FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

MEMORANDUM 

February 7, 2012 

TO: 

FROM: 

Patricia Carmona 

Chief Compliance Officer 

Tom Hintermister 

Assistant Staff Director 

Audit Division 

Christopher Hughey J\Q^ 

Deputy General Counsel T 

Lawrence L. Calvert, \ 

Associate General C 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

linS^^^ 

SUBJECT: 

Allison T. Steinle ATS 

Attomey 

Proposed Draft Final Audit Report on the Colorado Republican Federal 

Campaign Committee (LRA 827) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the proposed Draft Final Audit Report 

("DFAR") on the Colorado Republican Federal Campaign Committee C*the Committee"). Our 

comments address issues pertaining to the Committee's allocation account as presented in 

Finding 1 (Misstatement of Financial Activity) and Finding 2 (Allocation of Expenditures). We 

concur with any findings not specifically discussed in this memorandum. The Committee did 

not file a response to the lAR. If you have any questions, please contact Allison T. Steinle, the 

attomey assigned to this audit. 

II. FINDING 1 (MISSTATEMENT OF FINANCIAL ACTIVITY) AND FINDING 2 

(ALLOCATION OF EXPENDITURES) 

The Committee maintained five federal bank accounts and three non-federal bank 

accounts in 2007 and 2008. The Committee labeled one of these federal accounts as an 
Memorandum to Tom Hintermister 

Proposed DFAR on the Colorado Republican Federal Campaign Committee (LRA 827) 

Page 2 of3 

"allocation account," and to date has not indicated that the account was originally intended to 

function as anything other than an allocation account established pursuant to 11 C.F.R. § 106.7. 

However, the Committee not only used this account to pay for allocable expenses during the 

audit period, but also paid for $2,893,303 in 100% federal activity and $19,000 in 100% nonfederal activity out of the allocation account. The disbursements out of the account included, but 

were not limited to, disbursements for payroll, legal fees, mailers, and consulting services. The 

Committee also not only transferred funds into the allocation account from the other federal and 

non-federal accounts, but also made $147,830 in transfers back out of the allocation account to 

other federal accounts. 

Finding 2 of the proposed DFAR concludes that these transactions resulted in an 

overfunding of the allocation account in the amount of $ 131,725. In addition, the Committee 

failed to report $51,500 in 100% non-federal transfers into the allocation account, and Finding 1 

of the proposed DFAR includes this amount in its misstatement calculation. 

We agree with the Audit Division that the Committee overfunded the account by 

transferring more funds from the non-federal accounts than were needed to cover the non-federal 

share of the Committee's allocable activity. We also agree that that the Committee 

impermissibly transferred funds from its non-federal account to pay for non-allocable activity, 

and impermissibly paid for 100% non-federal activity out of its allocation account. The 

Commission's regulations prohibit committees from transferring fimds from a non-federal 

account to reimburse a federal account for non-allocable activity. 11 C.F.R. §§ 102.5(a), 

106.7(f)(1). The Commission's regulations also permit committees to use allocation accounts 

"solely for the purpose of paying the allocable expenses of joint federal and non-federal 

activities." 11 C.F.R. § 106.7(f)(l)(ii). An expense payable with 100% non-federal funds is, by 

definition, not allocable, and thus transfers of non-federal funds to a federal account and payment 

of 100% non-federal expenses thereafter by the federal account are not permissible.^ 

We also agree with the Audit Division that any activity not reported out of the allocation 

account should be included in the misstatement amount. Allocation accounts permit state party 

committees to mix funds from a committee's federal and non-federal operating accounts to pay 

allocable expenses, but are considered federal accounts torn which that committee must report 

all activity, including the non-federal portion of activity. See 11 C.F.R. §§ 104.17,106.7(f); 

Explanation and Justification for Methods of Allocation between Federal and Non-Federal 

Accounts, 55 Fed. Reg. 26,058,26,065-66 (June 26,1990). This reporting requirement allows 

the Commission to verify that committees are transferring and using the proper amount of nonfederal funds to pay for ^e non-federal share of allocable activities, and do not use non-federal 

funds to subsidize federal activities. See 55 Fed. Reg. at 26,066 (noting that a reporting 

requirement "allow[s] the Commission to track the flow of non-federal funds into federal 

' We note that that under a strict reading of 11 C.F.R. § 106.7(0(l)(i0> the Committee was also prohibited 

from using the allocation account to pay for the 100% federal activity using 100% federal funds. However, had the 

Committee paid for the 100% federal activity out of a federal operating account also used to pay for allocable 

activity pursuant to 106.7(f)(l)(i), as opposed to an allocation account established pursuant to 106.7(f)(l)(ii), it 

could have done so as long as the 100% federal activity was not funded by non-federal funds. See 11 C.F.R. 

§§ 102.S(a). 106.7(f)(l)(0. Therefore, we read 11 C.F.R. § 106.7(f)(l)(i) and (ii) together to only prohibit the 

transfer of non-federal fiinds and the payment of 100% non-federal expenses thereafter. 
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Proposed DFAR on the Colorado Republican Federal Campaign Committee (LRA 827) 

Page 3 of3 

accounts, and [] ensure[s] that the use of such funds is strictly limited to payment for the nonfederal share of allocable activities"). 

Finally, we note that the Georgia Federal Elections Committee ("GFEC") audit addressed 

similar, but not identical, issues. This audit involved payments for 100% federal activity and 

100% non-federal activity out of a so-called 'payroll escrow" account, which in some ways 

resembles an allocation account.^ However, we do not believe that the GFEC audit affects the 

legal analysis in this case. We do not understand the Commission to have expressed any views 

as to the regulatory requirements for actual allocation accounts, which were not at issue in the 

GFEC audit, or as to the regulatory requirements for the payment of allocable expenses fiom 

federal accounts for committees that choose to pay their allocable expenses in that method. As 

noted above, to our knowledge, the allocation account here was an actual allocation account 

established pursuant to 11 C.F.R. § 106.7, and not as a payroll escrow account used exclusively 

to pay salary and taxes. Instead, it appears that this was an allocation account that was simply 

mismanaged in terms of the funds transferred in and paid out of the account. 

^ Specifically, GFEC established a payroll escrow account to ease its administrative payroll processing 

burden. The payroll escrow account was funded by transfers fiom the committee's federal and non-federal operating 

accounts. GFEC then made 100% federal, 100% non-federal, and allocable payroll disbursements for salary and 

taxes from the payroll escrow account. GFEC did not disclose any non-federal activity associated with the payroll 

escrow account. GFEC asserted that its payroll escrow account was neither a federal account nor an allocation 

account, and thus stated that it was not required to report the account's non-federal activity. In that case, the 

Commission did not approve the Audit Division's recommendation that the Commission find that the payroll escrow 

account "did not comply with the regulations, but that the filing of additional reports was unnecessary." See Final 

Audit Report on the Georgia Federal Elections Committee.