Interaffiliate Transactions Exception Remains Narrow — For Now

The U.S. Small Business Administration, Office of Hearings and Appeals recently affirmed–for now–its narrow reading of the so-called interaffiliate transactions exception.

In a recent size appeal decision, Newport Materials, LLC, SBA No. SIZ-5733 (Apr. 21, 2016), OHA upheld a 2015 decision in which OHA narrowly applied the exception, holding that interaffiliate transactions count against a challenged firm’s annual receipts unless three factors are met: 1) the concerns are eligible to file a consolidated tax return; 2) the transactions are between the challenged concern and its affiliate; and 3) the transactions are between a parent company and its subsidiary.

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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.”

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SBA Affiliation Rules: “Inter-Affiliate Transactions” Exception Is Narrow

Under the SBA’s affiliation rules, the so-called “inter-affiliate transactions” exception applies only where the companies in question would be eligible to file a consolidated tax return.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that the inter-affiliate transactions exception does not apply when affiliated companies are ineligible to file a consolidated tax return–a result that seems to authorize “double counting” of affiliated companies’ revenues in the context of SBA size determinations.

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