FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

June 15.2011 

MEMORANDUM 

To: The Commission 

Through: Alec Palmer 

Acting Staff Director 

From: Patricia Carmona 

Chief Compliance Officer 

Joseph F. Stoltz 

Assistant Staff Dir 

Audit Division 

Thomas Hintermister 

Audit Manager 

By: Rickida Morcomb 9^ 

Lead Auditor 

Subject: Preliminary Audit Report - McCain-Palin 2008 Inc. and McCain-Palin 

Compliance Fund, Inc. 

Attached for your approval is the subject Preliminary Audit Report (PAR). Also 

attached is the Office of General Counsel (OGC) legal analysis of the PAR (Attachment 

1). 

In its legal analysis, OGC recommended the Audit Division raise two matters for 

the Commission's consideration that are not included in the PAR. These two matters are 

attached to this cover memorandum (Attachment 2- Media Vendor Interest and Hybrid 

Communications). It is noted that the Commission addressed similar matters in the 

respective audit reports of the general election candidate committees in the 2004 election 

cycle. Neither of these matters received the four affirmative votes necessary for a finding 

and they were presented as "Additional Issues" in the audit reports for the 2004 election 

cycle. 

With respect to tiie PAR, OGC concurs with die Audit staffs method for billing 

the Press in Finding 1: Campaign Travel Billing for Press. OGC agrees that the General 

Committee should refund the amounts of excess reimbursements to tiie press rather than 

transferring fimds to the candidate's primary election committee. OGC also concurs v^dth 

the Audit staffs calculation of the amount the media should reimburse to the General .• 

Committee for the actual costs of the air charter contract paid for and used by both the 

primary and general campaigns. 
OGC recommended that the Audit staff also raise the issue of aircraft 

configuration costs to the Commission in this cover memorandum. Specifrcally, OGC 

questioned the legal basis for the Audit staffs use of a "reasonable benefit" approach for 

calculating the plane reconfiguration costs billable to the Press. 

The Audit staff analyzed $650,000 in reconfiguration costs associated with the 

plane chartered for the Presidential candidate. Originally, the Audit staff determined that 

the General Committee could include in the actual cost of travel: (1) 100 percent of 

reconfiguration costs attributable primarily to the convenience and needs of the press; (2) 

78 percent, based on the proportion of press passengers to the number of total passengers, 

of reconfiguration costs attributable to the convenience and needs of all passengers; and 

(3) zero percent of costs that were allocable only to the convenience and needs of the 

campaign. 

In light of the guidance from OCC with respect to the 78 percent allocation noted 

above, the Audit staff has revised its calculation for the actual cost of travel that is billable 

to the Press. The new calculation does not apply the 78 percent allocation to any 

reconfiguration costs and limits the items not considered billable to the Press to the costs 

for painting and applying logos totaling $161,386 and the cost for one divider curtain 

totaling $1,167. The new calculation presented in the Preliminary Audit Report of billable 

reconfiguration costs is $487,447 ($650,000-$161,386-$ 1,167). This calculation aligns 

with the General Committee's opinion expressed in response to the exit conference that 

costs for painting and applying logos and the cost of one divider are not billable 

reconfiguration costs. It is also noted that this new calculation resulted in only a $5,808 

adjustment to the amount recommended to be refiinded to the Press ($344,892). 

Recommendation 

The Audit staff recommends that the report be approved. 

This matter is being circulated for a tally vote. If an objection is received, it is 

requested that this matter be placed on tiie next Executive Session agenda. If you have 

any questions, please contact Rickida Morcomb or Thomas Hintermister at (202) 694-

1200. 

Attachments: 

Preliminary Audit Report on McCain-Palin 2008 Inc. and McCain-Palin Compliance Fund, Inc. 

Attachment 1- Office of General Counsel Legal Analysis (LRA 759), dated December 1,2010 

Attachment 2- Media Vendor Earned Interest and Hybrid Communications 

Attachment 3- Summary ofPrevious Audits 

cc: Office of General Counsel 
Preliminary Audit Report on McCainPalin 2008 Inc. and McCain-Palin 

Compliance Fund, Inc. 

March 24, 2008 - December 31, 2008 

Why the Audit 

Was Done 

Federal law requires the 

Commission to audit 

every political committee 

established by a 

Presidential candidate 

who receives general 

fiinds for the general 

campaign.' The audit 

determines whether the 

candidate was entitled to 

all ofthe general funds 

received, whether the 

campaign used the 

general funds in 

accordance with the law, 

and whether the campaign 

otherwise complied v^th 

the limitations, 

prohibitions, and 

disclosure requirements 

of the election law. 

Future Action 

The Commission may 

initiate an enforcement 

action, at a later time, 

witii respect to any of the 

matters discussed in this 

report. 

About the General Committee 

McCain-Palin 2008 Inc. (General Committee) is the principal 

campaign committee for Senator John S. McCain, the Republican 

Party's nominee for the office of President of the United States. 

The General Committee is headquartered in Arlington, Virginia. 

For more information, see chart on Campaign Organization, p. 2. 

Financial Activity of the General 

Committee 

Receipts 

o $ 84,103,800 Federal Funds Received $ 84,103,800 

o Offsets to Operating Expenditures 9,318,570 

o Loans Received 17,076,880 

o Other Receipts 1,154,733 

o Total Receipts $ 111,653,983 

Disbursements 

o Operating Expenditures $ 92,083,836 

o Loans Repayment 17,076,880 

o Other Disbursements 1,491,107 

o Total Disbursements $ 110,651,823 

Findings and Recommendations for the 

Creneral Committee (p. 5) 

• Campaign Travel Billing for Press (Finding 1) 

• Expenditure Limitation (Finding 2) 

26 U.S.C. §9007(a). 
About the Compliance Fund 

The McCain-Palin Compliance Fund, Inc. (Compliance Fund) was established pursuant 

to 11 CFR §9003.3(a)(l)(i). The Compliance Fund accepts contributions to be used 

solely for legal and accounting services to ensure compliance with the Federal Election 

Campaign Act (Act). These contributions include the Compliance Fund's share of 

contributions from affiliated joint fundraising committees. The Compliance Fund is also 

headquartered in Arlington, Virginia. An overview of financial activity for the 

Compliance Fund is presented below.. 

Financial Activity of the Compliance Fund 

• Receipts 

o Contributions $ 9,679,490 

o From Other Authorized Committees 25,046,453 

o Offsets to Operating Expenditures 1,131,139 

o Other Receipts 12,471,782 

o Total Receipts $48,328,864 

Disbursements 

o Operating Expenditures $11,675,642 

o All Other Disbursements 13,112,237 

o Total Disbursements $24,787,879 

Finding and Recommendation for the 

Compliance Fund (p. 5) 

• Failure to File 48-Hour Notices 
About Joint Fundraising Committees 

This audit included seven joint fimdraising committees. Each of the joint fundraising 

committees is headquartered in Alexandria, Virginia and was an authorized committee of 

the candidates John McCain and Sarah Palin. The combined financial activity for these 

joint fimdraising committees is presented below and the financial activity for each of 

these committees is presented on page 4. 

Financial Activity ofthe Joint Fundraising 

Committees 

Receipts 

o Contributions $ 207,620,125 

o From Other Authorized Committees 812,325 

o Offsets to Operating Expenditures 159,926 

o Total Receipts $208,592,376 

Disbursements 

o Operating Expenditures $30,374,903 

o All Other Disbursements 167,116,292 

o Total Disbursements $197,491,195 

Finding and Recommendation for the Joint Fundraising 

Committees (p. 5) 

Based upon the limited examination of the reports and statements filed, and the records 

presented by seven joint fimdraising committees, the Audit staff did not discover any 

material non-compliance. 
McCainMcCainAudit Report on 

2008 Inc. and 

Compliance Fund, 

Inc. 

March 24, 2008 - December 31, 2008 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Inventory of Campaign Records 1 

Part II. Overview of Campaign 

Campaign Organization 2 

Overview of Financial Activity 3 

Part III. Summaries 

Findings and Recommendations - General Committee 5 

Finding and Recommendation - Compliance Fund 5 

Finding and Recommendation - Joint Fundraising Committees 5 

Part IV. Findings and Recommendations for the 

Greneral Committee 

Finding 1. Campaign Travel Billing for Press 6 

Finding 2. Expenditure Limitation 14 

Part V. Finding and Recommendation for the 

Compliance Fund 

Failure to File 48-Hour Notices 16 

Part VI. Finding and Recommendation for the Joint 

Fundraising Committees 

Based upon the limited examination of the reports and statements filed and the 

records presented, the Audit staff discovered no material non-compliance. 18 

Part VII. Attachment 

Statement of Net Outstanding Qualified Campaign Expenses 19 
Parti 

Background 

Authority for Audit 

This report is based on audits of McCain-Palin 2008 Inc. (General Committee), McCainPalin Compliance Fund, Inc. (Compliance Fund), and seven joint fimdraising committees 

affiliated with the Compliance Fund, undertaken by the Audit Division ofthe Federal 

Election Commission (the Commission) as mandated by Section 9007(a) of Titie 26 of 

the United States Code. That section states that "after each presidential election, the 

Commission shall conduct a thorough examination and audit of the qualified campaign 

expenses ofthe candidates of each political party for President and Vice President." This 

includes joint fundraising committees authorized by the candidates. Also, Section 

9009(b) of Titie 26 of the United States Code states, in part, tiiat the Conimission may 

conduct other examinations and audits as it deems necessary. 

Scope of Audit 

The audits ofthe General Committee and Compliance Fund examined: 

1. The receipt of excessive contributions and loans. 

2. The receipt of contributions from prohibited sources. 

3. The receipt of transfers from other authorized committees. 

4. The disclosure of contributions and transfers received. 

5. The disclosure of disbursements, debts and obligations. 

6. The recordkeeping process and completeness of records. 

7. The consistency between reported figures and bank records. 

8. The accuracy of the Statement of Net Outstanding Qualified Campaign Expenses. 

9. The campaigns' compliance vsdth spending limitations. 

10. Other campaign operations necessary to the review. 

The audits of the seven joint fimdraising committees affiliated with the Compliance Fund 

examined: 

1. The receipt of excessive contributions and loans pertaining to the Compliance Fund. 

2. The proper allocation of contributions among joint fundraising participants. 

3. The proper allocation of expenses and net amounts transferred to the Compliance 

Fund. 

4. The consistency between reported figures and bank records. 

Inventory of Records 

The Audit staff routinely conducts an inventory of campaign records before it begins the 

audit fieldwork. The records for each of the audited committees were complete and the 

fieldwork began immediately. 
Part II 

Overview of Campaign 

Campaign Organization 

General Committee Compliance Fund 

Important Dates 

• Date of Registration 08/12/08 02/25/08 

• Audit Coverage Dates 09/01/08 thm 12/31/08 03/24/08 thm 12/31/08 

Headquarters Arlington, VA Arlington, VA 

Bank Information 

• Bank Depositories 3 4 

• Bank Accounts 8 Bank Accounts 8 Bank Accounts 

Treasurer Salvatore A. Pupura 

(08/12/08-08/18/08); 

Joseph Schmuckler 

(08/19/08-Present) 

Salvatore A. Pupura 

(02/25/08-03/20/08); 

Joseph Schmuckler 

(03/21/08-Present) 

Joint Fundraising Committees 

The audit included seven joint fimdraising committees affiliated with the Compliance Fund. 

Four of the joint fundraising committees registered with the Federal Election Commission in 

April 2008 and three registered in August 2008. These committees are headquartered in 

Alexandria, Virginia and Lisa Lisker is the Treasurer for each committee. Six of the joint 

ftindraising committees each maintained a single bank account, and the seventii joint ftindraising 

committee maintained two bank accounts. 
Overview of Financial Activity 

(Audited Amounts) 

General 

Committee 

Compliance 

Fund 

Opening Cash on Hand $0 $0 

Receipts 

• Contributions $ 9,679,490 

• Federal Funds Received $84,103,800 

• From Other Authorized Committees 25,046,453 

• Offsets to Operating Expenditures 9,318,570 1,131,139 

• Loan Received 17,076,880 

• Other Receipts 1,154,733 12,471,782 

Total Receipts $111,653,983 $48,328,864 

Disbursements 

• Operating Expenditures $92,083,836 $11,675,642 

• Transfers to Other Authorized 

Committees 

222,502 

• Loan Repayment 17,076,880 

• Refunds to Contributors 551,599 

• Other Disbursements 1,491,107 12,338,136 

Total Disbursements $110,651,823 $24,787,879 

Closing Cash Balance @12/31/2008 $1,002,160 $23,540,985 
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Part III 

Summaries 

General Committee 

Finding 1. Campaign Travel Billing for Press 

The General Committee apparently received reimbursement from the Press for campaign 

travel that was above the maximum amount billable to the Press. The Commission's 

regulations provide tiiat a 10 percent markup on the actual cost of transportation and 

services may be billed to tiie Press. The General Committee believes the excess 

reimbursement from the Press for travel is a misallocation of billing proceeds, requiring 

the General Committee to pay John McCain 2008, Inc. (tiie Primary Committee) for the 

overage collected. The Audit staff recommends tiie General Committee refimd $344,892 

to the Press for reimbursements received in excess of the maximum amount billable. (For 

more detail, see p. 6.) 

Finding 2. Expenditure Limitation 

The expenditure limitation for the 2008 general election for the office of President of the 

United States was $84,103,800. Based on the Audit staff's review of financial activity 

through March 31,2011 and estimated winding down costs, the General Committee has 

not exceeded the limitation. (For more detail, see p. 14.) 

Compliance Fund 

Failure to File 48-Hour Notices 

The Compliance Fund failed to file 48-hour notices for 169 contributions totaling 

$240,700 received prior to tiie general election. The Audit staff recommends that the 

Compliance Fund provide evidence that 48-hour notices were timely filed or submit any 

written comments it considers relevant. (For more detail, see p. 16.) 

Joint Fundraising Committees 

Based upon the limited examination of the reports and statements filed, and the records 

presented by seven joint fimdraising committees, the Audit staff discovered no material 

non-compliance. (For more detail, see p. 18.) 
Part IV 

Findings and Recommendations for the 

General Committee 

I Finding 1. Campaign Travel Billing for Press 

Summary 

The General Committee apparently received reimbursement from the Press for campaign 

travel tiiat was above the maximum amoimt billable to the Press. The Commission's 

regulations provide that a 10 percent markup on the actual cost of transportation and 

services may be billed to the Press. The General Committee believes the excess 

reimbursement from the Press for travel is a misallocation of billing proceeds, requiring 

the General Committee to pay John McCain 2008, Inc. (the Primary Committee) for the 

overage collected. The Audit staff recommends the General Committee refiind $344,892 

to the Press for reimbursements received in excess of the maximum amount billable. 

Legal Standard 

A. Expenditures for Transportation and Services Made Available to Media 

Personnel and Secret Service. Expenditures by an authorized committee for 

transportation, ground services or facilities (including air travel, ground transportation, 

housing, meals, telephone service and computers) provided to media personnel. Secret 

Service personnel or national security staff will be considered qualified campaign 

expenses, and, except for costs relating to Secret Service personnel or national security 

staff, will be subject to the overall expenditure limitations of 11 CFR 9003.2(a)(1) and 

(b)(1). 11 CFR §9004.6. 

B. Billing Media Personnel for Transportation and Services. The committee shall 

provide each media representative, no later than 60 days from the campaign travel or 

event, an itemized bill that specifies the amounts charged for air and ground 

transportation for each segment ofthe trip, meals and other billable items specified in the 

White House Press Corps Travel Policies ahd Procedures issued by the White House 

Travel Office. 11 CFR §9004.6(b)(3). 

C. Reimbursement Limits for Transportation and Services of Media Personnel. 

The amount of reimbursement sought ftom media personnel shall not exceed 110 percent 

of the media representative pro rata share (or a reasonable estimate ofthe media 

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

available. Any reimbursement received in excess of this amount shall be retumed to the 

media representative. 11 CFR §9004.6(b) and (d)(1). 

D. Pro Rata Share Definition. A media representative's pro rata share shall be 

calculated by dividing the total actual cost of the transportation and services provided by 

the total number of individuals to whom transportation and services were made available 

(to include committee staff, media personnel, Secret Service staff)- 11 CFR 

§9004.6(b)(2). 
E. Administrative Costs for Transportation and Services of Media Personnel. The 

conunittee may deduct from the amount of expenditures subject to the overall limitation 

the reimbursements paid by media representatives for transportation and services, up to 

the actual cost ofthe transportation and services provided to the media representatives. 

The committee may deduct an additional amount of the reimbursements received from 

media representatives, representing the incurred administrative costs of 3 percent. The 

committee may deduct an amount in excess of 3 percent representing the administrative 

costs actually incurred by the committee in providing services to the media, provided that 

the committee is able to docuinent the total amount of administrative costs actually 

incurred. 

For the purposes of the above paragraph, administrative costs include all costs incurred 

by the committee in making travel arrangements and seeking reimbursement, whether 

these services are performed by committee staff or independent contractors. 11 CFR 

§9004.6(c). 

F. Attribution of Travel Costs. Expenditures for campaign-related transportation, food 

and lodging by any individual, including a candidate, shall be attributed according to 

when the travel occurs. If the travel occurs on or before the date of the candidate's 

nomination, the cost is a primary election expense. Travel to and from the conventions 

shall be attributed to the primary election. Travel by a person who is working exclusively 

on general election campaign preparations shall be considered a general election expense, 

even if the travel occurs before tiie candidate's nomination. 11 CFR §9034.4(e)(7). 

G. Travel Support Documentation. For each trip, an itinerary shall be prepared and 

made available by the committee for Commission inspection. The itinerary shall show 

the time of arrival and departure and the type of events held. 

For trips by govemment conveyance or by charter, a list of all passengers, along with a 

designation of which passengers are and which are not campaign-related, shall be made 

available for Commission inspection. When required to be created, a copy ofthe 

government's or charter company's official manifest shall also be maintained and made 

available by the committee. 11 CFR §9004.7(b)(3) and (4). 

H. Assets Purchased from the Primary Election Committee. If capital assets are 

obtained from the candidate's primary election committee, tiie purchase price shall be 

considered to be 60 percent of the original cost of such assets to the candidate's primary 

election committee. 11 CFR §9004.9(d)(l)(ii). 

Facts and Analysis 

A. Facts 

In 2008, the Press covering the campaign of tiie Presidential candidate (John McCain) 

and tiie Vice Presidential candidate (Sarah Palin) travelled predominately on two aircraft 

chartered by the campaign. The aircraft for the Presidential candidate was the same 

aircraft used by John McCain 2008, Inc. (tiie Primary Committee) and was chartered 

through Swift Air, LLC (Swift Air). The aircraft for the Vice Presidential candidate was 

chartered through JetBlue Airways Corporation shortly before the Republican National 
Convention. The Press also occasionally travelled on aircraft chartered by tiie General 

Conunittee through CSI Aviation Services (CSI) and via ground transportation 

throughout the campaign. 

As cited above, the amount of reimbursement sought from media personnel shall not 

exceed 110 percent ofthe media representative's pro rata share (or a reasonable estimate 

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

services made available. Any reimbursement received in excess of this amount shall be 

returned to the media representative. 11 CFR §9004.6(b) and (d)(1). 

According to the General Committee, it did not receive Press travel reimbursement above 

the 110 percent allowed by the regulations. The General Committee calculated total 

transportation costs for the Press to be $4,503,658. The total billing to the Press equals 

106 percent of tiie cost calculated by tiie General Committee. The General Committee 

acttially received $4,476,728 from the Press as reimbursement for travel. 

During fieldwork, the Audit staff calculated that the General Committee received Press 

travel reimbursement in excess of the 110 percent allowed by tiie regulations. The Audit 

staff calculated tiie total pro rata transportation cost for the Press to be $3,756,215 and a 

maximum amount billable to the Press (110 percent of cost) of $4,131,836.^ Based on 

the Audit staffs calculation of transportation costs, the General Committee is required to 

reftind to tiie Press $344,892 ($4,476,728 - $4,131,836). 

The main difference between the General Committee's figure and the Audit staffs figure 

is the calculation for total transportation costs. The General Committee disagreed with 

the Audit staffs cost calculation methods with respect to charter frights associated with 

the aircraft used by the Presidential candidate. The General Committee also did not agree 

with the Audit staffs initial application of aircraft reconfiguration costs. 

The Audit staff calculated transportation costs based on actual hours used only by the 

General Committee during the general campaign. The General Conimittee, in contrast, 

calculated transportation costs based on the life of the charter contract, which covered 

both the primary and general campaign periods. 

Applying Cost on Aircraft for Presidential Candidate 

The Primary Conimittee and the General Committee chartered a Boeing 737-400 from 

Swift Air for use by the presidential candidate. The Swift Air contract covered the period 

from June 30,2008 through November 15,2008. The contract stipulated payments 

totaling $6,384,000 to be paid in 19 weekly installments of $336,000. The contract 

covered nine weeks for the Primary Committee and ten weeks for the General 

Committee. The contract also required tiie General Committee and Primary Committee 

to pay costs for fiiel, catering, passenger taxes, and ground handling fees. There was also 

an aircraft reconfiguration cost of $650,000 that was paid initially by the Primary 

' The General Committee billed at 106 percent, but was able to document administrative costs of 110 

percent for all modes of transportation. In determining the amount billable to the Press, the Audit staff 

credited the General Committee for any under billing ofthe Press associated with any one aircraft or mode 

of transportation. In other words, any under billing of the Press for travel on the aircraft for the Vice 

Presidential candidate, CSI chartered aircraft, and ground transportation was applied to any overbilling of 

the Press that may have occurred for travel on the Presidential aircraft. 
Committee. The General Conunittee correctly reimbursed the Primary Committee 

$390,000 ($650,000 less 40 percent depreciation) for these aircraft reconfiguration costs. 

The contract allowed 22.4 flight hours per week, or a total of 425.6 flight hours for the 

life ofthe contract. If tiie full flight hours per week were not flown, the hours rolled over 

to subsequent week(s). If the contracted 22.4 flight hours per week were exceeded and 

no accumulated unused hours were available, tiiere was a charge of $15,000 per 

additional hour. Neither tiie Primary nor General Conimittee ever exceeded tiie 22.4 

flight hours in a week. The General Committee used 140.3 flight hours and the Primary 

Committee used 111.8 flight hours during tiie contract. 

The General Committee made its first weekly installment payment of $336,000 on 

August 29,2008, and made total payments of $4,047,402 to Swift Air. This amount 

included charges for fuel, catering, passenger taxes, and ground handling fees. 

For tiie first week of tiie campaign, the General Committee used the total cost ofthe 

contract (primary and general) and divided it by the remaining number of hours available 

under the contract, including unused hours paid for by the Primary Committee. Later 

weeks were calculated using the amount yet to be paid on the contract and dividing it by 

the estimated flight hours that would be used in the fiiture, based on weekly averages. 

The calculation included reconfiguration costs. This method caused a fluctuation of the 

hourly charter rate calculated from as low as $11,569 to as high as $39,715. Using this 

rate, the segment cost was calculated and divided by the number of passengers. 

The Audit staff calculated the charter rate per flight hour for Swift Air by taking the 

contract weekly installment ($336,000) and dividing that by the actual weekly hours 

flown. The cost for fuel, catering, passenger taxes, ground handling, and certain 

reconfiguration costs were then added to determine the total segment cost. The cost per 

passenger was then calculated by dividing the total segment cost by the total number of 

passengers on the segment. 

Applying Reconfiguration Costs 

The Audit staff and the General Committee did not initially agree on the amount of 

aircraft reconfiguration costs billable to the Press. Historically, the Commission has 

allowed the Press to be billed only for the aircraft reconfiguration costs that could be 

reasonably considered as having benefited the Press. The General Conunittee believes all 

costs for reconfiguring an aircraft at the beginning and at the end ofthe campaign should 

be considered when calculating the billable amount for the Press. The General 

Committee also stated that part of the aircraft reconfiguration cost was to bring tiie 

aircraft into compliance with FAA safety standards tiiat ultimately benefited tiie safety of 

all passengers including the Press. 

B. Preliminary Audit Report & Audit Division Recommendation 

The issue of press travel reimbursement was presented at the exit conference. In 

response, tiie General Committee submitted the following points for the Commission's 

consideration. 
10 

Cost Calculation 

The General Committee made a comparison between the Swift Air contract, which 

spanned both the primary and general election periods, and similar aircraft contracts tiiat 

were analyzed during previous presidential audits: Dole-Kemp in 1996, Bush-Cheney in 

2000, and Kerry-Edwards in 2004. The General Committee specifically referenced the 

Audit staffs calculation of the hourly rate for each aircraft from the 1996 Dole-Kemp 

audit, which accumulated all operating costs and divided that total by the actual number 

of hours flown by each aircraft. By applying the same calculation to the entire amount of 

tiie Swift Air contract ($6,384,000 divided by 252.1 hours flown), the General Committee 

contends its cost calculations used for billing the Press were accurate. 

The Audit staff agrees tiiat when using the total Swift Air contract amount for both the 

primary and general election periods, as well as the fiill aircraft reconfiguration costs, the 

General Committee did not receive travel reimbursement from the Press that exceeded 

the maximum allowed by the regulations. However, as in Dole-Kemp only those costs 

attributable to the General Conimittee should be used in determining the travel cost the 

General Committee may bill to the Press. This conclusion is consistent with travel cost 

calculations in past presidential audits and supported by 11 CFR §9034.4(e)(7), which 

states, in part, that expenditures for campaign-related transportation shall be attributed 

according to when the travel occurs. As in Dole-Kemp, the Audit staff used only tiie 

general election operating cost ($4,047,402) and the actual weekly hours flown by the 

General Committee when calculating the billable cost to the Press. This is a more 

appropriate method when calculating costs and billing for campaign travel during the 

general election period. 

The General Committee provided a spreadsheet that spanned the primary and general 

election periods and relied on adjusting the per hour billing rates on a segment-bysegment basis due to using fewer flight hours than available in the Swift Air contract. 

The General Committee made the spreadsheet available to demonstrate that the Primary 

and General Committees' billing allocation was based on total costs ($6,354,859) that 

were lower than the contract amount ($6,384,000). The General Committee contends 

that no overbilling ofthe Press could have occurred since the difference ($29,141) was 

never billed to the Press by the Primary conimittee during week eight. However, it 

appears tiiat the General Committee billed this difference to tiie Press^. Therefore, the 

General Committee included the total contract amount in calculating the billing 

allocation. 

The Audit staff used tiie weekly $336,000 installment divided by tiie acttial weekly hours 

flown during the general election period for billing calculations (plus the fuel, catering, 

taxes, and ground handling fees). The General Committee explained that tiie Audit 

staffs calculations had the benefit of hindsight because during the fast pace ofthe 

election campaign the actual flying hours were unknown at tiie time of billing. 

Therefore, estimates of pro rata share had to be used in order to be in compliance ofthe 

regulations to bill media representatives within 60 days of travel. The General 

' During the second week ofthe general campaign, the General Committee calculated Press billing by 

using the total cost ofthe contract ($6,384,000) and subtracting the amount ofthe contract already billed 

($2,140,752) to arrive at the remaining balance ofthe contract. The helicopter cost ($29,141) was included 

in the $2,140,752 already billed. The remaining balance of the contract was then divided by the average 

estimated flight hours remaining on the contract to detennine the adjusted charter rate for the week. 
11 

Committee believes the Audit staffs methodology would be in conflict witii 11 CFR 

§9004.6(b)(3), which says, in part, that media representatives should be given a bill that 

specifies amounts charged for air and ground for each segment. 

The Audit staffs methodology does not conflict witii 11 C.F.R. §9004.6(b)(3), given that 

the actual flight hours are known soon after flights occur and thereby falling within the 

required 60 days to provide the Press an itemized bill that specifies the amounts charged 

for air transportation for each segment of the trip. It appears the General Committee 

invoiced the Press on average 12 days after completion of each travel week, allowing 

time to use the actual flight hours for tiie week. Other billable travel costs known at the 

time of billing also could have been added to determine the cost per passenger. This 

method would incorporate adjusting for weekly flight hours. 

The General Committee also referenced the 2000 Bush-Cheney audit and explained that 

it used the same billing methodology and personnel in that audit, which did not include 

an adverse audit finding or any informal advice from the Audit staff suggesting a 

correction to the accounting methods was necessary. The Audit staff acknowledges that 

the same billing methodology was used in 2000 Bush-Cheney however, the amount of the 

overbilling ofthe Press was not material. Furthermore, there is no indication that cost 

associated with the Bush Primary Committee was included in the calculation of travel 

cost ofthe 2000 Bush-Cheney General Committee. 

Generally Accepted Accounting Principles 

The General Committee explained several accounting principles and standards under 

Generally Accepted Accounting Principles (GAAP) to support its methodology for 

billing the Press. The General Committee believes that the Audit staff did not apply the 

appropriate accounting basis in its analysis. Specifically, the General Committee 

believes the Audit staff incorrectiy applied a cash-basis of accounting instead of an 

accmal-basis in its analysis of Press billing. Under cash-basis accounting, revenue is 

recorded when cash is received and an expense is recorded when cash is paid. In accmalbasis accounting, revenue is recognized when it is eamed (or when services are 

performed) and expenses recognized when incurred.'* The General Committee explains 

that under accmal-basis accounting, tiie objective is to ensure that events tiiat change an 

entity's financial statements are recorded in the periods in which the events occur, rather 

than only in tiie periods the entity receives or pays cash. The General Committee also 

states the matching principle under GAAP dictates tiiat expenses are recognized when the 

revenue is recognized, and therefore the entire cost ofthe contract should be used when 

calculating billing for travel. 

The Audit staff agrees that tiie matching principle dictates that expenses are recognized 

when tiie revenue is recognized. In tum, tiie revenue recognition principle recognizes 

revenue in the period in which it is eamed. Since the period and activity audited was the 

general election period, the Audit staff correctly applied the $4,047,402 cost for the 

general election portion of the Swift Air contract and related expenses. 

The issue is not whether the cash or accmal-basis of accounting is applied to the 

transportation costs and revenue generated from the billing ofthe Press for travel; nor is 

* "Accounting Principles 7* Edition", Jerry J. Weygandt PhD, CPA, Donald E. Kieso PhD, CPA. Paul D. 

Kimmel PhD, CPA, page 90 
12 

tiiere a question ofthe matching principle under GAAP. At issue is whether the activity 

of a separate reporting and corporate entity (the Primary Committee) should be 

recognized by the General Committee and by tiiis audit. An underlying assumption to 

GAAP is that every entity is separate and, therefore, the revenues and expenses of each 

entity should be recogiiized as such. As previously noted, recognizing the activity ofthe 

two entities separately is fiirtiier supported by 11 CFR §9034.4(e)(7), which states in part 

that expenditures for campaign-related transportation shall be attributed according to 

when the travel occurs. Therefore, the General Committee should recognize only those 

transportation costs from September 1,2008 through November 4,2008 in the calculation 

for billing the Press. 

Reconfiguration 

The General Committee believes that aircraft reconfiguration costs are a part of placing 

the asset in service and reconfiguration costs were included in the value ofthe asset when 

it was purchased from the Primary Committee. Therefore, the General Committee 

contends that all reconfiguration costs could be billed to the Press pro rata since the Press 

used the asset. 

In response to the Exit Conference and after discussions with the Audit staff, the General 

Committee stated that all reconfiguration costs incurred, with the exception of decals and 

any item that benefited only campaign staff, such as dividing curtain expenses, should be 

included in the billable amount. After considering the General Committee's response, the 

Audit staff revised its calculation of aircraft reconfiguration costs billable to the Press. 

The Audit staff did not include costs for painting and applying logos totaling $161,386 

and the cost for a divider curtain totaling $1,167 in the calculation for billable 

reconfiguration costs since the General Conunittee indicated that these items benefited 

only the campaign. As a result, tiie Audit staff" calculated $487,447 ($650,000 -

$161,386 - $1,167) in reconfiguration costs billable for all travelers for both the primary 

and general periods. After taking 60 percent of the accepted reconfiguration cost because 

the aircraft was purchased from the Primary Committee, the Audit staff calculated 

$292,468 ($487,447 x 60%) of aircraft reconfiguration costs as billable during the general 

period. The Audit staff divided this amount by the total 140.3 flight hours flown by the 

General Committee to determine the amount of aircraft reconfiguration costs attributed to 

each segment. 

Other Considerations 

The General Committee stated that the Audit staff and the Commission have allowed for 

transfers and repayments between primary and general election presidential committees 

with respect to otiier types of vendors. The General Committee believes that any excess 

fimds from the Press for travel are no different than deposits related to otiier vendors such 

as those for telephone contracts, media placement refimds, or lease agreements, whereby 

repayments sometimes are necessary to ensure a primary committee does not subsidize 

the general committee. 

The General Committee also contends it would not be reasonable to force campaigns to 

renegotiate and redraft every legal contract that exists to separate Primary and General 

activity. To refund the Press would involve more than 700 separate billing transactions 

and it would "go against many ofthe intemal etiiics policies ofthe various news 
13 

organizations... who are not allowed to receive passage at discounted rates on campaign 

transportation so as to not unduly influence their coverage of the candidates." 

The Audit staff acknowledges the administrative burden that may be involved witii 

refunding tiie Press. Historically, the Conimission has allowed refunds to tiie Press to be 

made on a pro rata basis, such as in the 1996 Dole-Kemp audit, rather than recalculating 

each billing to the Press. The altemative suggestion, refimding the Primary Committee, 

would be considered a non-qualified campaign expense subject to repayment. The 

regulations state that a general election committee cannot incur primary-related expenses 

because they are not in furtherance ofthe general election. 11 C.F.R. §9002.11(a). 

The General Committee received reimbursements fromi the Press for campaign travel that 

were above the maximum amount billable to the Press. The Primary Committee appears 

to have billed an amount that was less than its cost. The Primary and General Conunittee 

each paid its share ofthe contract and billed the Press and Secret Service accordingly. 

Although the regulation limits how much can be billed, there is no requirement that any 

billing be made. Thus, the travel could be provided at no cost. 

The General Committee is correct that there are transactions between the Primary and 

General Committees in many Presidential campaigns in which either the primary or 

general election is publicly fiinded. Assets, ranging from office equipment to service 

deposits to, as in this case, aircraft configuration, often are purchased. In each case, value 

is transferred between the two committees. For example, if tiie General Committee 

purchases security deposits, it gives cash for the right to continue the service and recover 

the deposit after the campaign. No such exchange is involved in the proposed transfer to 

the Primary Conunittee in this case. 

The General Committee does not dispute tiiat it received more reimbursements from tiie 

Press during the general election period, but the General Committee believes a more 

appropriate term is misallocation of Press travel reimbursement received between the 

General Committee and tiie Primary Committee. The General Committee's methodology 

may accurately reflect the comparative actual use ofthe aircraft between the Primary 

(111.8 flight hours) and General Committees (140.3 flight hours), but it does not reflect 

the comparative actual costs paid by each committee. As seen below in Finding 2, the 

General Committee did not exceed the overall expendittwe limitation, even with the 

excessive Press reimbursements. However, the purpose is to match the cost ofthe 

campaign to the proper election and spending limit. For these reasons and those noted 

above, the General Committee received reimbursements totaling $344,892 from the Press 

that were above the maximum amount billable under the regulations. 

The Audit staff recommends tiiat, within 60 calendar days of service of tiiis report, the 

General Conunittee demonstrate it did not receive reimbursements from the Press for 

campaign travel tiiat were above the maximum amount billable to the Press. Absent such 

evidence, tiie General Committee should rettim, on a pro rata basis, $344,892 to Press 

representatives and provide documentation to support the refiinds. 
14 

Finding 2. Expenditure Limitation 

Summary 

The expenditure limitation for the 2008 general election for the office of President of tiie 

United States was $84,103,800. Based on the Audit staffs review of financial activity 

through March 31,2011 and estimated winding down costs, the General Committee has 

not exceeded the limitation. 

Legal Standard 

A. Presidential Candidate Expenditure Limitation. No presidential candidate eligible 

under 2 U.S.C. 9003 to receive payments from the Secretary of the Treasury may make 

expenditures exceeding $20,000,000 as adjusted for the increases in the Consumer Price 

Index. The expenditure limitation for the 2008 general election for the office of President 

ofthe United States was detennined to be $84,103,800. 2 U.S.C. §44la(b)(l)(B) and (c). 

B. Repayments. If the Commission determines that the eligible candidate of a political 

party and his or her authorized committees incurred qualified campaign expenses in 

excess ofthe aggregate payments to which the eligible candidates of a major party were 

entitled under section 9005, it shall notify such candidates of the amoimt of such excess 

and such candidates shall pay to the Secretary of the Treasury an amount equal to such an 

amount. 2 U.S.C. §9007.2 (b)(2). 

C. Net Outstanding Qualified Campaign Expenses (NOQCE). Witiiin 30 days after 

the end of the expenditure reporting period, the candidate must submit a statement of net 

''Outstanding qualified campaign expenses. The statement must contain: 

• the total of all committee assets including cash on hand, amounts pwed to the 

committee and capital assets listed at their fair market value; 

• the total of all outstanding obligations for qualified campaign expenses; and 

• an estimate of necessary winding-down costs. 11 CFR §9004.9(a)(l) and (b). 

D. Expenditure Report Period. In the case of a major party, the expenditure report 

period begins on September 1 before the election or the date on which the major party's 

nominee is chosen, whichever comes earlier. The period ends 30 days after the 

Presidential election. For the General Committee, the expenditure report period ran from 

September 1.2008 to December 4,2008. 11 CFR §9002.12(a). 

E. Compliance Fund Pay Winding Down. Contributions to the General Election Legal 

and Accounting Coinpliance Fund (GELAC) shall be used to defray winding down 

expenses for legal and accounting compliance activities incurred after the end ofthe 

expenditure report period by either the candidate's primary election committee, general 

election committee, or both. 

For purposes of tiiis section, 100 percent of salary, overhead and computer expenses 

incurred after the end ofthe expenditure report period shall be considered winding down 

expenses payable from GELAC fiinds, and will be presumed to be made solely to ensure 

compliance witii 2 U.S.C. 431 et seq. and 26 U.S.C. 9001 et seq. 11 CFR 9003.3(a)(2)(I). 
15 

Pacts and Analysis 

A. Facts 

The expenditure limitation for the 2008 general election for the office of President ofthe 

United States was $84,103,800. The following is the Audit staff's analysis of 

expenditures subject to the limitation. 

Reported Operating Expenditures as of March 31,2011 $ 84,022,537 

Add: Accounts Payable 

Payment to Press for Campaign Travel (Finding 1) 344,892 

Less: Accounts Receivable 

Due from Compliance Fund for Winding Down Expenses (263.629^ 

Net Expenditures Subject to the Limitation $ 84,103,800 

Expenditure Limitation 84.103.800 

Amount In Excess ofthe limitation $ -0-

As the chart demonstrates, the General Committee has not exceeded the limitation. The 

calculation assumes that the Compliance Fund will reimburse the General Committee for 

some winding down costs in accordance with 11 CFR §9003.3(a)(2)(I). This calculation 

is also contingent upon the Commission adoption of a payment to the Press of $344,892 

in Finding 1^. Further, a Statement of Net Outstanding Qualified Campaign Expenses 

(NOQCE) prepared by the Audit staff can be found at page 19 and supports tiie result of 

the limitation analysis above, 

B. Preliminary Audit Report & Audit Division Recommendation 

This matter was presented to the General Committee at the Exit Conference. In response, 

the General Committee submitted a narrative stating it concurs with the Audit staff that it 

did not exceed the spending limit, but believes fiirther adjustments to the analysis may be 

necessary pending the matters discussed in Finding I. As discussed, the General 

Committee does not agree with a payable to the Press for campaign travel and believes 

the Compliance Fund's reimbursement for winding down expenses may not be necessary 

because the General Committee would not have otherwise exceeded the limitation. 

' If it is determined that the $344,892 is a payable to the Primary instead of the Press, the adjustment to the 

spending limit would be the same. 
16 

Partv 

Finding and Recommendation for the 

Compliance Fund 

Failure to File 48-Hour Notices 

Summary 

The Compliance Fund failed to file 48-hour notices for 169 contributions totaling 

$240,700 received prior to the general election. The Audit staff recommends that the 

Compliance Fund provide evidence that 48-hour notices were timely filed or submit any 

written comments it considers relevant. 

Legal Standard 

48-Hour Notification of Contributions. An authorized committee of a candidate must 

file special notices regarding contributions of $1,000 or more received less than 20 days 

but more than 48 hours before any election in which the candidate is mnning. This mie 

applies to all types of contributions to any authorized committee of the candidate. 11 

CFR §104.5(f). 

Facts and Analysis 

A. Facts 

The General election was held on November 4, 2008. Contributions of $1,000 or more 

received by the Compliance Fund between October 16,2008 and November 1,2008 

required the filing of 48-hour notices. (FEC Form 6 - 48-Hour Notice of Contributions/ 

Loans Received). The Audit staff isolated 589 contributions, totaling $871,260, which 

required the filing of these 48-hour notices. A review of these records identified 169 

contributions, totaling $240,700, for which the Compliance Fund failed to file the 48-

hour notices. 

B. Preliminary Audit Report & Audit Division Recommendation 

The Audit staff discussed this matter with Compliance Fund representatives at the Exit 

Conference and provided a schedule of the contributions requiring 48-hour notice filings. 

In response. Compliance Fund representatives stated the matter had been previously 

addressed in a letter to the Reports Analysis Division and reiterated that "48-Hour 

Notices were not required for many of the identified contributions, as they were merely 

redesignations or reattributions that took place during the 48-Hour Notice reporting 

period." The Compliance Fund representatives also stated tiiat "the Compliance Fund's 

normal practice of filing a 48-Hour Notice was not followed for a remaining group of 

contributions, due to data-management errors made by its outside vendor. To elaborate, 

the Compliance Fund's outside data-management vendor 'tagged' tiiis group of 

contributions with an incorrect date in its database and consequently failed to locate the 

group in a subsequent, computerized search for contributions requiring a 48-Hour Notice. 

The Compliance Fund has now taken measures witii this outside vendor to ensure that 
17 

tills unintentional oversight is corrected, and Compliance Fund staff believes that this was 

a one-time occurrence." 

Additionally, Compliance Fund representatives emphasized that "48-Hour Notices are 

intended to bring to light any last-minute contributions that a candidate might deploy for 

campaign-related activities, such as advertising and get-out-the-vote efforts, during an 

election's final days. Donations to the Compliance Fund, however, may not be used for 

any candidate's election and may only support legal and accounting services to ensure 

compliance with Federal law. It should also be noted that the Compliance Fund today 

maintains a balance of over $20 million, meaning that these fiinds received shortly before 

the 2008 general election still have not been spent for any purpose. The Compliance 

Fund was therefore not in material violation of the 48-hoiir notice requirement when its 

reliance on an outside vendor caused it to delay disclosure of donations that would only 

fiind lavvyers' and accountants' legal compliance activities. For these same reasons, the 

Compliance Fund should not be fined for this vendor failure even if the Commission 

somehow finds that a technical infringement of the 48-hour notice requirement occurred." 

The Audit staff recommends that, within 60 calendar days of service of this report, the 

Compliance Fund provide: 

• documentation to demonstrate the contributions in question were 

properly included in 48-hour notices; or, 

• documentation establishing the contributions were not subject to 

48-hour notification; and/or, 

• any fiirther written comments it considers relevant. 
18 

Part VI 

Finding and Recommendation for the 

Joint Fundraising Committees 

Based upon the limited examination of the reports and statements filed, and the records 

presented by seven joint fundraising committees, the Audit staff discovered no material 

non-compliance. 
Part VII 

Attachment 

19 

McCain-Palin 2008 Inc. 

Net Outstanding Qualified Campaign Expenses 

As of December 4,2008 

As Determined on March 31,2011 

Assets 

Cash in Bank 

Accounts Receivable: 

Due from the Compliance Fund 

Due from the Primary Committee 

Due from other Vendors 

TOTAL ASSETS 

Obligations; 

Accounts Payable: 

For Qualified Campaign Expenses 

Due to the Compliance Fund 

Due to the Primary Committee 

Payment to Press for Campaign Travel 

$2,661,927 

$339,056 

$4,234,755 

(a) 

(b) 

$3,693,508 

$7.235.738 

$8,448,103 

$100,107 

$167,828 

$344,892 

$10,929,246 

Amount Due U.S. Treasury: 

Disgorgement of Interest Earned 

Disgorgement of Stale-Dated Checks 

$58,319 (c) 

$2,882 (d) 

Winding Down Costs: 

Actual: December 5,2008 to March 31,2011 

TOTAL OBLIGATIONS 

NET OUTSTANDING QUALIFIED CAMPAIGN EXPENSES (DEFICIT) 

$1,807.115 (e) 

$10,929,246 

($0): 

(a) This amount represents repayments for expenditures paid by General, $87,217 for Secret Service shortfall for campaign travel, $76,841 for 

transfers, and $2,399,908 for S percent allocable portion of media costs. A receivable for $97,961 is also due for compliance- related winding 

down costs. 

(b) This amount represents Press and Secret Service receipts, media reftinds, interest eamed, capital assets sold, and capital assets in-house to be 

sold. 

(c) This amount represents disgorgement made on Jan. 2,2009 fbr interest. 

(d) This amount represents disgorgement made on Jan. 2,2010 for stale-dated checks. 

(e) The General Committee has not exceeded the winding down cost limitation at 11 CFR §9004.11(b). 
Attachment 1 

Page 1 of 19 

FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

December 1/ 2010 

MEMORANDUM 

TO: 

FROM: 

SUBJECT: 

Joseph F. Stoltz 

Assistant Staff Director 

Christopher Hughey 

Acting General Counsel 

Lawrence L. Calvert, Jr. 

Associate General Co 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Delanie DeWitt Painter "^V? ^/^/^ 

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, Uic. (the "General Committee") and McCainPalin Compliance Fund (the "GELAC").' Our comments primarily focus on Finding I: 

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

the amounts of excess reimbursements to tiie press rather than transferring funds to the 

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

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

charter contract 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 conunents on two issues fhat are not 

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

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

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

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

1IC.F.R. §§ 2.4(a) and (b)(6). 
Attachment 1 

Page 2 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 2 

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

hybrid communications 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. Baclcground 

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

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

press for excessive reimbursements. The press traveled with the presidentiai 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 ofthe 

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

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

transportation cost to the press was $3,722,208. They determined that the maximum that 

the General Committee 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 

Conunittee must refimd the 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 travel 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 

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

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

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

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

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

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

hours for the entire contract. 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 otiier 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. 
Attachment 1 

Page 3 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 3 

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

contract. ^ 

The Primary Conimittee 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 contract cost of 

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

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

they were entitled to use; the Primary Conimittee used 111.8 flight hours and the General 

Committee used 140.3 flight hours. 

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

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

cost of travel 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 

committees used during the campaign. Since the contract price with Swift Air was fixed, 

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

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

plane for each hour to determine 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 General Committee's calculation worked. (These are not 

the actual figures, and do not reflect the continual re-estimation by the General Committee ofthe 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 Conunittee and the General Committee are viewed as one entity. The fixed 

contract price with Swift Air is $100,000. The Primary 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 fbr 14 hours and all 50 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 fbr just over half the cost. But $600 is more than "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 of the plane as paid by the two committees. 
Attachment 1 

Page 4 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 4 

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 Conimittee 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 contract, not the entire cost 

of the contract 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 Conimittee billed 

press travelers less than their pro rata share ofthe total amount the Primary Committee 

actually paid on the Swift Air contract, leaving an amount that the Primary Conimittee 

had paid on the contract 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 contract because the 

General Conunittee's calculation included a portion of the entire contract that had been 

paid by the Primary Committee. 

2. Reconfiguration Costs 

In addition to the Swift Air contract costs, the Committee and the auditors 

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

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

Primary Committee 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 travel, based on the costs the auditors concluded reasonably benefitted the 

press, liie auditors determined that the General Committee could include in the actual 

cost of travel 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 reconfiguration 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 tiie campaign was over. 
Attachment 1 

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Memorandum to Joseph F. Stoltz 

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Page 5 

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

General Committee had purchased the reconfiguration from the Primary Comniittee at 

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

General Committee. They then divided this by tiie 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 aiiplane, but did not accept the remaining 

reconfiguration costs for applying 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 of the disagreement between the General 

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

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

The General Committee argues its accounting method, in combining the contract 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 contract. While the auditors' method relied on the cost that each committee 

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

were paying for the contract 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 Commission to combine the 

contract cost and use of both the Primary 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 of the actual 

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

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

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

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

General Committee with which we are concemed here. 

' If both sides agree that $ 161,490 for logos and painting and $ 1,167 for a divider curtain could not 

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

tiie 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 Committee included at 100% and tiie auditors included at 78%. 
Attachment I 

Page 6 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 6 

The public financing mles 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 rata share is calculated by "dividing 

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

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

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

committee 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 Swift Air contract and related 

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

General Committee to Swift Air for travel 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 the 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 travel costs that the Primary 

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

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

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

based on the amount each committee actually paid for travel 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 

committees shared a contract for use of the same leased airplane. But the Commission 

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

cost" of ^ouru/transportation 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 traveling witii a candidate's general election campaign 

should pay only for general election period travel 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 traveled with that campaign. 

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

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

share ofthe "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). 
Attachment I 

Page 7 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 7 

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

Cost Paid By General Committee 

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

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

election campaign during the general election period. The General Committee caimot 

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

election campaign. 5ee 26 U.S.C. § 9002(11); 11 C.F.R. § 9002.11. As the General 

Committee caimot incur expenses for primary-related travel, it should not be able to 

effectively bill the press for those costs either. The publicly-fiinded General Committee 

and McCain's non-public ly funded Primary Committee should keep their expenses 

separate because the two campaigns operated under different mles, requirements and 

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

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

expenditure limitation, which equals the amount of public funds 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 

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

program; his primary campaign was entirely privately ftuided. 

Because primary and general election campaign expenditures must remain 

separate, the Conunission created "bright line" mles for attributing expenses between the 

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

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

primary and general committees. 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 mles were later revised to also apply to this situation, where the candidate received 

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

timing. Under the bright line attribution mles, travel costs are attributed based on when 

tiie travel occurs. 11 C.F.R. § 9034.4(e)(7). If the travel occurs before tiie date of tiie 

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

exclusively on general election campaign preparations. Id. While these bright line mles 

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 mles to determine the attribution ofthe travel costs 

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

travel cost. 

Under the bright line attribution mles, the General Committee'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 travel occurring at the same time as the payments were made, 

those amounts were attributable to the Primary Conimittee prior to the date ofthe 
Attachment 1 

PageSof 19 

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 C.F.R. § 9034.4(e)(7).* 

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

supports the conclusion that General Committee and Primary Committee travel 

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

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

committees 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 tiie 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 accounting 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 the expenditure 

report period in connection with the general election campaign. 11 C.F.R. § 9002.11(a)(2), 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 establishing 

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

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

date of nomination or were somehow pre-paying fbr 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(e)(7). 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 fi^om 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 fiiitiier the general election and should have been paid for 

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

^ Generally, publicly funded general election candidates set up a separate authorized committee for 

tiie 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. 
Attachment I 

Page 9 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 9 

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 for air and ground for each segment within 60 days. We understand 

from communications witii the Audit staff tiiat die auditors' approach is consistent with 

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

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

segment. The Conimittee 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 Conimittee, the proposed PAR notes 

that the Bush-Cheney 2000 committee used a similar 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 Committee 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 Committee, 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 Oenerai Conunittee 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 Committee. 

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

but may simply transfer funds from the General Committee to the Primary Coinmittee to 

correct the misallocation. .The General Committee's proposed transfer of fiinds to the 

Primary Committee will not resolve the issue that the General Conimittee 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-qualified campaign expenses that may 

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

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

9004.4,9007.2(b)(2). In the absence of any demonstration that the Primaiy 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 returned to the media representatives. 11 C.F.R. 

§ 9004.7(d)(2). 
Attachment I 

Page 10 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 10 

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

benefits to publicly ftuided 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 

limitation, even when the excessive reimbursements are included.Nevertheless, the 

General Committee's receipt of excessive press reimbursements is significant. The 

purpose of the travel reimbursement mles 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 C.F.R. § 9004.6,45 Fed. Reg. 43,376 

(June 27,1980). The Commission has pursued press travel 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 the 1996 cycle, the Dole-Kemp '96 ("DK96") audit resulted in a payment 

for expenses in excess ofthe 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 (Commission and DK96 

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

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

fmal 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 General 

Committee's compliance with the overall expenditure limit. 

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

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

reimbursement fi^m the media and may deduct the reimbursements received from the expenditures subject 

to the 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 Committee. To the extent that the GELAC reimburses the General Committee 

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

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

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

12 

Also in the 1988 cycle, the Commission ordered the Robertson 1988 Committee to refimd 

$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 the refund, but the court noted 

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

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

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

Cir. 1995), n.4. 
Attachment I 

Page 11 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 11 

C. Reconfiguration Costs Issue Should be Raised for Commission Consideration 

We recommend that 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 travel. Applying a reasonable benefit test to the 

reconfiguration costs, the auditors accepted tiiat 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 including airplane reconfiguration costs as actual costs of travel in determining 

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

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

previous audits where the Commission 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 allows for reimbursement of a pro rata share of 

the actual costs of travel 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 Kerry-Edwards concemed how 

to calculate the amount of leased airplane reconfigiuation 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 from the press may be sought. The Kerry-Edwards general committee, like tiie Generai 

Committee, purchased a leased plane reconfiguration at 40% depreciation from its primary committee, but 

die issue in that audit was different. The Kerry-Edwards audit did not concem tiie calculation of 

reconfiguration costs that could be billed to the press. Moreover, the Commission 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. Keny-Edwards 2004. Inc. (November 14,2007). 
Attachment I 

Page 12 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 12 

that the actual cost of travel be determined, and only then apportioned into pro rata shares 

for the press travelers. 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 in apportioning the pro rata share ofthe actual travel 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 Committee, 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 recommend, however, that you raise this issue for Commission 

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

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

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

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

$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 transferred 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 demonstrating that the eamed interest was not spent. The Committee 

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 funds 

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 Conimission 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 Conimission did not have four affirmative votes to seek 

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

Page 13 of 19 

Memorandum to Joseph F. Stoltz 

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

Page 13 

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

Committee, 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 income 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 determined 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 require 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 in 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 uiclude 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 Coinmission 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 third 

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

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

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

any interest income 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 

of the interest income is appropriate. 
Attachment I 

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 communications. 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 tiie Committee's expenditure 

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

in the cover memorandum to the PAR. 

In 2004, the Commission 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 Commission 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 Commissioner Weintraub 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), Statement of 

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

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

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

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

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

audit. The Conunission 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 Conimission, Preliminary Audit Report of the Audit Division on 

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

(May 26,2006) 
Attachment I 

Page 15 of 19 

FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C 20463 

May 26, 2006 

MEMORANDUM 

Joseph F. Stoltz 

Assistant Staff Director 

Audit Division 

TO: 

THROUGH: Robert J.Costa 

Acting Staff Director 

FROM: James A. Kah 

Deputy General Counsel 

Thomasenia P. DuncaiiU'^ 

Associate General Couilsel 

Lorenzo Holloway — 

Assistant General Counsel 

for Public Finance and Audit Advice 

Delanie DeWitt Painter 

Attomey 

Margaret J. Fomian ^ ^ ^ 

Attomey 

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

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

I. INTRODUCTION 

The Office of General Counsel has reviewed tiie Preliminary Audit Report ("proposed 

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

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

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

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

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

Foniian, lhe aitomeys assigned to this audit. 
Attachment 1 

Page 16 of 19 

Preliminary Audit Report - Bush-C^cuey '04 

(LRA # 664) 

Page 2 

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

The Audit Division found that Bush received in-kind contributions 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 conunissions. 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 contributions of $42,409,406 ($81,418,812/2 = $40,709,406 + $1,700,000) to 

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

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

$42,409,406. See26V.S.C. § 9007(b)(3). 

This Office recommends that you delete this issue and the related findings from the 

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

Advisory Opinion ("AO") 2006-11, this Office believes that tiie Commission 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 Commission approval so that the Commission can consider the issue. 

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

Campaign Act ("FECA") nor the 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 Commission's 

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

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

expenses in particular circumstances. Section 106.1(a) provides the general mie 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 C.F.R. § 106.1(a). 

For a broadcast communication, the "attribution shall be deteimined by the proportion 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 oi* 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 - the 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) (Commission 

stated that reference to "Republicans in Congress" in an advertisement did "not constitute 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 tiiat it could be difficult to 

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

Explanaiion and Justification of JJ CF.R. § J00.J7, 60 Fed. Reg. 35.292,35,293-94 (July 6, 1995). 
Attachment I 

Page 17 of 19 

Preliminary Audit Report - Bush-Cheney '04 

(LRA #664) 

Page 3 

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

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

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 tfie communication refers to a clearly identified federal candidate 

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

identifying them." 11 C.F.R. § 106.8(a). When the Commission promulgated section 106.8, the 

Commission considered whether to "include other forms of communications such as broadcast or 

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

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

fiirther detail before establishing new mles." 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 Commission, nevertheless, 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, in Advisory Opinion 2006-

11, the Commission considered attribution of the cost of a mass mailing tiiat 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 appUed analogous "space or time" principles set forth in 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 tiie 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 candidate 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 Office recognizes that the Commission could follow the attribution principles set 

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

the Commission take note ofthe 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 

mailings and, it is questionable whether some of the advertisements generically refer to otiier 

candidates, hideed, the advertisements appear to be primarily focused on fiuthering 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 of the 

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 C.F.R. 
Attachment I 

Page 18 of 19 

Preliminary Audit Report ~ Bush-C^cney '04 

(LRA #664) 

Page 4 

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

§ 9002.1 l(b)(3)(expenditures that fiuther the election of otiier candidates). 

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

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

50% to Bush. In AO 2006-11, tfie Commission by analogy applied the principles set forth in 

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

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

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

those principles here, we recommend that the Commission consider tiu'ee issues. See 11 CF.R. 

§ 106.1(a)(1); AO 2006-11. 

First, the content of the 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 were "devoted" to promoting the election of any other candidates. 

In fact, some of the vague references in 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 orKeiry 

using vague descriptions such as "our leadeis 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 pr Kerry 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 otiier party candidates, tiie amount of space and time devoted to Bush in tfie 

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

his allies or leaders in Congress, all of the advertisements contam several seconds of pictures or 

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

§ 441 d(d) and 11 C.RR. § 110.11 (c).^ An attribution based on space and time could treat this 

portion of tfie advertisements as solely devoted to Bush and conclude that Bush's attribution 

' The Conimission explained in tiie section 106.8 rulemaking that "[glenenc references to 'our great 

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

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 tiie media advertisements is similar to tiiese generic references. 

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

approves tiie communication. 2 U.S.C. § 441d(d)(I): 11 CF-R. § 110.11(c). The candidate statement shall be an 

unobsciired full screen view ofthe candidate making the statement or the candidate in voice-over accompanied by a 

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

reasonable color contrast lor a period of at least 4 seconds. I(t. 
Attachment 1 

Page 19 of 19 

Preliminary Audit Report ~ Bush-Cheney '04 

(LRA #664) 

Page 5 

should be higher tfian 50%. Conversely, the fact that tfiis disclaimer is legally required might 

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

§ 441d(d)(l); 11 C.RR. § 110.11(c). 

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

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

by including the finding in the Preliminary Audit Report and requesting additional mfonnation 

from Bush in Bush's response to the Preliminary Audit Report. To receive public fimds, the 

candidate agreed tfiat 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 coimection between any disbursement and the 

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

joint allocation with the 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 C.F.R. §§ 9003.1(b)(1), 9003.5; see also 

26 U.S.C. § 9002(11); 11 CF.R. § 9002.11(b)(3); 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 committee 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 further" a candidate's election to the office 

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

expenses to fiirtiier the election of one or more individuals to federal or non-fedeial public office, expenses incurred 

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

incurred to fiuther 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 tiiat expenditures tiiat furtiier the 

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

will be considered qualified campaign expenses "only to the extent that they specifically fiirther the election ofthe 

candidate for President or Vice President." 11 C.F.R. § 9002.11(b)(3). 
Attachment 2 

Page I of 5 

Media Vendor Earned Interest 

Summary 

Two media vendors eamed interest totaling $14,499 from McCain-Palin 2008 Inc.'s 

(General Committee).fiinds. The interest was maintained in the media vendors' accounts 

and was not used to purchase media buys or to offset commissions. There is no 

recommendation for payment to the U.S. Treasury since the General Committee did not 

benefit from the eamed interest. 

Legal Standard 

A. Investment of Public Funds: Other Uses Resulting in Income. Investment of 

public funds or any use of public funds that results in income is permissible, provided that 

an amount equal to all net income derived from such use, less Federal, State and local 

taxes paid on such income, shall be paid to the Secretary. 11 CFR §9004.5. 

B. Income on Investment or Other Use of Payments from the Fund. If the 

Commission determines that a candidate received any income as a result of an investment 

or other use of payments from the fund pursuant to 11 CFR §9004.5, it shall so notify the 

candidate, and such candidate shall pay to the United States Treasury an amount equal to 

the amount determined to be income, less any Federal, State or local taxes on such 

income. 11 CFR §9007.2(b)(4). 

Facts and Analysis 

A. Facts 

The General Committee used four media vendors during the general election campaign: 

one main media consultant and three media subcontractors. Two of the subcontractors did 

not have interest-bearing accounts, but the main media consultant, MH Media, and one 

subcontractor. Smart Media Group (SMG), did have accounts that eamed interest. 

MH Media maintained two separate accounts for the General Committee and the 

Republican National Committee (RNC) and the funds were not comingled. The General 

Conimittee and the RNC deposited funds in its respective MH Media account. Both 

accounts then wired money to the subcontractors for media buys. Each MH Media 

account had a corresponding sweep account that eamed interest. MH Media transferred 

the General Committee's funds from the deposit account to the corresponding sweep 

account. The fiinds eamed interest and then were transferred back into the deposit 

account. The same procedure was performed between the two RNC accounts. The sweep 

account for the General Committee eamed interest totaling $1,325 between September 1, 

2008 and November 1,2008. 

SMG was the subcontractor responsible for most television media buys. SMG set up three 

different accounts in order to differentiate between the types of media buys: 

o Smart Media Group McCain Palin 2008 Hybrid Account (only General 

fiinds deposited) 
Attachment 2 

Page 2 of 5 

o Smart Media Group McCain Palin General Account (only General funds 

deposited) 

o Smart Media Group RNC Account (only RNC funds deposited) 

Each SMG account had a corresponding ovemight sweep account and a master note 

account that eamed interest: 

o Hybrid Account: McCain Automated Sweep Advantage; McCain Palin 

2008 Hybrid Master Note Sweep 

o General Account: McCain Palin 2008 General Sweep Advantage; McCain 

Palin 2008 General Account Master Note Sweep 

o RNC Account: RNC Sweep Advantage; RNC Master Note Sweep 

The overnight sweep accounts would transfer monies in and out over a one-day span and 

the master note accounts would transfer monies over an eight to nine-day span. An SMG 

representative stated that the reason for the sweep accounts was added security of fiinds. 

The total interest eamed on the four sweep and master accounts that maintained the 

General Committee funds was $13,174 from August 29, 2008 through January 31, 2009. 

The combined interest earned by the two media vendors with the General Committee's 

funds is $14,499 (as presented below). The General Committee representative stated that 

the media vendors were advised to keep all earned interest separate and not to use eamed 

interest for media buys or any compensation. Smart Media Group transferred its interest 

to another account and did not use the fimds. Smart Media Group also paid taxes on the 

interest. MH Media kept its eamed interest in the deposit accounts. Both media vendors 

provided documentation such as bank statements and general ledgers to demonstrate the 

eamed interest was not consumed. The following displays the interest eamed in each 

account. 

MH Media McCain General Sweep $ 1,325 

SMG McCain Palin 2008 General Account Master Note Sweep $2,581 

SMG McCain Palin 2008 General Sweep Advantage $3,025 

SMG McCain Palin 2008 Hybrid Master Note Sweep $3,266 

SMG McCain Automated Sweep Advantage $4.302 

Total Interest Earned General Committee Funds $14,499 

Interest eamed by media vendors was an issue in the 2004 Presidential General Election. 

The Conimission discussed whether the interest would be subject to repayment pursuant 

to 11 CFR §9007.2(b)(4). See 11 CFR §9004.5. Some Commissioners held tiie view tiiat 

the standard for repayment should be whether the conimittee actually received or 

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

offset commissions. In the Report of the Audit Division on Kerry-Edwards 2004, Inc., the 

Commission approved a finding that recommended a repayment to the U.S. Treasury for 

media interest that apparentiy was used to pay for media buys or to offset commissions. 

Interest eamed by media vendors that the committee did not actually receive or benefit 

from did not receive the required four affirmative votes among Commissioners necessary 

to make a finding. 
Attachment 2 

Page 3 of5 

B. Committee Response to Audit Fieldwork 

The Audit staff presented this matter to the General Committee representatives. In 

response, the General Committee provided a narrative stating the interest eamed by the 

media vendors was not used to buy media time, offset commission and fees or subsidize 

any Campaign activity. The General Committee made the point that the media vendors 

were independent subcontractors. 

"They were not created by any member of the Campaign's staff for the purpose of 

doing business with the Campaign. These companies' purpose was to purchase 

advertising time on thousands of radio and TV station vendors and supervise 

production of our ads. They ensured that paid services - in this case, media placement 

and production - were actually rendered and delivered to local media outlets and other 

vendors. After the campaign delivered payment to these vendors' accounts for 

ordered items, the Campsdgn relinquished all access to, control of, and interest in the 

funds. Disbursed monies belonged solely to the vendor." 

The General Committee also stated that it pre-paid other vendors for goods and services, 

and the vendors may have eamed interest on the payments. The media vendors should not 

be held to a different standard. 

The Audit staff believes that interest totaling $14,499 earned on these accounts is not 

subject to repayment to the U.S. Treasury since the General Committee did not receive or 

benefit from the interest eamed. As a result, there is no finding or recommendation in the 

preliminary audit report for repayment to the U.S. Treasury. 

Hybrid Communications 

Summary 

The Republican National Committee spent $30,749,009 on hybrid media ad 

communications related to the General election that were not applied to the coordinated 

spending limitation or the General Committee's spending limitation. Excessive in-kind 

contributions resulting from hybrid conununications did not receive the four affirmative 

votes necessary for a finding in the audit reports of both 2004 general election candidates. 

Therefore, the following facts are provided for informational purposes only. 

Legal Standard 

A. Allocation of Expenses for Political Party Committee Phone Banks. Allocation of 

expenses for political party committee phone banks that refer to a clearly identified 

Federal candidate can be paid 50 percent by the Federal candidate and 50 percent by the 

national party with Federal fimds subject to the limitations, restrictions and requirements 

of 11 CFR 109.32 and 109.33 without coordination if: 

(1) The communication refers to a clearly identified Federal candidate; 

(2) The communication does not refer to any other clearly identified Federal or nonFederal candidate; 
Attachment 2 

Page 4 of 5 

(3) The communication includes another reference that generically refers to other 

candidates of the Federal candidate's party without clearly identifying them; 

(4) The communication does not solicit a contribution, donation, or any other funds 

from any person; and 

(5) The phone bank is not exempt from the definition of "contribution" under 11 CFR 

100.89 and is not exempt from the definition of "expenditure" under 11 CFR 

100.149. 11 CFR §106.8. 

B. Coordinated Party Expenditures in Presidential Elections. 

(1) The national committee of a political party may make coordinated party 

expenditures in connection with the general election campaign of any candidate for 

President of the United States affiliated with the party. 

(2) The coordinated party expenditures shall not exceed an amount equal to two cents 

multiplied by the voting age population of the United States, 11 CFR 110.18. This 

limitation shall be increased in accordance with 11 CFR 110.17. 

(3) The coordinated party expenditures shall be in addition to: 

• Any expenditure by a national committee of a political party serving as the 

principal campaign committee of a candidate for President of the United 

States; and 

• Any contribution by the national committee to the candidate permissible under 

ll.CFRllO.1 or 110.2. 

(4) Any coordinated party expenditures made by the national committee of a political 

party pursuant to paragraph (a) of this section or made by any other party 

committee under authority assigned by a national committee of a political party 

under 11 CFR 109.33, on behalf of that party's Presidential candidate shall not 

count against the candidate's expenditure limitations under 11 CFR 110.8. 11 

CFR § 109.32(a). 

C. Expenditure Limitation for President. The national party committees have an 

expenditure limitation for their general election nominee for President. The formula used 

to calculate the Presidential expenditure limitation considers not only the price index but 

also the total state voting-age population (VAP) of the United States. The Department of 

Commerce also publishes the total VAP of the United States annually in the Federal 

Register. 11 CFR §110.18. 

The formula used to calculate this expenditure is two cents multiplied by the total VAP of 

the United States (227,719,424), multiplied by the price index. Amounts are rounded to 

the nearest $100. 2 U.S.C. §441a(d)(2) and 11 CFR §109.32(a). Based upon this formula, 

the expenditure limitation for 2008 Presidential nominees is $ 19,151,200. Federal 

Register/Vol. 73, No. 31/Thursday, February 14,2008/Notices. 

Facts and Analysis 

A. Facts 

The Republican National Conimittee (RNC) spent $30,749,009 on its share of media ads 

considered to be "hybrid communications." Such communications referenced Senator 

John McCain or his general election opponent, then-Senator Barack Obama, and made 
Attachment 2 

Page 5 of 5 

references to one of the two major parties. These hybrid communications were paid 50/50 

between the RNC and the General Committee. The General Committee's portion of the 

hybrid expenditures (50 percent) was applied to the spending limitation. The RNC's 

portion of the hybrid expenditures (50 percent) was not applied to its coordinated 

spending limit (2 U.S.C. §441a(d)). 

National party committees each had a coordinated spending limit of $19,151,200 for their 

respective 2008 general election candidates. As noted below, the RNC applied 

expenditures totaling $18,834,336 toward its coordinated spending limit. Therefore, 

without applying any costs associated with hybrid communications, the RNC had 

$316,864 remaining under the coordinated spending limitation for Senator McCain's 

presidential campaign. 

44la(d) Coordinated Activitv: 

Media Ads $11,262,437 

Calls/Surveys $ 1,559,472 

Consultant Travel/Other $ 178,409 

Printed Mailers/Postage $5,648,706 

Campaign Accessories $135,048 

Media Radio Buys $50.264 

Total 441a(d) Coordinated $18,834,336 

B. Spending Limitation Analysis 

The General Committee accepted public fiinds of $84,103,800 and therefore agreed to a 

spending limitation ofthe same amount. If the Commission were to consider the RNC's 

portion of hybrid communications as in-kind contributions to the General Committee by 

the RNC, then an excessive in-kind contribution totaling $30,432,145 ($30,749,009 -

$316,864) would result since the RNC had spent more than its 441a(d) limitation. The 

potential excessive amount received by the General Committee would be repayable to the 

U.S. Treasury. It is noted that possible excessive in-kind contributions resulting from 

hybrid communications did not receive the four affirmative votes necessary for a finding 

in the audit reports of both 2004 presidential candidates in the general election. 
Attachment 3 

Summary ofPrevious Audits 

Name of Committee: McCain 2000, Inc. 

Election Cycle Audited: 1999-2000 (Presidential Primary) 

Final Audit Report Release Date: April 24, 2002 

Finding 1- Apparent Non-Qualified Campaign Expenses 

The Audit staff identified non-campaign related disbursements totaling $6,038 and lost 

equipment with a Fair Market Value of $23,983. As a result, the Commission determined that a 

pro-rata repayment to the U.S. Treasury in the amount of $1,998 for the non-campaign related 

disbursements and $7,934 for the lost equipment was warranted. 

Finding 2- Determination of Net Outstanding Campaign Obligations 

The Audit staff conducted an analysis of the Committee's financial position and concluded that 

the Committee did not receive matching fiinds in excess of its entitlement. 

Finding 3- Stale-Dated Checks 

The Audit staff identified checks issued by the Committee totaling $85,017, which had not been 

negotiated. The Commission determined that this amount was payable to the U.S. Treasury. 

Name of Committee: McCain 2000 Compliance Committee, Inc. 

Election Cycle Audited: 1999-2000 (Presidential Primary) 

Final Audit Report Release Date: April 24, 2002 

Finding 1- Misstatement of Financial Activity 

The Compliance Committee's reported receipts and ending cash balance for 2000 were misstated 

mainly due to $3,000 of unreported contributions. The Compliance Committee refimded the 

contributions and filed amended disclosure reports, which materially corrected the 

misstatements. 

Finding 2- Stale-Dated Checks 

The Audit staff identified checks issued by the Compliance Committee totaling $4,088, which 

had not been negotiated. The Conunission determined that this amount was payable to the U.S. 

Treasury.