Military Construction Corporation, No. 4456 (September 27, 2001) Docket No. SIZ-2001-08-09-30 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) Size Appeal of: ) ) Military Construction Corporation ) Docket No. SIZ-2001-08-09-30 ) ) Decided: September 27, 2001 Appellant ) ) RE: Bob Mathews Construction Co., Inc. ) ) Solicitation No. IFB-01-DCS-27-JC ) Department of Labor ) Office of Grants and Contracts Management, ) Employment and Training Administration ) Washington, DC ) ) APPEARANCES Hubert J. Bell, Jr., Esq. S. Gregory Joy, Esq. Smith, Currie & Hancock LLP for Appellant Military Construction Corporation William E. Barfield, Esq. Higley & Barfield, P.A. for Bob Mathews Construction Co, Inc. DIGEST Although the Area Office erred by placing, in an internal memorandum not provided to the parties, much of its rationale for finding a challenged concern small, rather than clearly stating in the size determination what elements it included in calculating the challenged concern's average annual receipts, it was not clear error because it did not affect the substantial rights of any party in this instance. The Area Office did not err, as a matter of law, by determining whether the annual receipts in a third year, for which annual receipt figures were not available, would cause the average annual receipts (AAR) for a three-year period to exceed the size standard by: (a) calculating, based on the known annual receipts for the other two years, the maximum that the third year's unknown receipts could be without pushing the AAR above the size standard; (b) comparing the margin by which that third year's hypothetical maximum annual receipts figure exceeded the known gross receipts for the third year with the corresponding margins for the two years for which it knew both gross receipts and annual receipts; and (c) evaluating whether it appeared "logical" that the unknown annual receipts would exceed the hypothetical maximum, when that would require that the margin between the known gross receipts and the unknown annual receipts be five times greater than the corresponding margins in the two years for which it knew the gross receipts and annual receipts. The Area Office did not err, as a matter of fact, by concluding, based on comparison of the margin between hypothetical maximum annual receipts and known gross receipts for the third year with the corresponding margins for the two years for which it knew the gross and annual receipts, that the margin in the third year would not be sufficiently greater than those in the first two years to cause the third year's receipts to push the AAR above the size standard. The Area Office did not err in failing to impute to the challenged firm income received by a controlling shareholder under the "identity of interest" rule (13 C.F.R. Section 121.103(a)(3)) where the income was received from the challenged firm itself. DECISION HOLLEMAN, Administrative 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 the Area Office erred by placing, in an internal memorandum not provided to the parties, much of its rationale for finding a challenged concern small. Whether the Area Office erred as a matter of law in choosing a method of calculating the challenged firm's average annual receipts. Whether the Area Office erred as a matter of fact in using the particular methodology it chose to calculate the challenged firm's average annual receipts. Whether the Area Office erred in failing to impute, to the challenged firm, income received by a controlling shareholder of the firm under the "identity of interest" rule. SUMMARY Appellant Military Construction Corporation (Appellant) appeals from a May 30, 2001, size determination by the Small Business Administration's (SBA) Office of Government Contracting - Area III, Atlanta, Georgia (Area Office). The Area Office found that Bob Mathews Construction Co., Inc. (BMC), the low bidder in a solicitation by the Department of Labor's Office of Grants and Contracts Management, Employment and Training Administration (ETA-OGCM), Washington, DC, for construction of a campus-style facility to house the new Jacksonville Job Corps Center, was a small business. Appellant argues that the size determination is based on a clear error or fact or law. Because Appellant has failed to show that the size determination rests on a clear error or fact or law, the Administrative Judge affirms the size determination and denies the appeal. I. BACKGROUND A. Procedural History 1. The Solicitation On June 6, 2001, the Department of Labor's ETA-OGCM, Washington, DC, issued Solicitation No. IFB-01-DCS-27-JC, seeking bids for construction of a campus-style facility to house the new Jacksonville Job Corps Center. The Contracting Officer (CO) assigned to the procurement North American Industry Classification System (NAICS) code 233320 (Commercial and Institutional Building Construction), with a corresponding $27.5 million average annual receipts (AAR) size standard. 2. The Protest Bids were opened on July 19, 2001. BMC's bid apparently did not include Section K, the small business self-certification. [1] Apparently in response to a request from the CO, BMC's attorney provided a completed self-certification on July 20, 2001. On July 20, 2001, Appellant, through counsel, filed a protest with the CO. Appellant alleged that BMC, the low bidder, exceeded the size standard. Appellant stated its president attended the bid opening and observed BMC's bid did not include Section K, the small business self-certification. Appellant further asserted that the Jacksonville, FL, Business Journal, December 2000, ranked BMC twelfth in revenue (with $28 million in 1998 and $30 million in 1999) among the fifty fastest growing commercial contractors in the Jacksonville area; that BMC had a subsidiary, Cypress Post (CP) Apartments; and that BMC leased its headquarters space from its president, Robert L. Mathews. On July 24, 2001, the CO referred the protest to the Area Office. On July 30, 2001, the Area Office informed BMC of the protest and requested that it submit a response to the protest, together with an SBA Form 355 and certain other information. On July 31, 2001, BMC submitted information requested by the Area Office, including an SBA Form 355, its fiscal year (FY) 1999 and FY 2000 corporate tax returns and financial statements, and its FY 2001 financial statement only. In its letter transmitting the documents to the Area Office, BMC stated that rental income from CP Apartments was included in "the Company revenue . . . as shown." 3. The Size Determination On August 3, 2001, the Area Office issued its size determination. The Area Office determined BMC's size as of its July 20, 2001, self-certification, filed the day after its initial offer. [2] The Area Office found that BMC's FY ends on June 30 of each calendar year. Therefore, the Area Office found the applicable accounting period was July 1, 1998, through June 30, 2001, encompassing BMC's FY 1999, FY 2000, and FY 2001. The Area Office found that BMC supplied its Internal Revenue Service (IRS) Forms 1120 (U.S. Corporation Income Tax Return) for FY 1999 and FY 2000, but had not yet received its audited figures for FY 2001. Therefore, BMC supplied the gross receipts figure, certifying that it would appear on Line 1a of its 2001 IRS Form 1120. The Area Office also noted that the audited financial statements showed that BMC consolidated receipts from CP Apartments into BMC's receipts. The Area Office stated that, in making its calculations, it relied on BMC's FY 1999 and FY 2000 IRS Forms 1120, and BMC's certifications as to the unaudited figures for FY 2001, including its certification as to the gross receipts figure that would appear at line 1a of its FY 2001 Form 1120, and that the unaudited figure for FY 2001 was a lesser amount than would cause its average annual receipts to exceed $27.5 million; and a further certification that, even if the three-year receipts of CP Apartments were aggregated into its average annual receipts, they still would not exceed the applicable size standard. Taking into account BMC's submissions and certifications, the Area Office found that BMC's total receipts for the three-year period, divided by three, did not exceed the $27.5 million size standard. Thus, the Area Office concluded that BMC was a small business. On August 3, 2001, Appellant received the size determination. B. Arguments on Appeal On August 8, 2001, Appellant, through counsel, filed the instant appeal. On August 22, 2001, BMC, through counsel, filed a Response to the appeal. 1. The Appeal In its Appeal Petition, Appellant asserts the size determination is based on plain error of fact or law. Appellant argues, first, that the size determination is based on plain error of law because the Area Office (a) should have considered BMC's "total income" (Line 11, IRS Form 1120 for corporations) plus "cost of goods sold" (Line 2, IRS Form 1120), minus exclusions (Line 8, IRS Form 1120); but (b) may have considered only Line 1a of BMC's FY 1999 and FY 2000 Forms 1120, along with the data BMC certified would appear on Line 1a of BMC's FY 2001 Form 1120. Appellant argues, second, that the size determination is based on plain error of fact because the Area Office may have failed to consider the following elements of income: (a) interest income shown on the 2001 balance sheet, such as interest on BMC's sweep account and certificates of deposit, which would have appeared in Line 5, Form 1120; (b) rental income from BMC affiliate CP Apartments, which would be shown in Line 6, rather than Line 1a as BMC stated; (c) rental income that Robert L. Mathews (BMC's president, 50% owner, and director) personally received, which would not appear on IRS Form 1120 but should be included in BMC's receipts because of their identity of interest; and (d) non-construction earnings, if only construction earnings would appear on Line 1a of the FY 2001 IRS Form 1120. Thus, Appellant argues, the net effect of these errors is that: (a) although the FY 1999 receipts exactly match the sales revenue from the Dun & Bradstreet report, they do not include a significant amount of "other income" that would appear in Lines 4 through 7 or 9 through 10 of IRS Form 1120; (b) if the FY 2000 receipts also do not include "other income," BMC's actual FY 2000 receipts also would be substantially higher; and (c) thus, the AAR for the three-year period might well exceed the $27.5 million standard when the true receipts for FY 1999 and FY 2000 were combined with the amount shown on the 2001 balance sheet, standing alone or with the income from CP Apartments and Mr. Mathews. 2. Response to Appeal In its Response to the appeal, BMC argues, in general, that: (a) it submitted all the necessary information for the Area Office's consideration; (b) far from even asserting that BMC's AAR exceed $27.5 million, Appellant states only that they might; (c) Appellant's argument is based solely on the single reference to Line 1a, a certification on a balance sheet, and the unsupported hearsay allegations of a Dun & Bradstreet report; and (d) even using Appellant's definition of "receipts," the financial information BMC provided was sufficient for the Area Office to have correctly found BMC small. As to elements of income that the Area Office may have failed to consider, BMC argues that: (a) interest income was included in the 2001 balance sheet to be reported as part of Line 11 of IRS Form 1120; (b) CP Apartments rentals appear in Line 6 of IRS Forms 1120 for FY 1999 and FY 2000, as well as among the data on the 2001 balance sheet to be reported as part of Line 11 of IRS Form 1120; and (c) rental payments BMC pays to Bob Mathews, Sr., are reported on Line 16 of IRS Form 1120 and, because the gross income is not net or taxable, no expenses have been deducted and the calculations already include the rental payments. Finally, BMC argues, citing firm figures for total income and cost of goods sold for each of the three years, that its AAR are less than $27.5 million. II. DISCUSSION A. Threshold Matters Appellant filed its appeal within 15 days of receiving the size determination; thus, it is timely for the present procurement. Size Appeal of Urban/Meridian Joint Venture, SBA No. SIZ-4432, at 4 (2001) (citing Size Appeal of MBI Corporation, SBA No. SIZ-4375, at 5 n.8 (1999)); 13 C.F.R. Section 134.304(a)(1). 1. New Evidence on Appeal Both Appellant and BMC attached documentary evidence to their pleadings. Appellant attached copies of documents that it obtained from the Area Office under the Freedom of Information Act, as well as a blank IRS Form 1120. These documents are redacted copies of documents BMC submitted to the Area Office in response to the protest. The unredacted originals were part of the record before the Area Office when it made the size determination and thus are in the record before this Office. BMC, for its part, attached an affidavit executed August 17, 2001. No ruling as to Appellant's attachments appears necessary, because the originals already are in the record. The Administrative Judge will, of course, consider the contents of the Area Office File and will take judicial notice of the 2000 IRS Form 1120, as obtained from the Internal Revenue Service web site. However, BMC's affidavit includes new information. The Administrative Judge will not consider evidence not presented to the Area Office unless he orders it presented or the proponent serves and files a motion establishing good cause for the submission. Size Appeal of American Guard Services, SBA No. SIZ-4397, at 5 (2000); 13 C.F.R. Section 134.308(a). BMC has not filed a motion or alleged good cause. Accordingly, the Administrative Judge concludes BMC has not established good cause for admitting any evidence beyond the record and thus EXCLUDES it from consideration. 2. BMC's Failure to Self-Certify With Its Initial Offer Although Appellant's protest asserted that BMC's bid did not include the small business self-certification, Appellant has not raised, as an error on appeal, the Area Office's acceptance of BMC's self-certification. Therefore, the Administrative Judge finds that Appellant has abandoned this issue and will not address it in this appeal. Size Appeal of J.M. Waller Associates, Inc., SBA No. SIZ-4322, at 8 (1998). B. Merits of the Appeal Appellant has the burden of proving, by a preponderance of the evidence, all elements of its appeal. Specifically, it must prove the size determination is based on a clear error of fact or law. American Guard Services, SBA No. SIZ-4397, at 5; 13 C.F.R. Section 134.314. Appellant asserts the Area Office erred in calculating BMC's AAR. 1. Legal Error Regarding Elements of Income SBA's regulations require, and this Office's case law affirms, that a firm's AAR must be calculated as "total income" plus "cost of goods sold," as these terms are defined on Federal income tax return forms. Size Appeal of Carriage Abstract, Inc., SBA No. SIZ-4430, cat 8 (2001) (citing Size Appeal of Phillips National, Inc., SBA No. SIZ-4332, at 7 (1998)); 13 C.F.R. Section 121.104(a)(1). For a corporation, these terms are defined on IRS Form 1120. 13 C.F.R. Section 121.104(a)(1). Thus, "total income" is shown on Line 11. [3] Total income is the sum of the amounts shown on Lines 3 (gross profit), 4 (dividends), 5 (interest), 6 (gross rents), 7 (gross royalties), 8 (capital gain net income) [4], 9 (net gain or loss from sales of business property), and 10 (other income, including adjustments required by a change in a method of accounting, recoveries of bad debts, and credits for alcohol used as fuel). IRS Form 1120; Internal Revenue Service, U.S. Dep't of the Treasury, Instructions for Forms 1120 and 1120-A, at 2 (2000). However, "receipts" for purposes of calculating size excludes "net capital gains or losses." 13 C.F.R. Section 121.104(a)(1). Thus, to calculate annual receipts, the Area Office must add Line 11 (total income) to Line 2 (cost of goods sold) and subtract Line 8 (capital gain net income or loss) and any other exclusions required by the regulation. The only financial information in the record before the Area Office was the tax returns and financial statements for FY 1999 and FY 2001, as well as the financial statements only for FY 2001. The Area Office must use a firm's Federal income tax returns to determine its AAR; however, when, as here, no tax returns are available for one year, the Area Office may use a firm's financial statements or other records to calculate receipts. Carriage Abstract, SBA No. SIZ-4430, at 8 (citing Size Appeal of TROY Systems, Inc., SBA No. SIZ-4296, at 7 (1998)). As the challenged firm, BMC had the burden of demonstrating that it met the size standard, using information available and admissible on the self-certification date. TROY Systems, SBA No. SIZ-4296, at 7; 13 C.F.R. Section 121.1009(c). The Area Office found that BMC's accounting period for FY 2001 ended on June 30, 2001; therefore, BMC had not received its audited figures for FY 2001. The Administrative Judge finds the Area Office's implicit conclusion that BMC had provided all available information is not clearly erroneous. Therefore, the Area Office properly relied on these figures to calculate AAR for BMC. The size determination must include the basis for its findings and conclusions. 13 C.F.R. Section 121.1009(e). Therefore, the Area Office must state clearly what elements it includes in calculating a challenged concern's AAR. Instead, in this case, the Area Office prepared a separate memorandum for the record which described its method of calculating BMC's AAR. Though the Area Office properly refrained from discussing the amounts of BMC's receipts to protect its confidential commercial and financial information, J.M. Waller, SBA No. SIZ-4322, at 9 n.4, it should have stated in the size determination what elements of income it considered and what method it used to ascertain whether BMC's total income and cost of goods sold would cause its AAR for FY 1999 through 2001 to exceed the size standard. However, this error was not substantive and did not affect the rights of any party in this case. Therefore, the Administrative Judge finds the Area Office's error in not stating the basis for its findings did not rise to the level of clear error. Size Appeal of InfoTech Enterprises, Inc., SBA No. SIZ- 4346, at 12 n.5 (1999). a. Data Used for FY 1999 and 2000 It is clear from a review of the record before the Area Office that it considered the appropriate elements of BMC's income for FY 1999 and 2000; using each IRS Form 1120, the Area Office added total income from Line 11 to "cost of goods sold" from Line 2, and subtracted capital gain net income on Line 8. [5] b. Data Used for FY 2001 The Area Office did not, as Appellant suggests, merely use the gross receipts that would appear on Line 1a. Rather, it calculated, based on the known receipts for FY 1999 and FY 2000, the maximum that FY 2001 receipts could be without pushing the average of the three years above the $27.5 million limit. That hypothetical maximum FY 2001 receipts figure exceeds the FY 2001 gross receipts by a margin of greater than five percent. The Area Office then examined the margin by which BMC's annual receipts, in each of the two FY for which data were available, exceeded the respective gross receipts for those FYs: FY 1999 annual receipts exceeded FY 1999 gross receipts by slightly less than one percent, and FY 2000 annual receipts exceeded FY 2000 gross receipts by slightly less than four-tenths of one percent. Thus, the Area Office reasoned, it did not "appear logical" that the FY 2001 receipts would exceed the hypothetical maximum-apparently because that would require that the margin between the FY 2001 gross receipts and annual receipts be five times greater than the corresponding margins in FY 1999 and FY 2000. Though the Administrative Judge does not endorse this method of assessing annual receipts, it is not clearly erroneous in law. As noted above, total income, which is used to calculate annual receipts, includes gross profit (in this case, from construction), as well as dividends, interest, gross rents, gross royalties, capital gain net income, net gain or loss from sales of business property, and other income. Examination of the 2001 income statement reveals some such items of other, non- construction, income, such as interest, equipment rentals, and discounts; if these items do not total five times the corresponding amounts of such other income in 1999 and 2000and cost of goods sold and net capital gains or losses also remain relatively constant [6]it follows that the difference between gross receipts and annual receipts in FY 2001 would not be sufficiently greater than in FY 1999 and FY 2000 to cause the FY 2001 receipts to push the AAR over the $27.5 million limit. Therefore, the Area Office's reasoning was not clearly erroneous as a matter of law. 2. Factual Error Regarding Other Income The Administrative Judge finds that the size determination also was not based on any clear error of fact. This conclusion is based on evaluation of Appellant's claims concerning interest income, rental income from CP Apartments, and rental income from BMC to Mr. Mathews, as well as a comparison, between FY 1999 and FY 2001 and between FY 2000 and FY 2001, of all non-construction earnings. a. Interest Income The income statement, withheld in its entirety from Appellant, [1] does show the 2001 interest income. Because the Area Office considered only the 2001 gross receipts rather than the total income from line 11, the Area Office did not consider interest separately. However, FY 2001 interest income was, in fact, less than it was in 2000, and just over 45 percent higher than it was in 1999. Thus, its inclusion would not cause the margin between the 2001 gross receipts and the hypothetical maximum receipts to increase by five times from FY 2000 or from FY 1999. Therefore, there is no factual error in this regard. b. Rental Income from CP Apartments. Examination of the 2001 balance sheet does not reveal a separate item of income from CP Apartments. BMC stated in its letter transmitting the documents to the Area Office that this rental was included in "the Company revenue . . . as shown." Thus, its inclusion would not cause the margin between the 2001 gross receipts and the hypothetical maximum receipts to increase by five times from FY 2000 or from FY 1999. Therefore, there is no factual error in this regard. c. Rental Income from BMC to Robert L. Mathews Appellant argues that the rental income Robert L. Mathews personally receives from BMC should be included in BMC's receipts because of their identity of interest. Appellant's argument is meritless. This would require that the rental income be counted twice. Further, the "identity of interest" rule that Appellant cites relates only to control or the power to control. In Size Appeal of Ridge Instrument Co., Inc., SBA No. SIZ-4207, at 6 (1996), this Office found that an unrebutted presumption of identity of interest justifies treating stockholders as one entity for control purposes. The regulation defines identity of interest as a factor suggesting control or the power to control. 13 C.F.R. Section 121.103(a)(3). Thus, Appellant has not established why the "identity of interest" rule should be extended to justify imputing to a corporation income received personally by a shareholder of the corporation, especially when that income is received from the corporation itself. d. All Non-Construction Earnings The income statement, withheld in its entirety from Appellant, [2] does show that the construction income corresponds to the gross income. Therefore, other, non-construction income (or, to use the regulatory parameters, the total of all other income sources listed in Lines 4 through 10 of IRS Form 1120) must be added to calculate total income. Comparing all non- construction income as a whole from year to year, the Administrative Judge concludes that it decreased over 88 percent between FY 1999 and FY 2001, and decreased more than 212 percent between FY 2000 and FY 2001. Therefore, other, non-construction income to be included as part of total income not only did not increase fivefold between FY 1999 and FY 2001 or between FY 2000 and FY 2001, but actually decreased during each of those periods. Thus, the Administrative Judge concludes that the size determination's conclusion-that the difference between gross receipts and annual receipts in FY 2001 would not be sufficiently greater than in FY 1999 and FY 2000 to cause the FY 2001 receipts to push the AAR above the $27.5 million limit-was not based on any clear error of fact. Accordingly, the Administrative Judge concludes the Area Office properly found that BMC was a small business because its AAR did not exceed $27.5 million. Appellant has failed to meet its burden of establishing clear error in the size determination, and the size determination is affirmed. III. CONCLUSION For the above reasons, the Administrative Judge finds Appellant has failed to meet its burden of showing the size determination is based on a clear error of fact or law, AFFIRMS the Area Office size determination, and DENIES this appeal. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 134.316(b). _________________________________ CHRISTOPHER HOLLEMAN Administrative Judge _________________________ [1] The Area Office file includes BMC's representations and certifications, but neither the small-business self- certification, nor subsequent certifications to be checked if the small-business certification is completed, have been completed. BMC's July 20th self-certification is in the file. [2] The Area Office did not address Appellant's complaint that BMC had not self-certified as a small business in its initial offer including price. [3] Size Appeal of MTB Investments, Inc., SBA No. SIZ- 4239, at 5 (1997) (citing Internal Revenue Service, U.S. Dep't of the Treasury, Pub. No. 334, IRS Tax Guide for Small Business, at 24 (1995)). [4] Note, however, that this amount is later subtracted from "total income" because "receipts" for purposes of calculating size excludes "net capital gains or losses." 13 C.F.R. Section 121.104(a)(1). [5] The Administrative Judge notes that the Area Office's internal memorandum contains a transcription error in its computation of BMC's AAR for FY 2000. However, this error is not large enough to affect the final calculations as to BMC's size and thus is harmless. [6] Because "cost of goods sold" (Line 2, IRS Form 1120) must be added to "total income" (Line 11, IRS Form 1120), and "capital gain net income" (Line 8, IRS Form 1120) must be subtracted, these figures also would have to remain relatively static. However, in this case, "cost of goods sold" increased just over 54 percent between FY 1999 and FY 2001 and just over 8 percent between FY 2000 and FY 2001; and Line 8 (capital gain net income) was blank for both FY 1999 and FY 2000. Posted: October, 2001