FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

November 10/ 2010 

MEMORANDUM 

TO: 

FROM: 

Joseph F. Stoltz 

Assistant Staff Director 

Christopher Hughey Lf ^ 

Acting General Counsel I 

Lawrence L. Calvert, Jr. vi... 

Associate General Counsel 

Lorenzo Holloway cL C 

Assistant General Counsel (j 

For Public Finance and Audit Advice 

Delanie DeWitt Painter 

Attomey 

SUBJECT: Interim Audit Report for Los Angeles County Democratic Central 

Committee (LRA 816) 

I. INTRODUCTION 

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

Report ("IAR") for the Los Angeles County Democratic Central Committee (the 

"Committee").^ Your cover memorandum requests comments on Finding 3, Reporting 

Debts and Obligations. The Committee's accounting firm, Durkee & Associates (D&A) 

erroneously transferred funds from the Conunittee's federal and Levin accounts, 

principally to a credit card merchant account that it controlled, and eventually repaid the 

funds more than a year later. In addition, D&A delayed payment of $3,564 in credit card 

proceeds due to tiie Committee. You recommend that the Committee report these 

transactions as debts owed by D&A to the Committee. We agree that the Committee 

should report the funds transferred from its federal account and the delayed credit card 

proceeds as debts owed by D&A to the Coinmittee. We also agree that the Committee 

should report fimds erroneously transferred from its non-federal account to its federal 

account as a debt owed by the Committee to its non-federal account. We disagree, 

We recommend that tiie Commission consider this document in Executive Session because the 

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

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

Interim Audit Report for Los Angeles County 

Democratic Central Committee (LRA 816) 

Page 2 

however, that the Committee should report the Levin fimds transfers as debts owed to the 

Committee because the Coinmittee is not required to report debts related to Levin fiinds. 

In addition, we recommend that fhe proposed report address the payment of $7,700 by 

D&A to the Committee for the delayed credit card proceeds in a separate finding or subsection of Finding 3. We suggest that the proposed report recommend that the 

Committee provide more information about this transaction to clarify whether it was a 

contribution or an extension of credit in the ordinary course of business. 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. 

II. COMMITTEE MUST DISCLOSE DEBTS RELATED TO FEDERAL 

FUNDS BUT NOT DEBTS RELATED TO LEVIN FUNDS 

D&A erroneously transferred fiinds from the Committee's federal and Levin 

accounts to itself.^ D&A is an accounting and business management firm operated by the 

Committee's treasurer, Kinde Durkee. The firm handles the Conunittee's accounting, 

recordkeeping, and reporting and acts as its credit card processor. Most of the fimds at 

issue were erroneously transferred to a merchant account that D&A used to process credit 

card transactions for the Committee and other clients including political coinmittees. 

According to the Committee's counsel, the erroneous transfers were related to problems 

with reconciling this credit card processing account. 

The auditors calculated that D&A possessed fimds obtained from the Committee's 

federal and Levin accounts totaling as much as $98,565 between November, 2008 and 

March 23,2010.^ With respect to the federal account, D&A owed the Conunittee 

$15,000 that D&A repaid in four installment payments between May 26,2009 and 

December 15,2009, and $3,564 m credit card proceeds that were delayed.^ From the 

Levin account, D&A erroneously transferred to itself $45,000 that was repaid on 

March 23,2010, and erroneously disbursed $35,000 to a committee that is also a D&A 

client, Pasadena Area United Democratic Headquarters. This latter amount was repaid by 

D&A, not the Pasadena Area United Democratic Headquarters, in transfers that occurred 

between December 17,2009 and January 28,2010.^ D&A eventually retumed all of tiie 

^ We suggest that the Audit staff explain in the cover memorandum to the Conunission why it 

concludes that D&A transfers of Committee funds were erroneous. 

^ The enoneous transfers also caused some of the misstatements of activity in the Committee's 

federal and Levin accoimts, which are addressed in Findings 1 and 2 of the proposed IAR. 

* We address D&A's apparent advance of fiinds to cover these delayed credit card proceeds below 

in section III. of these comments. 

^ Despite its name, Pasadena Area United Democratic Headquarters' Statement of Organization 

states that it is a non-party committee. The Auditors have provided us with the following information 

about this series of transactions. Apparently D&A's merchant account was to have transferred to the 

Pasadena Area United Democratic Headquarters $35,000 in conuibutions from contributors to that 

committee. Instead, D&A mistakenly transferred $35,000 from the Conunittee's Levin account to 
Memorandum to Joseph F. Stoltz 

Interim Audit Report for Los Angeles County 

Democratic Central Committee (LRA 816) 

Page 3 

fimds to the Conunittee's federal and Levin accounts but did not retum some of the fimds 

until more tiian a year after witiidrawing them from the accoimts. 

In addition to these transactions, $ 15,000 was transferred fix)m the Committee's 

non-federal account to its federal account on December 31,2008 and retumed to the 

Committee's non-federal account on November 9,2009. The reason for tiiis transfer is 

not clear. The auditors recommend tiiat tiie Committee amend its reports to correct the 

reporting of tiiese transactions as debts and obligations (Schedule D). 

We agree that the Committee should report the transactions related to the 

Conunittee's federal account as debts owed by D&A to the Committee on Schedule D. 

See 11 C.F.R. § 104.3(d) and 104.11. The erroneous transfers from tiie federal account 

that were later repaid by D&A and the delayed credit card proceeds were debts owed to 

the reporting committee that should be disclosed on its reports. See id. We also agree 

that the Conunittee should disclose tiie $ 15,000 transfer from the Committee's nonfederal account to its federal account as a debt owed by the Conunittee to its non-federal 

account because it was a debt owed by the reporting coinmittee. See id. 

We do not agree, however, that tiie erroneous transfers fix)m the Committee's 

Levin account tiiat were later repaid should be disclosed on Schedule D as debts owed to 

the reporting committee because the Committee is not required to disclose debts related 

to Levin fimds. There is nothing in the regulations that requires committees to report 

debts owed to Levin fimds. The regulations set forth specific disclosure requirements for 

Levin fimds (on Schedule L) including disclosure of all receipts and disbursements for 

federal election activity and allocation information, but do not state anything about 

disclosure of debts owed by or to a Levin fund account.^ See 11 C.F.R. § 300.36. 

Schedule L, the aggregation page for disclosure of Levin funds, does not list debts and 

obligations as a category of Levin fund activity that should be reported.^ We do not think 

debts related to Levin fiinds are debts owed by or to a reporting political committee that 

should be disclosed as debts under sections 104.3(d) and 104.11. Levin funds are not 

Pasadena Area. At this point, apparentiy, D&A's merchant account had $35,000 in fiinds that belonged to 

Pasadena Area; Pasadena Area had $35,000 in Levin funds that belonged to the Conunittee; and the 

Conimittee was short $35,000 in Levin fimds. Ratiier tiian reverse all aspects of the transaction by having 

Pasadena Area retum the $35,000 in Levin fiinds to the Committee and Uien making Pasadena Area whole, 

Durkee apparently decided ihaX it would be more efficient to send $35,000 from D&A directiy to the 

Committee's Levin account. 

^ We note that the erroneous transfers and repayments would be disclosed as Levin fiind receipts 

and disbursements. 

^ Schedule L includes categories for disclosing receipts from persons, odier receipts, total receipts, 

transfers to the federal or allocation account for listed federal election activity purposes, otiier 

disbursements, total disbursements, and beginning and ending cash on hand. Receipts and disbursements 

of Levin funds are also itemized on schedules L-A and L-B. Levin funds are also reflected in schedules H: 

disbursements of amounts allocated between federal and Levin fiinds are disclosed on Schedule H-6, and 

transfers of Levin funds for allocated federal election activity are disclosed on Schedule H-5. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report for Los Angeles County 

Democratic Central Committee (LRA 816) 

Page 4 

federal fimds. They are a special kind of non-federal fimds that may be used to fimd an 

allocable portion of limited types of federal election activity but also may be used for any 

use that is lawful under applicable state law, otiier than so-called *Type III" and *Type 

IV" federal election activity. See 11 C.F.R. §§ 300.30(b)(2), 300.31,300.32(b), 300.33, 

300.34,300.36. Receipt and disbursement of Levin fimds must meet certain conditions, 

restrictions and requirements. See id. A committee may have a joint non-federal and 

Levin account. 11 C.F.R. § 300.30(c)(3). Thus, for disclosure purposes, except as 

otherwise specifically provided for in the Conunission's regulations, Levin fiinds are 

more like non-federal fimds than federal fiinds. Debts owed to or by a committee's 

Federal account must be disclosed as debts. See 11 C.F.R. § 104.3(d) and 104.11. But 

Levin funds, like non-federal funds, need not be disclosed as debts. 

Therefore, we disagree with the analysis and recommendation in Finding 3 with 

respect to tile Levin fimd transactions because the regulations do not requfre disclosure of 

debts related to Levin fimds. We reconunend that the draft IAR be revised to focus this 

finding on reporting of the transactions related to the federal account and the debt owed 

by the federal account to the non-federal account. 

IIL MORE INFORMATION IS NEEDED TO CLARIFY D&A'S APPRARENT 

ADVANCE 

We recommend that the proposed report address the issue of whether D&A's 

payment of $7,700 to the Conunittee for delayed credit card proceeds was a contribution. 

The proposed report states that the Committee's federal account received apparent 

advances fix>m D&A totaling $7,700 for the delayed credit card proceeds. Based on the 

available information, the sequence of events appears to be as follows. D&A apparentiy 

became aware of a delay in transmission from the credit card company to D&A's 

merchant account of fimds representing contributions made by credit card to the 

Committee. D&A apparentiy was not aware of the full amount of the contributions due 

the Committee. Consequently, it estimated the amount, and made apparent advances to 

the Committee from the merchant account in the aggregate amount of $7,700 ($5,700 and 

$2,000 checks) on December 22 and December 26,2008. Checks in the same amounts 

fix>m the Conimittee to D&A to repay the apparent advances were prepared on the same 

dates. ^ However, these checks did not clear the bank until February 17,2009, and it is 

unclear when they were deposited. The Committee told tiie auditors tiiat the $7,700 

represented an estimate of anticipated credit card deposits. D&A provided the auditors a 

list of contributions apparentiy associated with these transactions. The credit card 

contributions on that list totaled $5,887. The auditors determined tiiat the net credit card 

proceeds that should have been transferred were $5,424. As of Febmary 17,2009, when 

the repayment checks cleared the bank, D&A had transferred to the Committee only 

$1,860 oftiie $5,424 tiiat was due, leaving tiie $3,564 of delayed credit card proceeds 

' The auditors provided copies of the checks and the Committee bank statement for our review. The 

repayment checks from the Committee have tiie annotations "Loan Payment Kinde Durkee" on the $2000 

check and "CC Loan Payment Kinde Durkee" on tiie $5,700 check. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report for Los Angeles County 

Democratic Central Committee (LRA 816) 

Page 5 

(discussed above) that was not actually transferred to the Committee until after the 

repayment of the $7,700. 

The Committee's counsel (who is also listed as D&A's agent for service) stated 

that it is in the ordinary course of D&A's business to advance its clients fiinds to cover 

unexpected delays in receipt of credit card proceeds. Counsel asserted that this cost is 

built into D&A's fees, and the procedure is followed for all of D&A's clients. 

Much of the infomiation surrounding these transactions is unclear. The auditors 

do not know why the credit card proceeds were delayed, when D&A received the delayed 

credit card proceeds, how D&A estimated the amount that it advanced to the Conimittee, 

or whether D&A knew which specific contributions had been delayed. 

Additional information is necessary to clarify the nature of these transactions. 

The payments could be advances or, potentially, could be considered extensions of credit. 

If these transactions are considered advances, they would be contributions by D&A to the 

Conunittee. 2 U.S.C. § 431(8)(A) (i) ("contribution" includes any "advance ... of 

money.") Because D&A is a limited liability company, the contribution may be 

excessive or prohibited depending on whether D&A has elected to be treated as a 

partnership or a corporation for tax purposes^ If, however, these transactions are 

considered extensions of credit, they might not be contributions. Extensions of credit 

made in the ordinary course of the creditor's business, on terms substantially similar to 

those offered to nonpolitical debtors are not considered contributions, provided that 

commercially reasonable efforts are made to collect the debt. See 11 C.F.R. §§ 100.55, 

116.1(e), 116.3. 

To fully analyze these transactions, additional information is needed. We suggest 

that the proposed report address these transactions in a separate finding or as a subsection of Finding 3. In order to help the Conunission determine whether to treat the 

$7,700 as an extension of credit, the Committee should provide information about the 

specific terms D&A attaches to such extensions; whether similar terms are offered to 

nonpolitical D&A customers of similar size and risk of obligation; why D&A picked the 

time that it did to negotiate the Conimittee checks representing repayment of the $7,700; 

and any other information it believes might clarify the transactions. It would also be 

helpful if the Committee, given its close relationship with D&A, was able to provide 

information about D&A's tax status; if D&A is not treated as a corporation for tax 

purposes, then the potentially excessive amount would not exceed $2,700, which may not 

be worth inquiring about fiirther. 

' Even if D&A has not elected corporate tax treatment, it may contribute no more than $5,000 in 

any calendar year to tiie Committee. 2 U.S.C. § 441a(a)(l)(C). Thus, if the payment is considered an 

advance, and if D&A has elected partnership tax treatment or is a single member LLC, the advance would 

be excessive by $2,700.