Atttichment 1 

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FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

December l i 2010 

MEMORANDUM 

TO: 

FROM: f 

Joseph F. Stoltz 

Assistant Staff Director 

Christopher Hughey 

Acting General Counsel 

Lawrence L. Calvert, ^^y^^/j^^ 

Associate General Cou^i^pl) —^ 

SUBJECT: 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Delanie DeWitt Painter *^)f 

Attomey 

Preliminary Audit Report for McCain-Palin 2008, Inc. and McCain-Palin 

Compliance Fund, Inc. (LRA 759) 

The Office of the General Counsel has reviewed the proposed Preliminary Audit 

Report ("PAR") for McCain-Palin 2008, Inc. (the "General Committee") and McCainPalin Compliance Fund (the "GELAC"). ^ Our comments primarily focus on Finding 1: 

Campaign Travel Billing for Press. We agree that the General Committee should refimd 

the amounts of excess reimbursements to the press rather than ttansferring fimds to the 

candidate's primary election committee. We concur with your calculation of the amoimt 

the media should reimburse to the General Committee for the actual costs of the air 

charter conttact paid for and used by both the primary and general campaigns. We 

question, however, the legal basis for your calculation of reconfiguration costs billable to 

the press. We recommend that you raise the reconfiguration costs issue for the 

Commission's consideration. 

Your cover memorandum also requests comments on two issues fhat are not 

included in the proposed PAR: Issue 1 - Media Vendor Eamed Interest and Issue 2 ~ 

Hybrid Communications. We reiterate our informal advice conceming the interest issue 

* We recommend that the Conunission consider this document in Executive Session because the 

Commission may eventually debide to pursue an investigation of matters contained in the proposed Report. 

11C.F.R. §§ 2.4(a) and (b)(6). 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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to formalize our advice and inform the Commission. We also comment briefly on the 

hybrid commimications issue. We recommend that you raise both of these issues for the 

Commission's consideration in the cover memorandum to the Commission. Finally, we 

concur with the remaining findings not specifically discussed in this memorandum. If 

you have any questions, please contact Delanie DeWitt Painter, the attomey assigned to 

this audit. 

I. CAMPAIGN TRAVEL BILLING FOR PRESS (Finding 1) 

A. Background 

The draft PAR states that the auditors reviewed ttavel billing and press 

reimbursements and concluded that the General Committee must refund $382,299 to the 

press for excessive reimbursements. The press traveled with the presidential candidate 

on a plane chartered through Swift Air LLC ("Swift Air"). John McCain 2008, Inc. 

("Primary Committee") had used the same chartered airplane during the latter part of the 

primary campaign. The press ttaveled with the vice presidential candidate on a plane 

chartered through JetBlue Airways Corporation.^ The auditors calculated the total actual 

ttansportation cost to the press was $3,722,208. They determined that the maxunum that 

the General Conimittee could bill the press was 110% of tiiis actual cost, $4,094,429. 

The General Committee billed the press $4,503,658 and, in response to those bills, 

received reimbursements of $4,476,728. Thus, the auditors conclude that the General 

Committee must refimd tiie excessive amount of $382,299 ($4,476,728 ~ $4,094,429) to 

the press. The excessive reimbursements were caused by the Committee's method of 

calculating the actual ttavel costs on the leased airplane from Swift Air and the costs of 

reconfiguring the leased Swift Air and JetBlue airplanes. 

1. Swift Air Flight Costs 

The Swift Air charter contract for the leased aircraft covered a portion of the 

primary campaign and the entire general campaign and ran between June 30,2008 and 

November 15,2008. The conttact was signed on behalf of the Primary Committee, but 

the General Committee appears to have assumed the payments and terms ofthe contract 

and made weekly payments to Swift Air during the general election period. The total 

conttact cost was $6,384,000, to be paid in 19 weekly payments of $336,000. The 

conttact entitied the campaign to 22.4 flight hours per week for a total of425.6 flight 

hours for the entire conttact. Flight hours in excess of 22.4 hours per week were to incur 

additional charges and unused hours could be rolled over to later weeks, but if a total of 

fewer than 425.6 hours had been flown by the end of the contract, the campaign was to 

remain liable for tiie total contract cost of $6,384,000. In other words, the campaign was 

^ The press also traveled on aircraft chartered through CSI Aviation Services, as well as by ground 

transportation, but the excessive reimbursements were primarily related to the air travel on, and costs of 

reconfiguring the Swift Air plane, and to a lesser extent, to the reconfiguration costs for the JetBlue plane. 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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entitled to no refund or rebate for flight hours that remained unused at the end of the 

conttact. ^ 

The Primary Committee paid Swift Air $336,000 per week each week for nine 

weeks and the General Committee paid the same weekly amount each week for ten weeks 

during the general election period. The General Committee made its first weekly 

payment on September 8,2008. Over the ten weeks it had the aircraft, the General 

Committee paid Swift Air a total of $4,047,402, which included the conttact cost of 

$3,360,000 plus $687,402 for fiiel, catering, passenger taxes and ground handling fees. 

Neither the Primary Committee nor the General Committee used up the flight hours that 

they were entitied to use; the Primary Conunittee used 111.8 flight hours and the General 

Committee used 140.3 flight hours. 

To determine the amount that the General Committee could receive in press 

reimbursements, the General Committee had to calculate the pro rata share of the actual 

cost of ttavel for each passenger. The General Committee and the Audit Division used 

two different methods to calculate this pro rata share. 

The General Committee's calculation was based on the cost over the entire life of 

the contract and included the entire amount that the General Committee paid as well as a 

portion of the amount that the Primary Committee paid on the contract. Specifically, the 

General Committee's calculation is based on the combined actual flight hours that both 

conunittees used during the campaign. Since the conttact price with Swift Air was fixed, 

the committees could develop the cost of operating the plane for each hour by dividing 

the conttact price by the hours flown. The committees used the cost of operating the 

plane for each hour to detennine the pro rata share for each passenger.^ During the 

course of the campaign, however, the committees could not have known the total actual 

hours. The committees, therefore, estimated the hours and adjusted the estimate on a 

^ In addition to the contract cost, the Swift Air contract required the campaign to pay additional 

costs for fuel, catering, passenger taxes and ground handling fees. These costs are included in the auditors* 

calculation. 

* Here is a simplified example of how the Generai Committee's calculation worked. (These are not 

the actual figures, and do not reflect the continual re-estimation by the General Committee of the total cost 

over the entire life of the contract. They are simplified figures used to illustrate the principle at issue here). 

Assume that the Primary Committee and the General Committee are viewed as one entity. The fixed 

contract price with Swift Air is $100,000. The Primaiy Committee and the General Committee have flown 

a total of 20 hours. The hourly operating cost would be $5,000 per hour ($ 100,000/20). If there were 50 

passengers on the plane for each of the 20 hours flown, then the pro rata share for each passenger would be 

$100 per hour ($5,000/50). Further assume the Primary Committee used the plane for six hours, and the 

General Conunittee for 14 hours and all SO passengers flew for each of the 20 hours. Under this example, 

the Primary Committee's passengers would be billed $600 ($100 x 6) and the General Committee's 

passengers would be billed $1,400 ($100 x 14). Now assume that the Primary Committee possessed the 

plane just under half the time and paid for just under half the cost of the plane, and the General Committee 

possessed the plane just over half the time and paid for just over half the cost. But $600 is more tilian "just 

under" half the cost per passenger and $1,400 is more than "just over" half. The Committee's method more 

accurately reflects the comparative use of the plane between the two committees; but it does not accurately 

reflect the comparative cost ofthe plane as paid by the two committees. 
Attachment 1 

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Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCam-Palin 2008, Inc. (LRA 759) 

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segment-by-segment basis. Using this method of calculating the pro rata share, the 

General Committee claims that it received press reimbursement of only 106% of the 

actual cost - less than the regulatory maximum of 110%. 

The Audit Division took a different approach to calculate the pro rata share and 

concludes that the General Committee received reimbursements in excess of the 

maximum 110%. It looked only at the actual cost paid by the General Committee to 

Swift Air for travel during the general election portion of the conttact, not the entire cost 

ofthe conttact over its entire life during both the primary and general campaigns. The 

auditors' calculation was based on the $336,000 weekly payments to Swift Air, as well as 

costs for fiiel, catering, passenger taxes and ground costs and some reconfiguration costs 

(see below). Thus, the Audit Division concludes that the Primary Committee billed 

press ttavelers less than their pro rata share of the total amount the Primary Committee 

actually paid on the Swift Air conttact, leaving an amount that the Primary Conunittee 

had paid on the conttact but did not bill. Consequently, the General Committee billed 

press travelers more than their pro rata share - in fact, more than 110% of their pro rata 

share - of the amount the General Committee actually paid on the conttact because the 

(jeneral Committee's calculation included a portion of the entire conttact that had been 

paid by the Primary Committee. 

2. Reconfiguration Costs 

In addition to the Swift Air conttact costs, the Conunittee and the auditors 

included different amounts for reconfiguration costs for the Swift Air plane in their 

calculations. The Swift An aircraft total reconfiguration cost was $650,000.^ The 

Primary Conunittee initially paid for the reconfiguration and the General Conimittee 

reimbursed the Primary Committee $390,000, the total reconfiguration cost less 40% 

depreciation. The General Committee's calculation ofthe press's share of 

reconfiguration costs originally included the entire $650,000 amount of reconfiguration 

costs, but it apparently later accepted the auditors' exclusion of $162,657 in costs for 

logos, painting, and a divider curtain. 

The auditors, however, accepted only $422,620 in reconfiguration costs as actual 

costs of press ttavel, based on the costs the auditors concluded reasonably benefitted the 

press, llie auditors deteimined that the General Committee could include in the actual 

cost of ttavel 100% of reconfiguration costs attributable primarily to the convenience and 

needs of the press; 78%, based on the proportion of press passengers to the number of 

total passengers, of reconfrguration costs attributable to the convenience and needs of all 

passengers; and zero percent of those costs that were allocable only to the convenience 

' This amount paid for goods and services including painting and application of decals and 

campaign logos to the aircraft; a portable satellite phone system; divider curtains for the cabin; seat parts; 

engineering and design work; repairs; labor; and the cost of returning the aircraft to its original condition 

once the campaign was over. 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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and needs of the campaign.^ The auditors then took 60% of $422,620, because the 

General Committee had purchased the reconfiguration from the Primary Committee at 

40% depreciation. The auditors concluded that $253,572 was billable to the press by the 

General Committee. They then divided this by the 140.3 flight hours flown by the 

General Committee to detennine the reconfiguration cost per flight segment. The 

auditors also accepted as actual travel costs billable to the press $33,814 in 

reconfiguration costs for battery packs and satellite phones for the JetBlue aircraft, out of 

total reconfiguration costs of $77,119 for that airplane, but did not accept the remaining 

reconfiguration costs for applymg logos, repainting the plane and placement and removal 

of divider curtains. 

B. Excessive Media Reimbursements Determined By Calculating Actual Travel 

Cost 

1. General Committee and Audit Division Disagree on How to 

Calculate Actual Travel Cost 

We understand that the center ofthe disagreement between the General 

Conimittee and the Audit Division is which accounting method should be used to 

calculate the actual cost for the passengers' pro rata share under 11 CF.R. § 9004.6(a). 

The General Conimittee argues its accounting method, in combining the conttact cost of 

both committees, was more reasonable than the auditors' accounting method given that 

the contract price was not directly proportional to the actual use of the aircraft over the 

period of the conttact. While the auditors' method relied on the cost that each conimittee 

paid under the conttact, the General Committee argues that the cost that the committees 

were paying for the conttact was not directly reflective of the flight hours that they were 

using as they proceeded through the campaign. 

As a legal matter, however, we question whether the Commission should apply 

the General Committee's approach because it requires the Conunission to combine the 

conttact cost and use of both the Primaiy Committee and the General Committee. The 

problem with the General Committee's argument is, as noted at footnote four above, its 

method may accurately reflect the comparative actual use of the aircraft between the two 

committees, and even may accurately reflect the combined pro rata shares ofthe actual 

cost to the Primary Committee and the General Committee, but is out of proportion to the 

comparative actual costs paid by the two committees. And because, of the two 

committees, the General Conunittee is the only one that is publicly financed and the only 

one that is tiie subject of this audit, it is the "actual cost," 11 C.F.R. § 9004.6(a), to the 

General Conimittee with which we are concemed here. 

* If both sides agree that $ 161,490 for logos and painting and S1.167 for a divider curtain could not 

be included in actual cost, then $650,000 minus $162,657 = $487,343. Thus, the real difference between 

the General Committee's position and the auditors' position appears to be the difference between $487,343 

and the auditors' $422,620. Presumably, that difference is accounted for by the costs that benefitted all 

passengers, which the Conimittee included at 100% and the auditors included at 78%. 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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The public financing rules allow general election committees to seek limited 

reimbursements from the media for travel expenses. See 11 C.F.R. § 9004.6(a)(2) and 

(3). "The amount of reimbursement sought from a media representative... shall not 

exceed 110% of the media representative's pro rata share (or a reasonable estimate of the 

media representative's pro rata share) of the actual cost of the transportation and services 

made available." 11 C.F.R. § 9004.6(b)(1). The pro ratti share is calculated by "dividing 

the total actual cost of the transportation and services provided by the total number of 

individuals to whom such ttansportation and services are made available."^ 11 C.F.R. 

§ 9004.6(b)(2). While we can apply this regulation to the ttavel expenses of one 

conimittee operating in one election, neither the regulation itself, nor its Explanation and 

Justification provide a formula for calculating the actual cost of air travel on a chartered 

airplane used by two committees in two different elections (primary and general). 

The auditors' calculation of the actual cost of the Swifr Air conttact and related 

costs is simple. The auditors determined that the actual cost was the amount paid by the 

General Committee to Swift Air for ttavel during the general election period. The 

calculation was based on the weekly installment payment of $336,000 and additional 

costs, the weekly flight hours, and tiie number of passengers. Under the Audit Division's 

method, the General Committee billed the press and received reimbursements from the 

press, not only for the amounts the General Committee paid to Swift Air during the 

general election period, but also for a portion of the ttavel costs that the Primary 

Conimittee paid to Swift Air for ttansportation attributable to the primary campaign. 

The Audit staffs calculation is appropriate because the cost of the Swift Air 

conttact paid for and used by both the primary and general campaigns should be divided 

based on the amount each conimittee actually paid for ttavel during the primary or 

general campaign. The regulatory history provides no guidance about how to determine 

the "actual cost" in a case like this one, where a candidate's primary and general 

conimittees shared a contract for use of the same leased airplane. But the Conunission 

has noted, in addressing what types of costs could be charged to fhe media as the "actual 

cost" of ground ttansportation and facilities, that "campaigns should already be well 

aware that each media representative may only be charged his or her own pro rata share 

of costs" and "committees may not force the traveling press to absorb the costs" of 

services "used or consumed" by others. Explanation and Justification for 11 C.F.R. 

§ 9004.6,64 Fed. Reg. 42,581-2 (Aug. 5,1999). Id. at 42,582. This reasoning would 

support the conclusion that media ttaveling witii a candidate's general election campaign 

should pay only for general election period ttavel and not be forced to absorb air travel 

costs more properly viewed as attributable to the candidate's primary campaign, and 

specifically to the media who ttaveled with that campaign. 

^ The travel reimbursement rule at section 9004.6 has changed in some ways over the years, but the 

Commission has consistently stated that committees should determine the media representative's pro rata 

share of the "actual cost" ofthe transportation. See, e.g., Explanation and Justifications for 11 C.F.R. 

§ 9004.6,45 Fed. Reg. 43,376 (June 27,1980); 56 Fed. Reg. 35903 (Jul. 29. 1991), 60 Fed. Reg. 31,858-59 

(June 16.1995). 64 Fed. Reg. 42,581 (Aug. 5,1999). 
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Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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2. General Committee's Actual Cost Should Be Based On Travel 

Cost Paid By General Committee 

The General Committee's press billing and reunbursement calculation should be 

based only on the General Committee's payments for travel in fiirtherance of the general 

election campaign during the general election period. The General Committee cannot 

mcur primary-related travel expenses because they are not in fiirtherance of the general 

election campaign. See 26 U.S.C. § 9002(11); 11 C.F.R. § 9002.11. As tiie General 

Committee cannot incur expenses for primary-related ttavel, it should not be able to 

effectively bill the press for those costs either. The publicly-fimded General Comniittee 

and McCain's non-publicly fiinded Primary Conimittee should keep their expenses 

separate because the two campaigns operated under different rules, leqiurements and 

limitations. Senator McCain agreed to use only public fimds for his general election 

campaign; to take no conttibutions; and to keep his spending within the general election 

expenditure limitation, which equals the amount of public fimds he received. See 26 

U.S.C. §§ 9002(11), 9003(b); 2 U.S.C. §§ 441a(b)(l) and (c); 11 C.F.R. § 9002.11. By 

conttast. Senator McCain opted not to participate in the primary matching payment 

program; his primary campaign was entirely privately fUnded. 

Because primary and general election campaign expenditures must remain 

separate, the Commission created "bright line" rules for atttibuting expenses between the 

primary and general expenditure limitations after issues arose in prior election cycles 

about how to divide expenses that benefitted both campaigns between publicly fiinded 

prunary and general conunittees. 11 C.F.R. § 9034.4(e); see Explanation and 

Justification for 11 C.F.R. § 9034.4(e), 60 Fed. Reg. 31,854 at 31,866-68 (Jun. 16,1995). 

These rules were later revised to also apply to this situation, where the candidate received 

public fimds in only one election. Id. Many of these bright line rules are based on 

timing. Under the bright lme atttibution rules, travel costs are attributed based on when 

tiie tt:avel occurs. 11 C.F.R. § 9034.4(e)(7). If the ttravel occurs before tiie date of tiie 

nomination, the cost is a primary expense, unless the ttavel is by a person working 

exclusively on general election campaign preparations. Id. While these bright lme rules 

are normally applied to situations to determine the attribution of travel cost to a primary 

and general campaign sharing expenses, we believe that it is appropriate for the 

Commission to use these same rules to detennine the attribution of the travel costs 

between these committees and how much these conunittees should bill the press for 

ttavel cost. 

Under the bright line attribution rules, the General Conunittee's weekly payments 

to Swift Air were for general expenses and the Primaiy Committee's weekly payments 

were for primary expenses because the weekly payments appear to be related to the 

weekly use of the leased plane. To the extent that the payments and the amounts billed to 

the press were related to ttavel occurring at the same time as the payments were made, 

those amounts were atttibutable to the Primary Committee prior to the date of the 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

Pages 

candidate's nomination and to the General Committee after the date of the candidate's 

nomination. See 11 CF.R. § 9034.4(e)(7).* 

In addition, the separate reporting of expenditures by these separate committees 

supports the conclusion that General Committee and Primary Conunittee ttavel 

expenditures must remain separate. The General Conunittee and the Primaiy Committee 

file separate reports and are separate committees.^ Publicly funded authorized 

conimittees shall report all expenditures to fiirther the candidate's general election 

campaign in reports separate from reports of any other expenditures made by those 

committees with respect to other elections. 11 C.F.R. § 9006.1. 

3. Draft Preliminary Audit Report Requires Additional Explanations 

The draft PAR addresses a number of the General Committee's arguments 

including arguments based on GAAP accounting principles, its contention that the 

auditors' methodology conflicts with section 9004.6(b)(3) of the Commission's 

regulations, and its interpretation of previous audits including Dole-Kemp 1996, BushCheney 2000 and Kerry-Edwards 2004. We defer to the Audit Division's expertise in 

analyzing the correct application of accounting and auditing principles and procedures. 

We suggest, however, that you expand the explanation of why the Audit staffs approach 

is more appropriate and why the Committee's arguments and citations of precedent are 

not correct, if possible. The Committee raises complex accoimting arguments and 

additional explanation would help clarify the auditors' analysis of those arguments for 

readers who do not have accounting expertise. In particular, the auditors may wish to 

address whether this issue arose in prior audits in such a way that the General Committee 

The regulations allow a limited exception for qualified campaign expenses incurred prior to the 

general election expenditure report period for property, goods or services to be used during die expenditure 

report period in connection with the general election campaign. 11 C.F.R. § 9002.1 l(aX2), 9003.4,9004.4. 

The Commission explained that this exception is "designed to permit a candidate to set up a basic campaign 

organization before the expenditure report period begins." Explanation and Justification for 11 C.F.R. 

§ 9003.4,45 Fed. Reg. 43375 (Jun. 27,1980). The rule lists examples of expenses such as establishmg 

financial accounting systems and organizational planning. 11 C.F.R. § 9003.4(a). The General Committee 

has not demonstrated that the Primary Committee's weekly lease payments were related to travel after the 

date of nomination or were somehow pre-paying for the General Committee's use of the leased plane 

during the general election period. Nor is there any indication that travel during the primary period was by 

persons who were working exclusively to prepare for the general election. See 11 C.F.R. § 9034.4(eX7). It 

would be difficult for the General Committee to make such a demonstration because both campaigns paid 

the same weekly amount for the leased plane and both campaigns used the leased plane. Although unused 

hours rolled over from week to week, neither committee used all of the flight hours they could have used 

under the contract. Nevertheless, if the General Committee is able to demonstrate that some portion of the 

Primary Committee's contract payments was to fiirther the general election and should have been paid for 

by the General Committee, its actual cost of travel and the amount it may bill the press might increase. 

' Generally, publicly fimded general election candidates set up a separate authorized committee for 

the general election, which they authorize to incur expenses on their behalf, as well as a separate legal and 

compliance fimd. See 26 U.S.C. §§ 9002(1); 11 C.F.R. §§ 9002.1,9002.2,9003.3. 
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Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, Inc. (LRA 759) 

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would have been on notice that its choice of accounting method might have negative 

consequences. 

We also suggest that the PAR explain the Audit staffs response to the 

Committee's argument that the auditors' methodology is in conflict with section 

9004.6(b)(3), which requires that media representatives be given a bill that specifies 

amounts charged fbr air and ground fbr each segment within 60 days. We understand 

from conununications with the Audit staff that the auditors' approach is consistent with 

that regulation because the auditors used the number of ttavelers to calculate a pro rata 

amount of billable costs and accounted for varying numbers of travelers on each flight 

segment. The Committee could have used a similar calculation and timely billed the 

media. We suggest that the Audit staff explain this in the PAR. 

With respect to the precedents cited by the Committee, the proposed PAR notes 

that the Bush-Cheney 2000 committee used a sunilar billing methodology to the General 

Committee, but that method did not result in any material overbilling of the press or audit 

finding in that audit. The absence of a finding in that audit is not a precedent, and does 

not indicate the approach or billings by the Bush-Cheney 2000 committee were correct. 

It merely indicates that the difference between the committee's and auditors' calculations 

in that audit was not large enough to raise an issue of material noncompliance. Here, the 

difference in the calculations is large enough to result in a finding. Moreover, according 

to the Audit staff, the General Conimittee seeks to apply the hourly calculation used in 

the Dole-Kemp 1996 audit to the total Swift Air costs over the life of the entire contract 

for both the General Committee and Primary Cominittee, and not, as in Dole-Kemp 1996, 

to a general election committee's portion of the costs for travel during the general 

election campaign. 

The General Conimittee states in its response to the exit conference that there was 

no "overbilling" of any press traveler but, at most, a "misallocation" of the proceeds of 

press billings between the Primary Committee and the General Conunittee. 

Consequentiy, it concludes, it should not have to make any refimds to any press entities, 

but may simply ttansfer funds from the General Committee to the Primary Committee to 

correct the misallocation. The General Committee's proposed ttansfer of funds to the 

Primairy Committee will not resolve the issue that the General Committee received 

reimbursements fix)m the press in excess of its actual cost. If the General Committee's 

public fluids are ttansferred to the Primary Committee and used to pay for primary 

campaign expenses, the payments would be non-qualifred campaign expenses that may 

be subject to repayment because they would not be made to fiirther McCain's campaign 

for tiie generai election. See 26 U.S.C §§ 9002(11), 9007(b)(4); 11 CF.R. §§ 9002.11, 

9004.4,9007.2(b)(2). In the absence of any demonstration that the Primary Committee 

paid for general election travel, see supra note 8, the transfer would not resolve the 

excess press reimbursement problem. The amount of excess press reimbursements the 

General Committee received should be retumed to the media representatives. 11 CF.R. 

§ 9004.7(d)(2). 
Attachment 1 

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Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCain-Palin 2008. Inc. (LRA 759) 

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Finally, we address the degree to which this finding matters. One of the principal 

benefits to publicly fimded general election committees ofthe regulations' provisions 

permitting press reimbursements is that the committee may deduct properly received 

reimbursements from the overall expenditure limitation. 11 C.F.R. § 9004.6(a). Here, 

however, the auditors conclude that the Committee did not exceed the expenditure 

lunitation, even when the excessive reimbursements are included.^' Nevertheless, the 

General Conunittee's receipt of excessive press reimbursements is signifrcant. The 

puipose of the ttavel reimbursement rules at section 9004.6 is to eliminate the possibility 

that a committee could effectively be subsidized by the media through charging the 

media higher amounts than their pro rata shares for transportation provided by the 

campaign. See Explanation and Justification for 11 CF.R. § 9004.6,45 Fed. Reg. 43,376 

(June 27,1980). The Conunission has pursued press ttavel billing and reimbursement 

issues in the enforcement context. See MUR 3385, Bush Quayle '88 (Committee agreed 

to a conciliation agreement with a $10,000 civil penalty for a violation of section 

9004.6).'^ In tiie 1996 cycle, tiie Dole-Kemp '96 ("DK96") audit resulted in a payment 

for expenses in excess of the expenditure limitation, which included press and Secret 

Service reimbursements collected in excess of actual costs, and the Commission pursued 

the issue in enforcement. See MURs 4670,5170,5171 (Conimission and DK96 

ultimately negotiated a Global Settlement and Release and a conciliation agreement with 

a $75,000 civil penalty to resolve the payment and pending enforcement matters, but the 

final negotiated agreements do not address the press reimbursement issue or require that 

DK96 reimburse the press.) Thus, we believe that the facts surrounding the Swift Air 

flight costs and the press reimbursements for them merit inclusion in the PAR, 

notwithstanding that they have no impact in this particular case on the Generai 

Committee's compliance with the overall expenditure limit. 

Expenditures for transportation, ground services or fiicilities provided to media are qualified 

campaign expenses that count against the overall expenditure limitation, but conunittees may seek 

reimbursement fi'om the media and may deduct die reimbursements received from die expenditures subject 

to die overall expenditure limitation. 11 C.F.R. § 9004.6(a). 

'' The auditors' calculation of the overall expenditure limitation includes a GELAC reimbursement 

that lowers the General Committee's total expenditures below the limitation. The GELAC may reimburse 

the General Committee for certain types of expenses such as winding down costs and compliance expenses 

initially paid by the General Conunittee. To die extent that the GELAC reimburses the General Committee 

for these expenses, the expenses no longer count against the General Committee's expenditure limitation. 

The auditors' calculation also assumes die General Committee will pay the excess reimbursement amount 

to the press or make a transfer to the Primaiy Committee. 

Also in the 1988 cycle, the Commission ordered die Robertson 1988 Committee to refiind 

$105,634.56 in press overpayments. In a judicial review of the repayment determination, the Robertson 

Committee argued that the Commission did not have the authority to order die refiind, but the court noted 

that the "issue is not before us" in die review of the repayment because the Commission conceded "that any 

challenge would have to fiame" Robertson's "press charges as impermissible corporate campaign 

contributions," enforceable through die procedures of section 437g. Robertson v. FEC, 45 F.3d 486, (D.C. 

Cir. 1995), n.4. 
Attachment 1 

Page 11 of 19 

Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCain-Palln 2008, Inc. (LRA 759) 

Page 11 

C. Reconfiguration Costs Issue Should be Raised for Commission Consideration 

We recommend tliat you raise in the cover memo for the Commission's 

consideration the issue of which reconfiguration costs should be considered actual costs 

of travel and included in calculating the pro rata amounts billable to the press. The Audit 

staffs analysis is based on whether reconfiguration costs reasonably "benefitted" the 

press. You state: "Historically, the Commission has only allowed the Press to be billed 

for those aircraft reconfiguration costs that could be reasonably considered as having 

benefitted the Press." Draft PAR at 10. In contrast, the General Committee considered 

all costs for reconfiguring the Swift Air aircraft, except for decal painting and some cabin 

dividers, as actual costs of ttavel. Applying a reasonable benefit test to the 

reconfiguration costs, the auditors accepted that 100% of costs where there was "an 

association" with the press were actual costs of travel, but asserted that only 78% of costs 

that were "not clearly associated" with the press but were instead for the convenience and 

needs of all passengers were accepted as actual costs of travel permissibly factored into 

the press reimbursement calculation. The 78% figure was based on a percentage derived 

from the proportion of press seats on the plane. But the auditors did not include any 

amount of the reconfiguration costs for logos and painting as actual costs of travel. For 

the JetBlue aircraft, the auditors accepted as actual costs of travel only the costs of battery 

packs and satellite phones because the press benefitted from those items, but did not 

accept reconfiguration costs for applying logos, repainting the plane and a divider curtain. 

We question the legal basis for this approach and believe this issue should be 

considered by the Commission.'^ The regulations do not set forth a "reasonable benefit" 

test for mcluding airplane reconfiguration costs as actual costs of ttavel in determining 

the amount of ttavel expenses for which a committee may seek reimbursement from the 

press. With respect to tiie Commission's past practice, the draft PAR does not cite any 

previous audits where the Conimission applied a reasonable benefit test to press billings 

for airplane reconfiguration costs. We have been unable to locate any prior Titie 26 audit 

report that directly addressed this issue one way or the other. If the Audit Division is 

aware of Commission precedent on point, you should cite that precedent in the proposed 

report. We note that 11 C.F.R. § 9004.6 aUows for reimbursement of a pro rata share of 

the actual costs of ttavel and does not distinguish between actual costs for aircraft 

operating costs (such as flight costs) and reconfiguration costs. The regulation requires 

While we question this approach, we agree that the Committee's reliance on the Kerry-Edwards 

2004, Inc. audit for the reconfiguration issue is misplaced. The dispute in Keny-Edwards concemed how 

to calculate the amount of leased airplane reconfiguration costs that would count against the expenditure 

limitation, not the amount included in "actual cost" in determining the amount of travel expenses for which 

reimbursement fix>m the press may be sought. The Keny-Edwards general committee, like the General 

Committee, purchased a leased plane reconfiguration at 40% depreciation fi'om its primary committee, but 

die issue in diat audit was different. The Keny-Edwards audit did not concem the calculation of 

reconfiguration costs that could be billed to the press. Moreover, the Conunission never definitively 

addressed the reconfiguration valuation in that audit because the expenditure limitation issue was resolved 

when adjustments to other expenditures brought the total expenditures below the limitation. See Statement 

of Reasons, Kerry-Edwards 2004, Inc. (November 14,2007). 
Atttichment 1 

Page 12 of 19 

Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCain-Palin 2008, hic. (LRA 759) 

Page 12 

that the actual cost of ttavel be detennined, and only then apportioned into pro rata shares 

for the press ttavelers. Thus, the part of the process where the number of press seats 

should be considered is not in calculating the actual costs of the reconfiguration (the 

78%), but m apportioning the pro rata share of the actual ttavel costs for press 

passengers. 

IL MEDIA VENDOR INTEREST 

The cover memorandum to the draft PAR notes the issue of interest eamed by the 

Committee's media vendors totaling $14,499. The issue is not in the draft PAR and there 

is no repayment recommendation because the Committee did not benefit from the eamed 

interest. This Office previously responded to your informal query about whether the 

interest eamed by the media vendors must be repaid to the United States Treasury and 

whether this matter should appear in the PAR as a finding or issue. As we said in our 

response, we conclude that because the interest eamed by media vendors did not benefit 

the Coinmittee, the Audit Division should not recommend any repayment of the interest. 

This conclusion is based on the Commission's actions in the 2004 cycle general election 

committee audits. We reconunend, however, that you raise this issue for Commission 

consideration in the cover memorandum forwarding the PAR to the Conimission. 

The Conmiittee used a media consultant, MH Media, and three media vendor 

subcontractors including Smart Media Group ("SMG"), which did television media buys. 

The auditors found tiiat MH Media ($1,325) and SMG ($13,174) eamed interest tottding 

$14,499.79 on Committee fimds between August 29,2008 and January 31,2009. The 

interest remained in the media vendors' bank accounts and none of the interest was used 

for media buys, compensation, or any other campaign purpose. The Committee states 

that it advised the media vendors to keep all eamed interest separate and not to use it for 

any media buys or compensation. SMG ttansferred the interest to another account and 

did not use the funds, while MH Media kept the interest in the deposit accounts. The 

media vendors provided documentation to the auditors including bank statements and 

general ledgers demonsttating that the eamed interest was not spent. The Conimittee 

believes the media vendor interest need not be repaid. 

Candidates must repay income eamed from the investment or other use of public 

fimds, less taxes paid on such income. See 11 C.F.R. §§ 9007.2(b)(4), 9004.5. This type 

of repayment "ensure[s] that any income received through the use of public fimds 

benefits the public financing system." Explanation and Justification for 11 C.F.R. 

§§ 9004.5 and 9007.2,60 Fed. Reg. 31858 and 31864 (June 16,1995). 

In the 2004 presidential audits, the Commission was unable to reach agreement on 

whether to seek repayment of interest eamed by media vendors on public fimds where the 

interest eamed was not paid to the committees or used to pay for media buys, 

commissions or other campaign purposes that would benefit the committees. In the 

Bush-Cheney '04 audit, the Commission did not have four affirmative votes to seek 

repayment of $19,745 in interest eamed on media vendor accounts. See Report ofthe 
Atttichment 1 

Page 13 of 19 

Memorandum to Joseph F. Stoltz 

Preliminary Audit Report McCain-Palin 2008, hic. (LRA 759) 

Page 13 

Audit Division on Bush-Cheney '04, Inc. and the Bush-Cheney '04 Compliance 

Conunittee, Inc. (approved Mar. 22,2007). Some Commissioners thought that "the 

standard for repayment should be whether the General Committee received or benefited 

from the interest eamed by having the interest used to make media buys or offset 

commissions." Id at 11-12. They concluded that because Bush-Cheney '04, Inc. "did 

not receive or benefit from the interest eamed, no finding or repayment determination 

would be appropriate." Id. at 12. Other Commissioners, however, concluded that 

repayment "may be appropriate" and "that the purpose for payment of interest or income 

was to ensure that any mcome received through the use of public funds benefits the 

public financing system." Id Subsequently, the Commissioners expressed similar views 

in the Kerry-Edwards 2004, Inc. audit, but agreed on repayment of interest where the 

interest benefited the committee and was used for campaign purposes. See Report of the 

Audit Division on Kerry-Edwards 2004, Inc. and the Kerry-Edwards 2004 Inc. General 

Election Legal and Accounting Compliance Fund (approved June 14,2007). The 

Commission detennined that Kerry-Edwards 2004, Inc was required to repay $41,277 for 

interest that was used to pay for media buys and/or to offset amounts owed to the media 

vendor. However, the Commission did not requre repayment of $159,446 in interest that 

was never paid to the committee or used for campaign purposes and was eamed on loans 

from the media firm to its parent company. Id at 33-34. 

Based on the Commission's actions m the 2004 audits, this Office concludes that 

because the interest eamed by the media vendors was not used for campaign purposes or 

otherwise to benefit the Committee, the Audit Division should not recommend any 

repayment of the interest. We recommend, however, that you raise this issue for 

Commission consideration in the cover memorandum forwarding the PAR to the 

Commission. The Commission's regulations remain unchanged and do not include any 

test of benefit or use for campaign purposes for repayment of interest income. See 11 

C.F.R. §§ 9007.2(b)(4), 9004.5. Nevertheless, tiie Commission's actions in tiie 2004 

audits indicate lack of Commission consensus for repayment of interest beyond those 

payments that benefit the committee in some way. Some Commissioners may have 

concems about whether interest income eamed on public fimds deposited with a thiid 

party vendor actually benefits a conimittee and is used for campaign purposes and may 

want to apply a benefit test for repayment of interest income. The Committee relied on 

the Commission's actions in the 2004 audits when it advised its media vendors to keep 

any interest mcome separate. We acknowledge that a benefit test for income repayments 

could be abused to circumvent the regulations if, for example, a campaign deposited large 

amounts of public fimds with vendors to eam income as a way to enrich the vendors. 

That potential for abuse is not evident here. The amount of income at issue is minimal, 

and you have informed us that the Committee has already repaid a larger amount of 

interest it eamed on public fimds. Therefore, we conclude that raising this issue in the 

cover memorandum for Commission consideration but not recommending any repayment 

ofthe interest income is appropriate. 
Atttichment 1 

Page 14 of 19 

Memorandum to Joseph F. Stoltz 

Preliminaiy Audit Report McCain-Palin 2008, Inc. (LRA 759) 

Page 14 

III. HYBRID COMMUNICATIONS 

The cover memorandum to the draft PAR requests our comment on the issue of 

hybrid coinmunications. Hybrid communications refer to a clearly identified candidate 

and make a generic reference to other party candidates without clearly identifying them. 

The Republican National Committee ("RNC") spent $30,749,009 on hybrid media 

communications related to the general election. These expenses were not treated as 

coordinated party communications or counted against the Committee's expenditure 

limitation. We concur that this issue should be raised for the Commission's information 

in tile cover memorandum to the PAR. 

In 2004, the Conimission did not pursue similar hybrid communications in the 

audits of both major party nominees. This Office commented that the auditors should not 

include the hybrid ad issue as a finding in the report or count the expenses against the 

candidates' expenditure limitations, but should raise the issue in the cover memorandum 

for the Commission's consideration. See Attachment 1. We also discussed several legal 

aspects of the issue the Commission could consider. Id. The Comniission was divided 

on the issue and Commissioners issued Statements of Reasons for the audits. See 

Statement of Commissioners Lenhard, Walther and Weintraub, Audit of Bush-Cheney 

'04, Inc. (March 21,2007), Statement of Conunissioner Weinttaub on Audit of BushCheney '04, Inc. (March 21,2007), Statement of Commissioners Mason and von 

Spakovsky, Final Audit Report on Bush-Cheney '04, Inc. (March 22,2007), Sttitement of 

Commissioners Mason and von Spakovsky, Final Audit Report on Kerry-Edwards, 2004, 

Inc. (May 31,2007). Our analysis of the issue remains the same, and we have attached 

our legal comments on this issue in the Bush-Cheney '04 audit for your infonnation. 

Attachment 1. Subsequently, the Commission initiated a rulemaking on hybrid 

commumcations, which has not yet been completed and thus, is not applicable to this 

audit. The Commission considered expanding section 106.8, which applies to telephone 

banks, to address other types of "hybrid communications." See Notice of Proposed 

Rulemaking ("NPRM"), "Hybrid Communications," 72 Fed. Reg. 26569 (May 10,2007). 

Attachment 1. 

Memorandum to the Commission, Preliminary Audit Report of the Audit Division on 

Bush-Cheney '04, Inc. and the Bush-Cheney '04 Compliance Conimittee (LRA # 664)" 

(May 26,2006) 
Attachment 1 

Page 15 of 19 

FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

Nay 261 2006 

MEMORANDUM 

Joseph F. Stoltz 

Assistant Staff Director 

Audit Division 

TO: 

THROUGH: Robert J.Costa 

Acting Staff Director 

James A. Kah 

Deputy Genera] Counsel 

FRCiM: 

SUBJECT: 

Thomasenia P. Dunes 

Associate General Coihisel 

Lorenzo Holloway ^^[f^— 

Assistant General Counsel 

for Public Finance and Audit Advice 

Delanie DeWitt Painter 

Attorney 

Margaret J. Foraian ;J ^ ^ 

Attomey 

Preliminary Report of the Audit Division on Bush-Cheney '04, Inc. and the 

Bush-Cheney '04 Compliance Committee (LRA #664) 

I. INTRODUCTION 

The Office of General Counsel has reviewed the Preliminary Audit Report fproposed 

Report") ofthe Audit Division on Bush-Cheney '04, Inc. (tiie "Committee" or "Bush") and tiie 

Bush-Cheney '04 Compliance Committee ("GELAC^") that you submitted to this Office on 

February 1,2006. This is the second of two memoranda discussing our comments on the 

proposed Report. In this memorandum, we comment on the issue of possible in-kind 

contributions Bush received from the Republican National Committee ("RNC") when tiie RNC 

and Bush divided media expenses for broadcast advertisements that clearly identified the 

candidate and/or his opponent and made vague references to other political figures (Findings 1. 

B. and 2). If you have any questions, please contact Delanie DeWitt Painter or Margaret J. 

Fonnan, lhe attorneys assigned to this audit. 
Attachment 1 

Page 16 of 19 

Preliminaiy Audit Report ~ Bush-C^icuey '04 

(LRA#664) 

Page 2 

n. ATTRIBUTION OF MEDIA COSTS (AUDIT REPORT FINDING I.B. AND 2.) 

The Audit Division found that Bush received in-kind conttibutions from the RNC for 

media expenses. The RNC and Bush equally divided media expenses for broadcast 

advertisements that clearly identified President Bush and/or John Kerry and made vague 

references to other political figures in Congress. The divided media expenses totaled 

$81,418,812. The RNC also paid $1.7 million in commissions. The proposed Report concludes 

that Bush should have paid for all of the media and commissions. Since the RNC paid for half of 

the media expenses and $ 1.7 million in commissions, the proposed Report concludes that the 

RNC made in-kind conttibutions of $42,409,406 ($81,418,812/2 = $40,709,406 + $1,700,000) to 

Bush. The proposed Report reconunends that, unless Bush demonstrates that it did not receive 

these in-kind contributions from the RNC, the Audit staff will reconunend a repayment of 

$42,409,406. ^-ge 26 U.S.C. § 9007(b)(3). 

This Office recommends that you delete this issue and the related findmgs fi^m the 

Report and. not count tiiese expenses against Bush's expenditure limitation. In light of recent 

Advisoiy Opinion ("AO") 2006-11, this Office believes tiiat the Conunission would approve the 

50% attribution of these media expenses between Bush and the RNC. Instead, we recoimnend 

that you raise the issue in the Audit Division's cover memorandum when the Report is circulated 

for Conunission approval so that the Conunission can consider the issue. 

In consideiing this issue, the Commission should note that neither the Federal Election 

Campaign Act ("FECA") nor tiie Commission's regulations definitively address the allocation of 

broadcast advertisements referencing only one clearly identified federal candidate (and/or his 

opponent) and a vague reference to their political allies in Congress. The Conunission's 

regulations at part 106 address the allocation of similar types of expenses. The regulations at 

part 106 include both general allocation rules and specific rules for allocating specific types of 

expenses in particular circumstances. Section 106.1(a) provides the general rule that 

expenditures made on behalf of more than one clearly identified candidate shall be attributed to 

each candidate according to the benefit reasonably expected to be derived. 11 CF.R. § 106.1(a). 

For a broadcast communication, the "attribution shall be determined by the proportt'on of space 

or time devoted to each candidate as compared to the total space or time devoted to all 

candidates." Id. A candidate is clearly identified if his or her name or likeness appears or if his 

or her identity is apparent by unambiguous reference.' 2 U.S.C. § 431(18); 11 C.F.R. 

§§ 106.1(d) 100.17. However, the advertisements at issue here clearly identify only the party 

nominees - tiie references to leaders, liberals or allies in Congress do not clearly identify any 

specific candidates. See also Advisory Opinion C*AO") 2004-33 (Ripon Society) (Conunission 

stated that reference to "Republicans in Congress" in an advertisement did ''not constittite an 

unambiguous reference to any specific Federal candidate" under section 100.29(b)(2)). Thus, 

section 106.1 does not apply. 

' In 1995, the Commission considered adopting a broader definition of "clearly identified candidate" that 

would have included groups of candidates but declined to so after receiving comments that it could be difficult to 

determine the identities ofthe candidates in a group, for example, based on a reference to "pro life" candidates. See 

Explanation and Justification ofJJ CF.R. § J00.J7, 60 Fed. Reg. 35,292,35,293-94 (July 6, 1995). 
Attachment 1 

Page 17 of 19 

Preliminary Audit Report - Bush-Qicney '04 

(LRA#664) 

Page 3 

Section 106.8, which sets forth a flat 50% attribution rule for party committee phone 

banks, also does not apply here. The language of that section applies only to one narrow 

category of campaign communications costs: phone banks. Section 106.8 "applies to the costs 

of a phone bank conducted by... a political party" under certain delineated circumstances, 

which include, inter alia, that the communication refers to a clearly identified federal candidate 

and "generically refers to otiier candidates of tiie Federal candidate's party without clearly 

identifying them." 11 CF.R. § 106.8(a). When the Conimission promulgated section 106.8, the 

Commission considered whether to '^include other fonns of conununications such as broadcast or 

print media" but "decided to limit the scope of new section 106.8 to phone banks at this tune 

because each type of commimication presents different issues that need to be considered in 

fiuther detail before establishing new rules." Explanation and Justification for 11 C.F.R. 

§ 106.8, "Party Committee Telephone Banks," 68 Fed. Reg. 64,517,64,518 (Nov. 14,2003). 

The Coinmission, nevertiieless, has approved the attribution of expenditures for 

communications that refer to one clearly identified candidate and make a generic reference to 

other party candidates under certain circumstances. Most recently, m Advisoiy Opinion 2006-

11, the Commission considered attribution of the cost of a mass mailing that expressly advocated 

the election of one clearly identified federal candidate and the election of otiier party candidates 

who were referred to generically. The Commission recognized that sections 106.1 and 106.8 do 

not directly apply, but applied analogous "space or time" principles set forth m section 106.1(a) 

to measure the "benefit reasonably expected to be derived" by the clearly identified federal 

candidate. The Commission concluded that at least 50 percent of the cost of the mailing must be 

attributed to the clearly identified candidate even if the space in the mailing attributable to him is 

less than that attributable to other candidates. However, if the space of the mailing devoted to 

the clearly identified candidate exceeded the space devoted to the generic party candidates, the 

costs attributed to the clearly identified candichte must exceed 50 percent and reflect at least the 

relative proportion of the space devoted to the candidate. Thus, the Commission approved a 

minimum 50% attribution to the clearly identified candidate, not an automatic 50/50% split. 

This OfGce recognizes that the Commission could follow the attribution principles set 

forth in AO 2006-11 when it considers Bush's proposed media attribution. We recoinmend that 

the Coinmission take note of the distinctions between AO 2006-11 and this audit, and (2) the 

policy considerations for a candidate who receives public financing that were not present in 

AO 2006-11 when it considers whether to apply the attribution method of AO 2006-11 here. As 

discussed in greater detail below, this audit concems broadcast advertisements rather than mass 

maiUngs and, it is questionable whether some of the advertisements generically refer to other 

candidates, hideed, the advertisements appear to be primarily focused on furthering the election 

of a publicly-financed presidential candidate. Moreover, unlike AO 2006-11, the allocation 

principles of section 106.1 would be applied in the context of a publicly-financed presidential 

election. If the amount that is allocated to Bush is improper because it does not include all ofthe 

expenses that are in furtherance of his campaign for election to the office of President, 11 C.F.R. 

§ 9002.11(a)(1), this would result in the introduction of private contributions into a publicly 

funded general election campaign through payment of media costs by the party, and those 

payments would not count against the candidate's expenditure limitations. Compare 11 CF.R. 
Attachment 1 

Page 18 of 19 

Preliminaiy Audit Report - Bush-C^cney '04 

(LRA #664) 

Page 4 

§ 9002.1 l(a)(l)(expenditures tiiat fiirther tiie election to tiie Office of President) with 11 C.F.R. 

§ 9002.1 l(b)(3)(expenditures tiiat fiirther tiie election of otiier candidates). 

If tiie Commission decides to apply tiie attribution metiiod of AO 2006-11, it would 

attribute at least 50% of the media costs to Bush, but there is the potential to attribute more than 

50% to Bush. In AO 2006-11, tiie Conunission by analogy applied the principles set fortii in 

section 106.1(a)(1) ofthe "proportion of space or time devoted to each candidate as compared to 

the total space or time devoted to all candidates" to measure tiie "benefit reasonably expected to 

be derived" by the clearly identified candidate. If the Conimission applies AO 2006-11 and 

those pn'nciples here, we recommend that the Cominission consider three issues. See 11 C.F.R. 

§ 106.1(a)(1); AO 2006-11. 

First, the content ofthe advertisements appears to be primarily focused on promoting the 

election of the clearly identified candidate and does not make clear that references to other 

individuals allied with Bush weie "devoted" to promoting the election of any other candidates. 

In fact, some of the vague references m the advertisements do not even rise to the level of 

"generic" party references that the Commission considered in approving attributions in AO 

2006-11 and section 106.8.^ The advertisements refer to Congressional allies of Bush or Kerry 

using vague descriptions such as "our leaders in Congress," "Congressional leaders," "liberals in 

Congress" and "liberal allies" rather than stating the party names "Democrats" or "Republicans" 

(except in one Spanish advertisement) or making clear that these officials were party candidates. 

The ambiguous references address whether legislators supported the plans of Bush or Kerry 

rather than their status as candidates of a party - many Senators were not up for re-election and 

non-incumbent candidates are not included in the references. The references may have had a 

political purpose of associating Bush or Keiry with groups of Congressional incumbents as a 

way to increase support for Bush rather as a way to benefit any other unidentified party 

candidates. 

Second, even assuming, arguendo, that each reference to a Congressional ally or leader 

was devoted to other party candidates, the amount of space and time devoted to Bush in the 

advertisements still may exceed 50 percent. In addition to the repeated references to Bush and 

his allies or leadeis in (Congress, all of the advertisements contain several seconds of pictures or 

footage of Bush alone, stating that he approved the advertisement as requured by 2 U.S.C. 

§ 441 d(d) and 11 CF.R. § 110.11 (c).^ An attribution based on space and time could tteat this 

portion ofthe advertisements as solely devoted to Bush and conclude that Bush's atttibution 

' The Cominission explained in the section 106.8 rulemaking that "[g]eneric references to 'our great 

Republican team' or 'our great Democratic ticket' would satisfy" the requirement for a generic reference to other 

party candidates. 68 Fed. Reg. 64,518. AO 2006-11 provided "Vote John Doe and our great Democratic team" as 

an example of a message referencing a clearly identified candidate and generically referring to other party 

candidates. Nothing in die media advertisements is similar to these generic references. 

^ Television advertisements must include a statement identifying the candidate and stating that the candidate 

approves die communication. 2 U.S.C. § 441d(d)(l); 11 C.RR. § 110.11(c). The candidate statement shall be an 

unobscured full screen view of lhe candidale making ihe slatement or tbe candidale in voice-over accompanied by a 

phoio or image and shall also appear in writing at the end of the communication in a clearly readable manner with 

reasnnahlp color contrast ior a prriod of at least 4 seconds. Ja. 
Attachment 1 

Page 19 of 19 

Preliminaiy Audit Report ~ Bush-C3ieney '04 

(LRA #664) 

Pages 

should be higher than 50%. Conversely, tiie fact that tiiis disclaimer is legally required might 

support not considering this portion of the advertisement in calculating an attribution. 2 U.S.C. 

§ 441d(d)(l); 11 CF.R. § 110.11(c). 

Finally, the Commission may not have enough documentation from Bush to detennine if 

the allocation to Bush should not be greater than 50%. The Conunission could address this issue 

by including the finding in the Preliminaiy Audit Report and requesting additional information 

fix>m Bush in Bush's response to the Preliminary Audit Report. To receive public fimds, tfae 

candidate agreed that he had the burden of proving that disbursements are qualified campaign 

expenses, to meet the documentation requirements for disbursements and to provide an 

explanation, at the Commission's request, of the connection between any disbursement and tfae 

campaign. 11 C.F.R. §§ 9003.1(b), 9003.5. Since Bush disbursed public fimds as a part ofthe 

joint allocation with tiie RNC, Bush has the burden of demonstrating that its proposed attribution 

of the media expenses is appropriate and that only 50% of these media expenses were qualified 

campaign expenses attributable to Bush.^ See 11 CFR. §§ 9003.1(b)(1), 9003.5; see also 

26 U.S.C. § 9002(11); 11 CF.R. § 9002.n(]o)i3); Cf. Statement of Reasons in Support of 

Repayment Determination Afier Administrative Review for Keyes 2000, Inc. (approved March 8, 

2004) at 24-25 (when a publicly-financed conmiittee engages in dual activities it must be able to 

document the expenses for each type of activity). 

* A qualified campaign expense must, inter alia, be incurred "to fiirther" a candidate's election to die office 

of President or Vice President. 26 U.S.C. § 9002(11); see 11 C.F.R. § 9002.11(a)(1). If a committee also incurs 

expenses to fiirther the election of one or more individuals to federal or non-federal public office, expenses incuned 

"which are not specifically to fiirther die election of such other individual or individuals shall be considered as 

incurred to fiirdier the election" of the publicly-financed candidates "in such proportion as the Commission 

prescribes by mles and regulations." 26 U.S.C. § 9002(11). The regulations state diat expenditures diat fiirther die 

election of other candidates for public office shall be allocated and paid in accordance with 11 C.F.R. § 106.1(a) and 

will be considered qualified campaign expenses "only to the extent that they specifically further the election of die 

candidate for President or Vice President." 11 C.F.R. § 9002.11(b)(3).