Environmental Affairs Management, Inc., No. BDP-119 (May 3, 1999) Docket No. BDPT-98-08-14-01 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) IN THE MATTER OF: ) Docket No. BDPT-98-08-14-01 ) Environmental Affairs ) Decided: May 3, 1999 Management, Inc. ) APPEARANCES Steven W. Mastrantonio, Esq., Amer Cunningham Brennan Co., L.P.A., for Petitioner Environmental Affairs Management, Inc. Andrea L. Mayer, Esq., Michael D. Schattman, Esq., for Respondent Small Business Administration. DIGEST A new regulation will not apply in a termination proceeding completed before, but appealed after, the new regulation's effective date if the new regulation makes no change affecting the decision on appeal. Thus, where knowing submission of a false statement to the SBA was good cause for 8(a) program termination under both the former and the new regulations, the Administrative Law Judge (ALJ) will apply the old regulation on appeal. The ALJ must sustain the SBA's decision to terminate an 8(a) program participant unless a review of the written administrative record demonstrates that the SBA's conclusion that an 8(a) program participant falsely stated he is the 100% owner of the participant is arbitrary, capricious, or contrary to law. The ALJ's review of the administrative record is narrow and does not permit him to substitute his own judgment for that of the SBA. The ALJ must examine whether the SBA considered all the facts presented as well as the laws and regulations that guide the decision-making process. Then, he must determine whether the SBA made a clear error of judgment in its decision before he can conclude the SBA's decision is arbitrary, capricious, or contrary to law. A clear error of judgment can be found if the SBA (1) fails to properly apply the law and regulations to the facts of the case; (2) fails to consider an important aspect of the problem; (3) offers an explanation for its determination that runs contrary to the evidence; or (4) provides an implausible explanation that is more than a difference between the ALJ's views and those of the SBA. In sum, the SBA must articulate a satisfactory explanation for its action, including a rational connection between the facts found and its determination. FINAL DECISION ARKOW, Administrative Law Judge: Petitioner Environmental Affairs Management, Inc. (EAM) appeals a decision by the Respondent Small Business Administration (SBA) terminating it from the 8(a) program1 because EAM's president, Mr. John Braswell, knowingly submitted false information to the SBA in EAM's 1996 and 1997 annual updates and possibly in its application for 8(a) certification. The SBA alleges Mr. Braswell falsely claims to be the 100% owner of EAM because Mr. Gregory Bobonik owns a 49% interest in EAM. EAM contends the termination is arbitrary, capricious, and contrary to law because Mr. Braswell has been EAM's only owner since its admission into the 8(a) program. I agree and conclude the SBA's decision terminating EAM from the 8(a) program is arbitrary, capricious, and contrary to law. Jurisdiction Jurisdiction to decide this appeal is proper. 15 U.S.C. Section 637(a)(9)(A), (B)(ii); 13 C.F.R. parts 124 and 134 (1999). The appeal is timely. 13 C.F.R. Section 134.202(a) (1999). Issue Whether the action of the SBA terminating EAM from the 8(a) program is arbitrary, capricious, or contrary to law. 15 U.S.C. Section 637(a)(9)(C); 13 C.F.R. Section 134.406(b) (1999). Procedural Background On November 26, 1997, the SBA advised Mr. Braswell, the President of EAM (an Ohio corporation) and the individual upon whom EAM's 8(a) eligibility was based, that it intended to terminate (letter of intent to terminate) EAM's 8(a) program participation. Administrative Record (AR) Ex. 28. Citing 13 C.F.R. Section 124.209(a)(19) (1997),2 the SBA stated the reason for the proposed termination was that EAM knowingly submitted false information to the SBA and EAM's principal, Mr. Braswell, knew or should have known the information was false. See id. The SBA concluded Mr. Braswell falsely represented himself as the 100% owner of EAM in EAM's 1996 and 1997 annual updates to the SBA and "possibly" in its 8(a) application. See id. The SBA pointed to contradictory information in EAM's 1996 tax return, Mr. Braswell's personal tax return, and EAM's Ohio Minority Business Enterprise certification (MBE), all of which stated Mr. Bobonik owned 49% of EAM's shares. Id. at 2. On July 10, 1998, after considering information provided by EAM to refute the allegations in the letter of intent to terminate, including EAM's claim that its former accountant made a mistake, the SBA advised EAM that its response to the letter of intent to terminate was not credible. AR Ex. 3 at 3. Concluding EAM had not overcome the grounds for the proposed termination, the SBA terminated EAM from the 8(a) program (termination letter). Id. at 3-4. The SBA reasoned (1) Mr. Braswell's signature on EAM's 1996 tax return and its 1996 Ohio FT-1120-S, Notice of S Corporation Status, both stating Mr. Braswell is a 51% shareholder and Mr. Bobonik is a 49% shareholder, belied EAM's claim its statements resulted from an accountant's error; (2) Mr. Braswell's confusion as to whether Mr. Bobonik relinquished his holdings in June 1994, rather than May 1993, resulted from the fictional nature of Mr. Bobonik's divestiture of his EAM shares, rather than mere inadvertence; and (3) EAM's subsequent amendment of its tax returns after the SBA discovered the falsehood did not cure the original falsehood. Id. at 3. EAM timely appealed the termination decision on August 14, 1998. Appeal Petition. On December 1, 1997, pursuant to 13 C.F.R. Section 124.211 (1997), the SBA suspended EAM from receiving 8(a) contract support pending completion of the termination action. EAM appealed the suspension. On February 8, 1999, the suspension was lifted because the SBA failed to establish by adequate evidence that Mr. Braswell, on behalf of EAM, made false statements in its annual updates and possibly in its 8(a) application and that suspension was necessary to protect the interests of the government. The evidence showed Mr. Braswell had been the 100% owner of EAM since its admission into the 8(a) program. Matter of Envt'l Affairs and Management, Inc., SBA No. MSB-621 (1999). Findings of Fact I. EAM's Admission into the 8(a) Program. EAM applied for admission into the 8(a) program on May 22, 1992. AR Ex. 84 at 1. Its application stated Mr. Braswell owned 51% of EAM's shares and Mr. Bobonik owned the other 49%. Id. at 3. Because Mr. Bobonik owned shares in another business in the same or similar line of business as EAM,3 the SBA declined EAM's application. AR Ex. 83. Thereafter, EAM furnished the SBA a copy of a "Share Exchange Agreement," dated May 12, 1993, stating Mr. Bobonik "will exchange on an even basis his shares in EAM, Inc., for Braswell's shares in ESM, Inc., and Brasbob, Inc." See AR Ex. 81. Pursuant to the agreement, Mr. Braswell and Mr. Bobonik each agreed to resign from all directorships and offices of the respective concerns of which they were surrendering shares. Id. EAM also furnished the SBA a copy of stock certificate number 1, dated October 27, 1988, certifying Mr. Bobonik owned 49 shares of EAM. AR Ex. 82 at 1. The reverse side of the certificate, dated May 11, 1993, was marked "Canceled" and signed, "John W. Braswell - president." AR Ex. 82 at 3. Finally, EAM furnished the SBA a copy of stock certificate number 3, dated May 12, 1993, and signed by Mr. Braswell twice, once as president and once as secretary, certifying that Mr. Braswell owned 49 shares. AR Ex. 82 at 2. A "stub" along the top edge of stock certificate number 3 stated certificate number 3 for 49 shares was issued to Mr. Braswell and a certificate for 49 shares, the certificate number and date of which are illegible, was received. Id. Based on this evidence, the SBA concluded Mr. Bobonik relinquished his shares in EAM and Mr. Braswell became the 100% owner of EAM. See AR Ex. 76 at 1. Relying on this and other evidence submitted in EAM's request for reconsideration and subsequent appeal of SBA's denial of program admission, the SBA agreed on June 3, 1994, to admit EAM into the 8(a) program. See AR Ex. 72 at 1-2. On August 3, 1994, Mr. Braswell signed EAM's participation agreement with the SBA, permitting EAM's admission into the 8(a) Program. Id. at 6. II. Income Tax Returns. Before this termination action commenced, EAM submitted a copy of its 1996 original federal return, prepared by its former certified public accountant (CPA) and signed by Mr. Braswell as taxpayer's president. It stated Mr. Braswell owned a 51% interest in EAM and Mr. Bobonik owned 49%. AR Ex. 63 at 5, 6. While the termination action was pending, EAM submitted copies of several amended tax returns to the SBA to support its contention that the original tax returns resulted from a mistake. The SBA considered copies of the following documents: (1) EAM's unsigned original 1994 Form 1120-S, U.S. Income Tax Return for an S Corporation, prepared by EAM's former CPA, which stated Mr. Braswell owned a 51% interest in EAM and Mr. Bobonik a 49% interest, AR Ex. 68; (2) EAM's amended 1994, 1995, and 1996 federal returns, dated December 16, 1997, signed by Mr. Braswell as taxpayer's president and prepared by EAM's current CPA, which stated Mr. Braswell owned a 100% interest in EAM and Mr. Bobonik a 0% interest, AR Ex. 19 at 2-8; AR Ex. 22, Ex. D, at 1-6; id., Ex. C, at 1-13; (3) Gregory A. and Judy L. Bobonik's (the Boboniks') unsigned amended 1994, 1995, and 1996 Ohio personal tax returns, prepared by EAM's current CPA, which stated, "the correction is being made to properly reflect 100% ownership and profit/loss allocation to John Braswell," AR Ex. 11 at 10-11; id. at 2-4; id. at 5-7; (4) The Boboniks' unsigned amended 1994, 1995, and 1996 federal personal tax returns, dated February 3, 1998, prepared by EAM's current CPA, which stated, "the correction is being made to properly reflect 100% ownership and profit/loss allocation to John Braswell," id. at 8-9; id. at 6-7; id. at 3-4; and (5) John W. and Felicia A. Braswell's (the Braswells') unsigned amended 1994,4 1995,5 and 19966 Ohio personal tax returns, dated February 3, 1998, prepared by EAM's current CPA, which stated the amendment resulted in the Braswells' being entitled to refunds each year, id. at 15; id. at 14; id. at 16. III. Corporate Books and Records. In addition to EAM's stock certificates and the stub, see supra Part I, EAM submitted to the SBA copies of minutes of its directors and shareholders meeting held on May 12, 1993. AR Ex. 58 at 98. The minutes stated the articles and by-laws would be amended to reflect EAM would have one director and Mr. Braswell was elected director. They were signed by Mr. Braswell, as sole shareholder. Id. Although the SBA generally requires an 8(a) applicant to include copies of its articles of incorporation and by-laws in its application, EAM's were not included in the administrative record, which was certified as complete. IV. Other Facts. In 1995, 1996, and 1997 annual update reports submitted to the SBA, EAM stated Mr. Braswell owned 100% of the firm. AR Ex. 69, 66, and 62, at 2. In each update form, the SBA directed EAM to "[a]ttach a copy of [its] most recent year-end business tax returns including all schedules and statements." Id. at 4. However, only the 1997 update included a corporate tax return. The 1996 return attached to the 1997 update contradicted the 1997 update. An Ohio FT-1120-S, Notice of S Corporation Status, dated May 16, 1996, signed by both EAM's former CPA, as preparer, and by Mr. Braswell, as president, stated Mr. Braswell owned 51% and Mr. Bobonik owned 49% of EAM. AR Ex. 65. In a letter dated November 25, 1997, Mr. Braswell responded to the SBA's questions concerning EAM's ownership. AR Ex. 32. In the letter of explanation, he stated (1) Mr. Bobonik relinquished his EAM shares in June 1994 and (2) EAM's tax returns contained "erroneous information." Id. V. Affidavits. In an affidavit sworn to December 22, 1997, Mr. Braswell affirmed the truth of the information in EAM's 8(a) submissions and admitted there were mistakes resulting from an accountant's error. AR Ex. 2 at Attachment 1. He stated that (1) on May 12, 1993, all of Mr. Bobonik's shares in EAM were transferred to him, leaving him the 100% owner of EAM; (2) the transfer of shares from Mr. Bobonik to him was memorialized in a Share Exchange Agreement entered into on May 12, 1993; (3) at about the same time, the stock certificate previously issued to Mr. Bobonik was cancelled; (4) since the transfer, he has continued to own 100% of EAM's shares; (5) in 1994, after Mr. Bobonik transferred the EAM stock certificate, EAM switched accounting firms and retained another firm's (former CPA) services through the 1996 tax year. Id. Mr. Braswell's affidavit further stated that (1) at no time did he tell EAM's former CPA, or otherwise try to deceive EAM's former CPA into believing, that anyone other than he had any interest in EAM; (2) he believed that, due to the change in accountants in 1994, the tax returns erroneously reflected the distribution of profits to Mr. Bobonik; (3) upon learning that EAM's 1996 tax return incorrectly distributed profits to Mr. Bobonik, EAM's current CPA amended the returns for 1994, 1995, and 1996, and filed the amended returns with the IRS on December 18, 1997; and (4) at no time had he ever knowingly submitted false information to the SBA with regard to his ownership of EAM. Id. In an affidavit sworn to December 22, 1997, Mr. Bobonik stated that (1) until May 12, 1993, he owned 49% of EAM's shares; (2) on May 12, 1993, he transferred all of his shares and ownership in EAM to John Braswell; and (3) he has not owned any EAM shares since May 12, 1993. AR Ex. 2 at Attachment 2. Petitioner's Position EAM requests the termination be withdrawn and it be permitted to continue in the 8(a) program. Amended Appeal Petition at 3. EAM argues that (1) Mr. Braswell's error as to the stock transfer date was inadvertent and not intended to mislead; (2) Mr. Braswell had no motive to deceive the SBA into believing the stock transfer was later rather than sooner; (3) Mr. Braswell informed EAM's former CPA that he owned 100% of EAM's stock; and (4) EAM had acted to correct the erroneous tax returns. Id. at 2-3. EAM contends the SBA's termination decision is arbitrary, capricious, and contrary to law. Appeal Petition at 3. Respondent's Position The SBA requests its decision to terminate EAM be upheld because it was neither arbitrary, capricious, nor contrary to law. Answer at 1, 8. It presents four arguments. First, the SBA's counsel argues: EAM does not dispute that the information it submitted to SBA regarding the ownership of EAM was false. Because EAM provided conflicting information concerning its ownership, portions of that information are, by definition, false. EAM's only explanation is that its principal, Braswell, did not know, and should not have known, that such information was false. . . . This explanation lacks credibility. Id. at 10. Second, the SBA argues that EAM's explanation, that Mr. Braswell did not and should not have known that his statements were false, lacked credibility because (1) they were given under the penalty of perjury; (2) the proximity of his signature, on the 1996 Ohio FT-1120-S, Notice of S Corporation Status, to the statement Mr. Bobonik was the 49% owner of EAM calls into question the truthfulness of the 100% ownership claim; (3) Mr. Braswell certified each year, in EAM's 1993, 1994, 1995, and 1996 certifications as an Ohio MBE, that Mr. Bobonik was a 49% owner; and (4) it was difficult to believe that Mr. Braswell's one-year misstatement of when the stock transfer occurred, in EAM's letter of explanation, resulted from simple mistake. Id. at 10-11. Third, the SBA argues the correction of the tax returns, some unsigned, did not rectify EAM's previous submission of false information to SBA. Id. at 11. Fourth, the SBA argues EAM's failure to provide a statement from EAM's former CPA, who had allegedly entered the incorrect information on EAM's tax returns, casts further doubt on EAM's claims. Id. at 12. Discussion I. Applicable Regulations. On November 26, 1997, the SBA notified EAM it intended to terminate EAM's 8(a) program participation. AR Ex. 28. On July 10, 1998, the SBA notified EAM it terminated EAM from the 8(a) program. AR Ex. 3. EAM timely appealed the termination on August 14, 1998. Appeal Petition. On June 30, 1998, the SBA published a final rule amending parts 124 and 134 of title 13 (new regulations).7 The threshold question is whether this decision is governed by the substantive provisions of the new regulations, which were effective July 30, 1998. The "DATES" section of the new regulations provides: Effective Date: This rule is effective on July 30, 1998. Compliance Dates: Subpart A applies to all applications for the 8(a) Business Development program pending as of July 30, 1998 and all 8(a) procurement requirements accepted by SBA on or after July 30, 1998. These rules do not apply to any appeals pending before SBA's Office of Hearings and Appeals. . . . Except for 13 CFR 134.408(c), the procedural revisions to 13 CFR part 134 apply to all appeals served or filed on or after June 30, 1998. 13 CFR 134.408(c) applies as of the publication to all pending appeals before SBA's Office of Hearings and Appeals. 63 Fed. Reg. 35,726, 35,726-27 (1998) (emphasis added). Thus (1) the new part 134 provisions apply to this appeal; (2) the new regulations establish compliance dates for applying the new part 124, subpart A, to eligibility cases and procurement cases; (3) they do not, however, establish a compliance date for applying part 124, subpart A, to termination appeals. The SBA urges I should apply the former part 124, while EAM argues I should apply the new part 124. The SBA argues that (1) it was the SBA's "intent" that the new part 124 apply only to termination decisions made on or after July 30, 19988 and (2) the former part 124 applies because the termination letter was served before the July 30 effective date of the new part 124. SBA's Supplemental Response to Court's Order to Brief Issue, October 15, 1998 (SBA's Supplemental Response). Further, the SBA argues that a new substantive rule generally has a retroactive effect only if the language of the rule requires that result, and that there is a presumption that the rule has a prospective effect. SBA's Response to Court's Order, filed December 8, 1998. EAM argues that the new regulations do not distinguish between procedural rules and substantive rules in its "effective date" language. Thus, the new part 124 applies to any appeal filed after July 30, 1998. EAM's Response to SBA's Brief, filed October 20, 1998, at 1. Neither EAM nor the SBA cites any change to part 124 that is decisionally relevant. In fact, neither party discusses any change to part 124, in either of its briefs in response to my Orders of September 18, 1998, and December 8, 1998. I find that none of the changes to part 124 is relevant to the decision of this case. The decisionally relevant provision of the former part 124-that is, the "false submissions" ground for termination-remains in effect with only cosmetic changes. Compare 13 C.F.R. Section 124.209(a)(19) (1998) ("Knowing submission of false information to SBA . . . on behalf of a section 8(a) business concern by its principals, officers, or agents, or by its employees, where the principal(s) of the section 8(a) concern knows or should have known such submission to be false.") with 13 C.F.R. Section 124.303(a)(15) (1999)("Submission by or on behalf of a Participant of false information to SBA . . . where responsible officials of the 8(a) BD Participant knew or should have known the submission to be false."). Without a decisionally significant change in the regulations, there is no justiciable issue to address. It simply does not matter, in this case, which regulation applies because the outcome is the same-knowing submission of a false statement to the SBA is good cause for termination from the 8(a) program. The cases cited by the SBA do not contradict this: Each case involved a decisionally significant change in the law or regulation. Landgraf v. USI Film Prods., 511 U.S. 244, 248 (1994) (change permitting legal relief for hostile-work- environment claim); Bowen v. Georgetown University Hosp., 488 U.S. 204, 208 (1988) (retroactive Medicare cost limit rules); Bennett v. New Jersey, 470 U.S. 632, 634 (1985) (change governing use of funds); Gersman v. Group Health Ass'n, Inc., 975 F.2d 886, 888 (D.C. Cir. 1992) (change applying statute to conduct after contract formation), cert. denied, 511 U.S. 1068 (1994). Accord, Lindh v. Murphy, 521 U.S. 320 (1997) (change in law not applied in pending case); Bradley v. School Bd. of Richmond, 416 U.S. 696 (1974) (change in law applied in pending case); Thorpe v. Housing Authority of Durham, 393 U.S. 268 (1969) (change in regulations applied in pending case); United States v. Schooner Peggy, 5 U.S. (1 Cranch) 103, (1801) (change in law during appeal applied). The SBA (1) served its letter of intent to terminate, (2) considered EAM's response, and (3) made and served its decision that applied the former part 124 in terminating EAM from the 8(a) program-all prior to the July 30, 1998, effective date of the new regulations. Therefore, because the changes to part 124 are not relevant to the decision in this case and neither party would be prejudiced by my refusal to apply the new part 124, the former part 124 will be applied.9 II. Standard of Review. The determination of the SBA must be sustained unless a review of the written administrative record demonstrates that the SBA's conclusion that Mr. Braswell, on behalf of EAM, falsely stated he is the 100% owner of EAM is arbitrary, capricious, or contrary to law. 13 C.F.R. Section 134.406(b) (1999). My review of the administrative record is narrow and does not permit me to substitute my own judgment for that of the SBA. I must examine whether the SBA considered all the facts presented as well as the laws and regulations that guide the decision- making process. Then, I must determine whether the SBA made a clear error of judgment in its decision before I can find the SBA decision is arbitrary, capricious, or contrary to law. See Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). A clear error of judgment can be found if the SBA (1) fails to properly apply the law and regulations to the facts of the case; (2) fails to consider an important aspect of the problem; (3) offers an explanation for its determination that runs contrary to the evidence; or (4) provides an implausible explanation that is more than a difference between my views and those of the SBA. In sum, the SBA must articulate a satisfactory explanation for its action, including a rational connection between the facts found and its determination. See id. III. Ownership of EAM. The SBA concluded it had good cause to terminate EAM from the 8(a) program. The SBA termination letter alleged a violation of 13 C.F.R. Section 124.209(a)(19) (1997). AR Ex. 3. The regulation provides that the SBA may terminate "[p]articipation of a 8(a) business concern" before "the expiration of the concern's Program Term for good cause." 13 C.F.R. Section 124.209(a) (1998). Good cause includes "[k]nowing submission of false information . . . on behalf of a section 8(a) business concern by its principals, officers, or agents, or by its employees, where the principal(s) of the section 8(a) concern knows or should have known such submission to be false." 13 C.F.R. Section 124.209(a)(19) (1998). The SBA concluded that Mr. Braswell falsely represented himself as the 100% owner of EAM and contends that Mr. Braswell owns only 51% of EAM's shares, while Mr. Bobonik still owns the other 49%. The central factual determination to be made by the SBA was whether Mr. Bobonik still owned EAM shares. EAM represented to the SBA, before EAM's admission into the 8(a) program and in subsequent annual updates to the SBA, that Mr. Braswell was the 100% owner of EAM. Implicit in those representations is that Mr. Bobonik divested himself of his EAM shares before EAM's admission into the 8(a) program and had not owned any EAM shares since. If Mr. Bobonik owned 49%, EAM would have been ineligible for admission because, as a nondisadvantaged owner of an 8(a) applicant, he could not own more than 10% of another firm in the same or similar line of business as the applicant.10 13 C.F.R. Section 124.104(c)(2)(1998). The purpose of this provision is to preclude individuals not socially and economically disadvantaged, such as Mr. Bobonik, from asserting control over an 8(a) firm. Therefore, Mr. Braswell's statements concerning his ownership were material representations that affected whether the SBA would admit EAM into the 8(a) program. The evidence in the record is not generally in dispute. Its significance and truthfulness are. To accept the SBA's conclusions that Mr. Bobonik still owned shares of EAM, the Share Exchange Agreement, Mr. Bobonik's cancelled EAM stock certificate, Mr. Braswell's certificate for 49 additional shares, and EAM's corporate minutes-presented to the SBA to secure EAM's admission into the 8(a) program-all must have falsely represented EAM's ownership. Also, EAM's 1996 and 1997 updates, the affidavits of Mr. Bobonik and Mr. Braswell, the amended tax returns prepared by EAM's current CPA and signed by Mr. Braswell, and the amended personal tax returns of the Braswells and the Boboniks all must have falsely stated that Mr. Bobonik still has no ownership interest in EAM. The SBA's resolution of this conflict must be evaluated to determine whether the SBA's conclusion that the evidence establishes Mr. Braswell, on behalf of EAM, made false statements to the SBA because Mr. Bobonik still owned a 49% interest in EAM is in accordance with the State Farm standard. See supra Part II; Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). EAM's corporate books and records, including the minutes of its shareholders and directors meetings and its stock certificates, are central to a determination of who owned EAM and whether the State Farm standard is met. A. Evidence of EAM's Stock Records. A shareholder of an Ohio corporation is a person whose name appears on the books of the corporation as the owner of shares of such corporation. Matter of Envt'l Affairs and Management, Inc., SBA No. MSB-621, at 10 (1999) (citing Ohio law). One whose name appears on the corporate books and records is the presumptive owner of the shares. Id. (citing Finn v. Brown, 142 U.S. 56, 67 (1891)). A corporation's books and records are a fundamental source of evidence identifying shareholders. Envt'l Affairs and Management, Inc., MSB-621 at 10. Though incomplete, the corporate records included in the administrative record before me lead to only one conclusion-that Mr. Braswell had been EAM's sole shareholder since May 12, 1993, when Mr. Bobonik divested himself of his 49 shares pursuant to the Share Exchange Agreement. Stock certificate number 1, dated October 27, 1988, for 49 shares was issued to Mr. Bobonik. The reverse side of the certificate number 1 was marked "Canceled." Stock certificate number 3, dated May 12, 1993, for 49 shares was issued to Mr. Braswell. The stub attached to certificate number 3 showed it was issued to Mr. Braswell in return foranother certificate, also for 49 shares, presumably certificate number 1.11 Before EAM's admission into the 8(a) program, the SBA viewed these documents as legally sufficient to establish that Mr. Bobonik divested himself of his EAM shares and Mr. Braswell was the sole shareholder of EAM. I agree with that conclusion. No corporate documents in the administrative record undermine that conclusion or substantiate the SBA's theory either that a transfer of shares back to Mr. Bobonik occurred or that the transfer did not take place. Possession of the stock certificate evidences the holder's ownership of the shares and creates a rebuttable presumption of ownership. Id. at 12. Likewise, a transfer of a stock cer tificate by the holder divests him of his ownership interest. A share is transferred to a purchaser when the purchaser acquires possession of the stock certificate. Id. (citing Ohio law). Upon receiving a stock certificate, a purchaser acquires whatever rights in the stock certificate the transferor had. Id. (citing Ohio law). Both the transferor, Mr. Bobonik, and the transferee, Mr. Braswell, state under oath that Mr. Bobonik no longer owned shares of EAM. Under these circumstances, Mr. Bobonik could not establish an ownership interest in EAM because he could not meet the presumption of ownership created by EAM's possession of Mr. Bobonik's cancelled stock certificate, as well as the evidence of the Share Exchange Agreement and his affidavit. Absent a successful claim of ownership, Mr. Bobonik could not (1) exercise the control of EAM prohibited by 13 C.F.R. Sections 124.104(c)and 124.104(d)(1998) or(2)claim ownership of EAM, because the transfer of his shares complied with Ohio's statutory transfer requirements and he no longer possessed the stock certificate. Therefore, the SBA's conclusion that Mr. Bobonik was still an owner lacks a sound basis in fact and law. Furthermore, the record contains no evidence the SBA weighed the evidence of the stock certificates in determining EAM had falsely represented Mr. Braswell as the 100% owner of EAM. But see AR Ex. 36 at 4 (noting the existence of the stock certificates in the file). The SBA's termination letter, however, noted parenthetically, after acknowledging EAM provided the SBA a copy of the cancelled stock certificate for 49 shares originally issued to Mr. Bobonik, that "[w]hile the certificate is marked `CANCELED', the surrender portion on the rear side of the certificate is signed but not completed." AR Ex. 3 at 2. Presumably the SBA was expressing skepticism whether the surrender was effected. The SBA, however, did not consider the effect of the Share Exchange Agreement on the transfer. See AR Ex. 81. Ohio law permits the transfer of a share of stock on an instrument other than the stock certificate. Ohio Rev. Code Ann. 1308.23 (Anderson 1998). The Share Exchange Agreement is such an instrument and, when considered with certificate number 1, certificate number 3 (with the stub), the presumptions of ownership, and the affidavits, compels the inescapable conclusion that Mr. Bobonik divested himself of his EAM shares. The SBA made a clear error of judgment in failing to consider this important aspect of the problem. B. Corporate Minutes. Although the administrative record includes no books or records of account or detailed records of shareholders and their respective holdings, it does include some of EAM's minutes of proceedings of shareholders and directors meetings. See AR Ex. 58 at 87-88, 97-98. The May 12, 1993, minutes stated that (l) Mr. Braswell was appointed president and treasurer of EAM and (2) Mr. Braswell, signing the minutes as the sole shareholder of EAM, became its sole director. Id. at 97-98. Taken together with the stock certificates, these minutes corroborated that, on or before May 12, 1993, Mr. Braswell became EAM's sole shareholder and sole director and Mr. Bobonik was no longer an EAM shareholder. The record contains no indication the SBA, in reaching its conclusion, considered the evidence of the corporate minutes and weighed it with the other evidence in determining whether EAM had falsely represented Mr. Braswell as the 100% owner of EAM. C. Affidavits. Affidavits of knowledgeable persons may be probative in determining the real fact of ownership. After the SBA commenced these termination proceedings, EAM presented the affidavits of Mr. Braswell and Mr. Bobonik to establish EAM's ownership and to explain conflicting documents in the record. Mr. Braswell's affidavit stated he became EAM's 100% owner on or about May 12, 1993, he had since continued as EAM's sole shareholder, and he had never knowingly submitted false information to the SBA with regard to the ownership of EAM. His affidavit also attributed mistakes in various documents that contradict his claim of 100% ownership of EAM to errors by EAM's former CPA. AR Ex. 2, at Attachment 1. Mr. Bobonik's affidavit stated that, on May 12, 1993, he transferred his 49% ownership interest in EAM to Mr. Braswell and has not owned any EAM shares since that date. AR Ex. 2 at Attachment 2. The SBA's termination letter recognized EAM submitted these affidavits for its consideration, but the SBA merely concluded EAM's response submissions were not credible. AR Ex. 3. The SBA did not explain why it concluded the affidavits were not credible. The affidavits were consistent with the stock certificates, corporate minutes, Share Exchange Agreement, and amended tax returns. This evidence demands more than the summary conclusion that they are not credible. D. Tax Returns. Finally, documents, including tax returns, can be relevant evidence of ownership, but are not necessarily pivotal evidence establishing ownership of corporate shares. Envt'l Affairs and Management, MSB-621 at 14-15. The SBA correctly stated that EAM's original tax returns listed Mr. Bobonik as a 49% owner and that EAM's amended tax returns showed Mr. Bobonik had no interest in EAM. The SBA then concluded, because they were signed by Mr. Braswell, stating under penalty of perjury that they were true, correct, and complete, those original tax returns establish Mr. Bobonik's ownership interest in EAM. Tax returns do not establish facts. Estate of Ruth E. DuBois v. Comm'r, 67 T.C.M. (CCH) 2951 (1994) (citing Roberts v. Comm'r, 62 T.C. 834, 837 (1974) (holding that "merely signing a tax return under penalty of perjury does not establish the facts contained therein") (emphasis added)). Accord, Seaboard Comm'l Corp. and Subsidiary Cos. v. Comm'r, 28 T.C. 1034, 1051 (1957) (noting that a tax return "cannot be regarded as more than a statement of petitioner's original claim"). Consistent with the amendment of EAM's income tax returns, the Boboniks and the Braswells then amended their federal and state personal income tax returns. This was necessary because, when EAM amended its federal and state returns, it reallocated to the Braswells all of its income and losses allocated in the original tax returns to the Boboniks. Amending a tax return is an authorized means to ensure tax obligations are correctly reported to federal and state taxing authorities. Therefore, the original tax returns, although admissions against EAM's interest, did not establish Mr. Bobonik still owned an interest in EAM. They are only some evidence of corporate ownership that reasonably should be viewed as less persuasive than the stock certificates themselves, stub, Share Exchange Agreement, corporate minutes, and affidavits of ownership. Because the original tax returns on which the SBA so heavily relied to reach its decision were later amended, the weight to be accorded those returns is further diminished. The amended tax returns, which should be accorded greater weight than the original tax returns because they were filed while under the scrutiny of the SBA, showed Mr. Braswell as the 100% owner of EAM and supported EAM's position that its statements were not false. The amendments logically also supported EAM's claims it was correcting a CPA's mistake. Further, the SBA failed to compare, in a meaningful manner, the significance of the corporate evidence with that of EAM's original tax returns. III. SBA's Concessions. The SBA's reasoning itself supported the conclusion that suspicion alone was the basis for its decision to terminate EAM. The SBA asserted EAM knowingly submitted false information to the SBA "in its 1996 and 1997 annual updates and possibly in its application for 8(a) certification." AR Ex. 28 at 2 (emphasis added). The annual updates and the 8(a) application both reflected Mr. Braswell was the 100% owner of EAM. If the SBA's conclusion is that the 8(a) application was only "possibly" false, then the SBA was merely speculating that the application is false. This speculation does not support a reasonable belief that EAM submitted false statements to the SBA in its 8(a) application. In its Answer, pursuant to 13 C.F.R. Section 134.206 (1999), the SBA addresses the factual allegations in EAM's Amended Appeal Petition. The "SBA denies knowledge or information sufficient to determine the truth of EAM's assertions as to the present and previous ownership of EAM." Answer at 7. This denial of knowledge or information is contrary to the basis for the SBA's decision to terminate EAM from the 8(a) program. The SBA's decision was founded on the untruthfulness of EAM's claims of ownership. The SBA's uncertainty and lack of knowledge or information to determine the truth of EAM's claims of ownership fall short of the requirement that the SBA have a reasonable belief that false statements concerning EAM's ownership were submitted to the SBA. IV. SBA's Analysis and Conclusion. In its letter of intent to terminate, the SBA attempted to explain its rationale for concluding that Mr. Braswell made false statements when he claimed he was the sole owner of EAM. That explanation fell short of being reasonable in many respects. A. Tax Returns. The SBA concluded the amended personal federal and state tax returns of both the Boboniks and the Braswells were unsigned copies of the returns, and thus not credible. See AR Ex. 3 at 2, 3. Despite this conclusion, the SBA also concluded that the returns were filed. See 8(a) Termination Review of Response to 45 Day Letter, AR Ex. 9 at 3 ("It was only after SBA's request for personal tax returns . . . that [EAM's] principals [filed] their amended tax return."). In addition, the SBA acknowledged that EAM's amended corporate tax returns were signed and filed with the IRS. Answer at 6, 7. The SBA concluded in its analysis that the personal returns were filed. AR Ex. 9 at 3. Yet, in its termination letter, the SBA suggested they were not credible because they were unsigned, AR Ex. 3 at 2, 3, and presumably not filed. The SBA did not state why the lack of signatures makes the returns less credible. Possibly, the SBA believed, because they are not signed, they were also not filed. Such a conclusion is not supported by the evidence. The SBA, though certifying the "full" administrative record to be a "true and correct copy of the non-privileged documents in the Agency Record," failed to include in the administrative record evidence favorable to EAM, proving the Boboniks filed those returns. I take judicial notice of the Docket File in the suspension case. Envt'l Affairs and Management, Inc., Docket No. MSBS-97-12-23-31, Motion to File Sup plemental Evidence Instanter, Attachments 1-5. These attachments, which include letters from the IRS acknowledging it changed the account of the Boboniks for tax years 1994 and 1995 and Ohio tax payment cards for the years 1994-96, match the tax owed on the unsigned tax returns the SBA questions. I find those returns were filed and the adverse conclusions drawn by the SBA are not supported by evidence. The SBA concluded, when Mr. Braswell signed EAM's original 1996 tax return under penalty of perjury, that he owned 51% and Mr. Bobonik owned 49% of EAM. It also concluded the information in the return should be believed over the other information EAM presented concerning Mr. Braswell's ownership. These conclusions ignored the fact that all of the other evidence supporting Mr. Braswell's claim of 100% ownership, including EAM's amended tax return, were also subject to some penalty if the contents were false. The 8(a) application itself, including the corporate documents submitted with the application, was subject to the false statement provisions of the Small Business Act. 15 U.S.C. 645(a). The affidavits of Mr. Bobonik and Mr. Braswell were subject to the false statement provisions of Ohio law. Ohio Rev. Code Ann. 2921.13(A)(6) (Anderson 1998). False corporate documents were subject to a civil penalty under Ohio law. Ohio Rev. Code Ann. 1701.93(A), (B) (Anderson 1998). Thus, the fundamental flaw in the SBA's reasoning-the original tax returns were subject to penalty if false; thus, they must have been true-is that the contrary evidence also was subject to penalty if it were false; thus, the contrary evidence must also have been true. The SBA's rationale concerning the amended tax returns illustrates its confused reasoning process. Referring to the amendment, the SBA stated, "that the tax returns were amended after SBA discovered the discrepancy does not mitigate [sic] the charge that [EAM] deliberately provided false information" to the SBA in its application and annual updates. AR Ex. 3 at 3. Then the SBA concluded, "[c]orrection of a falsehood after it is discovered does not make the falsehood any less false." Id. The SBA appears confused about what it believed was false: EAM's application and updates; or EAM's original tax returns. The SBA concluded, not that EAM corrected a falsehood, but that it maintained a falsehood throughout its participation in the 8(a) program. In reaching this conclusion, the SBA assumed, not that the original tax returns were false, but that they alone, among all the evidence in the record, were true. Though the confusion arguably resulted from drafting error, the SBA's counsel makes no such proffer on appeal; rather, she adopts the SBA's flawed reasoning. Answer at 11. This reasoning, even if a mere error in drafting, when combined with the other faulty analysis and factual assumptions, illustrates the arbitrary and capricious nature of the SBA's decision to terminate EAM. The SBA also attached further importance to the signature of EAM's former CPA on EAM's original tax return. AR at Ex. 9 at 3. Yet it ignored that EAM's current CPA signed EAM's amended tax return. The SBA did not explain why the signature of the former CPA should carry greater weight than that of EAM's current CPA. For the first time in the termination letter, the SBA took EAM to task for not obtaining a letter from the former CPA who, EAM claims, prepared the tax returns and other documents showing Mr. Bobonik was a 49% owner of EAM. The SBA stated the "most credible evidence EAM could have provided is noticeable in its absence," a "statement by the accountant correcting this mistake would certainly be in order," and "[n]o such statement was provided." AR Ex. 3 at 3. The SBA never requested EAM provide such a statement. See, for example, the letter of intent to terminate, AR Ex. 28. EAM argues in its Appeal Petition, in response to the SBA's belated precatory request, that its former CPA is now deceased. Appeal Petition at 2. The SBA does not object to this argument but continues to argue that failure to present the former CPA's statement undercuts EAM's credibility. Answer at 12. Generally, my decision must be decided solely on a review of the written administrative record. 13 C.F.R. Section 134.406(a) (1999). Evidence of the death of EAM's former CPA is outside the record. The SBA, however, assumed that EAM could have presented evidence from its former CPA, to explain why a mistake was made in these documents. It then based its conclusion, in part, on the absence of such evidence. It is problematic whether EAM can be denied the opportunity to address this point without violating its due process rights. I could remand the case to the SBA, directing it to afford EAM the opportunity to present, for the SBA's consideration, evidence of the death of its former CPA to explain the absence of his statement. Merely establishing the CPA's death, however, would not assist in deciding the extent of his involvement in the mistake. Further, to do so would unduly delay a decision in this already protracted litigation. Therefore, in the interest of judicial economy, I will not draw the negative inference the SBA suggested from the absence of the former CPA's statement. B. Notice of S Corporation Status. EAM completed an Ohio FT-1120-S, Notice of S Corporation Status. AR Ex. 65. Prepared by EAM's former CPA on May 14, 1996, and signed by Mr. Braswell on May 16, 1996, the form stated Mr. Braswell owned 51% and Mr. Bobonik owned 49% of EAM. Id. The SBA attached great significance to this document. In its termination letter, the SBA reasoned it would have been difficult for Mr. Braswell to sign the form without seeing Mr. Bobonik's name listed as the 49% owner of EAM. AR Ex. 3 at 3. Thus, the SBA argued, Mr. Braswell's signature on this document belies EAM's claim that the statement resulted from an error. Answer at 10, 11. The SBA first addressed this discrepancy in its termination letter. Thus, EAM was again denied the opportunity to present evidence to rebut the SBA's conclusion. However, EAM's defense to the SBA's claim, in general, is that any inconsistencies concerning ownership resulted from mistakes made by its former CPA and not recognized by Mr. Braswell. The SBA did not address EAM's position adequately. EAM's position is, not that Mr. Braswell did not know what was on the form but, because of his accountant's actions, he mistakenly believed that the former CPA properly completed the form. Accordingly, the SBA's analysis of the Ohio FT-1120-S form failed to address the crux of EAM's defense to the termination action. C. EAM's Letter of Explanation. In a letter dated November 25, 1997, responding to the SBA's questions concerning EAM's ownership, Mr. Braswell advised the SBA that Mr. Bobonik relinquished his EAM shares in June 1994. The letter explained further that EAM's tax returns contained "erroneous information." AR Ex. 32. Seizing on that discrepancy with the Share Exchange Agreement's May 1993 date and stock certificates submitted to the SBA in 1993, the SBA in its termination letter reasoned: Although your misstatement that the stock transfer occurred in June, 1994, rather than May, 1993, could have been a simple mistake, [the SBA finds] that this alleged mistake is further evidence that Mr. Bobonik did not relinquish his stock in May, 1993. Given your management and control of EAM, it is difficult to believe that your knowledge of when this event occurred could be off by over a year, if in fact the May, 1993 transfer had actually occurred. AR Ex. 3 at 3. In response, EAM argues Mr. Braswell had no motive to deceive the SBA into believing that the stock transfer was later rather than sooner. Rather, if the share transfer had not actually occurred, Mr. Braswell would have had every reason to keep his story consistent to avoid drawing SBA's attention. Appeal Petition at 2. EAM claims it confused the transfer date with the date EAM was admitted into the 8(a) program. Id. There is no evidence in the record, nor does the SBA assert, that any ownership transfer took place in June 1994. EAM only claims the letter contained a mistake and points to a logical explanation-that it confused these two dates. The SBA relied on this discrepancy ("it is difficult to believe that your knowledge of when this event occurred could be off by over a year") to reach the conclusion that no transfer occurred. That reliance was misplaced. That the dates varied by more than a year proves nothing but a discrepancy in EAM's explanation. Without the SBA showing anything more, its rationale was flawed. EAM's erroneous explanation was just that-an explanation. The explanation arguably raises a question of credibility, but it does not support the conclusion that confusing the two dates established a falsehood. D. SBA's Conclusion. The SBA's analysis and conclusion were unreasonable and contrary to the weight of the evidence in the record. Its rationale-Mr. Braswell knowingly signed the original tax returns and state filings; thus, the information was true-ignores that he also knowingly signed the corporate documents, amended tax returns, affidavits, and other documents indicating he is the 100% owner of EAM. Accordingly, using the SBA's reasoning, these documents are also true. The SBA did not explain why the stock certificates are not what they purport to be. The SBA did not consider the significance of the corporate books and records. It merely speculates the original tax returns and state filings are sufficient proof that the stock certificates falsely represent ownership. Although inconsistent actions contradicting EAM's corporate books and records may cause one to question those books and records, something more is required to explain why the corporate books and records do not establish ownership. By fail ing to analyze the significance of the stock certificates, Share Exchange Agreement, affidavits, and amended tax returns in their own right, the SBA failed to offer the rational connection between facts and judgment required to pass muster under the arbitrary and capricious test. The SBA merely made a credibility determination based on inconsistent information. That is insufficient. Therefore, after a review of the administrative record, I find the SBA's conclusion Mr. Braswell, on behalf of EAM, falsely stated he is the 100% owner of EAM is not fully supported in the record by the evidence and is unreasonable. I find the SBA made a clear error of judgment in concluding EAM should be terminated from the 8(a) program because it submitted false statements concerning its ownership. Accordingly, the SBA's decision is arbitrary, capricious, and contrary to law. Conclusion Respondent Small Business Administration's decision terminating Petitioner Environmental Affairs Management, Inc. from the 8(a) program is ARBITRARY, CAPRICIOUS, AND CONTRARY TO LAW. See 15 U.S.C. Section 637(a)(9)(C); 13 C.F.R. Section 134.406(b) (1999). Subject to 13 C.F.R. Section 134.408(c) (1999), this is the final decision of the Small Business Administration and is binding on the parties. 15 U.S.C. Section 637(a)(9)(D). 13 C.F.R. Section 134.408(a) (1999). RICHARD S. ARKOW Administrative Law Judge _______________________________ 1 Small Business Act of 1958, 8(a), as amended, 15 U.S.C. Section 637(a); 13 C.F.R. part 124 (1999). The purpose of section 8(a) is to "promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals so that such concerns can compete on an equal basis in the American economy . . . ." 15 U.S.C. Section 631(f)(2)(A). 2 This provision was not changed in 1998. 3 See 13 C.F.R. Section 124.104(c)(2)(1998) (prohibiting nondisadvantaged owners of an applicant concern from owning more than 10% of a concern in the same or similar line of business). 4 Accompanying the amended 1994 Ohio return was the Braswells' unsigned amended 1994 federal return, dated February 3, 1998, prepared by EAM's current CPA, which stated the amendment was "made to properly reflect 100% ownership and profit/loss allocation to John Braswell," AR Ex. 11 at 12-13. 5 Accompanying the amended 1995 Ohio return was Page 2 of the Braswells' amended 1995 federal return, which stated the amendment was "made to properly reflect 100% ownership and profit/loss allocation to John Braswell," id. at 11. 6 Accompanying the amended 1996 Ohio return was Page 1 of the Braswells' unsigned amended 1996 federal return, dated February 3, 1998, prepared by EAM's current CPA, which stated the amendment resulted in the Braswells' being entitled to a $187.00 refund, id. at 17. 7 Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals, 63 Fed. Reg. 35,726 (1998). 8 Counsel failed to cite any authority for her assertion of the SBA's intent. In response to an order to provide authority, counsel presented the declaration of the SBA's Associate General Counsel for General Law, who stated that the Office of General Law was responsible for drafting these rules and the "SBA did not intend that the substantive revisions apply to termination cases in which the termination decision was made prior to July 30, 1998." SBA's Supplemental Response Ex. A. This declaration is not competent legal authority to support counsel's assertion regarding the SBA's intent. Thus, I find counsel for the SBA was unable to support her argument with competent legal authority, such as commentary from the Federal Register, that the SBA intended the former substantive rules apply. 9 Cf. Matter of D'Wiley's Svcs., Inc., SBA No. MSB-537, at 5- 6 (1996) (holding SBA's failure to apply new rules, effective after SBA started termination proceedings but before SBA decided to terminate petitioner from the 8(a) program, denied petitioner the benefit of newly created rights). 10 Although the record contains no direct evidence that Mr. Bobonik owns 10% or more of ESM, Inc., which is in the same or similar line of business as EAM, the parties have conceded that fact and it is not in issue. This restriction is not in the new regulations. This omission is not decisionally significant. 11 Stock certificate number 2 is absent from the record. I conclude that it was issued to Mr. Braswell because EAM was admitted into the 8(a) program based on his majority ownership. The SBA does not explain why the certificate is missing from the record, which was certified as complete. Posted: May, 1999