Supreme-Technology, Inc., No. 4092 (August 31, 1995) Docket No. SIZ-95-4-13-34 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) SIZE APPEAL OF: ) ) Supreme-Technology, Inc. ) ) Appellant ) Docket No. SIZ-95-4-13-34 ) 8(a) Size Determination ) Case No. 03-SD-95-048 ) Philadelphia Regional Office ) Philadelphia, Pennsylvania ) _______________________________) DIGEST Where, in the two years before application to the 8(a) program, a firm receives 62% of its revenues from contracts with a single large business, the two firms are affiliated and other than small. Where two companies that are owned by a father and son individually are in similar lines of business, the son's company leases space in two locations from the father's company, the son's company receives 62% of its revenues from contracts with the father's company, the son formerly worked for the father's company, and there is no clear fracture between father and son, the two firms are affiliated based on identity of interest. DECISION August 31, 1995 BLAZSIK, 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 a firm that receives 62% of its annual receipts from contracts with a single company in the two years before it applied to the 8(a) program is affiliated with that company because its viability is in jeopardy without those contracts. Whether a son's company, which is in the same industry as his father's company, receives 62% of its revenues from contracts with the father's firm, leases office space in two locations on favorable terms from the father's firm both of which are adjacent to the father's business addresses, and where the son was formerly the Special Assistant to the President at the father's company, is affiliated with his father's business because they have an identity of interest. Facts On January 9, 1995, the Associate Administrator for Minority Enterprise Development (AA/MED) requested that the Small Business Administration (SBA) Philadelphia Regional Office (Regional Office) make a size determination on Supreme-Technology, Inc. (Supreme) in connection with its application for participation in the section 8(a) Program. Specifically, the AA/MED questioned whether Supreme is affiliated with Sonicraft, Inc. (Sonicraft), an allegedly large business and, therefore, is other than small. The basic facts are undisputed. Supreme is a communications company deriving a majority of its revenues from SIC codes 4813 (Telephone Communications, Except Radiotelephone) and 4899, (Communications Services, N.E.C.). [1] It is wholly owned by Bretrand F. Jones, Supreme's Chief Executive Officer and sole director, and is headquartered in Alexandria, Virginia with a branch office in Chicago, Illinois. Bretrand Jones has held all corporate offices since 1986. Before he founded Supreme, from 1984 to 1986, Bretrand Jones was Special Assistant to the President of Sonicraft. Sonicraft is a communications manufacturing company with a primary SIC code of 3663 (Radio and Television Broadcasting and Communications Equipment). Sonicraft's president and majority shareholder, Jerry T. Jones, is also the father of Supreme's owner, Bretrand F. Jones. Sonicraft's headquarters is at 8859 S. Greenwood Avenue, Chicago, Illinois, and it has a branch office at 6303 Little River Turnpike, #320, Alexandria, Virginia. Sonicraft rents office space to Supreme at 8849 S. Greenwood Avenue, Chicago, Illinois, and at 6303 Little River Turnpike, #340, Alexandria, Virginia. The terms of the leases permit Supreme to defer all rent payments until January 1996, when all prior monthly payments will be due with the 1996 monthly payments. On January 13, 1995, the Regional Office requested that Supreme provide a breakdown of its revenues received from contracts with Sonicraft for its three most recent completed fiscal years, information on any other transactions with Sonicraft during the last three years, a breakdown of Supreme's revenues by SIC code, evidence and documentation of Supreme's principal place of business and Bretrand Jones' personal residence, and evidence of payment of rent to Sonicraft. In response to the Regional Office's request, Supreme provided financial information from fiscal years 1992, 1993, and 1994, during which Supreme received, respectively, 88%, 50%, and 30% of its annual receipts from contracts with Sonicraft. On March 8, 1995, the Regional Office determined that Supreme is affiliated with Sonicraft through identity of interest, contractual relationships, and common facilities. The Regional Office based its determination on Supreme's SBA Form 355, its financial records from fiscal years 1992 and 1993, its Federal tax returns for the applicable years, its responses to requests for information, and Dun & Bradstreet reports for both Supreme and Sonicraft. The Regional Office issued its determination on March 9, 1995, and Supreme filed an appeal postmarked April 10, 1995. Arguments on Appeal In its appeal, Appellant asserts that the Regional Office incorrectly found affiliation because Supreme is not reliant for contracts on Sonicraft. Appellant asserts that the Regional Office erred in using only the 1992 and 1993 financial information in computing the percentage of revenue attributable to contracts with Sonicraft, and that the Regional Office should have evaluated the 1994 revenues as well. This would have shown only 52% of the average annual receipts attributable to Supreme- Sonicraft contracts. Further, Appellant asserts that the contract revenues need not be included in analyzing affiliation because all its contracts with Sonicraft were awarded competitively. Appellant further asserts that no identity of interest exists between Supreme and Sonicraft as a result of the father- son relationship because there is a remoteness of business interests, amounting to a clear fracture between Bretrand and Jerry Jones. Discussion This appeal was timely filed within 30 days of receipt of the Regional Office determination. See 13 C.F.R. Section 121.1705(a)(1).[2] Appellant's first assertion, that it does not rely on contracts with Sonicraft for its economic viability, is without merit. The regulation governing affiliation through contractual relationships, 13 C.F.R. Section 121.401(k), provides: Affiliation through contractual relationships. Affiliation generally arises where one concern is dependent on another concern for contracts and business to such a degree that its economic viability would be in jeopardy without such contracts/business. It is undisputed that during 1992 and 1993, Supreme received approximately 62% of its total annual revenues contracts with Sonicraft. [3] It is reasonable to conclude that, without these contracts, Supreme could not generate adequate profits to remain an economically viable business. Because Supreme's economic viability would be in jeopardy without the Sonicraft contracts, the firms are generally affiliated. See Size Appeal of AA Engineers & Associates, Inc., No. 3824 (1993). Appellant's assertion, that the Regional Office erred in not considering Appellant's 1994 financial information in determining contractual reliance, is incorrect. Although the Regional Office may have requested Appellant's fiscal year 1994 financial information, the request does not automatically make that information relevant to the analysis. The issue in this case is not Supreme's size based on its average annual receipts for the last three completed fiscal years. See 13 C.F.R. Section 121.402(a), (c). Rather, the issue is whether Appellant is affiliated with Sonicraft through contractual relationships. The regulations specifically provide that all size and affiliation issues are determined at the time the concern applied to the 8(a) program. See 13 C.F.R. Section 121.1103(a). Hence, affiliation through contractual relationships may be based on findings from a single fiscal year; in fact, the Regional Office could have made a determination using only Supreme's 1993, rather than 1992 and 1993, financial information. Because Supreme applied for participation in the 8(a) program before the close of its 1994 fiscal year, the 1994 financial information is not relevant to the Regional Office determination. Even if Appellant is not affiliated with Sonicraft through contractual relationships, there is affiliation because Supreme and Sonicraft have an identity of interest based on a family relationship. 13 C.F.R. Section 121.401(d). Indeed, it is presumed that Jerry Jones and Bretrand Jones, as father and son, have an identity of interest and that their companies are affiliated. Supreme's assertion to the contrary is without merit Notwithstanding the presumption of identity of interest between family members, an appellant may rebut the presumption by presenting evidence, such as lack of close involvement in business matters or by other factors that would render the application of the regulation unjust or inequitable under the circumstances. See Size Appeal of Maria Elena Torano & Associates, No. 4010 (1995), citing Size Appeal of Golden Bear Arborists, Inc., No. 1899 (1984). Supreme asserts that there is a lack of involvement in "each other's business transactions" which amounts to a clear fracture between Jerry and Bretrand Jones. The facts, however, do not support this assertion and the record clearly shows interaction between the Supreme and Sonicraft creating an identity of interest. First, the firms both are in the communications industry; Sonicraft manufactures broadcast and telecommunications equipment, while Supreme provides communications services. See Size Appeal of Pershield, Inc., No. 3952 (1994). Additionally, Supreme receives well over half its revenues from Sonicraft contracts in the communications industry. Second, Sonicraft leases office space to Supreme both in Chicago and Alexandria. In each location, Supreme's office is adjacent to Sonicraft's office. Further, the leases are not arm's length agreements; the terms are highly favorable to Supreme and permit Supreme to defer its current rental payments until 1996. See Size Appeal of Bordges Timber, Inc., No. 3649 (1992). [4] Third, from 1984 to 1986, Bretrand Jones was the Special Assistant to his father, Jerry Jones, President of Sonicraft. He left Sonicraft and founded Supreme, which now derives a substantial amount of revenue from contracts with his former employer, Sonicraft. In light of the above facts, Appellant has failed to rebut the presumption of identity of interest between the two firms based on family relationships between the two firms by showing a remoteness between, or a fracture in, the family ties. Appellant's assertion that Bretrand Jones left Sonicraft because of a fracture of business interests is simply not consistent with the facts, which clearly show continuing close business and personal ties, amounting to an identity of familial interest. In summary, Appellant is affiliated with Sonicraft through contractual relationships on which Supreme relies for its economic viability. See 13 C.F.R. Section 121.401(k). The firms also are affiliated because Appellant has failed to rebut the presumption that there is an identity of interest between Supreme and Sonicraft based on the family relationship between Bretrand and Jerry Jones. See 13 C.F.R. Section 121.401(d). Conclusion The Regional Office determination is AFFIRMED, and the appeal is DENIED. This constitutes the final decision of the Small Business Administration. See 13 C.F.R. Section 121.1720(b). ___________________________ Gloria E. Blazsik Administrative Judge ____________________ [1] Supreme also receives some revenue from SIC code 8742, Management Consulting Services; SIC code 7373, Computer Integrated Systems Design; SIC code 8711, Engineering Services; SIC code 1522, General Contractors, Other than Single Family. In 1992 and 1993, 61% of Supreme's revenues were from its primary SIC codes, 4813 and 4899. [2] The appeal is timely because the Regional Office mailed its determination on Thursday, March 9, 1995, and, allowing a reasonable time for delivery, receipt is presumed on March 13, 1995. [3] Even if the 1994 financial information were relevant, by Appellant's own admission, Supreme's revenues from contracts with Sonicraft still accounted for a majority (52%) of its total 1992-1994 revenue. [4] These facts also could support a separate finding of affiliation (even absent familial relationship). See 13 C.F.R. Section 121.401(i).