Les Violins, Inc., No. 4021 (May 1, 1995) Docket No. SIZ-94-4-22-56 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) Les Violins, Inc. ) ) Docket No. SIZ-94-4-22-56 Appellant ) ) Economic Injury Disaster Loan ) Application # 7692-02778 E ) DIGEST Where the same five individuals collectively own 100 percent of each of two business concerns, those individuals have an identity of interest under 13 C.F.R. Section 121.401(d) and so may be treated as though they were one party, creating affiliation between the two firms. The definition of average annual receipts in 13 C.F.R. Section 121.402(b)(2), includes cover charges paid to entertainers performing in a nightclub. DECISION May 1, 1995 REINHART, Administrative Judge: [1] Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq, and the regulations codified at 13 C.F.R. Part 121. Issues Whether the Disaster Area Office erred in finding that two firms are affiliated when the same individuals, who are not all members of the same family, own 100 percent of the stock of each firm; and in finding that payments to entertainers of their contractual share of the cover charges collected by a night club are included in its average annual receipts. Facts On May 26, 1993, Les Violins, Inc., which does business as Les Violins Supper Club (Appellant) applied for a Small Business Administration (SBA) Economic Injury Disaster Loan for economic losses suffered as a result of Hurricane Andrew. Appellant is a nightclub that provides live entertainment, food, and alcohol. It is affiliated with two other companies, General Entertainment Productions, Inc. (GEP), which does business as "Club Tropigala" and is in the same general line of business as Appellant; and Zaragozana 1830, Inc., which manages commercial property. Members of two families, the Currais and Cachaldora families, own all the stock in Appellant, GEP, and Zaragozana. None of the three companies has any other stockholders. Appellant describes its business as follows: We supply entertainment as a means to increase our food and alcoholic beverage sales. The entertainment is the main attraction of our clubs and it is what makes them different from regular restaurants and bars. Both Appellant and GEP hire performers on an independent contrac- tor basis. Club Tropigala pays entertainers 80 percent of the cover charges collected if the Club is responsible for all advertising; 90 percent if the artist is responsible for TV; and 100 percent if the artist is responsible for all advertising. The SBA Disaster Area 2 Office (Disaster Area Office), Atlanta, declined Appellant's application on August 9, 1993, because Appellant was not a small business. The Disaster Area Office found that Appellant's primary business activity was a nightclub, covered by Standard Industrial Classification (SIC) code 5813, Drinking Places (Alcoholic Beverages); that the applicable size standard was $4,375,000, including a 25 percent upward adjustment because Appellant was located in a labor surplus area; and that the revenues of Appellant and its affiliates together exceeded that amount during the three years preceding the disaster. On February 2, 1994, Appellant submitted a timely request for reconsideration. Appellant argued that GEP is not Appellant's affiliate; that revenues it paid to the entertainers who performed at Appellant's establishment should have been excluded from its average annual receipts; and that sales taxes collected by Appellant should have been excluded from its average annual receipts. The Disaster Area Office issued its reconsideration decision on March 21, 1994. It agreed that it should have excluded the sales taxes from average annual receipts, but affirmed its original findings with respect to the other two issues. It again declined Appellant's loan application. [2] Appellant timely filed this appeal, which was postmarked April 15, 1994. Arguments on Appeal Appellant admits that the Currais and Cachaldora families all have an identity of interest with the other members of their own family under 13 C.F.R. Section 121.401(d), but argues that the two families do not have an identity of interest with each other. Therefore, according to Appellant, only the Currais family (with 60 percent ownership) control Appellant, and only the Cachaldora family (with 70 percent ownership) control GEP, so there is no affiliation between the two companies. Appellant also asserts that the combined revenues of the three companies for the preceding three years actually are below the applicable size standard, because cover charges collected by them should not be included in computation of its average annual revenue. Discussion The applicable regulation, 13 C.F.R. Section 121.401(a), requires that size determinations include the applicant concern and all of its domestic and foreign affiliates. Affiliation occurs in part when there is an identity of interest between or among parties, in which case they may be treated as though they were one party. 13 C.F.R. Section 121.401(d). Appellant bears the burden of rebutting the presumption of affiliation under 13 C.F.R. Section 121.401, based on identity of interest among persons with common investments in more than one firm. Size Appeal of Techcor Construction, Inc., No. 3491 (1991). Here, Appellant failed to do so, and the record clearly shows affiliation because of identity of interest, for the reasons found by the Disaster Area Office. [3] First, Appellant stated on its SBA Form 355 that GEP and Zaragozana are affiliates. Second, Section 121.401(d) expressly provides that affiliation may be found where there is an identity of interest among those who have "common investments in more than one concern." See Size Appeal of Bunkoff General Contractors, Inc., No. 3804 (1993). This rule recognizes that common business investments among parties create common interests for them to protect, and will cause such parties to "act in unison" for their common benefit. Size Appeal of Quality Elevator Company, No. 3461 (1991). The record clearly shows that the Currais and Cachaldora families have common investments in Appellant, GEP, and Zaragozana 1830, Inc. and, therefore, it can be presumed that they will act in unison to protect these common interests. [4] Thus, Appellant and GEP are properly treated as one "party". Third, affiliation based on identity of interest may occur because a person is presumed to control or have the power to control a concern if he or she owns or controls or has the power to control 50 percent or more of its voting stock. 13 C.F.R. Section 121.401(e)(1). The record shows that the Currais family owns 60 percent of Appellant's stock, and 30 percent of GEP's stock. The Cachaldora family owns 40 percent of Appellant's stock, and 70 percent of GEP's stock. Because Appellant's and GEP's identity of interest based on common investment effectively makes them one party, the record shows that this "party", (i.e., the two entities treated as one), owns 100 percent of the stock of Appellant and GEP and, therefore, controls both firms. See Size Appeal of Hersha Enterprises, Ltd., No. 3669 (1992). For all the above reasons, Appellant clearly shares an identity of interest, amounting to affiliation, both with GEP and Zaragozana. Therefore, the Disaster Area Office properly included all three companies' average annual receipts in determining Appellant's size. The second issue to be resolved on appeal is Appellant's argument that revenue from cover charges collected by Appellant, and paid to its entertainers according to contractual agreement, was improperly included in computation of its average annual revenues. (Appellant concedes that its revenues, when combined with those of GEP, exceed the applicable size standard.) Section 121.402(b) defines receipts in pertinent part as including-- all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions....However, the term receipts excludes...amounts collected for another by a travel agent or real estate agent.... Emphasis added. The above regulation was invalidated in part in Stellacom v. U.S., 738 F.Supp. 647 (D.D.C. 1992)-- to the extent it does not afford to advertising agents the exclusion of amounts collected for another from the calculation of "receipts," and to the extent it does not afford the exclusion for amounts collected for another to the calculation of receipts to any other agent who may be entitled to such exclusion pursuant to the standards developed in rulings of the Small Business Administration's Size Appeal Board or Office of Hearings and Appeals. This Office has explicitly ruled that Stellacom does not extend the exclusions in Section 121.402(b) beyond travel agents and real estate agents "except in situations involving agents who collect amounts for another pursuant to the standards developed in the decisions of this Office and its predecessor." Size Appeal of Cannon & Cannon, Inc., No. 3737 (1993). Appellant argues that the cover charges it collects and pays to the entertainers are "amounts collected for another" under Section 121.402(b)(2), (i.e., mere pass through funds) and so should be excluded from the calculation of gross receipts. Appellant has not cited any decisions of the Size Appeals Board or this Office to support its argument, and we are aware of none. To the contrary, by Appellant's own admission, its artists are "independent contractors," and are an integral part, indeed "the main attraction," of its business. The sample contract of its acknowledged affiliate, GEP, shows that it pays these performers variable percentages of the cover charges it collects, depending upon the circumstances, and retains the rest. Thus, as in Cannon & Cannon, supra, the arrangement at issue here is "tantamount to subcontracting." Even after Stellacom, Section 121.402(b) does not permit a concern to exclude from its own gross receipts any amounts paid to subcontractors. Size Appeal of Alpha-Omega Environmental Co., No. 3658 (1992). Therefore, this Office concludes that the Disaster Area Office properly determined that the cover charges Appellant paid to entertainers under its contractual arrangements with them, should be included in Appellant's average annual receipts. Conclusion For the reasons stated above, the Disaster Area Office's determination is AFFIRMED and the appeal is DENIED. This is the final decision of the Small Business Administration in this proceeding. See 13 C.F.R. Section 121.1720(b). __________________________ Gail D. Reinhart Administrative Judge ____________________ [1] Administrative Judge Stephen Wright has left the Agency. As the Acting Assistant Administrator for Hearings and Appeals, I have designated Gail D. Reinhart as Administrative Judge to preside in this matter for the Office of Hearings and Appeals, in accordance with 13 C.F.R. Section 134.18(a). [2] The reconsideration decision identified Appellant's primary business activity as a dinner theater (SIC code 5812, Eating Places Except Food Services, Institutional), rather than a nightclub. While Appellant's letterhead identifies it as a "supper club," promotional materials included in the record refer to it as a "night club." It is not necessary to determine which of these classifications is more appro- priate, however, since the size standard for both is the same. Appellant raised the issue of the proper SIC classi-fication in its original request for a size determination, but did not pursue it. [3] Although the Disaster Area Office did not discuss the issue, the record also shows affiliation based on common management under 13 C.F.R. Section 121.401(h), because members of the two families are officers, directors, and shareholders in all three companies. See, for example, Size Appeal of DGR Associations, Inc., No. 3643 (1992); and Size Appeal of Fremont Construction Company, No. 2417 (1986). [4] The ownership of Zaragozana 1830, Inc. is identical to the ownership of Appellant, and Appellant does not challenge the Disaster Area Office's finding that these two firms are affiliates.