The tax code is famous (or infamous) for perceived loopholes, but the IRS isn’t the only regulatory agency with a loophole in its regulations. The SBA’s affiliation rules contain—or at least used to contain (more on that later)—a gaping loophole when it comes to Multiple Award Task Order Contracts, or MATOCs, and the ostensible subcontractor rule.
Tag Archives: SBA size appeals
SBA OHA: Inter-Affiliate Transactions Exception Does Not Apply to a Division
SBA Office of Hearings and Appeals cases frequently involve contractors trying to argue that they are not affiliated with other entities. But in Size Appeal of The Associated Construction Co., SBA No. SIZ-5314 (2011), the contractor at issue attempted to argue the opposite—that it was affiliated with another entity, namely, a division of itself.
This strange case came about because the contractor hoped to take advantage of the so-called “inter-affiliate transaction exception” under 13 C.F.R. § 121.104(a), which allows contractors to deduct “proceeds between a concern and its domestic or foreign affiliates” from its average annual receipts for size purposes. Unfortunately for the contractor, SBA OHA held that a company cannot be affiliated with its own division—meaning that the exception did not apply.
SBA Affiliation Rules, the Passive Investor, and Weekend at Bernie’s
Remember Weekend at Bernie’s, the 1980s comedy about a couple of young corporate employees who pretend their murdered boss is still alive? (Random note: did you know that they made a Weekend at Bernie’s 2 in 1993? Neither did I, until I was writing this post).
What does Bernie have to do with the SBA affiliation rules? In the movie, Bernie appears to control his company—even though he is not exactly in a position to make executive decisions. Like Bernie, in the SBA’s eyes, a person can be deemed to control a company, even if he or she does not actually exercise any power. The decision of the SBA Office of Hearings and Appeals in Size Appeal of BR Construction, LLC, SBA No. SIZ-5303 (2011) shows that SBA affiliation problems can arise when bylaws and operating agreements contain certain provisions that the SBA will find give legal control to a minority owner, even if that minority owner, in practice, acts as a passive investor.
The Non-Manufacturer Rule: More Than Employees
Back in 1976, Boston (the band, not the city), released its self-titled debut album, featuring the hit “More Than a Feeling.” The tune is still a staple on classic rock stations everywhere. Before you curse me for getting the song stuck in your head, think of it as an easy way to remember a critical aspect of the “non-manufacturer” size rule. Simply put, it’s about more than employees.
When an agency issues a solicitation for supplies or products, it’s easy for small businesses to assume that non-manufacturer rule applies, meaning that a business qualifies as “small” so long as it has less than 500 employees. But, as the SBA’s Office of Hearings and Appeals has confirmed, a company can only submit a valid offer if your company meets all five “prongs” of the non-manufacturer rule. Having less than 500 employees only gets you part of the way there.
SBA OHA Dismisses SBA Size Protest Based on Contractor’s CCR Profile
To survive dismissal, a SBA size protest must be “specific,” that is, it must explain why the protested contractor is not small, and (in many cases), provide third-party evidence supporting the claim.
In Size Appeal of SoftConcept, Inc., SBA No. SIZ-5197 (2011), the SBA’s Office of Hearings and Appeals held that a SBA size protest was insufficiently specific when the protester alleged that the contract awardee did not list the NAICS code in question, NAICS code 541519, in its Central Contractor Registration profile.
SBA Affiliation Rules and Unanimity Provisions: Some SBA OHA Guidance
A company’s minority owners often insist that certain actions be approved unanimously or on a supermajority basis, giving the minority owner the ability to control (or at least veto) those actions.
But small government contractors must tread very carefully when it comes to unanimity or supermajority provisions in their bylaws, operating agreements, or other governing documents. Although the SBA permits unanimity or supermajority provisions regarding certain “extraordinary” corporate actions, other unanimity or supermajority provisions may result in a finding that the minority owner exercises undue negative control over the company, leading to affiliation problems with other companies controlled by that minority owner.
The decision of the SBA’s Office of Hearings and Appeals in Size Appeal of DHS Systems, Inc., SBA No. SIZ-5211 (2011) offers some guidance as to which provisions pass muster under the SBA affiliation rules, and which do not.
Contradictory, Post Hoc Statements Don’t “Fix” Ostensible Subcontractor Rule Problem
When a small government contractor gets its hand caught in the “affiliation” cookie jar, the natural reaction is to scramble to fix the problem, even if it means contradicting the contractor’s own proposal. But don’t expect post hoc efforts at fixing a problem with the SBA affiliation rules to pan out. The SBA’s Office of Hearings and Appeals has held that where a contractor’s after-the-fact statements regarding affiliation contradict its proposal, the language of the proposal governs.