16

Legal Standard

Continuous Reporting Required. A political committee must disclose the amount and
nature of outstanding debts and obligations until those debts are extinguished. 2 U.S.C
§434(b)(8) and 11 CFR §§104.3(d) and104.11(a).

Itemizing Debts and Obligations

e A debt of $500 or less must be reported once it has been outstanding 60 days from the
date incurred (the date of the transaction); the committee reports it on the next
regularly scheduled report.

¢ A debt exceeding $500 must be disclosed in the report that covers the date on which
the debt was incurred. 11 CFR §104.11(b).

Facts and Analysis
The Audit staff reconciled the accounts’ of the largest vendors and determined that the

MDSC had outstanding debt balances at the end of nearly every reporting period,
however, this debt was not disclosed on Schedules D.

Debts to 13 vendors totaling $620,575 were not reported on the disclosure reports for
calendar year 2000. The amount of the debts not reported ranged from $7,888 (July 1 -
July 19, 2000 reporting period) to $398,991 (October 1 — October 18, 2000 reporting
period). The major debt categories were direct mail ($334,270); consulting ($129,502);
and, media purchase and production ($71,292).

At the exit conference, the Audit staff provided the MDSC representatives a detailed
listing of unreported debts for all reporting periods. The Audit staff inquired as to why
the MDSC failed to disclose its debts, however, the representatives offered no answer.

Interim Audit Report Recommendation and Committee Response
In response to the recommendation in the interim audit report, the MDSC filed Schedules
D, by reporting period, which materially disclosed the debts noted above.

se

7 The reconciliation consisted of calculating invoiced and paid amounts for individual reporting periods in
the 1999 - 2000 campaign cycle. The Audit staff then determined whether any outstanding debts were

correctly disclosed on Schedules D.


10

not the total amount of the contributions received”. The MDSC maintained sufficient
balances in its bank accounts to refund the contributions.

During calendar year 2000, the MDSC made 11 transfers to the non-federal account
totaling $839,117. Annotations on various records indicate that the purpose for 7 of the
disbursements was to transfer the non-federal portions of contributions. Five transfers
totaling $200,500 were not reported. (See Finding 1.) One of the unreported transfers in
the amount of $104,000 was accompanied with a list of specific contributions. These
contributions were timely transferred to the non-federal account and not included in the
excessive contributions noted above. However, the MDSC did not maintain similar
records for all transfers and when the interim audit report was prepared it was not
possible to determine if other transfers were related to the excessive contributions
discussed above and, if so, they were made timely.

At the exit conference, the Audit staff gave the MDSC’s representatives a schedule of
excessive contributions. In response, the MDSC acknowledged the receipt of the
contributions, however, it provided no evidence demonstrating that the excessive portions
were refunded, transferred, or timely reattributed. MDSC representatives cited Advisory
Opinion # 2001-17 (the AO) as the justification for the way they handled contributions
that were intended to be split between the federal and non-federal accounts. In the AO
the Commission outlined a method for reporting such contributions by a national party
committee. But, the outlined method relied on the requirement to disclose contributions
received by the national party’s non-federal account and requires that the two portions of
the contribution be cross referenced on the national party’s reports. Disclosure reports
filed by State party committees do not provide a similar reporting mechanism. Therefore
MDSC’s reliance on AO 2001-17 to justify not reporting these transactions in any form is
incorrect.

Interim Audit Report Recommendation
The Audit staff recommended that the MDSC:
© Provide evidence demonstrating that the contributions in question were not
excessive or were refunded or transferred to the non-federal account (prior to the
audit) >. If the contributions were transferred to the non-federal account, the
disclosure reports should be amended to reflect the portion of the contribution so
transferred and the associated transfers as memo entries;
¢ Provide records associating each excessive contribution deposited into the federal
account with the corresponding transfer to the non-federal account. If such
association can be demonstrated, amend Schedules A and B‘ as follows:

2 ‘These contributions are a subset of the $330,125 of contributions not reported and discussed in Finding
1. The difference is due to the application of the revised reattribution regulations. (See Legal
Standards above.)

3 The MDSC received Requests for Additional Information (RFAI) from the Commission’s Reports

Analysis Division related to apparent excessive contributions. Although a refund of the above

described excessive contributions would normally be warranted, the Commission is not requiring

refunds of contributions transferred to the non-federal account because the language in the RFAI letters
may not have fully clarified the requirements for transfers of excessive contributions.

See Finding 1.



Part I
Background

Authority for Audit

This report is based on an audit of the Missouri Democratic State Committee (MDSC),
undertaken by the Audit Division of the Federal Election Commission (the Commission)
in accordance with the Federal Election Campaign Act of 1971, as amended (the Act).
The Audit Division conducted the audit pursuant to 2 U.S.C. §438(b), which permits the
Commission to conduct audits and field investigations of any political committee that is
required to file a report under 2 U.S.C. §434. Prior to conducting any audit under this
subsection, the Commission must perform an internal review of reports filed by selected
committees to establish threshold requirements for substantial compliance with the Act. 2
U.S.C. §438(b).

Scope of Audit

Following Commission approved procedures, the Audit staff evaluated various factors
and as a result, this audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The disclosure of disbursements, debts, and obligations.

The disclosure of expenses allocated between federal and non-federal accounts.
The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

PAIAWAWNS

Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
The period covered by this audit pre-dates these changes. Therefore, the statutory and
regulatory requirements cited in this report are those that were in effect during the audit

period.


14

Facts and Analysis
A review of the MDSC’s receipt records identified 32 contributions totaling $189,000
that appeared to be from prohibited sources.

Twenty-one of these contributions totaling $88,000 were from LLC’s and 10
contributions totaling $41,000 were from PC’s. The MDSC did not maintain records to
verify that the contributing LLC’s chose, for IRS purposes, to be treated as corporations
or partnerships. The MDSC did not represent that the contributions were transferred to
the non-federal account.

In addition, the MDSC received one prohibited contribution of $60,000 from a labor
organization’s treasury funds. This contribution was deposited into a federal account but
was not reported to the Commission. As noted in Finding 1, the MDSC made transfers to
the non-federal account, but could not, in all cases, associate the excessive or prohibited
contribution with any transfer. Without such evidence it was not possible to determine if
the contribution was transferred, and if so, whether the transfer was timely. However,
this contribution was disclosed as a contribution to the non-federal account on reports
filed with the Missouri Ethics Commission. The reporting of the contribution by the non-
federal account suggests that it is among the contributions that MDSC stated were
transferred.

At the exit conference, the Audit staff presented the MDSC’s representatives with a
schedule of contributions from prohibited sources. In their response, the representatives
stated that the contribution from a labor organization’s treasury funds was mistakenly”
deposited to the federal account. The mistake was discovered on November 2, 2000 and
the contribution was transferred to a non-federal account. In addition, the representatives
stated that 7 contributions from LLC’s totaling $23,000 and one contribution from a PC
totaling $5,000, were transferred to a non-federal account. However, the representatives
provided no documentation demonstrating that these contributions were actually
transferred to a non-federal account.

Interim Audit Report Recommendation
The Audit staff recommended that the MDSC:

e Provide documentation demonstrating that the contributions in question were not
prohibited, or were refunded or transferred timely to a non-federal account (See
below for reporting of transferred amount.)°;

e For the LLC’s, examples of documentation include but are not limited to: a signed
statement from each LLC, a copy of an IRS Form 8832 (Entity Classification
Election), a copy of IRS. Form 1065 (Partnership Tax Return), or a copy of IRS

6 The MDSC received RFAI’s from the Commission’s Reports Analysis Division related to apparent
prohibited contributions. Although a refund of the above described prohibited contributions would
normally be warranted, the Commission is not requiring refunds of contributions transferred to the non-
federal account because the language in the RFAI letters may not have fully clarified the requirements for
transfers of prohibited contributions.



Comparison of Disclosure Reports and Bank Records

2000 Activity
Reported _| Bank Records | Discrepancy

{Opening Cash Balance $43,174 $48,559 ($5,385)
Understated

IReceipts {$20,267,531 $20,527,670 | ($260,139)
Understated

[Disbursements {$20,297,473 $20,534,470 | ($236,997)
Understated

[Ending Cash Balance $13,232 $41,759 $28,526
Understated

Explanation of Discrepancies

Opening Cash on Hand — 2000

The understatement of opening cash on hand was primarily the result of an
unreported contribution of $5,000 from a Political Action Committee (PAC) in
1999.

Receipts — 2000
The understatement of receipts was the net result of the following:

e Eight reported contributions not found deposited in the $-  7All-
federal account.

¢ Contributions not reported. This amount represents + 330,125
portions of contributions that the MDSC transferred to
the non-federal account. At the time the interim audit
report was prepared, records necessary to associate the
contributions with a particular transfer were not
available. However, with the exception of four
contributions, all were reported as contributions to the
non-federal account on reports filed with the State of
Missouri Ethics Commission. (See Finding 2.)

¢ Unreported prohibited contribution. This contribution + 60,000
from a labor organization was also found reported as
contribution to the non-federal account on reports filed
with the State of Missouri Ethics Commission. (See
Finding 3.)

© Unreported PAC contribution-Non-Excessive. + = 1,500


Part III
Summaries

Findings and Recommendations

Finding 1. Misstatement of Financial Activity

A comparison of the MDSC’s reported figures with its bank statements revealed that the
MDSC had misstated the receipts, disbursements, and cash-on-hand balances on its FEC
reports for calendar year 2000. Much of the misstatement was the result of non-federal
contributions being deposited in the Federal Account and, according to the MDSC,
transferred to the non-federal account, but not reported. In response to the interim audit
report recommendation, the MDSC filed amended reports. However, the reports did not
fully comply with the Audit staff’s recommendation. (For more detail, see p. 5. See also
Finding 2.)

Finding 2. Receipt of Contributions That Exceed Limits
The Audit staff identified 25 contributions from individuals and political committees that
exceed the contributions limits by $176,125. The MDSC deposited these contributions
into the federal account and purportedly transferred the excessive portions into the non-
federal account. Records were not provided that would allow the Audit staff to identify
which contributions were transferred. In addition, the MDSC made transfers totaling
$200,500 from its federal account to its non-federal account, but failed to report them.
(See Finding 1.) Presumably, these relate to the contributions discussed above. The
interim report recommended that MDSC submit evidence to show that the contributions
were not excessive or were timely transferred to the non-federal account and absent such
evidence refund the excessive portion to the contributor. It also recommended that
MDSC file amended reports to disclose the contributions and related transfers to the non-
federal account. In response the MDSC provided information detailing the timely
disposition of all except one of the excessive amounts. But regarding amending the
reports, the MDSC maintained that it was not required to report either the contributions
that exceeded limits or the transfers to a non-federal account. (For more detail, see p. 8).

Finding 3. Receipt of Prohibited Contributions

The Audit staff identified 32 contributions totaling $189,000 from potentially prohibited
sources such as limited liability companies (LLC’s). The MDSC did not maintain
records to verify that the contributing entities chose to be treated as partnerships for tax
purposes and therefore eligible to make a contribution. The interim audit report
recommended that the MDSC provide documentation to show that the contributions were
either not prohibited or timely disposed of and to report the contributions and any related
amounts transferred to a non-federal account. In response, the MDSC provided a
schedule which detailed the transfer of the contributions to the non-federal account.
However, the MDSC did not comply with the recommendation to amend its reports. (For
more detail, see p. 12).



Part II
Overview of Committee

Committee Organization

Important Dates

e _Date of Registration September 15, 1980

e Audit Coverage January 1, 1999 — December 31, 2000
Headquarters Jefferson City, Missouri

Bank Information

e __Bank Depositories 1

e Bank Accounts 2 Federal and 3 Non-Federal
Accounts

Treasurers

e Treasurer When Audit Was Conducted Michael Kelley

¢ Treasurer During Period Covered by Audit__| Donna Knight

Management Information

e Attended FEC Campaign Finance Seminar __| No

¢ Used Commonly Available Campaign Yes
Management Software Package

e Who Handled Accounting and Paid Staff
Recordkeeping Tasks

Overview of Financial Activity

(Audited Amounts)
Amount in $
Cash on hand at January 1, 1999 $ 8,097
o Contributions 1,540,791
o Transfers From Affiliates/Other Party Committees - 5,112,470
o Transfers From Non-Federal Account 13,183,324
o Other Receipts 1,493,398
Total Receipts 21,329,983
o Operating Expenditures 19,640,872
o Other Disbursements 1,655,449
Total Disbursements 21,296,321
Cash on hand at December 31, 2000 $41,759



15

Form SS-4 (Application for Employer Identification Number) indicating that the
entity has not elected to be treated as a corporation by the Internal Revenue
Service and is therefore eligible to make such a contribution;.

e Provide records to associate the prohibited contributions deposited into the federal
account with the corresponding transfer to the non-federal account. If such
association can be demonstrated, amend Schedules A and B as follows:

o Report the contribution that was subsequently transferred to the non-
federal account on Schedule A as a memo entry, explaining why it was
transferred.

o Report the amount transferred to the non-federal account on Schedule B as
amemoentry. Both memo entries must indicate the date of the transfer
and be cross referenced.

¢ Absent such additional documentation, refund $189,000 to the contributors,
providing evidence of such refunds (copies of the front and back of the negotiated
refund checks); and

e If funds are not available to make the necessary refunds, disclose those
contributions requiring refunds on Schedule D (Debts and Obligations) until funds
become available to make the refunds.

Committee Response to Recommendations and the Audit Staff's

Assessment
In response to the interim audit report, the MDSC provided a schedule which detailed the

disposition of the potentially prohibited contributions. According to the schedule:

¢ Nine contributions totaling $90,000 (including $60,000 from the labor organization)
were transferred to a non-federal account. One $5,000 contribution was not
transferred timely.
One $5,000 contribution from an LLC organized in Missouri was permissible.
The remaining 22 contributions totaling $94,000 were disgorged (transferred) from
the federal account on September 22, 2003. A copy of a negotiated check or other
evidence of the transfer was not provided. The MDSC stated that it continues to seek
documentation for these contributions to establish their permissibility. It should be
noted that transferring these contributions from the federal account rather than
refunding them to the contributors is not an acceptable resolution since the transfer
occurred well outside of the 30-day regulatory time frame for handling questionable
contributions.

MDSC did not comply with the recommendation to file amended reports to include the
contributions or their related transfers to the non-federal account.

| Finding 4. Disclosure of Outstanding Debts .

Summary

The MDSC failed to itemize outstanding debts totaling $620,575 to thirteen vendors on
its disclosure reports for calendar year 2000. In its response to the interim audit report,
the MDSC filed Schedules D, by reporting period, to disclose the debts.


Part IV
Findings and Recommendations

| Finding 1. Misstatement of Financial Activity

Summary

A comparison of the MDSC’s reported figures with its bank statements revealed that the
MDSC had misstated the receipts, disbursements, and cash-on-hand balances on its FEC
reports for calendar year 2000. Much of the misstatement was the result of non-federal
contributions being deposited in the Federal Account and, according to the MDSC,
transferred to the non-federal account, but not reported. In response to the interim audit
report recommendation, the MDSC filed amended reports. However, the reports did not
fully comply with the Audit staff’s recommendation. (See also Finding 2.)

Legal Standard

Each report must disclose:

¢ The amount of cash on hand at the beginning and end of the reporting period,

¢ The total amount of receipts for the reporting period and for the calendar year; and

e The total amount of disbursements for the reporting period and for the calendar year.
2 U.S.C. § 434(b)(1), (2) and (4).

Itemization of Contributions. Political committees must itemize:

e Any contribution from an individual if it exceeds $200 per calendar year (or per
election cycle in the case of authorized candidate committees) either by itself or
when aggregated with other contributions from the same contributor;

e Every contribution from any political committee, regardless of the amount; and

e Every transfer from another political party committee, regardless of whether the
committees are affiliated. 2 U.S.C. § 434(b)(3)(A), (B), and (D).

Itemization of Disbursements. Political committees that are not authorized
committees must itemize each disbursement to a person that receives in excess of $200
during the calendar year. 2 U.S.C. § 434(b)(5)(A), (C), and ().

Facts and Analysis

The following chart details the discrepancies between the totals on the MDSC disclosure
reports and bank records for calendar year 2000. Succeeding paragraphs explain why the
discrepancies occurred, however, without records to demonstrate the derivation of the
reported amounts it was not possible to explain all differences.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

November 20, 2003

MEMORANDUM

TO: RON M. HARRIS
PRESS OFFICER
PRESS OFFICE

FROM: JOSEPH F. STOLTZ
ASSISTANT STAI ECTOR
AUDIT DIVISION /

SUBJECT: PUBLIC ISSUANCE OF THE AUDIT REPORT ON THE
MISSOURI DEMOCRATIC STATE COMMITTEE

Attached please find a copy of the audit report and related documents on the
Missouri Democratic State Committee, which was approved by the Commission on
October 31, 2003.

The report may be released to the public on November 20, 2003.

Attachment as stated

cc: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
Web Manager


adjustments above may be made by memo entry, the correct reportable amounts for total
receipts and disbursements may differ from the amounts shown under Bank Records in
the table presented on page 6.

In response to the interim audit report, the MDSC submitted amended Summary Pages
for the above noted reports. However, as discussed more fully in Finding 2, it neither
reported the contributions deposited into the federal account along with the subsequent
transfers to a non-federal account nor filed the memo schedules requested. Other
discrepancies in reported receipts and disbursements were corrected.

| Finding 2. Receipt of Contributions That Exceed Limits

Summary

The Audit staff identified 25 contributions from individuals and political committees that
exceed the contributions limits by $176,125. The MDSC deposited these contributions
into the federal account and purportedly transferred the excessive portions into the non-
federal account. Records were not provided that would allow the Audit staff to identify
which contributions were transferred. In addition, the MDSC made transfers totaling
$200,500 from its federal account to its non-federal account, but failed to report them.
(See Finding 1.) Presumably, these relate to the contributions discussed above. The
interim report recommended that the MDSC submit evidence to show that the
contributions were not excessive or were timely transferred to the non-federal account
and absent such evidence refund the excessive portion to the contributor. It also
recommended that MDSC file amended reports to disclose the contributions and related,
transfers to the non-federal account. In response the MDSC provided information
detailing the timely disposition of all except one of the excessive amounts. But regarding
amending the reports, the MDSC maintained that it was not required to report either the
contributions that exceeded the limits or the transfers to a non-federal account.

Legal Standard

Party Committee Limits. A party committee may not receive more than a total of
$5,000 per year from any one contributor or from any one multicandidate political
committee. 2 U.S.C. §441a(a)(1)(C); 2 U.S.C. §441a(a)(2)(C); 2 U.S.C. §441a (f), 11
CFR §§110.1(a) and (d) and 110.9(a).

Handling Contributions That Appear Excessive. If a committee receives a
contribution that appears to be excessive, the committee must either:
1. Return the questionable check to the donor; or
2. Deposit the check into its federal account and:
¢ Keep enough money in the account to cover all potential refunds;
¢ Keep a written record explaining why the contribution may be illegal;
¢ Include this explanation on Schedule A if the contribution has to be itemized
before its legality is established;
e Seek a reattribution of the excessive portion, following the instructions provided
in FEC regulations; and


e Net Reported transfers from the non-federal account not - 142,500
found in federal account. This amount represents the
difference between transfers from the MDSC’s non-
federal account detailed on the federal account bank
statements and those reported on Schedule H3 (Transfers
From Non-Federal Accounts).

e Unexplained difference + 18,423
e Net understatement 260,139

Disbursements — 2000
The understatement of disbursements was the net result of the following:

¢ Unreported transfers to non-federal Account. These $+ 200,500
relate to the contributions discussed above that MDSC
transferred to the non-federal account. Five of the
transfers are annotated to indicate that they represent
the non-federal share of contributions. (See Finding 2.)

e Seven reported disbursements totaling $31,000 not - 31,000
found in the federal account. These disbursements
were reported as contribution refunds; four reported
refunds totaling $20,000, were to persons whose
contributions were among those not reported and
discussed in the receipts section above.

e Unexplained difference + 67,497
e Net understatement $ + 236,997

Closing Cash on Hand — 2000
The $28,526 understatement of the closing cash on hand was the net result of the

misstatements described above.

At the exit conference, the Audit staff provided the MDSC representatives with schedules
explaining the misstatements. The representatives offered no response at that time.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that the MDSC file amended reports, by reporting period,
for calendar year 2000 to correct the misstatements noted above including amended
schedules A, B and H3 (Transfers from Non-Federal Accounts) as appropriate. The
interim audit report also noted that depending on MDSC’s response to Findings 2 and 3,
contributions that were initially deposited into the federal account and subsequently
transferred to the non-federal account should be reported on memo Schedules A and B as
outlined in the recommendations at those findings. To the extent that some of the


Finding 4. Disclosure of Outstanding Debts

The MDSC failed to itemize outstanding debts totaling $620,575 to thirteen vendors on
its disclosure reports for calendar year 2000. In its response to the interim audit report,
the MDSC filed Schedules D, by reporting period, to disclose the debts. (For more detail,
see p.15).


Table of Contents

Part I. Background
Authority for Audit
Scope of Audit
Changes to the Law

Part II. Overview of the MDSC
Committee Organization
Overview of Financial Activity

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Misstatement of Financial Activity
Finding 2. Receipt of Contributions that Exceed Limits
Finding 3. Receipt of Prohibited Contributions
Finding 4. Disclosure of Outstanding Debts

Page

12
15


11

o Report the portion of the contribution to the federal account that was
subsequently transferred to the non-federal account on Schedule A as a
memo entry, explaining that the full contribution exceeded the limits
(noting the amount) and that the excessive portion was transferred to a
non-federal account.

o Report the amount transferred to the non-federal account on Schedule B as
a memo entry. Both memo entries should indicate the date of the transfer
and should cross reference each other;

© Absent such evidence, refund $176,125° to the contributors and provide evidence
of such refunds (copies of front and back of negotiated refund checks); and

e If funds are not available to make the necessary refunds, disclose those
contributions requiring refunds on Schedules D (Debts and Obligations) until
funds become available to make the refunds.

Committee Response to Recommendations and the Audit Staff's

Assessment

In response to the interim audit report, the MDSC provided schedules which detailed the

disposition of the excessive portions of contributions from individuals and political

committees. According to the schedules, the excessive portions of contributions were

disposed of as follows:

¢ Sixteen excessive portions of contributions from individuals totaling $75,000 and 4
from PACs totaling $41,125 were “netted” against the reimbursements from the non-
federal account for the non-federal share of allocable expenses.

¢ Four excessive portions of contributions from individuals and one fromaPAC
totaling $56,500 were transferred from the federal account to a non-federal account
by check.

© The excessive portion of a contribution in the amount of $3,500 from one individual,
which was received on 12/28/00, was electronically withdrawn from the federal
account in January 2001.

The information provided was sufficient for the Audit staff to conclude that all but one
$2,500 excessive contribution was disposed of in a timely manner.

Regarding amending the reports, the MDSC maintained that it was not required to report
either contributions that exceeded limits or the transfers of such amounts to a non-federal
account. Citing Advisory Opinion 2001-17, the MDSC stated:

e “(T]he Commission has acknowledged that its rules do not specifically address the
reporting of the receipt of contribution checks where the proceeds are intended to be
split between Federal and non-Federal accounts.”

¢ Inthe AO the Commission allowed the DNC to report in the manner proposed as long
as it used memo entries with explicit cross references between the disclosures for the
Federal and non-Federal accounts. But the requirements for cross references need not
be implemented for contributions received prior to January 1, 2002.

5 This figure consists of excessive portions of contributions from PAC’s ($61,125) and individuals
($115,000).


13

Application of Limits and Prohibitions to LLC Contributions. A contribution from
an LLC is subject to contribution limits and prohibitions, depending on several factors, as
explained below.

e LLCas Partnership. The contribution is considered a contribution from a
partnership if the LLC chooses to be treated as a partnership under Internal Revenue
Service (IRS) tax rules, or if it makes no choice at all about its tax status. A
contribution by a partnership is attributed to each partner in direct proportion to his or
her share of the partnership profits. 11 CFR §110.1(e)(1). (See
explanation of Partnership Contributions (PC) below.)

e LLCas Corporation. The contribution is considered a corporate contribution—and
is barred under the Act—if the LLC chooses to be treated as a corporation under IRS
tules, or if its shares are traded publicly. 11 CFR §110.1(g)(3).

e LLC with Single Member. The contribution is considered a contribution from a
single individual if the LLC is a single-member LLC that has not chosen to be treated
as a corporation under IRS rules. 11 CFR §110.1(g)(4).

Limited Liability Company’s Responsibility to Notify Recipient Committee. At the

time it makes a contribution, an LLC must notify the recipient committee:

¢ That it is eligible to make the contribution; and

e Inthe case of an LLC that considers itself a partnership (for tax purposes), how the
contribution should be attributed among the LLC’s members. 11 CFR §110.1(g)(5).

Questionable Contributions. If a committee receives a contribution that appears to be

prohibited (a questionable contribution), it must follow the procedures below:

1. Within 10 days after the treasurer receives the questionable contribution, the
committee must either:

e Return the contribution to the contributor without depositing it; or
¢ Deposit the contribution (and follow the steps below). 11 CFR §103.3(b)(1).

2. If the committee deposits the questionable contribution, it may not spend the funds
and must be prepared to refund them. It must therefore maintain sufficient funds to
make the refunds or establish a separate account in a campaign depository for
possibly illegal contributions. 11 CFR §103.3(b)(4).

3. The committee must keep a written record explaining why the contribution may be
prohibited and must include this information when reporting the receipt of the
contribution. 11 CFR §103.3(b)(5).

4. Within 30 days of the treasurer’s receipt of the questionable contribution, the
committee must make at least one written or oral request for evidence that the
contribution is legal. Evidence of legality includes, for example, a written statement
from the contributor explaining why the contribution is legal or an oral explanation
that is recorded by the committee in a memorandum. 11 CFR §103.3(b)(1).

5. Within these 30 days, the committee must either:
© Confirm the legality of the contribution; or
e Refund the contribution to the contributor and note the refund on the report

covering the period in which the refund was made. 11 CFR §103.3(b)(1).


Report of the

Audit Division on the
Missouri Democratic State
Committee

January i 1999 —- December 31, 2000



Report of the
Audit Division on the

Missouri Democratic State Committee
January 1, 1999 - December 31, 2000

Why the Audit
Was Done
Federal law permits the

Commission to conduct an

audit and field
investigation of any

political committee that is

required to file reports

under the Federal Election

Campaign Act (the Act).

The Commission generally
conducts such audits when
a committee appears not to

have met the threshold

requirements for substantial
compliance with the Act.!

The audit determines
whether the committee
complied with the
limitations, prohibitions
and disclosure
requirements of the Act.

Future Action
The Commission may
initiate an enforcement

action, at a later time, with

respect to any of the
matters discussed in this

report.

About the Committee (p. 2)

The Missouri Democratic State Committee maintains its headquarters in
Jefferson City, Missouri. For more information, see the chart on the
Committee Organization, p.2.

Financial Activity (p. 2)

Receipts

o Total Contributions 1,540,791

o Transfers from Affiliates/Other 5,112,470
Party Committees

o Transfers from Non-Federal 13,183,324
Account

o All Other Receipts 1,493,398

o Total Receipts $21,329,983

Disbursements

o Operating Expenditures $19,640,872

o All Other Disbursements 1,655,449

o. Total Disbursements $21,296,321

Findings and Recommendations (p.3)

Misstatement of Financial Activity (Finding 1)

Receipt of Contributions That Exceed Limits (Finding 2)
Receipt of Prohibited Contributions (Finding 3)
Disclosure of Outstanding Debts (Finding 4)

'2 U.S.C. §438(b).


¢ If the committee does not receive a proper reattribution or redesignation within 60
days after receiving the excessive contribution, refund the excessive portion to the
donor.

e 11 CFR §§103.3(b)(3), (4) and (5) and 110.1(k)(3)(ii)(B).

Joint Contributions. Any contribution made by more than one person (except for a
contribution made by a partnership) must include the signature of each contributor on the
check or in a separate writing. A joint contribution is attributed equally to each donor
unless a statement indicates that the funds should be divided differently. 11 CFR
§110.1(k)(1) and (2).

Reattribution of Excessive Contributions. FEC regulations permit committees to ask

donors of excessive contributions (or contributions that exceed the committee’s net debts

outstanding) whether they had intended their contribution to be a joint contribution from

more than one person and whether they would like to reattribute the excess amount to the

other contributor. The committee must inform the contributor that:

1. The reattribution must be signed by both contributors;

2. The reattribution must be received by the committee within 60 days after the
committee received the original contribution; and

3. The contributor may instead request a refund of the excessive amount. 11 CFR
§110.1(k)(3). Within 60 days after receiving the excessive contribution, the
committee must either receive the proper reattribution or refund the excessive portion
to the donor. 11 CFR §§103.3(b)(3) and 110.1(k)(3)(ii)(B). Further, a political
committee must retain written records concerning the reattribution in order for it to be
effective. 11 CFR §110.1(1)(5). 7

Revised Regulations Applied. The Commission recently adopted new regulations that
allow committees greater latitude to reattribute contributions to joint account holders and
has decided to apply these regulations to current matters. The Audit staff has evaluated
the excessive contributions discussed below using the new regulation.

Facts and Analysis

A review of the MDSC’s receipt records identified contributions from PAC’s and
individuals that appeared to exceed the contribution limits by $176,125. Four of the
excessive contributions totaling $61,125 were from PAC’s. Twenty-one excessive
contributions totaling $115,000 were from individuals.

These contributions were deposited into the federal account and, according to the MDSC
representatives, the excessive portions of the contributions were subsequently transferred
to the non-federal account. The MDSC did not maintain records to associate these
excessive contributions with specific transfers. Therefore, at the time the Interim Audit
Report was prepared, the Audit staff could not conclude that the excessive portions of the
contributions mentioned above were in fact transferred to the non-federal account.
However, all but 4 of the excessive contributions were reported as contributions to the
non-federal account on reports filed with the State of Missouri Ethics Commission. The
MDSC reported only the amount of the contributions retained in the federal account and



12

¢ That opinion came out in the middle of the following election cycle. So, the question
is whether the Committee should be required to amend its reports extensively because
it did not comply with a particular reporting practice when there had been no
Commission guidance.

The Audit staff maintains that in the absence of specific guidance to the contrary, the
MDSC should have complied with 2 USC §434(b) which requires committees to report
the total amount of receipts and disbursements for the reporting period and the calendar
year including the itemization of any contribution from an individual if it exceeds $200
per calendar year either by itself or when aggregated with other contributions from the
same individual. The Commission affirmed the requirement in MUR 4961. In that case
the Commission found that during the 1996 election cycle the DNC had violated 2 U.S.C.
§434(b) by failing to report contributions received and transferred to its non-federal
account in the same manner proposed here by the Audit staff. AO 2001-17 did not
provide new reporting requirements. Rather, it provided an exception to the existing
requirements, and the exception applied only to a national party committees that when the
opinion was issued, reported both federal and non-federal transactions.

| Finding 3. Receipt of Prohibited Contributions

Summary

The Audit staff identified 32 contributions totaling $189,000 from potentially prohibited
sources such as limited liability companies (LLC’s). The MDSC did not maintain
records to verify that the contributing entities chose to be treated as partnerships for tax
purposes and therefore eligible to make a contribution. The interim audit report
recommended that the MDSC provide documentation to show that the contributions were
either not prohibited or were timely disposed of, and to report the contributions and any
related amounts transferred to a non-federal account. In response, the MDSC provided a
schedule which detailed the transfer of the contributions to the non-federal account.
However, the MDSC did not comply with the recommendation to amend its reports.

Legal Standard
Receipt of Prohibited Contributions - General Prohibition. Candidates and
committees may not accept contributions (in the form of money, in-kind contributions or
loans):
1. In the name of another; or :
2. From the treasury funds of the following prohibited sources:
© Corporations (this means any incorporated organization, including a non-stock
corporation, an incorporated membership organization, and an incorporated
cooperative);
e Labor Organizations; 2 U.S.C. §441b

Definition of Limited Liability Company. A limited liability company (LLC) is a
business entity recognized as an LLC under the laws of the state in which it was
established. 11 CFR §110.1(g)(1).