Facing a Size Protest? SBA Might Want Your Tax Returns
Yesterday’s tax filing deadline brought to mind a recent size protest decision that affirmed a finding that a contractor was not a small business because it failed to furnish tax forms or other financial information when it was asked to do so by the Small Business Administration (“SBA”). Size Appeal of Rigid Constructors, LLC, SBA No. SIZ-6193 (Feb. 24, 2023).
This case got started when the US Army Corps of Engineering awarded a small business set-aside contract to Rigid Constructors for the construction of bank stabilization along the Red River in Louisiana. One of Rigid’s competitors filed a protest with the Contracting Officer asserting that Rigid was not a small business for a variety of reasons including a claim that Rigid was affiliated with some 37 other concerns. Id., slip op. at 2.
Size protests are referred to the relevant SBA area office for the protest to be reviewed. Almost always, the SBA will ask the contract awardee to furnish a variety of information for it to evaluate the protestor’s allegations. The awardee is also given the opportunity to respond to the allegations. Absent an extension of time, the awardee is required to respond within three working days or risk a finding that the firm is “other than small.”
In this case, the awardee was, among other things, asked to furnish tax returns for the previous five fiscal years. Id. at 3. These were required to ascertain the awardee’s annual receipts combined with those of its affiliates. SBA must use the firm’s prior federal tax returns to ascertain the firm’s annual receipts for each of the fiscal years under review. When a tax return has not been filed for one of the years, the SBA “will calculate the concern’s annual receipts for that year using any other available information, such as the concerns regular books of account, audited financial statements, or information contained in an affidavit by a person with knowledge of the facts.” See 13 CFR § 121.104(a).
When Rigid responded to SBA’s request, it indicated that some of the concerns under review had not filed some of the tax returns for the period under review but “offered virtually no supporting financial information, like regular books of account, audited financial statements, or affidavits.” Id. at 8. Based on what it had to work with, the Area Office found that Rigid when combined with its affiliates was not a small business even though their collective receipts for which information was available did not exceed the size standard of $39.5 million. Id. at 5. The Area Office simply “could not ascertain whether [Rigid] was small without the financial information for all of [its] affiliates.” Accordingly, the Area Office applied the rule that “SBA may presume that disclosure of the information required [by it] would demonstrate that the concern is other than a small business.” Id. at 6 (citing 13 CFR § 121.1008(d)).
On appeal, SBA’s Office of Hearings and Appeals (“OHA”) affirmed the Area Office’s size determination. OHA noted that “the Area Office repeatedly, and properly, requested that [Rigid] produce unredacted tax returns or other financial information . . . and [Rigid[ failed to comply with these requests. . . .” Id. at 9. For that reason, OHA held that the Area Office properly applied the adverse inference and affirmed its decision. It should be noted that Rigid tried to submit more complete financial information during its appeal. This, however, was in OHA’s view too little, too late because that information “could have been, but [was] not, provided to the Area Office during the size review.” Id.
Size protests are a fact of life in the world of small business contracting. When a company is faced with its first protest, it can be easy to have an “are you kidding me” reaction and think that if you just fill out the form and submit the data you have, all will be ok since you really are, in fact, a small business.
But, as unfair as it may seem, it’s critical that you respond fully—in terms of coughing up the documents that are being requested, filling out the form, and submitting a narrative response to the protester’s assertions. If you don’t, you’re leaving yourself in the hands of the SBA staffer reviewing your case. The best approach is to do everything you can to make it easy for the official to see things your way.