Morgan Construction Enterprises, Inc. No. 4503 (August 20, 2002) Docket No. SIZ-2002-06-26-24 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) SIZE APPEAL OF: ) ) Docket No. SIZ-2002-06-26-24 Morgan Construction ) Enterprises, Inc. ) Decided: August 20, 2002 ) Appellant ) ) Expanded Economic Injury ) Disaster Loan ) Application No. 9M49-06801 APPEARANCE Barrie Woolard, President, Morgan Construction Enterprises, Inc., for Appellant DIGEST Two concerns are affiliated when there is common family ownership and a strong financial interdependence of both concerns. The Area Office may not deviate from the regulatory criteria used to determine the size of a concern. DECISION ARKOW, Administrative Law Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq., and 13 C.F.R. Parts 121 and 134. Issues Whether two concerns are affiliated when there is common family ownership and a strong financial interdependence of both concerns. Whether the Area Office may deviate from the regulatory criteria used to determine the size of a concern. Facts On February 19, 2002, Morgan Construction Enterprises, Inc. (Appellant) applied to the Small Business Administration's (SBA) Disaster Assistance Office-Area 1 (Area Office) in Niagara Falls, New York, for a loan under the Expanded Economic Injury Disaster Loan (EIDL) program. The loan application was for economic injuries in connection with the September 11, 2001, terrorist attacks and Federal actions taken between that date and October 22, 2001. [1] The Area Office accepted Appellant's loan application for processing on February 21, 2002. The Area Office determined the applicable North American Industry Classification System (NAICS) code for Appellant's primary industry is 233320, Commercial and Institutional Building Construction, which has a corresponding average annual receipts size standard of $28.5 million, [2] plus a 25% increase because of Appellant's location in a labor surplus area. 13 C.F.R. Section 121.301(e). Thus, the applicable size standard is $35,625,000. On March 1, 2002, the Area Office denied Appellant's loan application because Appellant's receipts, including those of its affiliate The Morgan Contracting Corporation (MCC), exceed the applicable size standard. On March 14, 2002, Appellant asked the Area Office to reconsider the denial and requested a formal size determination. Appellant's SBA Form 355 and other information submitted with its loan application show Mr. Barrie Woolard is the concern's 100% owner as well as its president. His spouse, Ms. Adrienne Woolard, serves as its secretary. Ms. Woolard is the 100% owner and president of MCC. Mr. Woolard is its secretary. Mr. Woolard earns substantial wage income from both Appellant and MCC, and both concerns have their offices at the same location in New York City. Appellant submitted the 1999 and 2000 Federal income tax returns, profit and loss statements for 2001, and other information for both concerns with its loan application. In its reconsideration request, Appellant stated it and MCC are independently owned, function independently, and report their income and expenses separately for tax purposes. Although MCC exceeds the size standard, Appellant does not. Based on these circumstances, Appellant requested the Area Office to consider that Appellant is clearly a small business and it is unfair that it cannot qualify for assistance because of MCC's affiliation. On May 21, 2002, the Area Office issued its formal size determination. The Area Office found Appellant and MCC affiliates of each other because of the common family ownership of both concerns and the strong financial interdependence between the concerns. Next, the Area Office calculated Appellant's size using the average annual receipts of Appellant and its affiliate, MCC, for the years 1999-2001, and found that Appellant, combined with its affiliate, exceeds the size standard. Thus, the Area Office concluded Appellant is not a small business. Appellant appealed on June 26, 2002. In its appeal, Appellant argues (1) the Area Office should not have considered Appellant an affiliate of MCC because both concerns have functioned independently since their inception and have reported their income and expenses for tax purposes separately and (2) the Area Office should not have based its size determination on the concerns' "top line revenue," but on the revenues remaining after the costs of subcontractors and materials are subtracted. [3] Appellant estimates these remaining revenues for both concerns combined do not exceed 13% of the "top line revenue" and would be well below the size standard. Discussion Appellant filed its appeal within 30 days of receipt of the size determination, and thus the appeal is timely. 13 C.F.R. Section 134.304(a)(2). Appellant has the burden of proving, by a preponderance of the evidence, all the elements of its appeal. Specifically, it must prove the size determination is based on a clear error of fact or law. 13 C.F.R. Section 134.314; Size Appeal of General Maintenance Engineering, Inc., SBA No. SIZ-4405, at 5 (2000). SBA regulations require a concern applying for a disaster loan under the Expanded EIDL program to qualify as a small business as of the date the Area Office accepts the loan application for processing. 67 Fed. Reg. 11874, 11880 (Mar. 15, 2002) (to be codified at 13 C.F.R. Sections 121.302(c), 123.300(b), and 123.601(b)). Thus, the date on which Appellant must qualify as small is February 21, 2002. SBA's size standards define whether a business entity is small. 13 C.F.R. Section 121.101(a). Before applying the size standards, the SBA first must determine whether the concern has any affiliates. See 13 C.F.R. Section 121.103. SBA regulations provide that individuals with substantially identical business interests, such as family members, may be treated as one party, with such interests to be aggregated for purposes of determining affiliation. 13 C.F.R. Section 121.103(a)(3). There is a rebuttable presumption that family members have identical interests and must be treated as one person, unless the family members are estranged or not involved with each other's business transactions. Size Appeal of Golden Bear Arborists, Inc., SBA No. SIZ-1899, at 7 (1984). Here, there has been no evidence presented to rebut the presumption. In fact, the evidence shows that Appellant and MCC are closely tied to one another. They share the same offices, both spouses are officers in both concerns, and Appellant's president, Mr. Woolard, derives substantial wage income from both concerns. The fact that both concerns may have functioned independently from their inception and reported their income and expenses separately for tax purposes does not support the conclusion that they are not affiliated. Accordingly, the Area Office correctly concluded that Appellant and MCC are affiliates. The regulations further require the Area Office to average the concern's and its affiliate's annual receipts over its last three completed fiscal years. 13 C.F.R. Section 121.104(b). In this case the correct period of measurement is from 1999 to 2001. "Receipts" means "total income" plus "cost of goods sold" as these terms are defined or reported on Federal income tax returns. 13 C.F.R. Section 121.104(a)(1). Appellant's and its affiliate's Federal income tax returns for the years 1999 and 2000, and Appellant's and its affiliate's profit and loss statements for 2001, demonstrate the Area Office correctly determined that Appellant's and its affiliate's average annual receipts for the applicable 1999-2001 measuring period exceed the $35,625,000 size standard. Appellant's contention that the size of Appellant and its affiliate should be only 13% of the combined concerns' "top line revenue" is without merit. In determining size, SBA regulations require the Area Office to combine the annual receipts of the concern whose size status is at issue with those of all its affiliates. 13 C.F.R. Sections 121.103(a)(4); 121.104. The Area Office is bound by this method of calculating a concern's size, and must include all of the annual receipts of Appellant and its affiliate. Size Appeal of Recycling Resources LLC, SBA No. SIZ- 4324, at 4-5 (1998). Thus, the Area Office correctly rejected Appellant's request not to consider only the "top line revenue." Accordingly, review of the record demonstrates the Area Office correctly determined Appellant is not a small business under the applicable size standard. Therefore, Appellant has not met its burden of proving the size determination is based on a clear error of fact or law. Conclusion For the above reasons, the Area Office's size determination is AFFIRMED, and the appeal is DENIED. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 134.316(b). RICHARD S. ARKOW Administrative Law Judge _________________________ [1] See 13 C.F.R. Subpart G; 67 Fed. Reg. 11874, 11880 (Mar. 15, 2002) (to be codified at 13 C.F.R. Sections 121.302(c), 123.300(b), and 123.601(b)); SBA Disaster Declaration #9M49 (Sept. 18, 2001). [2] Effective February 22, 2002, the SBA raised the size standard for NAICS code 233320 to $28.5 million. 67 Fed. Reg. 3041, 3046 (Jan. 23, 2002). [3] "Top line revenue" appears to mean "annual receipts" as defined in SBA's size regulations. Posted: October, 2002