The U.S. Small Business Administration (“SBA”) size regulations provide that the size of a business concern that has been in business for three or more years is based upon the average annual receipts (“AAR”) of such concern for its three most recently completed fiscal years as of the date of the concern’s self-certification. 13 C.F.R § 121.104(c)(1). The size regulations clarify that a “completed fiscal year means a taxable year,” as defined by the IRS, 13 C.F.R. § 121.104(b), and state that “tax returns or amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern.” 13 C.F.R. § 104(a)(1).
Importantly, the regulations further state, “Where a concern has not filed a federal income tax return with the IRS for a fiscal year which must be included in the period of measurement, SBA will calculate the concern’s annual receipts for that year using any other available information, such as the concern’s regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts.” 13 C.F.R. § 121.104(a)(2).
These regulations are quite clear and specific. However, issues continue to arise due to (i) the annual change in a firm’s AAR based on a new three-year calculation period every time a concern enters a new fiscal year, (ii) the normal lag in filing a tax return for the just-completed fiscal year, and (iii) the concern’s desire to maintain its small business status.
For example, in Williams Adley & Co. — DC, LLP, SBA No. SIZ-5341 (Apr. 18, 2012), SBA’s Office of Hearings & Appeals (“OHA”) recently confronted an appellant’s challenges to an adverse Area Office size determination. The Appellant argued (i) that the Area Office should have considered the 2007-09 time period, rather than the most recent 2008-10 period, since the appellant had not filed its tax return for the 2010 fiscal year at the time of its self-certification; and (ii) that the Area Office should not have considered the 2010 tax return, since such was filed after the self-certification, and OHA therefore should remand the case for the submission and consideration of “other available information” as to the concern’s 2010 receipts.
OHA made short shrift of these arguments. As to the first, OHA held that the above-cited size regulations explicitly mandate use of the three most recent fiscal years. OHA further noted that the regulations specifically state what is to be done if a tax return for a particular year is not available. Indeed, OHA noted that this provision cuts directly against any suggestion that, in the absence of a filed tax return, resort should be had to an earlier time period for which returns had been filed. OHA relied upon a substantially similar case, Educational Services, Inc., SBA No. SIZ-4782 (May 1, 2006), that had directly addressed this issue, by stating that the “proper period of measurement of a firm’s receipts is the last three completed fiscal years immediately preceding self-certification, even though the federal income tax return for the last completed year was not available on the date of self-certification.” Williams Adley, SBA No. SIZ-5341 at 3.
As to the second issue, OHA held, again citing Educational Services, Inc., that the Area Office could appropriately use the post-certification filed 2010 tax return to determine the appellant’s size. OHA stated, “At a minimum, the Area Office could properly consider a tax return filed after the date of self-certification to be ‘other available information’ which can be used to calculate size in accordance with 13 C.F.R § 121.104(a)(2).” Id. at 6. OHA further rejected Appellant’s suggestion that it should be given an opportunity to submit other evidence of its 2010 receipts, noting that Appellant already had such a chance in responding to SBA’s information requests. OHA pointedly stated that “even if Appellant were to submit other information, it is not clear that such information could be used to contradict or supersede Appellant’s tax return,” which is recognized as “an inherently reliable source of information, due to the severe penalties for filing false tax returns.” Id.
This decision does not carve out new law. To the contrary, it merely reaffirms well-established principles set forth in SBA’s size regulations. However, the case does illustrate a common problem. All small businesses should keep in mind the following points, particularly in today’s environment where erroneous size certifications increasingly give rise to claims of civil, and possibly even criminal, fraudulent misrepresentations or misstatements under the False Claims Act and other statutes:
- Self-certification imposes affirmative responsibilities, including at least due diligence;
- Every business is charged generally with knowing its receipts as of the close of a fiscal year;
- Every business should reassess its size status as of the start of a new fiscal year before bidding, and should investigate its updated receipts to the extent necessary, before self-certifying itself as small;
- If there is an error in an earlier year tax return affecting your size status, file an amended return as soon as possible and before your next size self-certification;
- Adjust your CCR and ORCA representations appropriately as early as possible in each new company fiscal year;
- If you have not filed your tax return for your latest fiscal year at the time of your response to a size challenge, and think you have a good case you are still small, be sure to include all pertinent “other information” with your response, enabling SBA to calculate, with reasonable certainty, the receipts for such year;
- If you made a mistake and do not qualify as small for the subject procurement, acknowledge your error, explaining in general terms the bases therefor, and quickly move on. Do not waste your money, as was done in the above case, filing a fruitless challenge, possibly delaying the procurement and potentially increasing the chance that someone will pursue a false certification or other claim against you;
Ignorance or misunderstanding of the law is not an excuse.
Hopewell Darneille III is the attorney responsible for the content of this article.