Eurostyle Incorporated, No. 4233 (December 11, 1996) Docket No. SIZ-96-10-3-75 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ________________________________ ) SIZE APPEAL OF: ) ) Eurostyle Incorporated ) ) Appellant ) Docket No. SIZ-96-10-3-75 ) Solicitation No. ) NIMA402-96-B-0016 ) National Imagery and Mapping ) Agency ) St. Louis, Missouri ) ________________________________) DIGEST SBA will calculate an Appellant's average annual receipts based on its Federal income tax returns, unless SBA has reason to believe the returns are false. In determining whether a concern's Federal income tax returns are "false", the word implies an intent to deceive or reckless disregard of the truth; it does not mean they merely are inaccurate. DECISION December 11, 1996 HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Part 121. Issues Whether SBA must calculate an Appellant's average annual receipts based on its Federal income tax returns, unless SBA has reason to regard the returns as false, or may SBA use other sources of financial information. Whether, in determining if a concern's Federal income tax returns are "false", the word implies an intent to deceive or reckless disregard of the truth, or may it mean merely inaccurate. I. BACKGROUND On July 18, 1996, the National Imagery and Mapping Agency, St. Louis, Missouri, issued the subject solicitation as a sealed bid procurement for construction work to correct fire and safety deficiencies at its offices. The Contracting Officer (CO) set the procurement aside totally for small business and assigned it Standard Industrial Classification (SIC) code 1711, Plumbing, Heating and Air-Conditioning, with a corresponding average annual receipts size standard of $7 million. On August 22, 1996, bids were opened. The apparent successful offeror was Eurostyle Incorporated (Appellant). On August 26, 1996, J.E. Novack Construction Co. filed a protest with the CO, asserting Appellant was other than small because it recently had completed projects which were sufficiently large that its average annual receipts should exceed $7 million. On August 29, 1996, the CO forwarded the protest to the U.S. Small Business Administration (SBA or Agency) Area IV Office of Government Contracting in Chicago, Illinois (Area Office). On August 30, 1996, the Area Office wrote Appellant, informing it of the protest and requesting certain information. On September 5, 1996, Appellant submitted a completed SBA Form 355, and its Articles of Incorporation and By-Laws. Appellant also submitted its audited financial statements and Federal income tax returns for 1992-1995. Appellant asserted in its letter that, since it filed its income tax returns based on the completed contract method (in which it does not report income on a job until it completes the job), the gross income reported on its tax returns was not a true reflection of its total annual construction income. Therefore, it urged SBA to use the audited financial statements to determine its average annual receipts. Appellant also admitted affiliation with SRS Enterprises, Inc. On September 11, 1996, the Area Office issued a size determination, finding Appellant was affiliated with Eurostyle Classics, Inc., and SRS Enterprises, Inc. Further, the Area Office determined, relying upon the recently-revised 13 C.F.R. Section 121.104, that since the tax returns did not provide a "false or fraudulent" picture of Appellant's actual annual gross revenues, it must use the tax returns to calculate Appellant's average annual receipts. Based on the information in Appellant's tax returns, the Area Office found the average annual receipts of Appellant and its affiliates exceeded the applicable size standard. Therefore, it concluded Appellant was other than small. Appellant received the size determination on September 13, 1996, and filed the instant appeal on September 27, 1996. Appellant does not deny affiliation with Eurostyle Classics, Inc., or SRS Enterprises, Inc. Rather, Appellant asserts use of its Federal tax returns to calculate its average annual receipts produces a false and misleading picture. While Appellant concedes SBA has recently revised its regulations, it asserts SBA cannot have intended to penalize small firms using the completed contract method of reporting income. Appellant submits with its appeal a letter from its accountant, Dennis P. Nilges, CPA. The letter asserts his professional opinion, that use of Federal tax returns is misleading when a corporation uses the completed contract method to report income. Mr. Nilges further asserts that one large contract Appellant has with the General Services Administration distorts Appellant's total income. Finally, Mr. Nilges asserts the audited financial statements reflect Appellant's true financial position. On October 29, 1996, the Presiding Judge issued an Order, requesting SBA to file comments on the instant appeal, as it involves the interpretation of SBA's recently-revised regulations. On November 18, 1996, the Presiding Judge granted SBA's motion to extend its response time until November 22, 1996. On November 22, 1996, SBA filed a Response, asserting that 13 C.F.R. Section 121.104(c) mandates SBA use a firm's total income, as reported on Federal income tax returns, to determine average annual receipts. The Area Office may use different information only where it has reason to believe the tax returns are fraudulent. SBA relies on the Federal Register commentary on the revised regulations as support for its position. SBA previously permitted the use of other types of financial records to calculate average annual receipts, provided the firm stated its revenues using the accrual basis of accounting. In the revised regulations, SBA formally abandoned that policy, and now relies exclusively on Federal income tax returns in calculating average annual receipts. SBA's Response asserts that, permitting use of the completed contract method of accounting to calculate average annual receipts, would be inconsistent with the revised regulations. Although the Presiding Judge's November 18th Order permitted Appellant to respond to SBA's comments by December 6th, it failed to do so. II. DISCUSSION Appellant filed the instant appeal within 15 days of the CO's receipt of the size determination, and it is thus timely. 13 C.F.R. Section 134.304(a)(1). The issue here is whether SBA must use Federal income tax returns to compute an applicant firm's average annual receipts, with the sole exception of cases where SBA has reason to believe the returns are fraudulent. Or, may SBA use a firm's financial statements when the firm asserts use of the tax returns would provide a misleading picture of the firm's actual financial position. The Presiding Judge notes that Appellant does not dispute that, if the tax returns are used to compute Appellant's average annual receipts, it exceeds the applicable size standard. Previously, SBA's size regulations permitted calculation of an applicant firm's average annual receipts from either its regular books of account or its Federal income tax returns. 13 C.F.R. Section 121.402(d)(1)(1995). However, SBA recently revised the size regulations, and, as noted in the Agency Response, now requires use of a firm's Federal income tax returns to compute its average annual receipts, unless other information gives SBA reason to regard the returns as false. 13 C.F.R. Section 121.104(c) (1996). Also as noted in the Agency Response, the Federal Register commentary on the proposed rule stated that SBA simplified the definition of "annual receipts" in the new regulation "by incorporating figures already contained on a concern's Federal Income Tax return for purposes of calculating a concern's average annual receipts." 60 Fed. Reg. 57982, 57983 (1995). The Federal Register commentary on the final rule emphasized the new regulation was designed to clarify and simplify the rules governing computation of average annual receipts, partly by relying upon the Internal Revenue Service's definitions of such terms as "total income", "gross income" and "cost of goods sold". 61 Fed. Reg. 3280, 3281 (1996). Hence, as urged by the agency, the revised regulations and the accompanying commentary make clear SBA revised the size regulation, which previously permitted the use of various methods of bookkeeping to determine average annual receipts, to now require the use of a concern's Federal income tax returns to do so, except where the tax returns provide false information. Appellant, which bears the burden of proof in this appeal (Size Appeal of Rebmar, Inc., No. 4173 (1996)), has presented nothing, beyond mere argument, to support its position. As to the definition of "false", Appellant would have this Office construe the word to mean merely "misleading", because it asserts its tax returns provide a misleading picture of the firm's financial situation. However, the accepted definition of "false" clearly contradicts Appellant's argument. A false statement is more than merely incorrect; it is made either with actual knowledge it is incorrect or with reckless indifference to the actual facts. In re Bebar, 315 F.Supp. 841, 844 (D.C.N.Y. 1970). The characterization of a statement as false implies the party making the statement had an intent to deceive. Lanier v. State, 448 P.2d 587, 592 (Alaska 1968). Thus, Mr. Nilges' assertion that the tax returns do not accurately reflect Appellant's revenues is irrelevant under this regulatory language. Appellant does not assert, and there is no reason to believe, it prepared its tax returns with an intent to deceive. Accordingly, Appellant's tax returns do not provide false information. Therefore, the Area Office correctly relied upon them to find Appellant an other than small business, as required by SBA's recently-revised regulations. V. CONCLUSION For the above reasons, the Area Office IV determination is AFFIRMED, and the appeal is DENIED. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 121.316(b). ____________________________ Christopher Holleman Administrative Judge ____________________