FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

August 13/ 2008 

MEMORANDUM 

TO: John D. Gibson 

Chief Compliance Officer 

Joseph F. Stoltz 

Assistant Staff Director 

FROM: Christopher Hughey jTfZZ V 

Deputy General Counsel ^ 

Lawrence L. Calvert, Zx.ny^^:^^-^ 

Associate General Count^lNs^ V 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Delanie DeWitt Painter 

Attorney 

SUBJECT: Interim Audit Report on Tennessee Republican Party (LRA # 745) 

I. INTRODUCTION 

The Office of General Counsel has reviewed the Interim Audit Report ("Proposed 

Report") on the Tennessee Republican Party ('TRP"). We offer the following comments 

regarding Finding 3 (Excessive Coordinated Party Expenditures) and Finding 4 (Disclosure of 

Expenditures for Salary and Wages) in the Proposed Report. The Audit Division raised issues 

about these two findings in its cover memorandum for the Proposed Report. We commented on 

these findings informally in meetings and electronic messages, and this memorandum 

memorializes our comments. We concur with any findings and issues related to the Proposed 

Report not specifically addressed in this memorandum. If you have any questions, please contact 

Delanie DeWitt Painter, the attorney assigned to this audit. 

' This Office recommends that the Commission consider this document in Executive Session because the 

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

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

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 2 of 7 

n. ADDITIONAL INFORMATION IS NEEDED ABOUT DIRECT MAIL (Finding 3) 

The Proposed Report concludes that TRP exceeded the coordinated party expenditure 

limits by $721,093 because it paid for direct mail supporting Bob Corker for Senate which, the 

auditors contend, meets the content and common vendor conduct standards for coordinated 

expenditures. See 11 C.F.R §§ 109.37,109.21. TRP assigned its coordinated party expenditure 

limitation to the National Republican Senatorial Committee ("NRSC") on September 1,2006, 

and the NRSC spent most of the combined limit on media supporting Bob Corker for Senate. 

TRP incurred $721,093 in disbursements to a vendor, Creative Direct, LLC, between September 

and November 2006 for numerous direct mail pieces, which appear to support Bob Corker or to 

be in opposition to his opponent. Congressman Harold Ford, Jr. Bob Corker's campaign used 

the same vendor, Creative Direct, for $680,570 in direct mail between April and September 

2006.^ 

To be considered a coordinated expenditure, an expenditure must satisfy both the content 

and conduct standards. SeeU C.F.R. §§ 109.37,109.21. After reviewing the Proposed Report, 

we met with the Audit staff and explained that substantial additional information is necessary to 

support a conclusion that these expendiUires meet the "common vendor" conduct standard for 

coordinated expenditures. SeeU C.F.R. §§ 109.37(a)(3), 109.21(d)(4). We suggested that you 

send letters to TRP and its direct mail vendor. Creative Direct, to clarify whether there was 

sufficient evidence of coordination to support this finding. We also suggested that you apply the 

content standard for public communications at section 109.37(a)(2)(iii) to these mailings, if 

possible, rather than the express advocacy content standard of section 109.37(a)(2)(ii). 

The responses from TRP and Creative Direct indicate that they considered the direct 

mailings to be exempt volunteer activities. TRP states: 

We thought these were exempt. We had an official candidate, it was in the 

General, all processed and stamped in Tennessee, it was non-allocable, paid with 

Tennessee Victory funds, used volunteers. 

Thus, TRP has raised the "volunteer materials" exemption from the definition of contribution 

and expendimre. See 2 U.S.C. § 431(8)(B)(ix) and (9)(B)(viii); 11 C.F.R. §§ 100.87 and 

100.147. If the direct mail pieces qualify for the volunteer materials exemption, the possible 

"common vendor" coordination issue would be immaterial and TRP would not have exceeded 

the coordinated party expenditure limitations by paying for the direct mail. On the other hand, if 

they do not qualify for the volunteer materials exemption, the common vendor issue remains 

live. TRP and Corker used a common vendor; the common vendor developed mailings for both 

TRP and Corker; and, in response to direct inquiries, neither TRP nor Creative Direct denied the 

use of infonnation about Corker's plans, projects, activities or needs or claimed the existence of 

a firewall. Instead, they claimed the activity was exempt, and because exempt activity may be 

coordinated without limit, a mistaken impression that the activity was exempt may indicate that 

there was coordination. 

The NRSC also used Creative Direct for a coordinated expenditure in early September 2006. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 3 of 7 

A. Recommended Changes to Law and Analysis 

We recommend that you include the following language in the Proposed Report 

describing the legal requirements for the volunteer materials exemption. 

The Act limits the amount that a state party committee may contribute to or spend on 

behalf of a federal candidate. 2 U.S.C. § 441a(a)(2)(A), 441a(d). The Act, however, also 

exempts from the definition of "contribution" or "expenditure" campaign materials distributed in 

connection with volunteer activities when the state party distributes the materials on behalf of a 

federal candidate of that party. See 2 U.S.C. § 43l(8)(B)(ix) and (9)(B)(viii); 11 C.F.R. 

§§ 100.87 and 100.147. Thus, a state committee may spend an unlimited amount on campaign 

materials that qualify for the volunteer materials exemption. 

To qualify for the volunteer materials exemption, the state party committee's payment for 

the materials must meet a number of conditions, three of which are particularly important here. 

First, the committee's payment must not be for the costs of "general public communications or 

political advertising," which includes "direct mail." 11 C.F.R. §§ 100.87(a) and 100.147(a). 

"Direct Mail" is defined as any mailing by a commercial vendor or firom commercial lists. Id. 

Second, the materials must be "distributed by volunteers and not by commercial or for-profit 

operations."^ 11 C.F.R. §§ 100.87(d) and 100.147(d). Third, the exemption does not apply to 

materials purchased by the national party committee. 11 C.F.R. §§ 100.87(g) and 100.147(g). 

The remaining conditions are: 1) the portion of the payment allocable to federal candidates must 

be paid with federal funds; 2) payment must not be from funds designated by the donor for a 

particular federal candidate; and 3) the payment must be reported as a disbursement. 11 C.F.R. 

§§ 100.87(b), (c) and (e) and 100.147(b), (c) and (e). 

The Commission has interpreted mailings to qualify for the exemption if there was 

sufficient volunteer involvement even if there was some involvement by a commercial vendor. 

In past matters, the Commission "emphasized that a 'substantial volunteer involvement' is 

required [for] the volunteer materials exemption to apply." MUR 5837 (Missouri Democratic 

State Committee) Statement of Reasons of Commissioners Lenhard, Mason, von Spakovsky and 

Weintraub, Dec. 20, 2007, at 4. The Commission has considered the "totality of the volunteer 

involvement in evaluating whether a mailer was 'distributed' by volunteers or was commercial 

'direct mail.'" Id. at note 3. The question of whether there was substantial volunteer 

involvement depends on the specific facts and circumstances of the case. The Commission has 

not absolutely required any specific type of volunteer activity in all cases. 

Recently, in MUR 5837, the Commission found that the "amount of volunteer activity 

involved in bundling, bagging, tagging, and loading the mailers onto a USPS truck constitutes 

^ Congress intended that the exemption apply only to materials distributed by volunteers because "the 

purpose of die volunteer materials exemption is to encourage volunteers to work for and with local and State 

political party organizations;" thus, "[sjince the purpose is to encourage volunteer participation, distribution by 

commercial or for-profit operations is not exempted." H.R. Rep. No. 422,96*^ Cong., 1" Sess. 9 (1979). 
Memorandum to Joseph F. Stoltz 

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 4 of7 

'substantial volunteer involvement' in the distribution of the mailers and that activity is sufficient 

to meet the requirements of a volunteer exempt mailing under sections 100.87(d) and 

100.147(d)." Id. at 4. The Conunission noted that even though postage and labels were printed 

commercially, that did not diminish the volunteer work on the "most important tasks related to 

'distribution' - separation and delivery." Id. In another recent matter, the Commission noted 

that while "delivery to the Postal Service by volunteers is a relevant factor... it is not 

dispositive" of whether there was sufficient volunteer activity.* MURs 5824 and 5825 

(Pennsylvania Democratic State Committee) Statement of Reasons of Commissioners Lenhard, 

Mason and Weintraub, Jan. 2,2008 at 6. The Commission concluded that the exemption applied 

because of "the substantial amount of volunteer involvement in distributing the mailers, 

including unpacking, bundling, sorting, bagging, tagging, wrapping and loading the mailers" 

onto trucks hired to transport the mailers to the Postal Service, "as well as presenting them to a 

Postal Service employee on-site for weighing." Id; see also MUR 5841 (Arizona Democratic 

Party) (Commission found no reason to believe where addresses and postage were commercially 

printed and volunteers bundled, sorted by zip code, bagged and tagged mailers, but did not 

transport them to the Post office.) 

Conversely, the Commission has concluded in some older matters that the exemption did 

not apply because volunteers were not sufficiently involved in distributing the mailers. See, e.g., 

MUR 2559 (Oregon Republican Party) (volunteers stamped nonprofit mail seals, repackaged the 

brochures and sent them back to the commercial vendor for labehng, sorting by carrier route, 

tying, sacking, and delivery to the post office); see also MUR 2288 (Shimizu for Congress) 

(volunteers only applied a nonprofit mail seal to the printed material while all other functions 

were performed afterward by a commercial vendor). 

B. Recommended Changes to Recommendation 

We also recommend that the recommendation in Finding 3 be revised to seek additional 

information from the Committee to demonstrate that the volunteer materials exemption applies to 

these direct mail pieces. The recommendation should request information about the volunteer 

activities, and whether any national party funds were used to pay for the mailers. Specifically, 

the recommendation should request information about whether there was substantial volunteer 

involvement and whether the volunteers did any of the following separation and distribution 

activities for the mailers: unpacking, bundling, sorting by zip code or other types of sorting, 

bagging, tagging, wrapping, loading, weighing, or delivering the mailers to the Post Office. 

^ In a number of previous enforcement cases, delivery of mailers by volunteers to the post office was a 

significant factor in determining that the volunteer exemption applied. See. e.g., MUR 4538 (Alabama Republican 

Party) (volunteers hand stamped the mail indicia and took the mailers to the post office). However, that factor is not 

dispositive. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 5 of 7 

IIL APPLICATION OF NEW ALLOCATION RULES FOR STAFF SALARY 

(Finding 4) 

The Audit staff requests our comments on their application of the new and old rules for 

the payment of staff salary with federal, non-federal or an allocation of federal and non-federal 

funds depending on the amount of time staff spent on activity related to federal elections. See 11 

C.F.R §§ 106.7(c)(1), (d)(1) and (2), (e)(2) and 300.33(d); see also 11 C.F.R § 100.24(b)(4). 

This is the first audit to apply the new rules for allocation of salaries, wages and benefits for state 

party committees, which became effective on January 19,2006.^ See Explanation and 

Justification, "State, District and Local Party Committee Payment of Certain Salaries and 

Wages. " 70 Fed. Reg. 75379 (Dec. 20,2005). The audit period of January 1, 2005 through 

December 31,2006 covers activity both before and after the effective date of the new rule. We 

generally concur with the application of the old and new rules in the Proposed Report but 

recommend two changes to this finding. First, the recommendation in this finding should 

explain that an affidavit would be sufficient to document employee activity only if it describes 

the particular employee's job duties and activities. Second, the auditors should explain why 

there was no funding of federal activity by TRP's non-federal accounts. 

In general, the Proposed Report correctly applies both the new and old staff salary 

allocation rules. Under the new rule, state party committees like TRP must pay the salaries, 

wages and benefits of employees who spend 25% or less of their time in a month on federal 

election activity or activity in connection with a federal election either entirely with funds from 

their federal account or allocate the expenses between their federal and non-federal accounts 

using the allocation method for administrative expenses at section 106.7(d)(2). See 11 C.F.R. 

§§ 106.7(c)(1), (d)(1) and (2), (e)(2) and 300.33(d); 70 Fed. Reg. 75379-82. The new rule also 

clarifies that state parties must allocate fringe benefits in the same way as salaries and wages.^ 

70 Fed. Reg. 75382. Under the old rule, party committees could use non-federal funds for the 

salaries, wages and benefits of employees who spent less than 25% of their time on federal 

activities. Both old and new rules require party committees to keep a monthly log of the time 

each employee spends in connection with a federal election. The non-federal account may pay 

the salaries of staff who spent none of their time (0%) on federal election activities. Services 

provided by state party committee employees who spend 25% or more of their time on activities 

in connection with a federal election are federal election activity ("FEA") and must be paid with 

federal funds. 11 C.F.R. §§ 100.24(b)(4), 300.33(d)(2). 

The Commission amended these rules at its discretion following the Shays appellate court decision that the 

Commission had not provided an adequate explanation of its former rules under the Adnunistrative Procedure Act. 

70 Fed. Reg. 75379; see Shays v. FEC, 414 F.3d 76 (D.C. Cir. 2005). We suggest that you revise the Proposed 

Report to use this description of the rulemaking rather than stating that the Shays court "struck down" the old rule. 

* The Audit staff explained that the Proposed Report does not address any employee fringe benefits in 

addition to the salary and payroll tax payments because the auditors did not identify any TRP disbursements for 

employee fringe benefits. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 6 of7 

The Proposed Report correctiy applies the new and old rules for employees who spent 

between 0-25% of their time on federal election activity. To apply the correct rule for employees 

who spent less than 25% of their time on federal election-related activities, the auditors first 

considered whether salary and tax payments occurred before the effective date of the new rule 

(January 19,2006) and then considered whether there was a monthly log, time sheet or affidavit 

stating the amount of time spent by the employees on federal activity. We concur that where 

TRP has not provided sufficient documentation of how employees spent their time, salaries of 

those employees should be considered non-allocable federal election activity that must be paid 

with federal funds, like the salaries of employees who spent more than 25% of their time on 

activities in connection with federal elections. Committees must maintain a monthly log of the 

percentage of time each employee spends in connection with a federal election. 11 C.F.R. 

§ 106.7(d)(1). Where, as here, a committee fails to do so, and does not provide any other 

sufficient documentation of how employees spent their time, it is reasonable to treat salaries of 

those employees as non-allocable federal election activity. 

While we agree with this overall approach, we recommend that the Proposed Report be 

revised to clarify what constitutes sufficient documentation in the absence of a monthly log. 

TRP will have the opportunity to provide sufficient documentation of employee activity in 

response to the Interim Audit Report. Although the regulation requires party committees to keep 

a monthly log, the auditors found that TRP did not maintain monthly logs or time sheets for 

employees. TRP provided affidavits from four employees, which appear to be signed forms 

stating that they spent less than or equal to 25% of their time on federal activities. Such 

affidavits are not sufficient documentation. Form affidavits with only a broad statement that an 

employee spent less than 25% of time on federal election-related activity are not sufficient 

evidence because they do not provide information about that employee's actual job duties and 

activities. We recommend that the salary payments related to these affidavits be treated like 

other payments that lack sufficient documentation of employee activity. 

To be sufficient documentation, an affidavit should describe the individual employee's 

job duties and activities and explain how the employee allocated their time between federal 

election activity and other activity. For example, an affidavit would be sufficient if it stated that 

an employee primsu'ily worked on state legislature campaigns, described the employee's job 

duties and title and then stated that the employee thus spent less than 25% of her time on activity 

related to federal elections. 

The auditors note that they have not previously required this degree of specificity in such 

affidavits. Rather, they have allowed form affidavits with general information. We believe, 

however, that a form affidavit is not sufficient to meet the requirement that a committee must 

maintain a monthly log of the percentage of time each employee spends in connection with a 

federal election. 11 C.F.R. § 106.7(d)(1). In order for the Commission to accept an audited 

committee's affidavit instead of the required monthly log, the affidavit should provide 

information similar to a monthly log about employee activities. Therefore, we recommend that 

the recommendation in the Proposed Report be revised to clarify what would constitute a 

sufficient affidavit. 
Memorandum to Joseph F. Stoltz 

Interim Audit Report 

Tennessee Republican Party (LRA 745) 

Page 7 of 7 

Finally, the Proposed Report states, "there was no funding of federal activity by the nonfederal accounts." The auditors explained to us that there were adequate federal funds to prevent 

non-federal funding of federal activity. We suggest that the Proposed Report be revised to 

include a more detailed explanation of why the auditors concluded that no non-federal funds 

were used for federal activity.