Common investment affiliation can arise when SBA believes that two individuals’ common investments in multiple entities may make the individuals in question act with a common purpose. As few as two common investments can form the basis for affiliation.
A recent SBA Office of Hearings and Appeals opinion examines the argument that the number of common investments should be counted the same way the number of entities is treated for tax purposes. OHA’s answer: Nope.
In Eagle Support Servs. Corp., SBA No. SIZ-5972 (2018), OHA considered the size protest of an Air Force procurement set aside for SDVOSBs under NAICS code 561210, Facilities Support Services, with a corresponding size standard of $38.5 million. Eagle Support appealed the SBA Area Office’s determination finding that it was other than small.
A review of the size determination provides the context for OHA’s analysis. The SBA Area Office determined that Eagle Support “is not a small business due to affiliation with BCUBE, Inc. (BCUBE) and other concerns. BCUBE is a wholly-owned subsidiary of a large business based in Italy.”
First, OHA looked at basic ownership structure.
The size determination found that Eagle Support “is 51% owned by Mr. James C. Spencer, who is also Appellant’s President and CEO.” And, Eagle Support had
three other shareholders: BCUBE owns 20%; SSI-Eagle I, LLC (SSI-Eagle I) owns 16.17%; and SSI-Eagle II, LLC (SSI-Eagle II) owns 12.84%. SSI-Eagle I is wholly-owned by [Individual A], and SSI-Eagle II is wholly-owned by [Individual B]. [Mr. Spencer, Individual A, and Individual B] are unrelated to one another by blood, marriage, civil union or adoption. Appellant’s board of directors consists of [Mr. Spencer], [Individual B], [Individual C], [[Individual D], and an individual appointed by BCUBE. The Area Office found that Mr. Spencer has the power to control Appellant by virtue of his majority ownership interest.
Just looking at Eagle Support’s ownership, the size determination found that BCUBE was a minority owner of Eagle Support, and Mr. Spencer controlled Eagle Support because of his majority ownership percentage.
The Area Office also examined identity of interest affiliation under the common investment rule. While the SBA regulation is skimpy on details, it states that “individuals or firms with common investments” may have “substantially identical business or economic interests” and “may be treated as one party with such interests aggregated.” 13 C.F.R. § 121.103(f). Cases such as this one fill in the holes on what the rule means.
With respect to common investment affiliation, the
Area Office found that Mr. Spencer, [Individual A], [Individual B], and BCUBE share an identity of interest based on their common investments. In addition to their joint interest in Appellant, Mr. Spencer, [Individual A], [[Individual B], and BCUBE have common investments in Eagle Global, Eagle T&T, and Eagle-mTX. In fact, the four owners collectively hold 100% of each of these companies. The companies share office space, and Appellant subcontracts work to Eagle Global, Eagle T&T, Eagle-mTX, and Troysgate. Thus, their interests are not separate. The Area Office reiterated that Appellant owns 100% of Talon, and Eagle Global owns 50% of Troysgate. Therefore, the Area Office concluded, the four investors have common investments in six concerns: Appellant; Talon; Eagle Global; Eagle T&T; Eagle-mTX; and Troysgate.
The affiliation between Eagle Support and BCUBE, which is a large business, made Eagle Support other than small.
On appeal, Eagle Support argued that BCUBE does not share identity of interest with Eagle Support, in part because Eagle Support “files consolidated tax returns with Talon, and Eagle Global files consolidated tax returns with Eagle T&T and Eagle-mTX, so there are only two joint investments, not six.” As OHA characterized the argument, where “many of the joint investments are in concerns that file consolidated tax returns . . . such concerns should be treated as a single investment.” And “two common investments are insufficient, as a matter of law, to create an identity of interest.”
OHA rejected this argument because investments for tax purposes do not equate to investments for SBA purposes:
Each of the concerns in question (i.e., Appellant, Talon, Eagle Global, Eagle T&T, Eagle-mTX, and Troysgate) is a separate corporation or LLC, Appellant likewise identified the six concerns as separate business entities in its sworn SBA Form 355. Thus, the Area Office could reasonably find that investments in these concerns represent six common investments. Moreover, Appellant cites no authority in SBA regulations or in OHA case law for treating concerns that file consolidated tax returns as one unified entity. While this may be true for tax purposes, it is well-settled that IRS rules “are inapposite to size cases.”
OHA stated that, even granting the tax return argument, two common investments are enough for identity of interest. “Moreover, regardless of how the investments are counted, Appellant has not demonstrated that the investments are not substantial in number or in value. If anything, combining six investments into two larger investments would logically make those two investments even more substantial in value.”
Common investment affiliation remains a difficult analysis. Here, OHA looked past any groupings of companies on tax returns in reviewing the determination of common investments. Plus, OHA reiterated that either (or both) the number of investments, or the value of shared investments, can result in a finding of common investment affiliation.
Common investment affiliation is an area where small business owners must remain wary and look closely at what shared investments they have in other companies, even where the ownership is a minority interest.