FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 204&3

July 8, 1997

MEMORANDUM

SUBJECT: PUBLIC ISSUANCE OF THE AUDIT REPORT ON ALEXANDER FOR

PRESIDENT, INC., ALEXANDER FOR PRESIDENT COMPLIANCE

COMMITIEE, INC., AND ALEXANDER AUDIT FUND, INC.

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TO:

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RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERTJ.COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

Attached please find a copy ofthe audit report and related documents on Alexander

for President, Inc., Alexander for President Compliance Committee, Inc., and Alexander

Audit Fund, Inc. which was approved by the Commission on June 19, 1997.

Informational copies ofthe report have been received by all parties involved and

the report may be released to the public.

Attachment as stated

cc: Office ofGeneral Counsel

Office ofPublic Disclosure

Reports Analysis Division

FEC Library
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REPORT OF THE AUDIT DIVISION

ON

Alexander for President, Inc.

Alexander for President

Compliance Committee, Inc.

and

Alexander Audit Fund, Inc. .

Approved JUDe 19, 1997

FEDERAL ELECI10N COMMISSION

999 E STREET, N.W.

WASRINGTON, D.C.
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REPORT OF THE AUDIT DIVISION

ON

Alexander for President, Inc.

Alexander for President

Compliance Committee, Inc.

and

Alexander Audit Fund, Inc.

Approved June 19, 1997

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.

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TABLE OF ·CONTENTS

ALEXANDER FOR PRESIDENT, INC

ALEXANDER FOR PRESIDENT COMPLIANCE COMMITTEE, INC.

AND

ALEXANDER AUDIT FUND, INC.

Page

Executive Summary 1

Audit Report 3

Background 3

Findings 6

Legal Analysis 21

Transmittal to Committee 29

Transmittal to Candidate 31

Chronology 33
FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 204&3

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REPORT OF THE AUDIT DIVISION

ON

ALEXANDER FOR PRESIDENT, INC.,

ALEXANDER FOR PRESIDENT COMPLIANCE COMMI'ITEE, INC., AND

ALEXANDER AUDIT FUND, INC. .

EXECUTIVE SUMMARY

Alexander for President Committee, Inc. (the Primary Committee) registered with

the Federal Election Commission on January 19, 1995. In addition, the Alexander for

President Compliance Committee, Inc. (the Compliance Committee) and the Alexander

Audit Fund, Inc. (the Fines Committee) registered with the Federal Election Commission

on January 23, 1995 and March 18, 1996 respectively.

The audit was conducted pursuant to 26 U.S.C. §9038(a), requiring the

Commission to audit committees authorized by candidates who receive Federal Funds.

The Candidate received $4,573,444 in matching funds from the U.S. Treasury.

The findings ofthe audit were presented to the Committees at an exit conference

held at the completion offield work and later, in an Exit Conference Memorandum. The

Committees' responses to those findings are contained in the audit report.

The following is an overview ofthe findings contained in the audit report.

ApPARENT CQNTRlRlITIONS REsULTING FROM UNTlMEI,V PAYMENTS fOB

TBAVELON CORPORATE AIRCRAfT- 2 U.S.C. §44tb(a) and 11 CFR §§100.7(a)(lXiii)

and t14.9(e). A review oftravel on corporate aircraft utilized by the Primary Committee

identified costs incurred that were not fully paid in advance. All ofthe travel in question

occurred in late 1994 and early 1995. The Primary Committee's Treasurer explained that

the staffperson who handled travel in the early days ofthe campaign misunderstood the

regulatory requirements. The Primary Committee discovered and corrected the errors

prior to the audit. The amoWlt not timely paid was $17,618.

ApPARENT NON-QUAI,'DED CAMPAIGN EXPENSM· COMPLIANCE COMMITIEE

EXPENSES PAID By mE PRIMARy CQMMID];E - 11 CFR §§9032.9(a) and

9034.4(b)(3). The Audit staff noted that the Primary Committee made two disbursements

totaling 56,535 for expenses incurred by the Compliance Committee. The Primary

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Committee argued that the Commission's regulations are inconsistent in that they do not

allow such expenses to be paid by the Compliance Committee ifthe Candidate is Dot

successful, and yet regard the expenses as non-qualified campaign expenses ifpaid by the

Primary Committee. Nonetheless, the Primary Committee acknowledged that under the

regulations these expenses are non-qualified. The Commission detennined that a

prorated.portion ofthe amount ($1,469) is repayable to the U.S. Treasury.

MATCHING FUNDS RECEIVED IN EXCESS OF ENTITLEMENT - 11 CFR

§§9034.l(b) and 9038.2(b)(1). Audit staffcalculated that the Candidate received

matching funds in excess ofhis entitlement totaling 5835,338. The excess resulted

primarily from the Primary Committee's overstatement ofestimated winding down

expenses on its Statement ofNet Outstanding Campaign Obligations. The Commission

detennined that this amount was repayable to the U.S. Treasury. A repayment of

5631,977 was received on February 4,1997, leaving a balance ofS203,361.

STALE-DATED CHECKS -11 CFR §§9038.6 and 9007.6. The Audit staff

identified checks issued by the Primary Committee and the Compliance Committee

totaling 537,966 and 512,200 respectively, that had not been negotiated. The Committees

paid these amounts to the u.S. Treasury on November 15, 1996, and December 11, 1996.

Subsequently, a $1,000 check issued by each committee was negotiated, reducing the

amount due to $36,966 and $11,200 respectively. The Commission detennined diat the

lesser amount was payable to the U.S. Treasury and the overpayments were credited to

other amounts due.

ALEXANDER AUDIT FUND. INC. (J'INES COMMII I EEl

The Audit staffdid not detect any material non-compliance during the audit ofthe

Fines Committee.

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FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 204&3

REPORTOF THE AUDITDlVlSION

ON

ALEXANDER FOR PRESIDENT, INC.,

. ALEXANDER FOR PRESIDENTCOMPLIANCE COMMI1TEE, INC.,

AND

ALEXANDER AUDITFUND, INC.

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.i I. BACKGROUND

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A. AUDIT AUTHORITY

This report is based on an audit ofAlexander For President, Inc., (the

Primary Committee), Alexander For President Compliance Committee, Inc., (the

Compliance Committee), and Alexander Audit Fund, Inc., (the Fines Committee). The

audit is mandated by Section 9038(a) ofTitle 26 ofthe United States Code. That section

states that "after each matching payment period, the Commission shall conduct a

thorough examination and audit ofthe qualified campaign expenses of every candidate

and his authorized committees who received payments under section 9037." Also

Section 9039(b) ofthe United States Code and Section 9038.1(a)(2) ofthe Commission's

Regulations state that the Commission may conduct other examinations and audits from

time to time as it deems necessary.

In addition to examining the receipt and use ofFederal funds, the audit

seeks to detennine ifthe campaign has materially complied with the limitations,

prohibitions and disclosure requirements ofthe Federal Election Campaign Act of 1971,

as amended. °

B. AUDIT COVERAGE

The audit covered the period from the Primary Committee's inception,

November 9, 1994, through April 30, 1996. During this period, the Primary Committee's

disclosure reports reflect an opening cash balance of$-0-, total receipts of520,000,077,I

total disbursements of$19,330,094 and a closing cash balance of$669,983. In addition,

a limited review ofthe Committee's records and disclosure reports filed through January

31, 1997 was conducted for purposes ofdetermining the Committeets remaining

matching fund entitlement based on its financial position.

Figures in this repon are rounded to the nearest dollar.

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The audit ofthe Compliance Committee covered the period from its

inception, February 15, 1995, through January 31, 1996. The Compliance Committee

reported an opening cash balance ofS-o-; total receipts ofSI30,507; total disbursements

ofSI30,507; and a closing cash balance ofS-o-. The Compliance Committee made

nominal disbursements for bank account fees.

The audit ofthe Fines Committee covered the period from its inceptio~

April 17, 1996, through January 31, 1997. The Fines Committee reported an opening

cash balance ofS-O-; total receipts ofS94,479 and a closing cash on hand ofS94,479.

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i c. CAMPAIGN ORGANIZATION

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The Primary Committee registered with the Federal Electio~

Commission on January 19, 1995. The Treasurer ofthe Primary Committee is Todd

Eardensohn. During the campaign, the Primary Committee's office was located in

Nashville, Tennessee. After the campaign, the Primary Committee's headquarters was

moved to Alexandria, Virginia.

To manage its financial activity, the campaign maintained fourteen

bank accounts at various times. From the fourteen accounts, the Primary Committee

issued approximately 7,100 checks in payment for goods and services. Also, the Primary

Committee received approximately 31,400 contributions totaling 512,932,479 from

roughly 26,280 individuals. The Primary Committee also accepted 5297,767 from 141

political committees.

In addition, the Candidate received S4,573,444 in matching funds

from the United States Treasury. This amount represents 30% ofthe SI5,455,000

maximum entitlement. The candidate was detennined eligible to receive matching funds

on May 31, 1995. The Primary Committee made a total oftwelve matching fund requests

totaling $4,623,333. The Commission certified 99010 ofthe requested amount. For

matching fund purposes, the Commission detennined that Governor Alexander's

candidacy ended March 6, 1996. This detennination was based on a public statement by

the Candidate.

2. Compliance Committee

The Compliance Committee registered with the Federal Election

Commission on January 23, 1995. The Treasurer ofthe Compliance Committee from its

inception is Todd Eardensohn. The Compliance Committee used one depository and

maintained one bank account; received contributions totaling S130,420 from

approximately 200 persons; and transferred $77.,270 in contributions to the Fines

Committee and wrote $53,150 in refund checks to contributors.

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The Fines Committee registered with the Federal Election

Commission on March 18, 1996. The Treasurer ofthe Fines Committee from its

inception is Todd Eardensohn. The Fines Committee maintained one bank account and . _

received contributionstotaling 594,479 from approximately 140 persons. As ofJanuary

31, 1997, the Fines Committee bad not made any disbmsements. .

. D. AUDIT SCOPE AND PROCEDURES

In addition to a review ofthe Primary Committee's expenditures to determine the

qualified and non-qualified campaign expenses incmred by the campaign, the audits

covered the following general categories, as appropriate, for each committee:

1. The receipt ofcontributions or loans in excess ofthe statutory limitations;

2. the receipt ofcontributions &om prohibited sources, such as those from

corporations or labor organizations (see Finding rn.A.l.);

3. proper disclosure ofcontributions from individuals, political committees

and other entities, to include the itemization ofcontributions when

required, as well as, the completeness and 8CCmacy ofthe infonnation

disclosed;

4. proper disclosure ofdisbursements including the itemization of

disbursements when required, as well as, the completeness and accUracy of

the infonnation disclosed;

S. proper disclosure ofcampaign debts and obligations;

6. the accuracy oftotal reported receipts, disbursements and cash balances as

compared to campaign bank records;

7. adequate recordkeeping for campaign transactions;

8. accuracy oftile Statement ofNet Outstanding Campaign Obligations filed

by the Primary Committee to disclose its tiDancial condition and establish

coDtinuing maWdng fund entidement (see Findings m.B.2., III.B.3.);

9. the Primary Committee's compliance with spending limitations; and

10. other audit proceduJes that were deemed necessary in the situation

(see Findings III.B.I., III.B.4. and IV.A.).

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As part ofthe Commission's standard audit process, an inventory ofcampaign

records was conducted prior to the audit fieldwork. This inventory was conducted to

determine iftbe auditee's records were materially complete and in an auditable state.

Based on our review ofrecords presented, it was concluded that the records were

materially complete and fieldwork began immediately.

Unless specifically discussed below, fliD material non-compliance was detected. It

should be noted that the Commission may pursue further any ofthe matters discussed in

this report in an enforcement action.

01. ALEXANDER FOR PRESIDENT. INC.

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A. AUDIT FINDINGS AND RECOMMENDATIONS

NON- REPAYMENTMATrERS

1. Apparent Contributions ResultioK from tJntimely Payments for

Trayel on COIJ)Orate Aircraft

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Section 44Ib(a) ofTitle 2 ofthe United States Code states, in p~

that it is unlawful for any national bank, or any corporation organized by authority ofany

law ofCongress, to make a contribution or expenditure in connection with any election to

any political office, or in connection with any primary election or political convention or

caucus held to select candidates for any political office.

Section IOO.7(a)(I)(iii) ofTitle II ofthe Code ofFederal

Regulations states, in part, that the tenn "contribution" includes a gift, subscription, lo~

advance, or deposit ofmoney or anything ofvalue. The tenn "anything ofvalue"

includes all in-kind contributions. Unless specifically exempted under 11 CFR

§100.7(b), the provision ofany goods or services without charge or at a charge which is

less than the usual and normal charge for such goods or services is a contribution.

Section 114.9(e) ofTitle II ofthe Code ofFederal Regulations

states that a candidate, candidate's agent, or person traveling on behalfofa candidate

who uses an airplane which is owned or leased by a corporation or labor organization

other than a corporation or labor organization licensed to offer commercial services for

travel in connection with a Federal election must, in advance, reimburse the corporation

or labor organization, in the case oftravel to a city served by regularly scheduled

commercial service, the first class air fare and in the case oftravel to a city not served by

a regularly scheduled commercial service, the usual charter rate.

A review oftravel on corporate aircraft utilized by the Primary

Committee identified costs incurred that were not fully paid in advance as required by 11

CFR §114.9(e). All ofthis travel occurred in late 1994 and early 1995. The portion of

the travel costs not paid in advance totaled $17,618 and involved two corporations; the

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Pilot Oil Com,pany, 511,927, and the Textile Rubber and Chemical Company, S5,691.

All ofthe charges were outstanding for more than a year. .

The Primary Committee's Treasmer explained that the staffperson

who handled travel in the early days ofthe campaign misunderstood the requirements of.

11 CFR §114.9(e). In a number ofinstances, only the Candidate's travel expense was

paid rather than that ofall campaign travelers. The Treasurer fmther explained that when

the underpayments came to his attention, the outstanding balances were calculatecl and

the amounts were paid. No amounts were outstanding at the time ofaudit fieldwork.

This matter was discussed at a conference at the close offieldwork

and schedules were provided to Primary Committee representatives that showed the

calculation ofthe apparent corporate contribution. In the Exit Conference Memorandum,

the Audit staffrecommended the Primary Committee submit any comments or

documentation it felt might be relevant.

In response, the Primary Committee stated, in part,

££Shortly after its inception (in late 1994 and early 1995), the Primary

Committee made use ofcorporate aircraft for certain campaign-related

travel. As is often the case in the initial stages ofa presidential

campai~ the staffin charge ofcoordinating campaign-related travel

during this early period did not have experience with the Commission's

regulations. Yet, in all but one isolated incident, the corporations

supplying aircraft were correctly reimbursed in advance for candidate

airfare during the start-up period. Unfortunately, the staffperson

coordinating the travel at the inception ofthe campaign did not

understand the necessity ofprepaying for campaign-related passengers

other than the candidate, as required by II C.F.R. 114.9(e)(I), and thus

did not submit advance payments for passengers other than the

candidate. During a subsequent review ofthe flight manifests, the

Treasurer discovered that these additional passengers had not been

included in the Primary Committee's original advance payments.

Immediately upon this discovery, the underpayments were calculated

and additional payments were submitted to the two corporations

involved. These remedial steps were taken voluntarily by the Primary

Committee, not at the direction ofthe Commission staff. The Primary

Committee ackllowledges that 11 C.F.R. 114.9 requires reimbursement

in advance offirst class airfare for a "candidate, candidate's agent, or

person traveling on behalfofa candidate." Nevertheless, the Primary

Committee respectfully requests that no fmther action be taken by the

Commission for the following reasons:

(i) The underpayments in question took place during the early

stages ofthe campaign;

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(il) Once permanent compliance procedures and peisonnel were in

place, no similar incidents occmred; and

(iii) Upon discovery oftbe underpayments, the Primary Committee

voh.mtarily researched and calculated the correct amounts and

fully reimbursed the two corporations immediately.~'

In the Primary Committee voluntarily corrected these early

oversightS immediately upon their discovery. Ofits own accord, it provided to the Audit

staffall the schedules which calculated the underpayments ofthe flights in question.

Further, it is the contention ofthe Primary Committee that the

amount in question pertaining to the late payments to the two corporations is overstated

by $4,611. The $4,611 represents an itinerary change for a flight dated February 24,

1~9S, which the Primary Committee contends was paid as soon as the Treasurer received

notice ofthe itinerary change. This would result in a remaining amount of513,007.

Finally, the Primary Committee states that it paid 51,392,708 in air travel cost of~ich

late payments of513,007 would represent less than 1% ofthe total amount spent on air

travel by the Primary Committee.

The Audit staffacknowledges that the Primary Committee did

voluntarily reimburse the underpayments to the corporations in question and did so

during the active campaign. In addition, we acknowledge that an itinerary change did

arise that prevented the Primary Committee from prepaying for travel on the one trip.

However, the Primary Committee did not make payment for this itinerary change until

March 1, 1996, which is more than one year after the trip. We feel that based on the

amount oftime which elapsed before reimbursement, a contribution still OCCUlTed and

thus, the Primary Committee still received contributions totaling 517,618.

Further, the Audit staffdoes Dot dispute the Primary Committee's

amount paid for air travel. However, we do note that this amount represents all air travel

including commercial and charter aircraft. The total amount involved for travel on

corporate aircraft was only S81 ,428. Thus, the contribution amount would represent 22%

($17,6181$81.428) ofthe total amount paid for travel on corporate aircraft.

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AUDIT FINDINGS AND REcoMMENDADONS AMOUNTS DUE

TOTBEU.S.1'REAsURY -

1. Apparent Non-Oualified Campaign ExPC"SCS - Compliance

Committee Expmses Paid by the Primaa Commjttee

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Section 9032.9(a) ofTitle 11 ofthe Code ofFederal Regulations,

in part, defines a qualified campaign expense as one incutred by or on behalfofthe

candidate from the date the individual becomes a candidate through the last day ofthe

candidate's eligibility; made in connection with his campaign for nomination; and'neither

the incUJTence nor the payment ofwhich constitutes a violation ofany law ofthe United

States or the State in which the expense is incurred or paid.

Section 9034.4(bX3) ofTitle 11 ofthe Code ofFederal

Regulations states, any expenses incurred after a candidate's date ofineligibility, as

detennined under 11 CFR §9033.S, are not qualified campaign expenses except to the

extent pennitted under 11 CFR §9034,,4(a)(3). In addition, any expenses incurred before

the candidate's date ofineligibility for goods and services, to be received after the

candidate's date ofineligibility, or for property, services, or facilities used to benefit the

candidate's general election campaign, are not qualified campaign expenses.

During the Audit staff's review ofdisbursements by the Primary

Committee, the Audit staffnoted two disbursements totaling $6,535 pertaining to activity

for the Compliance Committee. The Compliance Committee is a general election legal

and accounting compliance fund established pursuant to 11 CFR §9003.3(a).

First, the Audit staffnoted an agreement between "Alexander for

President Compliance Committee, Inc." and Agnes Warfield, dated February 1, 1996,

which stated, in part, "the Committee (the Compliance Committee) wishes to employ

Warfield to raise funds for it." Along with the agreement was a check authorization fonn

in the amount of$l,ooo dated April 15, 1996. The purpose on the form reads "ContractCompliance Fundraising". The second item identified by the Audit staffas Compliance

Committee activity paid by the Primary Committee was contained on an invoice from

ACS, Inc. dated May 1, 1996 in the amount of$148,673. ACS, Inc. handled the

processing and reporting of contributions for the Primary Committee, Compliance

Committee and the Fines Committee. Identified on the invoice under the description of

44Processing Fees and Expenses" was the item "Compliance Committee Processing

$5,535."

This matter was presented to Primary Committee representatives at

a conference at the conclusion offieldwork. These representatives were provided with

supporting documentation for these items.

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In the Exit Conference Memorandum, the Audit staff

recommended that the Primary Committee submit evidence documenting that the above

expenditures were qualified campaign expenses. Absent such a demonstration, the Audit

staffnoted that it would recommend that the Commission make a detennination that the

Primary Committee make a pro-rata repayment to the United States Treasury pursuant to

Section §9038(b)(2) ofTitle 26 ofthe United States Code.

In response to the Exit Conference Memorandum, the Primary

Committee stated, in part,

"The non-qualified payments cited in the Memorandum resulted from

an internal inconsistency in the Commission's regulations. Governor

Alexander, before he withdrew from the race, established the

Compliance Committee (as permitted under 11 CFR 9003.3(a)(I)(i»,

primarily as a depository for redesignated excessive contributions to

the Primary Committee. Virtually all ofthe non-qualified costs cited in

the Memorandum were the administrative costs ofredesignating these

excessive contributions. Upon Governor Alexander's withdrawal from

the race, these costs were still unpaid. The Treasurer found, however,

that the costs could not be paid from the Compliance Committee's

accounts because regulations require that all funds in the Compliance

Committee accounts had to be returned to the contributors. 11 C.F.R.

l02.9(e)(2). Rather than leaving the creditors ofthe Compliance

Committee unpaid, the Treasurer choose to pay the costs from the

Primary Committee. The Primary Committee concedes, therefore, that

expenditures it made on behalf ofthe Compliance Committee were

"non-qualified" under the Commission's rules. The Primary

Committee argues, however, that the rules lead to an illogical result.

The rules allow a candidate to establish a compliance committee before

he secures the nomination, but they penalize candidates who fail to

secure the nomination. This inconsistency forces an unsuccessful

candidate who prudently chooses to establish a repository for

redesignated contributions to choose between paying his debts or

making non-qualified expenditures."

Although the Primary Committee argues that the Commission's

regulations are inconsistent, it acknowledges that under those regulations these expenses

are non-qualified.

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The Audit staffrecommends thatthe Commission determine that the l1imary

Committee is required to repay $1,469 «$1,000+$5,535)x.224799)2 to the U.S. Treasury

pursuant to Section 9038(bX2) ofTide 26 o~the United States Code.

2. Petcnninatjon geNet Ogtstandio& CamJ)li&D ObliptiQDS

Section 9034.5(a) ofTitle 11 ofthe Code ofFederal Regulations

requires that within 1Sdays ofthe candidate's date ofineligibility, the candidate shall

submit a statement ofnet outstanding campaign obligations which contains, among other

things, the total ofall outstanding obligations for qualified campaign expenses and an

estimate ofnecessary winding down costs. Subsection (b) ofthis section states, in part,

that the total outstanding campaign obligations shall not include any ac:counts payable for

non-qualified campaign expenses.

Section 9034.1(b) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, that ifon the date ofineligibility a candidate has net outstanding campaign

obligations as defined under 11 CFR §9034.5, that candidate may continue to receive

matching payments provided that on the date ofpayment there are remaining net

outstanding campaign obligations.

Governor Alexander's date ofineligibility was March 6, 1996.

The Primary Committee filed a Statement ofNet Outstanding Campaign Obligations

(NDCO) which reflected a 52,599,104 deficit at March 6, 1996. Initially, the Audit staff

reviewed the Primary Committee's financial activity through September 30, 1996,

analyzed estimates ofwinding down costs prepared by the Primary Committee and

developed a NOCO statement which showed a remaining entitlement on March 6, 1996

of51,986,360. As a result, in the Exit Conference Memorandum. it was calculated that

the Candidate had received matching funds in excess of entitlement totaling 5812,~99.

The major differences between the Primary Committee's NOCO

statement and the Audit staffs calculation were the amount ofestimated winding down

costs ($1,745,415 by the Primary Committee compared to the Audit staffs estimated

winding down costs ofS1;118,309) and the valuation ofits assets, particularly its

telephone and computersystems. Section 9034.5 ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that capital assets should be valued at 600,4 of cost if purchased

before the candidate's date ofineligibility.

In response to the Exit Conference Memorandum, the Primary

Committee did not disagree with the Audit staff'5 valuation ofestimated winding down

cost. However, the Primary Committee stated that it believed the "bright line"

depreciation test overstated the value ofits assets causing the Net Outstanding Campaign

This figure (.224799) represents the Committee's repayment ratio as calculated pursuant to II

CFR §9038.2(b)(2XiiiXB).

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Obligations Statement to be understated. The Primary Committee feels that this

understatement gives the impression that the Candidate has reCeived matching funds in

excess ofentitlement

The Primary Committee further contends that 11 CFR §9034.5

does Dot pertain to it The response cites the Federal Register Vol. 60 No. 116 which

states, in part, that "the Commission is adopting a bright line 400At depreciation figure for

capital assets that are used in both the primary and the general election campaigns." It

contends that since the Candidate did not participate in the general election the

depreciation standards do not apply to its capital assets.

The Audit staffnotes that the Explanation and Justification for

Regulations on Public Financing ofPresidential Primary and General Election Candidates

(the E&J) does include the language found in the Primary Committee's response. That

section explains one ofthe rationales used in changing the regulations, but does not state

that it applies only to committees whose candidate is also a candidate in the general

election. The same part ofthe E&J states, in part, that the 40010 depreciation applies to

capital assets received by a priltulry committee prior to the candidate's DOl and

subsequently sold to the general campaign committee or 10 another entity. (Emphasis

added.) This wording clearly indicates that assets sold by any primary committee

regardless ofthe purchaser are covered by the regulatory provision.

As originally filed, the Primary Committee's Net Outstanding

Campaign Obligations Statement included a telephone system as a capital asset. The

Primary Committee now contends that this classification was incolTeCt. It contends that

the acquisition ofthe phone system should be characterized as a lease and not a purchase

of an asset The Primary Committee argues that the appropriate test ofthe lease versus

purchase classification is a burden ofownership test and that the Commission should look

to various court decisions and the IRS in detennining the classification ofthe asset. The

Primary Committee cited seven court cases which it believes supports its argument the

original classification was incorrect.

The question at issue is whether the transaction is a lease or a

conditional sale. The Audit staffreviewed the court cases cited by the Primary

Committee and does not believe that they deal with the issue at hand.J All ofthe

documentation obtained by the Audit staffindicated that the intent of both parties was a

sale with a potential buyback ofthe asset. The Primary Committee provided a unsigned

draft ofa letter dated April 28, 1995 that notes the 25% buy back and amaintenance

agreement offered by AT&T. In a signed letter from AT&T referencing the "AT&T

Definity Equipment Bill", the buy back and the maintenance agreement are never .

mentioned. Documentation dated March 29, 1995 from AT&T offers the same

equipment in a "Master Equipment Lease Agreement Schedule.99 However, on July 1,

1995 the Primary Committee paid AT&T S190J30 as noted on the chec~ "pay for phone

Some ofthe cases cited pertained to sales and/or leases involving livestock, building construction,

real-estate, a motion picture and aircraft.

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system," rather than choosing to lease. Thus, all documentation available indicates a sale

rather than a lease. Further, it should be noted that the Primary Committee originally

classified the phone system on its NOCO as an asset.

When discussing its computer systems, the Primary Committee

argues that the interpretation ofthe term capital assets is too inclusive. It feels that only

components ofa computer system that cannot function alone should be grouped when

defming an asset. The Primary Committee believes that the current interpretation forces

.committees to include every individual component that might be identified as part of a

network when applying the 40% depreciation standard. The Primary Committee

concludes that the value oftheir capital assets are overstated by $29,627 as a result.

Prior to the 1996 election the Commission clarified how groups of

components are viewed when valuing committee capital assets. The Audit stafffeels the

revised procedure provides a more realistic picture ofthe assets available to the

campaign.

The Primary Committee addresses the use ofa mandatory

depreciation of40% when valuing their capital assets. It argues that the resulting 60% of

cost valuation, overstates the actual value ofits assets and understates its NOCO, which

in tum prohibits a candidate from receiving or retaining matching funds to which he

should be entitled. The Primary Committee further maintains that the capital assets of

most campaigns are comprised chiefly of computer hardware and software, and that it is a

fact of commercial life that no knowledgeable, arms-length buyer will pay near 600/0 of

the cost ofthose assets. The Primary Committee contends that, the only primary

committee able to realize 60% on such assets is that ofthe eventual nominee, and then

only because the primary committee is able to transfer its assets to a successor committee

that will not bargain for a fair market price for the assets. According to the Primary

Committee this has a detrimental effect on a committee attempting to wind down and pay

expenses in a business world that values the assets ofthe committee at substantially less

than the carrying value imposed by the Commission. In order to recoup the valuation of

the capital assets the Primary Committee feels this regulation encourages unsuccessful

primary committees to sell their assets to friendly parties who would be willing to pay

amounts higher than the fair market value or to use less cost effective lease arrangements

to satisfy their equipment needs.

The Audit staff agrees that most primary committees who do not

gain the nomination are unable to realize 60010 ofthe cost oftheir assets. However, the

CU1TeI1t regulations at 11 CFR §9034.S(c)(1) require a committee to include its capital

assets on the NOCO at 60010 of cost as a partial offset to this valuation. Assets that are

Dot classified as capital assets are not valued.

However, an Exit Conference Memorandum response filed in an

unrelated audit points out that the effective date ofthe current regulation was subsequent

to the purchase ofmany ofits capital assets. It is argued that only assets acquired after

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that date, August 16, 1995, are subject to the 4()OA» depreciation scale. Assets acquired

priorto August 16, 1995 should be considered. under the previoUs regulation which

allowed committeesto demonstrate a higher depreciation percentage. The Audit staff

agrees. All ofthe Primary Committee's capital assets were acquired priorto August 16,

1995. When the capital assets ofthe Primary Committee are revalued 1D1der the previous

regulation, the value is decreased from 5266,164 to $85,653.

The NOCO statement which follows uses the revised capital assets

valuation and has been updated to reflect the Primary Committee's financial activity

through January 31, 1997.

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13

ALEXANDDl fOR PRlSmlNT, INC:~

STA'IDIENTOFNETOtrrSTANDING CAMPAIGN OBLIGAnoNS

IS of March 6, 1996

as determined Januuy 31, 1997

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Cashin Bank

Cash on Hand

Accounts Receivable

Capital Assets

Total Ages

OBUGATIONS

Accouns Payable for Qualified CaDpaign

Expenses

Loan Payable

AmnmtPayable to US. Treasury

Stale-datedChecks

Actual Winding Down COs&

March 7, 1996 -January 31, 1997

Estimlted Winding Down Costs

February 1, 1997-JWle 30, 1997

Total Obligations

Net OutstaaciDI Cam..ilB OWiladoas

as of March 6, 1996 (Deficit>

$966,363 (a)

137

350,185

$979,615 (b)

1,205,000

36,966

950,427

~(c)

$1,402,338

3366158

'$l2fi36?Ql

FOOTNOTES TO NOCO

<a> Olistancing checks issued prior to the date of ineligibility and determined to be stale-dated have been added beck

to the Cash In Bank fil'".

<b) The expenditwes adck'essed in Finding III.B.I., Apparent Non-QaaJifaed Campaisn Expenses, were paid after the

date ofineligibility. Therefore they have been excluded from AccoWlts Payable for Qualified Campaign Expenses.

(c) Some estimates were used in determining this amoWlt. This estimate is subject to chanae. Committee records

and cUcIoue repons will be revie\\ed and chan., made as necasary.

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Matchipa Funds Recejyed in Excess of~ptitlement

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Section 9034.1(b) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, ifon the date ofineligibility a candidate has net outstanding campaign

obligations as defined under 11 eFR §9034.5, that candidate may continue to receive

matching payments for matchable contributions received and deposited on or before

December 31 ofthe Presidential election year provided that on the date ofpayment there

are remaining net outstanding campaign obligations.

Section 9038.2(bXl) ofTitle 11 oftbe Code ofFederal

Regulations states, in part, the Commission may determine that certain portions ofthe

payments made to a candidate from the matching payment account were in excess ofthe

aggregate amount ofpayments to which such candidate was entitled. Examples ofsuch

excessive payments include, but are not limited to, payments made to the candidate after

the candidate's date ofineligibility where it is later determined that the candidate had no

net outstanding campaign obligations as defined in 11 CFR §9034.5.

Based on the Audit staff's analysis ofthe Primary Committee's

NOCO statement, the Candidate had net outstanding campaign obligations on March 6,

1996 of51 ,963,820. That deficit was liquidated as follows:

Net Outstanding Campaign

Obligations (Deficit) as of3/6/96

Plus:

Net Private Contributions

Deposited 3n/96 - 4/15/96

Matching Fund Payment 3/15/96

Remaining Entitlement at 4/15/96

Plus:

Matching Fund Payment 4/15/96

219,967

565,242

($1,963,820)

785209

($1,178,611)

1 281 673

Amount received in excess of entitlement at 4/15/96

Plus:

Matching Fund Payments received

5/1/96 - 613/96

Total in Excess ofEntitlement

103,062

732276

• The amount in excess of entitlement in the Exit Conference Memorandum was 5812,799. The

principal differences in the analysis are the reduction of both capital assets and estimated winding

down costs.

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The principal cause ofthe Primary Committee's receipt of

matching funds in excess ofthe Candidate's entitlement was ail-overstatement ofwinding

down costs on the NOCO Statements filed with the matching fund submissions • in

particular estimated Legal and Accounting Expenses. Based on an analysis ofthe issues

identified during the audit, and after discussions with the Primary Committee, the Legal.

and Accounting Expense was reduced substantially, causing a corresponding reduction in

the Candidate's matching fund entitlement. The current estimated winding down cost are

less than both that originally provided by the Primary Committee and the amount

. contained in the Exit Conference Memorandum.

In addition to the excessive matching fund payments calculated

above, the Primary Committee's last matching fund payment was reduced. The Primary

Committee had requested S71,796 but, bad included an adjustment ofS99,242 as a

liability on its NOCO statement to adjust the value ofits assets from 60010 of cost to what

it believed to be fair market value. The adjustment was disallowed by the Commission at

that time based on 11 CFR § 9034.S(c)(I). Therefore, instead ofthe total remaining

obligations of$126,418 calculated by the Primary Committee, the recalculated NOCO

statement reflected a remaining entitlement of527,176 ($126,418·$99,242) and that

amoWlt was paid. Although a reduced value ofits capital assets has been accept~ the

Primary Committee still would not have been entitled to the matching funds based on the

overstatement ofestimated winding down expenses.

Recommend,tioD ##2

The Audit staffrecommends that the Commission determine that the Primary

Committee is required to repay $835,338 to the U.S. Treasury pursuant II CFR

§9038.2(b)(I). The Primary Committee made a repayment ofS631,977 to the U.S.

Treasury on February 4, 1997 and thus 5203,361 is still owed.

4. Stale-Dated Cbecks

Section 9038.6 ofTitle 11 ofthe Code ofFederal Regulations

states, in part, that ifthe committee has checks outstanding to creditors or contributors

that have not been cashed, the committee shall notify the Commission ofits efforts to

locate the payees, ifsuch efforts are necessary, and its efforts to encourage the payees to

cash the outstanding checks. The committee shall also submit a check for the total

amount ofsuch outstanding checks, payable to the United States Treasury.

The Audit staffreviewed the Primary Committee's bank activity

through September 1996. From this review, 62 checks, totaling $37,966, were identified

that had not been negotiated. Ofthese, 49 checks totaling 534,575 were for contribution

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refunds. At a conference held at the end offieldwork, Primary Committee representatives

were provided with schedules ofthe stale-dated checks. On JanUary 29. 1997 a

contribution refund check for S1,000 which was included above cleared the bank. Thus,

536,966 is the remaining amount ofstale-dated checks.

Recommegdatlon #I 3

The Audit staffrecommends that the Commission determine that stale-dated

checks, totaling 536,966 are payable to the United States Treasury. On November 1S,

1996, the Primary Committee submitted a check payable to the U.S. Treuury in the

amount of$37,966 for stale-dated checks. The excess payment of$1,000 will be

deducted from the total amount due the U.S. Treasury at section VI..

IV. AJdEXANDER FOR PRESIDENT COMPLIANCE COMMI'ITEE. INC

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A. FINDING AND RECOMMENDATION • AMOUNT DUE THE V.S. TREASURV·

STALE-DATED CHECKS

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Section 9007.6 ofTitle 11 ofthe Code ofFederal Relulations states, in

part, that ifthe committee has checks outstandina to creditors or contributors that have

not been cashed, the committee shall notify the Commission ofits efforts to locate the

payees, ifsuch effons are necessary, and its efforts to encouraae the payees to cash the

outstanding checks. The committee shall also submit a check for the total amount ofsuch

outstanding checks, payable to the United States Treasury.

The Audit staffreviewed the Compliance Committee's bank activity

through January 31, 1997. The review identified 19 checks, totaling S12,200, issued by

the Compliance Committee which bad not been negotiated. All ofthese checks were to

refund contributions.

At a conference held at the end offieldwork, Compliance Committee

representatives were provided with schedules ofthe stale-dated checks. A Compliance

Committee representative stated the Audit staffwould be provided with documentation to

resolve several items. On December 16, 1996, one ofthese checks in the amount of

S1,000 cleared the bank. Thus, the total ofthe remaining staJe-dated checks is $11,200.

RecommendatiOD tI 4

The Audit staffrecommends that the Commission determine that stale-dated

checks, totaling S11,200 are payable to the United States Treuury. On December 11,

1996 the Compliance Committee submitted a check payable to the U.S. Treasury in the

amount of$12,200 for the remaining outstanding checks. The excess payment ofS1,000

will be deducted from the total amount due the U.S. Treasury at section VI. ofthis repon.

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ALEXANDER AIJDIT fUND·JNC. (fINES COW" I f:E)

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The Audit staffdid not detect any material non-compliance during the audit ofthe

Fines Committee.

Ifresidual monies exist in the Fines Committee after payment ofany fines and

civil penalties assessed pursuant to the Federal Election Campaign Act, the Alexander

Audit Fund, Inc. must take the following action with respect to such monies:

o Return any residual monies to contributors on either a pro-rata basis or first-in,

first-out basis; o

o disgorge any residual monies to the United States Treasury;

o contribute any residual monies to any organization described in section 170(c)

ofTitle 26 ofthe United States Code; or

o transfer any residual monies to any national, state, or local committee ofany

political party so long as such monies are not used in connection with any

Federal election.

VI. SUMMARy OF AMOUNTS DUE TO THE U.S. TREASURY

A. PRIMARY COMMITrEE:

Finding 111.B.1.

Finding III.B.3.

Finding 111.8.4.

Apparent Non-Qualified Campaign Expenses:

Compliance Committee Expenses Paid by

the Primary Committee

Matching Funds Received in

Excess ofEntitlement

Stale-Dated Checks

$1,469

$835,338*

$36,966*

B. COMPLIANCE COMMIITEE

Finding IV.A. Stale-Dated Checks $11.200*

Total for both Committees

Paid to Date

Total Still Due

$884,973

$682 143

$202.830

• A portion or all ofthe amount has been paid.

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FEDERAL ELECTION COMMISSION

WASHINCTON. D.C. 20463

May 28, 1997

MEMORANDUM

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TO:

THROUGH:

FROM:

SUBJECT:

RobertJ.Costa

Assistant StaffDirector

Audit Divi ·on

MDIDI'1'"

Lorenzo HoI oway " .yj . Assistant OeD Counsel

Craig D. Reffner

Attorney

Proposed Audit Report for Alexander for President, Inc.,

Alexander for President Compliance Committee, Inc., and

Alexander Audit Fund, Inc.

(LRA#469)

The Office ofGeneral Counsel has reviewed the proposed Audit Report (the

"Report") on Alexander for President, Inc. (the "Primary Committee"), Alexander for

President Compliance Committee, Inc. (the "Compliance Committee"), and Alexander

Audit Fund, Inc. (the "Audit Fund"), which was submitted to this Office on April 1t

1997. The following memorandum summarizes our comments on the proposed Report·

We concur with findings in the proposed report which are not discussed separately in the

Since this document concernsthe audit of. publicly-flDallCCd,.presidential candidate. we

recommend that the Commission CODSider this document in open session. See II C.F.R. § 9038.I(e).

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Memorandum to Robert J. Costa

Audit Report

Alexander for President, Inc., eI a/.

(LRA #469)

Page 2

following memorandum. Ifyou have any questions concerning our comments, please

contact Craig D. Reffner, the attorney assigned to this audit.

I. Apparent Non-Qualified Campaign Expenses - Compliance

Committee Expenses Paid by the Primary Committee (III.B.I.)

The candidate established the Compliance Committee for his general election

campaign on February 15, 1995. The proposed Report identifies two expenditures

totaling 56,535 that the Primary Committee made on behalfofthe Compliance

Committee. The first expenditure, for 51,000, was made to Agnes Warfield, who

contracted with the Compliance Committee to raise funds. The second expenditure for

55,535, was made to ACS, Inc., a vendor that processed and reported contributions for

the Primary, Compliance and Fines Committees.2 The proposed Report concludes that

the expenditures in question are non-qualified campaign expenditures and recommends

that the Primary Committee make a pro-rata repayment ofSl,469 to the United States

Treasury.

The Primary Committee does not dispute that the expenditures in question were

made on behalfofthe Compliance Committee. Rather, the Primary Committee maintains

that because the contributions made to the Compliance Committee had to be refunded

pursuant to Section l02.9(e) ofthe Commission's regulations, the Primary Committee

paid the expenses in question so that the creditors ofthe Compliance Committee would

be paid. According to the Primary Committee, this '" inconsistency forces an

unsuccessful candidate who prudently chooses to establish a repository for redesignated

contributions [i.e., a GELAC] to choose between paying his [GELAC] debts or making

non-qualified expenditures.'" Proposed Report at 8.

This Office concurs with the recommendation for repayment in the proposed

Report. When a primary committee makes expenditures to raise funds for a GELAC and

process contributions made to a GELAC, such expenditures are not made in connection

with the candidate's campaign to seeking his or her party's nomination. 11 C.F.R.

§ 9032.9. Rather, such expenditures are related to the candidate's compliance activities

for a potential general election campaign. Thus, such expenditures are not qualified

campaign expenses for the primary election.3 See Joint Memorandum to the Commission

Although ACS, Inc., actually invoiced the Primary Committee a total ofS148.673 for the

processing and handling ofcontributions, the SS.SJS payment at issue here reflects that portion ofthe total

invoice that relates to the processing and collecting of contributions made to the Compliance Committee.

The expenses incurred by a primary committee to redesignate excessive contributions to n

GELAC. however. would be qualified campaign expenses. Since a primary committee that receives an

excessive contribution must either refund the contribution or attempt to reattribute or redesignate the

excessive portion ofthe contribution. II C.F.R. §§ 110.1 and 110.2, any costs incurred in ensuring that

Page 22
Memorandum to Robert J. Costa

Audit Repon

Alexander for President, Inc., tel aI.

(LRA #469)

Page 3

From the Audit Division and the Office oftbe General Counsel- GELAC and Fines and

Penalty Accounts Established by the 1996 Presidential Candidates, dated October 16,

1996, at 1-5. In addition, the Compliance ~ommittee's expenses could have been paid.

with any surplus primary committee monies that existed after all presidential primary

committee repayment obligations were made, the personal funds ofthe presidential

primary candidate or any remaining residual funds from the candidate committee that was

authorized for a different election cycle. See ide at S. See also AO 1988-5 and Financial

Control and Compliance Manual for Presidential Primary Candidates Receiving Public

Financing at 15.4

II. Determination of Net Outstanding Campaign Obligations (III.B.2.)

The proposed Report recommends that the Commission make a detennination that

the Committee repay $835,338 to the United States Treasury for receiving funds in excess

ofits entitlement. This repayment is based, in part, upon the valuation ofthe Primary

Committee's telephone system and computer equipment as capital assets in the Statement

ofNet Outstanding Campaign Obligations ("NOCO Statement"). The telephone system

was acquired by the Primary Committee in July 1995 at a cost of$190,330.14, including

sales tax. The proposed Report provides for a fair market value ofthe telephone system

of$31 ,400.00. The computer system, including all the hardware, software and wiring,

was acquired between December 1994 and July 1995 for $233,045.78. The proposed

Report provides for a fair market value of$54,253 for this capital asset.S

contributions fall within the limitations ofthe Act would be expenditures made in connection with the

candidate's campaign for nomination. II C.F.R. § 9032.9.

Although the Compliance Manual was not approved until January 1996, a point in time well after

the Compliance Committee was established, it appears that at least some ofthe Compliance Committee

expenses that are at issue here may have been incurred after January 1996. In the case of Agnes Warfield,

the available information shows that the Compliance Committee entered into an agreement with this

vendor on February I, 1996 for fundraising services. The Compliance Committee paid Agnes Warfield on

April IS, 1996. In the case ofACS, it is unclear exactly when the costs for processing contributions to the

Compliance Committee were incurred. However, ACS did not invoice the Compliance Committee until

May I, 1996. Assuming that the costs related to ACS's services were incurred during the time that Agnes

Warfield was fundraising on behalf ofthe Compliance Committee, then the costs in question were

apparently incurred after January 1996.

It should be noted that Primary Committee has argued that the telephone system and a portion of

the computer equipment at issue here are not capital assets. The Primary Committee contends that the

telephone system was not purchased, but rather was leased while some ofthe computer equipment actually

constituted separate components, rather than pieces ofthe entire computer system, that each cost less than

S2,OOO when purchased. The determination ofwhether items acquired by a primary committee are capital

assets is factually specific to each campaign and the available infonnation here shows that the telephone

system and computer equipment acquired by the Primary Committee appear to be capital assets. While it is

true that leased equipment is not a capital asset, the Primary Committee paid sales tax for the telephone

system at the time that it acquired this item. In addition, the Primary Committee sold the telephone system

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Audit Report

Alexander for President, Inc., el ala

(LRA #469)

Page 4

Currently, the depreciation fonnula for capital assets under the Commission's

regulations provides that the fair market value ofa capital asset is the total original cost of

the item when acquired, less 400Aa for depreciation. 11 C.F.R. § 9034.5(c). Prior to its

revision in 1995, Section 9034.5(c) provided candidates with the opportunity to claim a

higher depreciation than 40%. 11 C.F.R. § 9034.S(c) (1987). In doing so, the candidate

was required to demonstrate, through documentation, that the fair market value ofthe

item was less. II C.F.R. § 9034.5(c) (1987). Compare 11 C.F.R. § 9034.5 (1987) with

11 C.F.R. § 9034.5(c) (1995). In revising Section 9034.5, the Commission explained that

it was no longer going to allow committees to demonstrate that a capital asset had

depreciated greater than the standard 40% ratio because ''there was no corresponding

provision for the Commission to document a higher fair market value." 60 Fed. Reg.

116,31864,31868 (June 16, 1995) and 60 Fed. Reg. 116, 57537,57541 (November 16,

1995).

During the audit fieldwork, the Audit Division initially calculated the fair market

value ofthe assets in question at 6001'0 oftheir original cost, as required by II C.F.R.

§ 9034.5(c) (1995). This resulted in a fair market value of$114,198.08 for the telephone

system and $139,827.47 for the computer system. However, during the audit of another

publicly funded Presidential candidate in the 1996 election, it was argued that because

this depreciation fonnula was not effective until August 16, 1995, it should not be applied

to capital assets acquired before that date. 60 Fed Reg. 57537 (Nov. 16, 1995).

Although the Primary Committee did not challenge the retroactive application of Section

9034.5(c) (1995), the Audit Division, for purposes of consistency, applied Section

9034.5(c) (1987) when assessing the value of all capital assets acquired before August 16,

1995. This resulted in the fair market value calculations for the items in question as they

are currently stated in the proposed Report.6

Although the Primary Committee has not challenged the retroactive application of

Section 9034.5(c)(l) (1995), this Office believes that the capital assets at issue here

should be valued under Section 9034.5(c)(I) (1987) because that was the regulation that

was in effect at the time that these assets were acquired. The Supreme Court has

recognized that U[r]etroactivity is not favored in the law," Bowen V. Georgetolvn

University Hospital, 488 U.S. 204, 208 (1988), and noted that han administrative agency

may not apply a new rule retroactively when to do so would unduly intrude upon

after the campaign. Had the telephone system been leased, the Primary Committee would have neither

paid sales tax for it nor would the Primary Committee have been able to sell this item after the campaign.

In the case ofthe computersystem, the Primary Committee neither identified those items which are

purponedly separate components ofthe system, nor did it demonstrate that any pieces ofthe computer

equipment were in fact purchased and used separately. Thus, it appears that the computer equipment

included numerous parts of an entire system.

The Audit Division calculates the fair market value of assets acquired afier that date under current

Section 9034.S(c) (1995).

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Memorandum to Robert J. Costa

Audit Report

Alexander for President, Inc., et al.

(LRA 11469)

PageS

reasonable reliance interests." BeclcJer v. Community Health Services, 467 U.S. 51, 60 n.

12 (1984). In this case, there is an issue ofwhether the Primary Committee relied on

Section 9034.S(c)(l) (1987) at the time ofpurchase or at the time when it was required ~o

calculate the value ofthe capital assets for the purpose ofthe NOCO Statement. Both

versions ofthe regulations require the Primary Committee to value its capital assets based

on a percentage ofthe original cost Compare II C.F.R. § 9034.S(c)(1) (1987) with 11

. C.F.R. § 9034.S(c)(I) (1995). Since the Primary Committee's subsequent valuation is

linked to the original cost ofthe capital asset, the Primary Committee's reliance interest

in terms ofdepreciating the capital asset would occur at the time of purchase. For

example, ifthe Primary Committee had notice that it would not be able to claim

depreciation that is greater than 400/'0 ofthe original cost under the current regulations, 11

C.F.R. § 9034.S(c){l) (1995), it may have chosen not to purchase the capital assets or it

may have chosen to purchase other capital assets. However, the current regulations were

not in effect at the time ofthe purchase. Therefore, the Office ofGeneral Counsel

believes that the fair market value ofthe telephone system and computer equipment in

question should be calculated under Section 9034.5(c) (1987).7

In the case ofthe telephone system, the proposed Report shows that the fair

market value for this item is $31,400. This reflects a depreciation level of84% from the

original purchase price of$190,330.14 for the entire system. This Office understands that

this assessment offair market value reflects the amount that AT&T, the vendor who sold

the system, paid the Primary Committee to buy back select portions ofthe telephone

We note that the Primary Committee did raise two arguments about the applicability ofSection

9034.S(c) (1995). First, the Primary Committee argued that Section 9034.5(c) (1995) does not apply to

unsuccessful pmidential candidates, but rather instead only applies to primary candidates who transfer

their assets to their general election campaign. Second, the Primary Committee argues that the 400/0

depreciation formula in Section 9034.5(c) (1995) rails to accurately account for the fair market value of a

committee's capital assets, especially computer equipmen~ which the Primary Committee maintains has a

resale value that is substantially less than its initial cost.

IfSection 9034.5(c) (1995) is not applied in this matter,these arguments are moot. However, it

should be noted that the Commission previously rejected these arguments when it detennined to withhold

matching funds that the Primary Committee requested after the candidate's date of ineligibility. See

Statement ofReasons in support ofFinal Detennination - Alexander for President Comminee, Inc., May

1, 1996 Request for Additional Matching Funds. dated August 7, 1996. The basis for dIe Commission's

detennination concerned the NOCO Statement that the Primary Committee submitted showing that the fair

market value ofthe items in question was SI37,295, which was less than 00-/. ofdleir original cost. In

addressing the Primary Committee's arguments about the applicability ofSection 9034.5(c) to candidates

who do not panicipate in the general election, the Commission'5 Statement ofReasont noting that Section

9034.5(c) clearly applies to all presidential primary candidates who receive public funds under the

Presidential Primary Matching Payment Account Act, explained that the 40% depreciation fonnula

provided for under Section 9034.5(c) (1995) does reflect varying depreciation rates for capital assets. Id at

4 (ciling60 Fed.. Reg. 116,31854,31868 (Nov. 16, 1995).

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Audit Report

Alexander for President, Inc., el oJ.

(LRA 11469)

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system after the campaign concluded. Documents provided by the Primary Committee

during the audit fieldwork show that AT&T agreed, as a term ofthe sale, to buy back the

telephone system from the Primary Committee at 25% ofthe original cost.

In justifying the higher level ofdepreciation for this item, the Primary Committee

staff explained during the audit field work that AT&T's standard arrangement for buying

back telephone systems was to pay 25% ofthe initial cost for select items ofthe system

that could be resold or leased by AT&T. The $64,730.14 in equipment that AT&T did

not buy from the Primary Committee included such items as wires and cables which the

Primary Committee claims had fully depreciated. As the Primary Committee staff

explained, not only was this the type of equipment that AT&T declined to buy back

because it was unsalable, but, without the entire telephone system in place, the equipment

in question was useless.

This Office believes that there is sufficient information demonstrating the higher

level ofdepreciation for the telephone system. As an initial matter, it should be noted

that the amount paid for a primary committee's assets is not necessarily equal to the

depreciated value. See 52 Fed. Reg. 80264, 20870 (June 3, 1987). However, in the case of

the telephone system at issue here, AT&T apparently regularly agreed to buy back select

portions ofthe telephone systems it sold at 250/0 ofthe original cost. For example, the

Audit Division and the Office ofGeneral Counsel have confinned that other 1996

Presidential primary candidates purchased similar telephone systems from AT&T under

arrangements that provided for AT&T to buy select items ofthe telephone system back

after the campaign at 25% ofthe original cost. Given that AT&T has consistently agreed

to the same tenns for buying back used telephone systems, the resale price of 531 ,400

that is at issue here may be reflective ofthe depreciated value ofthe Primary

Committee's entire telephone system, including those items that AT&T did not

repurchase because they were either obsolete or had fully depreciated. Allbaugh it is

unclear ifthe Committee could have obtained more than $31,400 by selling the telephone

system to another buyer, the agreed upon terms for AT&T to repurchase the system nlay

reflect the fact that the telephone system depreciated more than 40010 ofits original cost.

In the case ofthe computer equipment, the proposed Report shows that the fair

market value for this capital asset is S54,253. This reflects a depreciation of 76% ofthe

original purchase price ofS233,045.78. This Office understands that the fair market value

ofthis item was based upon the total sales price that the Primary Committee was able to

obtain for the various items of computer equipment that were sold after the candidate

ceased his campaign. In justifying this higher level ofdepreciation, the Primary

Committee asserted that unlike other capital assets, computer equipment becomes

obsolete quickly and as such, is subject to a higher rate ofdepreciation than 40010 ofthe

original purchase price.

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Memorandum to RobertJ. Costa

Audit Report

Alexander for President, Inc.. etaI.

(LRA 11469)

Pap 7

Although computer equipment may be subject to depreciation higher than 400A.,

we again Dote that the amount paid for a primary committee's-assets may not necessarily

be equal to the depreciated value ofthe asset. In a transaction where the purchase price ~s

used to justify a depreciation that is greater than 400A. ofthe original cost, a committee

could sell its assets for less than the assets' depreciated value and, in tum, realize a

benefit for itselfby increasing the deficit as reflected in the NOCO Statement and, in

-tum, inflating its entitlement to public funds. See 11 C.F.R. §§ 9034.1(b) and 9034.S(b).

See also, 52 Fed. Reg. 80264, 20870 (June 3, 1987) (establishing higher depreciation than

400A. may be demonstrated by submitting an independent appraisal ofthe item's value)

(emphasis added). In the matter at band, however, the available infonnation shows that

the Primary Committee apparently sold its computer equipment to independent third

parties. Moreover, although the Office ofGeneral Counsel was unable to establish a

value for the computer equipment at the time that the NOCO Statement was submitted,

we were able to confirm from publicly available sources that the sales prices for some of

the computer equipment are comparable to current sales prices for similar used

equipmenL Accordingly, it appears that the Primary Committee's computer equipment is

subject to a higher depreciation level than 40% ofthe original cost.

Page 27
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'.. FEDERAL ELECTION COMMISSION

WASHINCTON, D.C. 204&3

July 1, 1997

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Mr. Todd Eardensohn, Treasurer

Alexander for President, Inc.,

. Alexander for President Compliance Committee, Inc.,

Alexander Audit Fund, Inc.

512 North Washington Street

Alexandria, VA 22314

Dear Mr. Eardensohn:

Attached please fmd the Audit Report on Alexander for President, Inc., Alexander

for President Compliance Committee, Inc., and Alexander Audit Fund, Inc.. The

Commission approved the report on June 19, 1997. As noted on page 4, the Commission

may pursue any ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9038.2(c)(1) and (d)(I), the Commission has made a

detennination that a repayment to the Secretary ofthe Treasury in the amount of$884,973

is required within 90 calendar days after service ofthis report (October 2,1997). The audit

report also notes that $682,143 has been paid, leaving a balance of$202,830.

Should the Candidate dispute the Commission's detennination that a repayment is

required, Commission regulations at 11 CFR §9038.2(c)(2) provide the Candidate with an

opportunity to submit in writing, within 30 calendar days after service ofthe Commission's

notice (August 4, 1997), legal and factual materials to demonstrate that no repayment, or a

lesser repayment, is required. Further, 11 CFR §9038.2(c)(2)(ii) pennits a Candidate who

has submitted written materials to request an opportunity to address the Commission in

open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 30 day period when deciding whether to revise the repayment detennination.

Such materials may be submitted by counsel ifthe Candidate so elects. Ifthe Candidate

decides to file a response to the repayment determination, please contact Kim L.

Bright-Coleman ofthe Office ofGeneral Counsel at (202) 219-3690 or toll free at (800)

424-9530. Ifthe Candidate does not dispute this determination within the 30 day period

provided, it will be considered final.

The Commission approved Audit Report will be placed on the public record on

July 8, 1997. Should you have any questions regarding the public release ofthis report,

please contact Ron Hanis ofthe Commission's Press Office at (202) 219-4155.

Page 29
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Any questiODS you may have related to matters covered during the audit or in the

\:-.. , audit reportshould be directed to Joe Stoltz orJoe Swearingen ofthe Audit Division at

(202) 219-3720 ortoll free at (800) 424-9530.

Sincerely,

t1-Robert J. Costa

r Assistant StaffDirector

Audit Division

Attachment as stated

Page 30
"'

FEDERAL ELECTION COMMISSION

WASHINCTON, D.C. 20463

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July 1, 1997

Governor Lamar Alexander

1114 17th Avenue S., Suite 103

Nashville,1N 37212

Dear Governor Alexander:

Attached please find the Audit Report on Alexander for President, Inc., Alexander

for President Compliance Fund, Inc., and Alexander Audit Fund, Inc.. The Commission

approved the report on June 19, 1997. As noted on page 4, the Commission may pmsue

any ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9038.2(c)(I) and (d)(l), the Commission has made a

determination that you are required to repay to the Secretary ofthe Treasury 5884,973

within 90 calendar days after service ofthis report (October 2,1997). The audit report also

notes that 5682,143 has been paid, leaving a balance of$202,830.

Should you dispute the Commission's detennination that a repayment is required,

Commission regulations at 11 CFR §9038.2(c)(2) provide you with an opportunity to

submit in writing, within 30 calendar days after service ofthe Commission's notice

(August 4, 1997), legal and factual materials to demonstrate that no repayment, or a lesser

repayment, is required. Further, 11 CFR §9038.2(c)(2)(ii) pennits a Candidate who has

submitted written materials to request an opportunity to address the Commission in open

session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 30 day period when deciding whether to revise the repayment detennination.

Such materials may be submitted by counsel ifyou so elect. If you decide to file a

response to the repayment detennination, please contact Kim L. Bright-Coleman ofthe

Office ofGeneral Counsel at (202) 219-3690 or toll free at (800) 424-9530. If you do not

dispute this determination within the 30 day period provided, it will be considered final.

The Commission approved Audit Report will be placed on the public record on

July 8, 1997. Should you have any questions regarding the public release ofthis report,

please contact Ron Harris ofthe Commission's Press Office ~t (202) 219-4155.

Page 31
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Any questiODS you may have Jelated to matters covered during the audit or in the

audit report should be directed to Joe Stoltz orJoe Swearingen ofthe Audit Division at

(202) 219·3720 ortoU free at (800)424-9530.

Sincerely,

f o,.,RobertJ. Costa

Assistant StaffDirector

Audit Division

Attachment as stated

Page 32 ..
CHRONOLOGY

ALEXANDER FOR PRESIDENT, INC.

ALEXANDER FOR PRESIDENT COMPLIANCE COMMITIEE, INC.

AND

ALEXANDER AUDIT FUND, INC.

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Audit Fieldwork

Exit Conference Memorandum

to the Committee

Response Received to the

Exit Conference Memorandum

Audit Report Approved

paqe 33

6110/96 - 10/10/96

I1f21/96

2/4/97

6/19/97
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