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Beyond Tax Returns: Federal District Court Says Contractors Must Include Information Outside Tax Returns in Calculating Size


Koprince Law LLC

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When it comes to calculating a company’s receipts for size purposes, the procedure for is (or at least was) pretty simple: Look at the company’s tax returns. Indeed, it has long been SBA’s position that they can only consider tax returns, as noted in Nordstrom Contracting & Consulting Corp., SBA No. SIZ-5891 (Mar. 7, 2018) (“[T]here is no authority for an area office to consider any evidence apart from tax returns…when calculating a firm’s average annual receipts.”) among other cases.  In other words, if something was not mentioned in a tax return, it couldn’t be considered by SBA. The only exception was if the tax returns were not filed, in which case SBA will review financial statements or similar information in lieu. 13 CFR § 121.104. Therefore, other than that exception, a contractor only needs to rely on the information in its tax return when making its size representation.

But the U.S. District Court of the District of Columbia (DDC) thinks otherwise. On May 18, 2023, it entered a decision on opposing motions for summary judgment in a size protest that had become a False Claims Act case. In this decision, it concluded the opposite: Contractors must in some cases consider information outside their tax returns. Let’s take a deeper dive.

United States ex rel. Bid Solve, Inc. v. CWS Mktg. Grp., Inc., 678 F. Supp. 3d 53 (D.D.C. 2023) began as a standard size protest back in 2018. At first, the matter was simple enough: CWS Marketing Group’s (CWS) size was protested, it submitted its tax returns, and SBA sided with CWS over the protester, Bid Solve, Inc. (Bid Solve) after reviewing those returns.

However, Bid Solve apparently knew there was something more going on and filed a False Claims Act case with the DDC against CWS. Bid Solve alleged that CWS had misreported its receipts by improperly subtracting expenses that it shouldn’t have subtracted. If these expenses were not subtracted, then CWS would be over the size standard. Proving this would necessarily require looking at information that wasn’t in CWS’ tax returns, and here is where the question arose: Was CWS justified in only relying on the information in its tax return? The DDC said “no” in light of 13 C.F.R.  § 121.104:

Defendants misread the regulation: They were not allowed to rely solely on CWS’s tax returns. And because of that, they should have never subtracted “flowthrough income” from CWS’s total revenue.

§ 104(a) provides a clear formula: receipts are “all revenue … reduced by returns and allowances,” and “the only exclusions from receipts are those specifically” listed in § 104(a). Tax returns may be used to calculate receipts, but they cannot override § 104(a)’s basic rules.

Looking at CWS’ argument, the DDC further explained why it was rejecting it:

Defendants disagree, proposing a different reading. They urge that a subsection—§ 104(a)(1)—required them to use only CWS’s tax returns when calculating its receipts. That provision states that “The Federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine” whether a business is small…(i)n other words, if they plugged in numbers from CWS’s tax returns, then they are in the clear, no matter if that calculation flouts other parts of the regulation.

The DDC then noted that, basically, CWS was using the “only tax returns” argument to justify the fact that they violated the provision that “reimbursements for purchases a contractor makes at a customer’s request” may not be excluded from receipts. CWS’ position would basically make it impossible to enforce the rest of the regulation if the contractor in question made an inaccurate tax return (unintentionally or otherwise).

The DDC then further explained how CWS’ position does not make sense. “For example, 13 C.F.R. § 121.1009(b) says that when making a size determination, the SBA will mostly rely on the information a bidder provided but ‘may use other information and may make requests for additional information.’” It would not make sense for the rule to be that others can submit other information but the contractor itself need only rely on its own tax returns. After all, the contractor would have the most access to its own information.

Impact on SBA Rule

Quite frankly, we think the DDC’s ruling here is just common sense. It does not stand to reason that a contractor could file inaccurate tax returns and then rely on those same inaccurate tax returns to its own benefit, or that tax returns could allow subtractions from receipts that SBA rules do not allow. It would completely undermine the size determination process.

With that, we turn to the fact that, as we noted above, SBA has historically stated that area offices will only rely on tax returns, when filed, in making size determinations. Thus far, it does not appear any SBA decision has cited to the DDC’s decision, either to accept it or attempt to get around it (technically, the DDC did not overturn any SBA precedent, this was a False Claims Act case). That said, we think it would make sense for SBA to adopt the DDC’s ruling as its own standard for size determinations.

However, that is basically something that SBA will have to do on its own, although we could see SBA continuing to rely on tax returns in the interest of efficiency. For it would have to be an odd situation indeed for a protester to have enough evidence about an awardee’s internal finances to be able to say that the awardee’s own tax returns are wrong. Generally, such an assertion is going to be pure speculation on the part of the protester, which means that a request that the protested firm provide additional information would be rejected by SBA. SBA will not act on requests or protests based on speculation alone. As such, it is going to be on SBA to change its own standard and ask protested firms to provide more than just their own tax returns in these protests. Whether it will do so remains to be seen.

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The post Beyond Tax Returns: Federal District Court Says Contractors Must Include Information Outside Tax Returns in Calculating Size first appeared on SmallGovCon - Government Contracts Law Blog.

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