

the Commission apply an allocation method for certain disbursements based on the ratio 

of funds received by each committee, while allocating 100% of certain other 

disbursements to KFC based on the nature and timing of such disbursements. The Audit 

staff also allocated certain other payroll expenses based on KFC's allocation of payroll 

expenses in the middle of November, 2004. There were not sufficient votes to adopt 

these alternative allocation methods that the Audit staff proposed; however, the 

Commission did agree with the allocation of certain disbursements ($22,974; "Expenses 

Allocation Based on Documentation"). 

Legal Standard 

Contribution Defined. A gift, subscription, loan (except when made in accordance with 

11 CFR §§100.72 and 100.73), advance, or deposit of money or anything of value made 

by any person for the purpose of influencing any election for Federal office is a 

contribution. 11 CFR §100.52(a). 

In-Kind Contribution. The term anything a/value includes in-kind contributions. The 

provision of services at a charge less than the usual and normal charge resultsin an inkind contribution. The usual and normal charge for a service is the commercially 

reasonable rate that one would expect to pay at the time the services were rendered. The 

value of such a contribution would be the difference between the usual and normal charge 

for the services and the amount the political committee was billed and paid. 11 CFR 

§100.52(d). 

Allocation of expenses between candidates. 

•	 If an individual is a candidate for a Federal office and a State office, he or she 

must designate separate principal campaign committees. The campaigns may 

share personnel and facilities, as long as expenditures are allocated between the 

campaigns, and the payment made from each campaign account reflects the 

allocation. 11 CFR §110.8(d) (1) and (3). 

•	 Expenditures made on behalf of more than one clearly identified Federal and nonFederal candidate shall be attributed to each candidate according to the benefit 

reasonably expected to be derived. For example, in the case of a fundraising 

program or event where funds are collected by one committee for more than one 

clearly identified candidate, the attribution shall be determined by the proportion 

of funds received by each candidate as compared to the total receipts by all 

candidates. In the case of a phone bank, the attribution shall be determined by the 

number of questions or statements devoted to each candidate as compared to the 

total number of questions or statements devoted all candidates. 11 CPR §106.1(a). 
8 

Transfers from Non-Federal to Federal Campaigns. Transfers of funds or assets from 

a candidate's campaign committee for a non-federal election to his or her principal 

campaign committee for a federal election are prohibited. 11 CFR §11O.3(d). 

Facts and Analysis 

The Candidate, an incumbent New York State legislator, filed his Statement of 

Candidacy on March 4,2003 and designated KFC as his principal campaign committee.' 

KFC opened a bank account on May 15,2003 and filed a Statement of Organization on 

July 2,2003. On April 9, 2004, the Candidate publicly announced his intention to seek 

the Republican nomination for the Congressional seat being vacated by Representative 

Amory "Amo" Houghton, Jr. According to KFC, the delay between the registration of 

the federal campaign committee and the public announcement of candidacy was due to 

the timing of Representative Houghton's decision not to seek re-election. 

For the period prior to the public announcement (May 2003 - March 2004), KFC raised 

contributions totaling $84,412 for the federal office while the State Committee raised 

$30,550 for the non-federal office. During the same period, KFC's disbursements totaled 

$12,095 for fundraising expenses, while the State Committee reported $106,673 in 

expenses." KFC did not report or pay for any disbursements associated with overhead 

costs such as rent, salary, phones, and office supplies. 

Shortly after the public announcement (April 2004), and through the general election 

(November 2004), the State Committee discontinued paying for overhead and 

administrative expenses. These expenses included such items as rent for office space, 

credit card bills, vehicle leases/insurance, postage, and phone service. In that same 

period, the State Committee received $5,100 in donations. During this time frame, KFC 

paid these expenses in full. After the general election, the State Committee resumed 

paying for many of these overhead and administrative costs, even though the Candidate 

was not seeking another term in the State Senate and had been elected to the U.S. House 

of Representatives. 

The Audit staff reviewed the disclosure reports filed by the State Committee with the 

State of New York for the period March 1, 2003 through December 31, 2004. The Audit 

staff identified reported disbursements by the State Committee totaling $144,409, a 

portion of which appear to benefit the Candidate's federal campaign. The portion of such 

disbursements that appears to have benefited the federal campaign was $118,056. The 

following categories show the breakdown of these amounts based upon the allocation 

method applied by the Audit staff: 

Expenses Allocated Based on Documentation - This category includes expenses 

supported by invoices and other documentation supplied by KFC which supported the 

actual benefit derived by each committee. 

3 The Candidate was elected into the New York State Assembly in 1980 and served there until being 

elected to the State Senate in 1986. He was re-elected to the State Senate in 2002 for a two-year term 

and served there until 2004. 

4 This amount does not include contributions to non-federal candidates/committees or amounts categorized 

as "unitemized" on the State Committees reports. 
9 

• Advertisement	 150 

• Professional Fee Paid to KFC Treasurer	 8,550 

• Credit Card Purchases 258 

•	 Poll (Allocated based on number of federal/nonfederal questionsj' 14,016 

$22,974 

Expenses Allocated Based on Funds Received Method - This category includes expenses 

allocated based on the funds (contributions) received by KFC and the State Committee. 

The percentage applied was 73% Federal ($84,412/$114,962) based upon $84,412 in 

contributions received by KFC divided by $114,962 in contributions received by both 

KFC and the State Committee -- between May 2003 and March 2004. In the view of the 

Audit staff, this was the best method available absent any other documentation. No 

alternati ve allocation method was offered by KFC. 

• Credit Card Purchases	 5,596 

• Vehicle Lease/Insurance/Tolls	 14,342 

• Computer Hardware/Software	 1,482 

• Salaries & Benefits	 7,789 

• Office Rent	 5,066 

• Office Supplies	 1,314 

• Overhead Expenses	 3,070 

•	 Membership Dues 209 

$38,869 

Expenses Allocated 100% Federal Based on the Nature of the Expenditures 

0/1/2004 - 3/31/2004) - This category includes payments to McLaughlin and Associates 

(M&A) for consulting after the "NY 29th CD survey" (congressional district poll) was 

conducted by M&A to determine "likely Republican Primary voters." The Audit staff 

allocated 100% of these expenses to KFC based on the timing of the consulting 

payments. In addition to these payments paid by the State Committee, KFC paid a total 

of $427,128 to M&A from the federal account. The State Committee had not made 

payments to M&A prior to this poll. Also included in this category are payments at the 

end of March for computer hardware/ software just prior to the Candidate's April 2004 

announcement to run for Congress. 

• Consulting (see Footnote 5, p.8)	 15,000 

•	 Computer Hardware/Software 7,035 

$22,035 

5	 KFC entered into an agreement effective on January 29,2004 with McLaughlin and Associates, Inc. 

(M&A) to provide consulting services and advice regarding research, advertising, fundraising, press and 

media. Consulting fees totaling $15,000 for January, February and March 2004 were paid to M&A by 

the State Committee in FebruarylMarch 2004 and were allocated 100% Federal by the Audit staff. Prior 

to the agreement, the State Committee paid M&A $19,200 in December 2003 for polling conducted in 

the 29th Congressional District. Interviews began November 19,2003 and included questions to 400 

"Likely Republican Primary Voters." The Audit staff determined that 73% (27/37) of the questions were 

related to the federal campaign and therefore allocated $14,016 ($19,200 x 73%) to KFC. Thirty of the 

67 questions were considered generic and therefore were not allocated federal or non-federal. 
10 

Expenses Allocated 100% Federal Based on the Nature of the Expenditures 

(4/1/2004 - 1114/2004) - This category includes payments that were paid by the State 

Committee while the Candidate was actively campaigning for Congress. 

• Salaries & Benefits	 249 

• Office Supplies	 657 

• Overhead Expenses	 407 

• Advertisements/Memberships (No copies of ads provided)	 775 

•	 Credit Card Purchases 942 

$ 3,030 

Expenses Allocated Based on KFC and the State Committee's Allocation of Payroll 

(11/5/2004 - 12/3112004) - This category includes expenses that had been paid 100% 

federal prior to the General election. Since KFC and the State Committee used an 

allocation ratio of 59% Federal/41 % State for the mid-November salaries of some 

employees, the Audit staff applied this ratio to the remaining salaries and office expenses 

to recognize wind down costs of the State office during this time period. 

• Salaries and Benefits	 9,312 

•	 Office (Paid to an individual) 35 

$9,347 

Expenses Allocated 100% Federal Based on the Nature of the Expenditures
 

(111512004 - 12/3112004) - This category includes a loan payoff for a campaign vehicle.
 

Since the Candidate won the election, allocation was considered 100% federal by the
 

Audit staff.
 

• Vehicle Lease/Insurance/Payoff	 14,047 

• Credit Card Purchases	 5,141 

• Office Rent	 200 

• Postmaster Expenses	 1,295 

• Ads	 875 

•	 Overhead Expenses 243 

$21,801 

Total Allocation to KFC (Federal)	 $118,056 

The Audit staff has determined that the share of expenditures (in-kind contributions) 

allocable to KFC appears to be prohibited because it represents a transfer of funds from a 

non-federal campaign to a federal campaign. None of the in-kind contributions were 

reported by KFC (see Finding 1). 

KFC representatives were provided a copy of the supporting schedule detailing the 

expenditure allocation at the exit conference. A representative asked what would be 

required to resolve the prohibited in-kinds. The Audit staff stated that the 

recommendation would be to reimburse the non-federal committee for the federal share. 

The representative stated that the non-federal committee had already closed its bank 

accounts and filed a termination notice with the State of New York. 
11 

In response to the exit conference, KFC provided additional documentation to support 

changes to some of the allocations of shared expenses. Counsel for KFC (Counsel) stated 

KFC did not have to file disclosure reports until Mr. Kuhl became an "actual candidate 

for Federal office." According to Counsel, this was when Representative Houghton 

announced he would not seek re-election (April 2004). Although a committee does not 

have to file reports when the candidate is testing the waters, it is required to file reports 

detailing all expenses if the candidate officially decides to seek office. These reports 

must include those expenses associated with testing the waters (11 CFR§100.13(a)). 

Furthermore, Counsel did not agree with the methodology used to allocate the shared 

expenses between the two committees and asserted there is no legal basis for this 

allocation. He did not, however, provide an alternative for assignment of the shared 

costs. 

Interim Audit Report Recommendation and Committee Response 

The Audit staff recommended that KFC: 

•	 Provide evidence that the expenditures were allocated according to the benefit 

reasonably expected to be derived by each campaign, or that the expenditures did 

not benefit the federal campaign, by submitting documentation and information 

about the actual usage and benefit derived by KFC and the State Committee. 

Such documentation and information was to include what each of the consultants 

and employees did for each campaign; the amount of time spent on those 

activities; and, evidence to establish which office space, equipment, and facilities 

were shared by the committees to support the benefit derived by each; or 

•	 Provide evidence that the resulting in-kind contributions were not from a
 

prohibited source; or
 

•	 Absent such evidence, the Audit staff recommended that $118,056 be paid to the 

U.S. Treasury, since the State Committee had terminated; and 

•	 The amount due was to be disclosed on Schedule D (Debts and Obligations) until 

paid. 

In response, KFC Counsel objects to this finding and argues that the Audit staff is wrong 

in the way the law has been applied. He states that "[t]he Report concocts an entirely 

new legal standard: after-the-fact allocation of state campaign spending that 'appeared to 

benefit the Candidate's federal campaign' " and that this " ... approach is nothing more 

than a biased assumption stated in the form of a presumption: because a state 

officeholder/candidate ran for Federal office, the activity of the state campaign must have 

benefited the Federal campaign somehow, unless the Federal campaign can show 

otherwise." He continues that the Audit staff has not presented any factual support on 

how the state campaign activity equates to an in-kind contribution and that the stated 

purposes of the spending have been ignored. 

Counsel also takes exception to the method by which the auditors applied an allocation 

ratio not based upon the actual benefit derived, but based upon the total amounts raised 

by the state and Federal campaigns. He states that there is no legal basis for this and cites 

the Supreme Court decision in the Wisconsin Right to Life case where he argues it was 

made clear that" ... simply because a Federal candidate is mentioned in some sort of 

public communication does not convert that communication into campaign activity 

within the purview of the Commission." 
12 

Counsel further notes that the Commission concluded in Advisory Opinion (AO) 1999-11 

that the" ...events in which Federal officeholders participate in their capacities as 

officeholders are not for the purpose of influencing a Federal election simply because the 

officeholders may be candidates for election to Federal office." Counsel then adds that 

" ... the Commission has already emphasized that the proper standard was express 

advocacy, and not your amorphous 'appearance of benefit' approach." 

The Audit staff notes that pursuant to 11 CFR 106.1(a)(1), expenditures that did not 

entirely benefit KFC, but benefited both KFC and the State Committee, should be 

allocated between the committees based on the benefit reasonably expected to be derived 

by each campaign. The law requires an individual who is a candidate for both a federal 

and state office to designate separate committees and establish completely separate 

campaign organizations, and no transfers of funds, goods or services between the 

campaigns are permitted. The campaigns may share personnel and facilities as long as 

expenditures are allocated between the committees and the payments made from each 

campaign account reflect the allocation. Payments should be allocated to each federal 

and non-federal candidate, (or the same person who is seeking both federal and nonfederal office) according to the benefit expected to be derived by each candidate. This is 

supported by AO's 1994-37 and 1978-67. 

The Audit staff allocated some State Committee expenditures based on the actual usage 

and actual derived benefit when sufficient documentation was available. However, when 

documentation was not available to make these determinations, the Audit staff based 

these allocations upon alternative methods: 1) a fundraising allocation formula: the 

amount of contributions received by KFC compared to the total contributions received by 

KFC and the State Committee; 2) the nature and timing of the disbursements; and 3) the 

allocation of payroll expenses that KFC used in the middle of November, 2004. Due to 

the limited available information regarding the actual use and benefits derived from the 

expenditures, the Audit staff believed these were the most appropriate allocation methods 

available to complete this review. In its response to the interim audit report, KFC had the 

opportunity to propose and support a different allocation method and to demonstrate that 

some, or all, of these expenditures did not benefit KFC. KFC did not provide an 

alternative allocation, nor evidence that the expenditures in question did not require 

allocation, but rather argued.the basis of the staff's allocation of the in-kind contribution 

total. 

As a result, no change was made to the amount of the apparent prohibited in-kind 

contributions presented in the interim audit report, $118,056. 

The Commission agreed with the allocation of certain disbursements ($22,974; 

"Expenses Allocated Based on Documentation"), but there were not sufficient votes to 

adopt the alternative allocation methods that the Audit staff proposed.