Nonprofits Not Exempt From Affiliation Rules, Says SBA OHA

A recent SBA Office of Hearings and Appeals decision confirms that there is no exception for nonprofit organizations when it comes to affiliation issues.

In the case, SBA OHA found affiliation between a self-certified small business and a nonprofit organization based on close family members controlling both the business concern and ​the ​nonprofit.​ Adding in the receipts from the affiliated nonprofit made the business in question ineligible for small business status.

In Johnson Development, LLC, SBA No. SIZ-5863 (2017), OHA considered the case of a business (Johnson Development) that was awarded a VA contract for clinic leasing space under NAICS code 531190, Lessors of Other Real Estate Property, with a corresponding $38.5 million annual receipts size standard. While the procurement was unrestricted, small business offerors would receive credit under the evaluation.

In its evaluation of proposals, the VA assigned small business credit to Johnson Development under the solicitation’s evaluation scheme. The VA subsequently announced that it had awarded the contract to Johnson Development.

An unsuccessful competitor filed a size protest, alleging that Johnson Development was affiliated with several other entities. The SBA Area Office determined that it had jurisdiction over the protest, even though the solicitation was unrestricted, because small business status was beneficial to offerors.

The SBA Area Office determined that Johnson Development was owned by Johnson Healthcare Holdings, LLC (JHH), which in turn was owned by James Johnson and his wife, Sallie Johnson. Their children are Milton Johnson and Sumner Rives. The SBA Area Office found the four family members affiliated based on identity of interest and found Johnson Development affiliated with 31 other companies controlled by the family members, including JHH.

Apparently, though, these affiliations didn’t push Johnson Development over the $38.5 million size standard. The SBA Area Office then turned to potential affiliation with a nonprofit entity, the James Milton and Sallie R. Johnson Foundation. The SBA Area Office determined that Ms. Rives was the Foundation’s President, and Johnson family members were the only directors and contributors. The SBA Area Office concluded that Johnson Development was affiliated with the Foundation based on common management and familial identity of interest.

Johnson Development filed a size appeal with OHA. Johnson Development emphasized that it was a “non-profit, charitable organization.” Johnson Development contended that there was a clear line of fracture between Johnson Development and the Foundation for two reasons. First, because the Foundation’s assets were “contributions for the public benefit” and the Foundation paid no compensation or reimbursement of expenses to any Johnson family member. Second, because all donations contributed to the Foundation was irrevocable, the Foundation was in a “a completely different line of business from [Johnson Development],” and there were no business connections such as loans, customers, or shared facilities between the two.

OHA first addressed the big picture issue: can a nonprofit be an affiliate? Citing 13 C.F.R. § 121.103(a)(6), OHA wrote that it “has consistently found no difference between for profit and non-profit entities” under the SBA’s affiliation rules. OHA continued:

under the regulation and settled OHA precedent, non-profit concerns are treated no differently than for-profit concerns in determining the size of a challenged concern. They may be found affiliated under the same criteria as other concerns, whether one concern controls or has the power to control the other.13 C.F.R. § 121.103(a)(1). Therefore, the fact the Foundation is a legitimate non-profit organization does not exempt it from being found affiliated with Appellant, and from having its receipts included in the calculation of Appellant’s annual receipts.

Having concluded that the Foundation could be an affiliate, OHA then rejected the argument that there was a clear line of fracture between Johnson Development and the Foundation. OHA wrote that, under the SBA’s affiliation rules as they existed at the time, companies controlled by close family members are presumed to be affiliated. Although this presumption can be rebutted by showing a “clear line of fracture,” a clear line of fracture “is a fracture between the family members themselves,” not between the entities in question.

Here, “Johnson family members operate the for-profit entities together.” Therefore, “there is no clear fracture between them,” and the presumption of affiliation could not be rebutted.

OHA affirmed the SBA Area Office’s size determination and denied the size appeal.

This decision is an important reminder that a nonprofit is treated the same as any other entity for affiliation purposes. Contractors shouldn’t make the mistake of thinking that, because nonprofits are treated differently under some laws, they will be treated differently for affiliation purposes.

One final note regarding the identity of interest rule for companies owned by close family members. The solicitation in this case was issued in 2015, and proposals were due in April 2016. But in a rulemaking effective June 30, 2016, the SBA tinkered with the identity of interest rule–which arguably can now be read as requiring the entities in question to conduct business with each other for the presumption to apply. We’ll keep our eyes peeled for case law interpreting the updated rule to see how OHA interprets it.