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2003-1: Treatment of Services Provided to Candidate Committees by Sole Proprietorship Law Firm Owed by Spouse of Candidate

Tuesday, February 11, 2003

Re: Administrative Code §§ 3-702(8), 3-703(1)(f), 3-704(2)(b); Campaign Finance Board Rules 1-02, 1-04(f), 1-04(g)(2), 1-04(g)(3), 1-08(c)(1), 4-01(l); Advisory Opinion Nos. 1989-8, 1989-20, 1990-5, 2000-7, 2001-8; Op. No. 2003-1.

The New York City Campaign Finance Board (the "Board") has received a request for an Advisory Opinion regarding (i) the operation of two candidate committees simultaneously and (ii) the provision of services to these committees at below market rates.1

Simultaneous operation of two candidate committees

The request states that Ms. Moskowitz may seek borough-wide or city-wide office in 2005, and has begun fundraising for such a campaign, while simultaneously seeking re-election to the City Council in 2003. It further states that Ms. Moskowitz has asked Mr. Grannis, her husband, to oversee compliance for both committees through his law firm, a sole proprietorship. The request describes plans for keeping the two committees separate, and asks whether the plans, including Mr. Grannis' intention to provide services to both committees simultaneously, comply with Advisory Opinion No. 2000-7 (November 16, 2000).

As described in Advisory Opinion No. 2000-7, which concerned simultaneous activity for a 2001 election and a post-2001 election, contributions and expenditures are presumed to be for the first election in which the participant is a candidate following the date that they are received or made. Rules 1-04(f) and 1-08(c)(1). However, as the Opinion notes, this presumption may be overcome:

if in fact all activities of the two committees are conducted independently, including with separate staffs and administrative functions, the contributions raised and the expenditures made by the post-2001 committee would not be subject to the limits and the contribution restrictions of the Campaign Finance Act…for the 2001 City Council elections, except to the extent that the fundraising activities of the post-2001 committee promote the candidate in a manner that affects his or her re-election.

 

The request indicates that the 2003 and 2005 committees each maintain and will continue to maintain separate staffs, headquarters, post office boxes, communications, and fundraising and other campaign activities. Further, it indicates that Mr. Grannis and a legal assistant under his employ will perform all compliance work for both committees, and notes the rates that the firm will charge for services provided by Mr. Grannis and his legal assistant. The request also indicates that the firm will provide bills to each committee, including detailed time entries reflecting the tasks performed by Mr. Grannis and his assistant. Further, the request represents that the legal assistant will administer the finances of the two committees, including keeping the committees' books, depositing checks, and paying vendors, and that the committees will be billed separately for the compliance and non-compliance portions of the work undertaken for the committees. Finally, Mr. Grannis has also stated that each of the two committees currently is actively engaged in fundraising and has paid staff.

Based on the foregoing, the request argues that Mr. Grannis' firm is effectively a "vendor" of services to the two committees. In this regard, its relationship with the committees must be arm's length, and the committees must pay fair market value for the services provided. The proposed hourly rate is discussed further below. Subject to that discussion, and provided (1) the hourly rate for Mr. Grannis' non-legal compliance services represents a reasonable estimation of the fair market value of those services, (2) the hourly rate for the compliance services of the legal assistant and the fees charged for the non-compliance-related services of the legal assistant both represent a reasonable estimation of the fair market value of those services and are the ordinary rates charged for work done by the legal assistant, (3) the structure and activities of the two committees and the relationship of the firm to the two committees conform to the representations made in the request letter and during the telephone conversations, and neither committee donates, contributes to, or lends any money to the other committee, and neither committee makes any expenditures of any kind on behalf of the other committee or in furtherance of the election for which the other committee is constituted, the presumptions contained in Rules 1-04(f) and 1-08(c)(1) would be overcome, and the activities of the 2005 committee would not be attributed to Ms. Moskowitz's 2003 campaign, "except to the extent that the fundraising activities of the 2005 committee promote the candidate in a manner that affects his or her re-election." Advisory Opinion No. 2000-7.

Provision of services below market rate

The request also asks whether the provision of services to the two committees by Mr. Grannis at an hourly rate significantly below Mr. Grannis' normal hourly billing rate for his services will be considered in-kind contributions to the committees. The request does not make a distinction between services that require legal counsel and routine compliance services that need not be provided as an attorney. The request states that "undercharging for one's services is effectively simply volunteering part of one's time," and argues that the language of Administrative Code §3-702(8) permits an individual to volunteer a portion of his or her time to a campaign and receive compensation or reduced compensation from the campaign for services provided at other times.

Administrative Code §3-702(8), defining "contribution," states that "any gift, subscription, advance, or deposit of money or any thing of value, made in connection with the nomination for election, or election, of any candidate" shall be considered a contribution. It further provides that "the value of services provided without compensation by individuals who volunteer a portion or all of their time on behalf of a candidate or political committee" will not be considered a contribution. (Emphasis added.)

The definition of "in-kind contribution" contained in Board Rule 1-02 provides that "a gift, subscription, loan, advance of, or payment for, any thing of value (other than money) made to or for any candidate or authorized committee" shall be an in-kind contribution. The definition further states that "personal services provided without compensation by individuals volunteering a portion or all of their time on behalf of a candidate or authorized committee" shall not be considered an in-kind contribution. Rule 1-04(g)(3), the provision for valuing in-kind contributions, accordingly provides that "if goods or services are provided at less than fair market value, the amount of the resulting in-kind contribution is the difference between the fair market value of the goods or services at the time the goods or services are received and the amount charged to the participant." See also Rule 1-04(g)(2), providing that "fair market value for services, other than those provided by an unpaid volunteer, means the hourly or piecework charge for the services at a commercially reasonable rate prevailing at the time the services were rendered." (Internal quotations omitted.)

The intent of Administrative Code §3-702(8) and Rule 1-02 is that once an individual has been compensated for a service, he or she may no longer be considered a volunteer for that service. Thus, the phrase "a portion or all of their time" contained in both definitions means that a person may volunteer a portion of his or her time to a campaign and spend his or her remaining work time on other endeavors. It does not mean that an individual may volunteer a portion of his or her time to a campaign and receive compensation from the campaign for other time spent providing the same services to the campaign. Such a scenario would be considered the provision of services below fair market value, and would result in an in-kind contribution equal to the value of the discount pursuant to Rule 1-04(g) above. To conclude otherwise would render meaningless the valuing of in-kind contributions where goods or services are provided at less than fair market value.

This analysis is consistent with the Board's prior opinions, including Advisory Opinion No. 1989-8 (January 25, 1989); Advisory Opinion No. 1989-20 (May 24, 1989, superseded on other grounds) ("unpaid voluntary services are not a contribution"); Advisory Opinion No. 1990-5 (June 13, 1990) (discounted services are a contribution if the discount is not offered to non-candidate customers in the ordinary course of business); Advisory Opinion No. 2001-8 (July 11, 2001) ("the provision of legal services to a candidate in connection with his or her nomination or election for which the candidate is charged less than the fair market value represents an in-kind contribution"). This interpretation is also consistent with the treatment of volunteering and in-kind contributions in other jurisdictions. See, e.g., New York State Election Law §14-100(9), upon which Administrative Code §3-702(8) is based ("contribution" shall not include "the value of services provided without compensation by individuals who volunteer a portion or all of their time on behalf of a candidate or political committee"), New York State Board of Elections Regulation §6200.6 (same exclusion from the term "contribution" for services provided without compensation by volunteers); New Jersey Administrative Code §§ 19:25-1.7 (definition of "in-kind contribution" does not include "services provided without compensation by an individual volunteering a part or all of his time;" "paid personal services" include "services performed other than on a voluntary basis"), 19:25-10.4 (computation of contribution amounts), 19:25-10.5 (contributions of paid personal services); California Fair Political Practices Commission Regulations §§ 18215(b)(3) ("contribution" includes "any goods or services received by or behested by a candidate or committee at no charge or at a discount from the fair market value, unless the discount is given in the regular course of business to members of the public"), 18215(c)(2) ("contribution" does not include "volunteer personal services"); Federal Election Campaign Act (2 U.S.C. §431(8)) (definition of the term "contribution" "does not include…the value of services provided without compensation by any individual who volunteers on behalf of a candidate or a political committee"); Federal Election Commission Regulations §§ 100.7(a)(1) ("contribution" includes "the provision of goods or services…at a charge which is less than the usual and normal charge"), 100.7(b)(3) ("contribution" does not include "the value of services provided without compensation by any individual who volunteers").

Consequently, to the extent an individual provides legal services to the two committees at below fair market value, rather than entirely as a volunteer, the committees will be considered to have received in-kind contributions from that individual equal to the value of the discount.2 Further, since in-kind contributions are subject to the contribution limits of the Act, legal services provided to the committees at below fair market value may not exceed the contribution limits applicable to each. Administrative Code §§ 3-702(8), 3-703(1)(f).

Compliance services, however, do not necessarily require the assistance of a lawyer and, indeed, most campaigns do not engage lawyers for this purpose. While the Administrative Code and the Board's Rules dictate that attorneys must charge their standard hourly rate for legal services provided to candidates (or donate these services as volunteers), the fair market value of routine compliance services varies widely. Attorneys who do not ordinarily provide routine compliance services through their law firms, and do not have a standard hourly rate for them, need not charge their ordinary hourly rate for legal services to avoid the imputation of an in-kind contribution. Rather, under the Administrative Code and the Board's Rules, the committees must pay the fair market value of routine compliance services, unless of course these services are provided to the committees on an entirely voluntary basis.

As with other vendors, any business arrangement with the committees must be contained in a contemporaneously written contract or other contemporaneously written record that complies with the requirements of Rule 4-01(l). In order to provide an accounting trail for the Board, it is important to maintain complete and contemporaneous records which separately detail any services performed for the two campaigns. It is also important that the records differentiate between routine compliance services and services (if any) that require legal counsel. The Board would accept the campaigns' reasonable characterization between the two kinds of services, in the absence of evidence that activity clearly requiring the assistance of legal counsel had been characterized as routine compliance services.

Finally, because Mr. Grannis is the spouse of the candidate, and has a 10% or greater ownership interest in his firm, expenditures made by the 2003 and 2005 committees for services rendered by him or his firm are not qualified expenditures, and may not be paid for with public funds. Administrative Code §3-704(2)(b).

NEW YORK CITY CAMPAIGN FINANCE BOARD

1 The request was made by letter dated January 9, 2003 from Eric Grannis on behalf of Council member Eva Moskowitz's anticipated 2003 and 2005 election campaigns, and was supplemented by telephone conversations between Mr. Grannis and Board staff on January 16, 2003 and February 6, 2003.

2 This result also conforms to the resolution (in an audit context) of the commercial relationship between Morris, Carrick & Guma and Friends of Hevesi during the 2001 elections.