SBA: Interaffiliate Transactions Exception Will Be Broadly Applied

The SBA will broadly apply the so-called “interaffiliate transactions” exception under the SBA’s size rules, essentially overturning an SBA Office of Hearings and Appeals decision issued last year, in which OHA interpreted the exception very narrowly.

In a Policy Statement issued May 24, 2016, the SBA states that it will broadly apply the interaffiliate transactions exception “regardless of the type of relationship that resulted in the finding of affiliation.”

First things first: what is the interaffiliate transactions exception, and why does it matter?  The exception is a component of the way the SBA calculates a company’s size under 13 C.F.R. § 121.104(a).  That rule provides that “total receipts” for SBA size purposes does not include “proceeds from transactions between a concern and its domestic or foreign affiliates.”

In some of its decisions, OHA has written that the purpose of the rule is to prevent unfair “double counting” of revenue during the size determination process.  For example, let’s say I own 100% of Company A, which earns $6 million in average annual receipts, all from federal prime contract.  I also own 100% of Company B, which earns $3 million in average annual receipts.  However, all $3 million come from subcontracts awarded by Company A.  Without an exception, the SBA will consider the affiliated entities to be a $9 million conglomerate, essentially double counting the $3 million subcontracted from Company A to Company B.

The interaffiliate transactions exception is supposed to prevent this sort of unfairness.  But in a decision issued last spring, OHA very narrowly interpreted the exception, finding that it applies only “if the concerns in question have a parent-subsidiary relationship and are eligible to file a consolidated tax return.”

At the time, I wrote:

I have a great deal of respect for OHA, and rarely find myself disagreeing with the legal merits of an OHA decision.  Here, though, I think OHA got it wrong.  The plain language of the regulation excludes transactions between “affiliates,” and “affiliates” is broadly defined in 13 C.F.R. § 121.103 to include companies with many types of overlapping control–including common management. 

Well, perhaps the SBA’s rulemakers read SmallGovCon.  In its new Policy Statement, the SBA says that “the regulation does not include a limitation on the types of affiliates for which interaffiliate transactions can be excluded, and in no way ties the exclusion to a concern’s ability to file a consolidated tax return with the identified affiliate.”  The SBA then declares:

SBA will not restrict the exclusion for interaffiliate transactions to transactions between a concern and a firm with which it could file a consolidated tax return. The exclusion for interaffiliate transactions may be applied to interaffiliate transactions between a concern and a firm with which it is affiliated under the principles in 13 CFR 121.103. Where SBA is conducting a size determination, SBA requires that exclusions claimed under section 121.104(a) be specifically identified by the concern whose size is at issue and be properly documented. This policy is effective immediately.

I’ve had my regulatory disagreements with the SBA (ahem–WOSB program, anyone?), but in this case, the SBA should be commended.  The shift in policy emphasizes fairness and will help prevent companies from being unjustly deemed “large” based on double counting of revenues.