FEDERAL ELECTION COMMISSION 

WASHINGTON. O.C. 20463 

JUN 2 2 2D15; 

MEMORANDUM 

TO: 

FROM: 

Patricia C. Orrock 

Chief Cqmpliance Officer 

Thorhas E. Hintermister 

Assistant Staff Director 

Audit Division 

Lisa J. Stevenson 

Deputy General Counsel - Law 

Lorenzo Holloway 

Assistant General Counsel 

Compliance Advice 

Joshua Blume 

Attorney 

SUBJECT: Interim Audit Report on tho Utah State Democratic Committee. (LRA 983) 

I. INTRODUCTION 

The Office Of the General Counsel has reviewed the Interim Audit Report ("lAR") on the 

Utah State Democratic Committee ("the Committee'*). The lAR contains five findings: 

Misstatement of Financial Activity (Finding 1); Recordkeeping for Employees (Finding 2); 

Improper Bank Account Structure (Finding 3); Receipt of L«vin Fund Donations that Exceed thie 

Limit (Finding 4); and Receipt of Contributions that Exceed Limits (Finding. S). Our comments 

address Findings 1 and 4. We concur with any findings not specifically discussed in this 

memorandum. If you have any questions, please Contact Joshua Blume, the attorney assigned to 

this audit. 
Comments on the Interim Audit Report 

Utah State Democratic Committee (LRA 983) 

Page 2 

II. MISSTATEMENT OF FINANCIAL ACTIVITY (Finding 1) 

The lAR finds that the Committee misstated its cash on hand and receipts at various times 

during the audit cycle. In the discussion of this finding, the audit report notes that the Committee 

maintained an improper bank account structure, which is the subject of Finding 3, during some of 

the audit cycle. Specifically, the Committee maintained two bank accounts at its depository - a 

Federal operating account and a non-federal operating account. At the same time, the Committee 

maintained a "parent account," the function of which was to accept daily transfers of funds from 

both the Federal and the non-federal operating accounts, and to traiisfer funds in turn to the 

operating accounts for the payment of Federal and non-federal expenses. Thus, the parent account 

contained commingled Federal and non-federal funds in violation of 11 C.F.R. § 102.S, as 

discussed in Finding 3. 

We agree that the use of the parent account in this manner - commingling Federal and 

non-Federal funds - was not in compliance with 11 C.F.R. § 102.5. The report, however, 

discusses a related issue - whether to treat the parent account as a Federal ^location account and, 

as a consequence, include its activity in the scope of Finding 1. With respect to this question, the 

Committee filed a request for Commission consideration. The Committee, however, withdrew the 

request when the Audit Division decided, in consultation with this office, not to treat the parent 

account as a Federal allocation account and, therefore, not to include that account's activity in the 

scope of this finding. 

We do not believe that the parent account is a Federal allocation account As a general 

rule, a Federal account must only hold Federal funds. 11 C.F.R. § 102.S(a)(l)(i).. A committee 

cannot deposit non-Federal funds into a Federal account and allow the commin^ing of Federal 

and non-Federal funds. Id. The exception to this rule is the Federal allocation account. See 11 

C.F.R. § 102.S(a)(l)(i): 11 C.F'.R. § 106.7(f). The Federal allocation account may maintain 

Federal and non-Federal funds for the purpose of paying allocable expenses. 11 C.F.R. § 

lQ6.7(f)(l)(ii). Were the parent account a Federal allocation account, the Committee would have 

been required to report all of its activity, including its non-federal activity. 11 C.F.R. §§. 104.17, 

106.7(f). 

The Commission addressed a similar question of whether an account that combined 

Federal and non-Federal funds should be considered a Federal allocation account in two prior 

audits, that of the Georgia Federal Elections Committee and that of the Minnesota Democratic 

Farmer-Labor Party. See Final Audit Report of the Commission on the Georgia Federal Elections 

Committee, at 13-14 (Aug. 9,2011) ("GFEC audit report"); Final Audit Report of the Commission 

on the Minnesota Democratic Farmer-Labor Party, at 9-15 (Dec. 17,2012) ("MNDFL audit 

report").. At issue in both audit reports was whether an account used by the committees to pay 

F^eral, non-federal, and allocated payroll C'payroll account") was an allocation account as that 

term is employed in 11 C.F.R. § 106.7(f), or the functional equivalent of an allocation account, and 

therefore whether the committees were required to report the non-federal activity associated with 

their payroll accounts.' Id. The committees argued that the payroll accounts were riot Federal or 

' In the GFBC audit, the GFEC used the payroll account to pay federal, non-federal, and allocated salaries and 

wages. GFEC audit report, at 13. In the MNDFL audit, the MNDFL used the payroll account to pay 100 percent 
Comments on the Interim Audit Report 

Utah State Democratic Committee (LRA 983) 

Page 3 

allocation accounts but simply were used as escrow or "pass through" accounts that accepted 

transfers from the committees' Federal and non-federal accounts and used these transferred funds 

to pay employees' Federal, non-federal, and allocated salary and wages. MNDFL audit report, at 

13; GFEC audit report, at 14. 

The Conunission ultimately did not approve, by the required four votes, the Audit 

Division's recommendation to conclude that the accounts were allocation accounts. GFEC audit 

report, at 14; MNDFL audit report, at 14-15. 

The parent account in this case bears less resemblance to an allocation account than the 

payroll accounts at issue in the two cited prior audits.^ In those audits, the payroll accounts 

accepted Federal and non-federal funds from the Federal and non-federal accounts and used those 

funds to pay allocable salary and wages. This procedure resembles the manner in which State, 

district, and local party committees customarily pay allocable expenses using an allocation 

account. See 11 C.F.R. § 106.7(f)(l)(ii) (State, district, and local party committees may establish 

separate allocation accounts in which Federal and non-federal funds may be deposited for the 

purpose of paying allocable expenses). 

Here, in contrast, apart from minimal disbursements for credit card service charges, the 

Committee did not use the parent account to pay any of its expenses, allocable or otherwise. 

Rather, the parent account functioned merely as a temporary "holding account," accepting and 

making transfers of Federal and nonrfederal funds from and to the respective operating accounts; 

the Committee made its disbursements from its operating accounts. The Coihmission's 

disposition of the previous audits presenting this question, where the accounts in question bore a 

greater resemblance to allocation accounts than in this matter, suggests that the Commission 

would not, by a majority vote, view the parent account at issue here as a Federal accoimt or the 

functional equivalent of an allocation account.^ 

federal and 100 percent non-federal salaries and wages. MNDFL audit report, at 11. Also, whereas the GFEC created 

its payroll account at the request of a third party vendor, the MNDFL created its payroll account on its own initiative. 

Compare GFEC audit report, at 13 an</MNDFL audit report, at 12-13. 

^ In the October 4,2012 open meeting on the Audit Division Recommendation Memorandum for the 

MNDFL audit, there was discussion about whether the Commission's vote in the GFEC audit should be construed as 

establishing a general rule that payroll accounts of the type in GFEC are permissible, or whether the vote should be 

interpreted narrowly as a decision not to render an adverse finding because no overfonding had actunlly taken, place. 

In this matter, however, the Audit staff has established that no overfiinding has actually taken place. 

' There is a distinction between this matter and the previous audits in that here. Federal and 

non-federal funds transferred to the parent account were periodically redirected to the Federal and non-federal 

operating accounts. During the GFEC audit hearing. Commissioner McGahn noted that the GFEC facts involved only 

a unidirectional flow ofmoney into the payroll account. See Audio File of Audit Hearing in Audit of GFEC, at 41 :S7 

- 42:58 (June 15,2010) at http://www.fgg.gpv/agpnda/2010/a«enda20100615.shtml. See also Office of the General 

Counsel Comments on Draji Final Audit Report on [the MNDFL], LRA 835, at 4 (Apr. 9,2012). 
Comments on the Interim Audit Report 

Utah State Democratic Committee (LRA 983) 

Page 4 

III. RECEIPT OF LEVIN FUND DONATIONS THAT EXCEED THE LIMIT 

(Finding 4) 

The lAR finds that two donations of non-federal funds that the Committee characterized as 

donations of Levin funds in its reports exceeded the maximum permissible amount for that 

category of funds. Specifically, one donation of $l 8,000 from Energy Solutions, and one donation 

of $ 14,000 from 1 -800 Contacts, exceeded the $ 10,000 limit per person per calendar year by 

$8,000 and $4,000, respectively, for a total of $12,000. See lAR, at 12; see also 11 C.F.R. 

§ 300.3 l(d)(l).^ 

The Committee argues that the disclosure of these two donations as Levin donations was a 

clerical error. See Commiltee Letter in Response to Exit Conference, at 2 (Noy. 26,2014). The 

Committee states that although it had a separate account dedicated for the deposit of Levin funds, 

it did not actually deposit Levin donations into, this account. Rather, the Committee deposited 

Levin funds into its non-federal account, identified them as such, and subsequently transferred 

them as needed into its Levin account for subsequent disbursement on permissible Federal 

Election Activity ("FEA"). Id. The Committee states that it erroneously marked the two donations 

at issue in this finding as Levin donations and that there were other donations made to the 

non-federal account that are eligible to be treated as Levin donations. The Committee proposes to 

substitute two such donations, one from SKIP AC in the amount of $8,000, and one from Bruce 

Bastian in the amount of $4,000, which, at a total amount of $12,000, would replace the excessive 

contributions. Id, at 2-3. 

We conclude that the proposed substitution is permissible provided that the Committee 

demonstrates that: 1) at the time it made disbursements on FEA using the donations identified in 

this finding, it otherwise had enough Levin-eligible funds in its non-federal account to cover the. 

disbursements; and 2) the two specific donations the Committee proposes to substitute are 

Levin-eligible donations. 

The FECA requires State party committees to finance FEA with Federal funds. See 52 

U.S.C. § 30125(b)(1). However, the FECA also allows State party committees to finance certain 

types of FEA with a special class of non-federal funds - "Levin Funds" - that are raised in 

accordance with certain conditions. ^ See 52 U.S.C. § 30125(b)(2); 11 C.F.R. § 300.31. C}ne such 

condition is that the party committee may raise donations from each donor aggregating no more 

than a maximum of either the donation limitation applied by the State in which the donation is 

* The S1Q,000 maximum of this subsection applies in this case because the State ofUtah permits unlimited 

contributions to political parties. .See Utah Code, Title 20A, Chapter 11 (containing no afTirmative limit on 

contributions to party committees); see also 

httD://www.ncsl.ore/research/elections-and-camoaiens/lmUs-on-contributioia-to-bolitical-Barties.asDx{\asi 

updated Feb. S, 2008) (last viewed June 8,2015). Where a State does impose a contribution maximum jess than the 

S10,000 limit prescribed by subsection (d)(1), then that lower State limit would apply instead. See 11 C.F.R. § 

300.31(d)(2). 

^ "Levin funds" refers to funds raised pursuant to ) 1 C.F.R. § 300.31 and are or will be disbursed pursuant to 

11 C.F.R. § 300.32. 11 C.F.R. § 300.2(1). 
Comments on the Interim Audit Report 

Utah State Democratic Committee (LRA 983) 

Pages 

raised or $10,000, whichever is less, during a calendar year. 52 U.S.C. § 3012S(b)(2)(B)(iii); 11 

C.F.R. § 300.31(d). 

The Commission's regulations specify that State, district, and local party committees 

intending to raise and spend Levin funds may, but are not required to, establish separate Federal, 

non-federal, and Levin accounts. These committees may, in the alternative, establish separate 

Federal and non-federal accounts; if they do so, they must use the non-federal account as a Levin 

account. 11 C.F.R. §§ 102.S(a)(3), 300.3 l(c)(2)-(3). If a committee chooses the latter option, it 

must demonstrate through a reasonable accounting method approved by the Commission that 

whenever it makes a disbursement for FEA or for any lawful use under State law, it had received 

sufficient donaitions of Levin funds to make the disbursement.^ 11 C.F.R. §§ 102.S(a)(3)(ii), 

300.30(c)(3)(ii). 

The Commission's regulations, however, do not require an accounting of the excessive 

portion of particular Levin Fund donations to make disbursements for FEA. The accounting is 

more holistic. The regulations only require an accounting to ensure that the Committee has 

sufficient donations of Levin Funds to make the disbursement for FEA. See 11 C.F.R. §§ 

102.S(a)(3)(ii), 300.30(c)(3)(ii). A State party committee, therefore, should be able to substitute 

Levin Fund donations to show that it has sufficient Levin Funds to make disbursements for FEA. 

We believe that State party committees have discretion to make this proposed type of a 

substitution of Levin Fund donations. The fact that a State paity committee need not establish a 

separately dedicated Levin account but may commingle Levin fonds and ordinary, non-federal 

funds in its accounts suggests that such committees have discretion, within the framework for 

raising Levin donations established by 11 C.F.R. § 300.31, to characterize non-federal funds as 

Levin funds so long as those funds are otherwise Levin-eligible. That committees have such 

discretion is also suggested by the fact that the Commission also declined to require committees 

raising Levin funds to include specific language informing the donor about how the fimds will be 

directed and used. See Explanation and Justification for Final Rules on Prohibited and Excessive 

Contributions: Non-Federal Funds or Soft Money, 67 Fed. Reg. 49064,49093 (July 29; 2002) 

("2002 E&J") (rejecting proposed requirements that solicitations for Levin donations must 

expressly state that the donations will be subject to the special limitations and prohibitions of 

section 300.31, or that there must be an express designation to the Levin account by the donors). 

Thus, whereas committees are required to notify contributors that their funds are subject to the 

limitations and prohibitions of the FECA, or that they will be used in connection with a Federal 

election, in the absence of a designation of a contribution to the Federal account in order to be able 

to treat such funds as Federally permissible funds, see 11 C.F.R. 102.S(a), committees are not 

under similar obligations with respect to funds they collect that they wish to treat as Levin funds. 

In declining to require the creation of separate Levin accounts, the Commission stated that it was 

"very aware of, and concemed about, the complexities of FECA as amended by [the Bipartisan 

' Here, the Committee apparently availed itself of aspects of both of the account structure options Commission 

regulations prescribe. It maintained a separately dedicated Levin account but did not deposit donations it intended to 

treat as Levin funds into the Levin account; rather, it deposited these funds into its non-federal account, apparently 

identifying the donations as Levin donations as it did so, and then transferred them as needed to its Levin account for 

subsequent disbursement for FEA from the Levin account. 
Comments on the Interim Audit Report 

Utah State Democratic Committee (LRA 983) 

Paged 

Campaign Reform Act of 2002] and want[ed] to provide party organizations with procedural 

flexibility to facilitate compliance with the substantive conditions and restrictions arising frcfm the 

Levin amendment." 2002 E&J, at 49093. 

Given this regulatory history, we agree with.the Committee that it may substitute the two. 

Levin-eligible donations for the excessive portions of the two donations at issue in the audit 

report.^ The Committee, however, must submit additional information to support its proposal to 

substitute the donations, The Committee must demonstrate through a reasonable accounting 

method that it had sufficient Levin-eligible funds to make the Levin disbursements at the time 

when it spent the monies acquired from the two excessive donations on Levin activities,' and it 

must demonstrate that the two donations it wishes to substitute were, in fact. Levin-eligible 

donations.^ Even though the Committee did not make FEA disbursements from its nonrfederal 

account directly, the Levin funds the Committee used originated in its non-federal account where 

they were commingled with other non-federal funds. Thus, we believe that the rule in 11 C.F.R. §§ 

102.S(a)(3)(ii), 300.30(c)(3)(ii} requiring the Committee to demonstrate by a reasonable 

accounting method that it has sufficient Levin funds to make Levin disbursements applies to the 

Committee. We, therefore, recommend that that the Audit Division revise the Interim Audit 

Report to request this information. 

^ The Committee also proposes to amend its previous reports to reflect the substitutions. The Reports Analysis 

Division has indicated to us. however, that in this situation it would require the Committee to flle new schedules.!.-A 

(Itemized Receipts of Levin Funds) and L-B (Itemized Disbursements of Levin Funds), showing disbursements of the 

excessive portions of the Levin donations identifled in the finding, from the Levin account to the .non-federal accouiit, 

and receipts of the substituted Levin donations by the Levin account from the non-federal account. 

' It is our understanding from the auditors that the Committee made two lump-sum transfers from- its 

non-federal account to its Levin account in anticipation of making Levin disbursements. If it is not possible to 

ascertain the time at which the monies from the two excessive donations were disbursed, we would suggest that the 

auditors use the time of the lump-sum transfer following the receipt of the two donations. 

* We note that, in addition to the requirements that the donations comply with State law, and with either the 

State law maximum or the $10,000 maximum, 11 C.F.R. § 300.31, State, district and local party committees that raise 

Levin funds to be used wholly or partly for FEA must pay the direct costs of such fiindraising with either "Federal or 

Levin funds. 11 C.F.R. § 300.32(a)(4).