Proposed Rule 8(a) Program

Wednesday,
October 28, 2009

Part IV

Small Business
Administration
13 CFR Parts 121 and 124
Small Business Size Regulations; 8(a)
Business Development/Small
Disadvantaged Business Status
Determinations; Proposed Rule
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55694 Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules

SMALL BUSINESS ADMINISTRATION Notice at www.Regulations.gov, please and other Federal mentor/protege ´ ´
submit the information to LeAnn programs that specifically authorize an
13 CFR Parts 121 and 124 Delaney, Deputy Associate exception to affiliation in their
Administrator, Office of Business authorizing statute. Because of the
RIN 3245–AF53
Development, 409 Third Street, SW., business development purposes of the
Small Business Size Regulations; 8(a) Washington, DC 20416, or send an 8(a) BD program, SBA administratively
Business Development/Small e-mail to leann.delaney@sba.gov. established an exception to affiliation
Disadvantaged Business Status Highlight the information that you ´ ´ ´ ´
for protege firms. Specifically, protege
Determinations consider to be CBI and explain why you firms are not affiliated with their
believe SBA should hold this mentors based on assistance received
AGENCY: U.S. Small Business information as confidential. SBA will from their mentors through an SBA-
Administration. review the information and make the approved 8(a) BD mentor/protege ´ ´
ACTION: Proposed rule. final determination of whether it will agreement. That exception exists in the
publish the information or not. current rule and remains in this
SUMMARY: This rule proposes to make FOR FURTHER INFORMATION CONTACT: proposed rule. The proposed rule
changes to the regulations governing the LeAnn Delaney, Deputy Associate merely spells out more explicitly the
8(a) Business Development (8(a) BD) Administrator, Office of Business affiliation exception for clarity
and Small Disadvantaged Business Development, at (202) 205–5852, or purposes.
(SDB) programs, and to the U.S. Small leann.delaney@sba.gov. In addition, the proposed rule makes
Business Administration’s (SBA or clear that an exception to affiliation for
Agency) size regulations. Some of the SUPPLEMENTARY INFORMATION: ´ ´
proteges in other Federal mentor/
changes involve technical issues such as This rule proposes to make a number ´ ´
protege programs will be recognized by
changing the term ‘‘SIC code’’ to of changes to the regulations governing SBA only where specifically authorized
‘‘NAICS code’’ to reflect the national the 8(a) BD and SDB programs, and by statute (e.g., the Department of
conversion to the North American several changes to SBA’s size ´ ´
Defense mentor/protege program) or
Industry Classification System. Other regulations. Some of the changes where SBA has authorized an exception
changes are more substantive and result involve technical issues. Other changes ´ ´
to affiliation for a mentor/protege
from SBA’s experience in implementing are more substantive and result from program of another Federal agency
the current regulations. For example, SBA’s experience in implementing the under the procedures set forth in
SBA has learned through experience current regulations. § 121.903. By statute, SBA is the sole
that certain of its rules governing the The following specific changes are agency responsible for determining size
8(a) BD program are too restrictive and being proposed to SBA’s regulations. for purposes of any Federal assistance.
serve to unfairly preclude firms from There are six proposed changes to SBA’s SBA does not believe that another
being admitted to the program. In other size regulations, two dealing with agency should be able to exempt firms
´ ´
mentor/protege situations, one from SBA’s affiliation rules (and in
cases, SBA has determined that a rule is
too expansive or indefinite and has amending requirements for joint effect make program-specific size rules)
sought to restrict or clarify that rule. In ventures, one clarifying how a by itself. There is a formal process
one case wording changes are being procurement should be classified, one spelled out in § 121.903 that an agency
proposed to correct past public or further explaining the nonmanufacturer must use if it would like to deviate from
agency misinterpretation. Also, new rule, and one relating to who may SBA’s size rules, including those
situations have arisen that were not request a formal size determination. The relating to affiliation. This process must
anticipated when the current rules were remaining proposed changes are to the be followed and SBA must specifically
drafted and the proposed rule seeks to regulations governing SBA’s 8(a) BD and authorize an exception to affiliation for
cover those situations. Finally, one of SDB programs. It is noted that all ´ ´
another Federal mentor/protege program
the changes, involving Native Hawaiian regulations governing the 8(a) program in order for SBA to recognize the
Organizations (NHO’s), implements a apply to the SDB program, unless exception. SBA does not anticipate
statutory change. otherwise specified. While the SDB approving exceptions to affiliation to
program no longer has an application agencies seeking to have such an
DATES: Comments must be received on and certification component, the exception for their mentor/protege ´ ´
or before December 28, 2009. provisions specifying what constitutes programs except in limited
ADDRESSES: You may submit comments, an SDB are still needed for self- circumstances. SBA believes that the
identified by RIN: 3245–AF53, by any of certification and protest purposes. 8(a) BD program is a unique business
the following methods: development program that is unlike
• Federal eRulemaking Portal: http:// Exception to Affiliation for Mentor/
´ ´ other Federal programs. If a program of
www.regulations.gov. Follow the Protege Programs
another agency is also intended to assist
instructions for submitting comments. The first proposed change would business development and an exclusion
• Mail, for paper, disk, or CD/ROM clarify when SBA would consider a from affiliation for joint ventures
submissions: Joseph Loddo, Associate ´ ´
protege firm not to be affiliated with its conducted under that agency’s mentor/
Administrator, Office of Business mentor based on assistance received ´ ´
protege program would promote such
Development, 409 Third Street, SW., from the mentor through a mentor/ business development, SBA would be

Mail Code, Washington, DC 20416. ´ ´
protege agreement. The current inclined to grant an exclusion from
• Hand Delivery/Courier: Joseph regulation may be misconstrued to affiliation because it would serve the
Loddo, Associate Administrator, Office allow other Federal agencies to establish same purpose as the exclusion from
of Business Development, 409 Third ´ ´
mentor/protege programs and exempt ´ ´
affiliation for 8(a) mentor/protege
Street, SW., Washington, DC 20416. ´ ´
proteges from SBA’s size affiliation relationships.
SBA will post all comments on rules. That was never SBA’s intent. The
www.regulations.gov. If you wish to exception to affiliation contained in Joint Ventures
submit confidential business § 121.103(b)(6) was meant to apply to The second proposed change to the
information (CBI) as defined in the User ´ ´
SBA’s 8(a) BD mentor/protege program size rules pertains to joint ventures.


Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules 55695

Under current § 121.103(h), a joint could form a second joint venture and individual firms. Because of this
venture is an entity with limited be awarded three additional contracts, affiliation, the revenues or employees
duration. Specifically, the current and a third joint venture to be awarded would be aggregated even where one of
regulation limits a specific joint venture three more. At some point, however, the firms sought a contract opportunity
to submitting no more than three offers such a longstanding relationship or individually.
over a two year period. Two firms contractual dependence would lead to a The proposed rule also clarifies the
´ ´
(including an 8(a) protege firm and its finding of general affiliation, even in the time at which SBA will determine
mentor) are limited to pursuing three ´ ´
8(a) mentor/protege joint venture whether this three in two years
contract opportunities under one joint context. As an alternative, SBA also requirement has been met. SBA
venture, but there is nothing in the considered revising this provision to understands that any offeror, including
regulations prohibiting the same two limit the number of contract awards that a joint venture offeror, may seek more
firms from forming a second joint the same partners to one or more joint than one contract opportunity at the
venture and pursuing three additional ventures could receive without the same time. Under SBA’s regulations,
contract opportunities. The rule limiting partners being deemed affiliates for all size is determined as of the date a
the number of contract opportunities purposes. SBA thought that three concern submits a written self-
any single joint venture can pursue was awards might be too restrictive and certification that it is small as part of its
actually intended to loosen the considered limiting the number of initial offer including price. See 13 CFR
requirements of the prior regulations. contracts that the same joint venture 121.404(a). As long as a concern is small
SBA’s previous regulations defined a partners could be awarded to five. as of that date, it may be awarded a
joint venture to be an entity that was Under this approach, the identical contract as a small business even if it
‘‘formed * * * to engage in and carry partners could form one joint venture has grown to be other than small as of
out a single, specific business venture and receive five contracts or form the date of award. In other words, even
for joint profit * * *’’ The genesis for several joint ventures and receive five if a concern has received additional
the change initially came from 8(a) contracts in total before SBA would find revenues which would render it other
firms, which complained that it was the partners to be affiliated for all than small after it certifies itself to be
hard and costly for them to go out and purposes. SBA specifically requests small as part of its initial offer including
form a new joint venture entity (usually comments on this approach, specifically price, it may be awarded a contract as
in the form of a limited liability addressing whether this approach is a small business. Having one specific
company (LLC)) for every contract preferable to the one proposed. point in time to determine size gives
opportunity that they sought. SBA
In drafting the current three offers certainty to the procurement process for
agreed, and decided to provide more
over two years requirement, SBA did both the concern and the procuring
flexibility. SBA did so by changing the
not intend to limit the number of agency. SBA believes that compliance
size regulations, the place in SBA’s
contracting opportunities that two (or with the three awards in two years rule
regulations where the term joint venture
more) firms could seek or contracts that should be treated similarly. As such,
was defined. Because the provision
they could be awarded through a joint SBA proposes to determine compliance
appears in part 121 of SBA’s
regulations, it applies to all of SBA’s venture relationship. As noted above, with the three in two years rule as of the
programs, including the 8(a) BD SBA believes that a ‘‘joint venture’’ is an date of initial offer including price. An
program (as intended). entity of limited duration. If SBA did individual joint venture may have
This provision, however, has caused not limit the number of contracting submitted offers to perform two, three or
confusion. Some firms misunderstood opportunities, or under this proposed more procurements before it finds out
that the limitation contained in the rule the number of contract awards, that that it has won any specific
regulation was on the number of offers a specific joint venture could receive, competition. If at the time of offer the
submitted by the joint venture instead of then the joint venture could be an joint venture had not yet received three
the number of contracts awarded to the ongoing entity with unlimited duration. contract awards, then the joint venture
joint venture. As such, some joint In determining the size of a joint would be able to submit offers for
ventures continued to submit offers venture, the receipts or employees of the several procurement opportunities and
beyond the three permitted by the joint venture partners are generally ultimately be awarded any contract for
regulation and were determined not to aggregated (unless an exclusion from which it submitted an offer before
be eligible for award where the joint affiliation applies). If the aggregated receiving a third contract. For example,
venture was otherwise the apparent receipts or employees are less than the Joint Venture AB has received two
successful offeror, but the offer was a size standard assigned to the relevant contracts. On April 2, Joint Venture AB
fourth (or more) offer. Firms have procurement, the joint venture qualifies submits an offer for Solicitation 1. On
recommended to SBA that if there is as a small business. If one of the joint June 6, Joint Venture AB submits an
such a limit, it should be on contracts, venture partners seeks a different offer for Solicitation 2. On July 13, Joint
not offers. Upon further reflection, SBA contract opportunity apart from the joint Venture AB submits an offer for
agrees and proposes to change the limit venture, its size is generally considered Solicitation 3. In September, Joint
of three offers to a limit of three contract individually (unless there are other Venture AB is found to be the apparent
awards under one joint venture bases for finding affiliation). If a specific successful offeror for all three
agreement. ‘‘joint venture’’ could seek unlimited solicitations. Even though the award of

The proposed rule would clarify that contracting opportunities and be the three contracts would give Joint
three contract awards is not an absolute awarded unlimited contracts, then the Venture AB a total of five contract
limit for a specific joint venture parties to the joint venture would awards, it could receive those awards
agreement. A joint venture could choose necessarily be deemed affiliates for all without causing general affiliation
to pursue and be awarded a fourth (or purposes because of their between its joint venture partners
more) contract award, but in doing so interdependent contractual relations. because Joint Venture AB had not yet
would cause the partners to the joint This is the case because in effect the received three contract awards as of the
venture to be deemed affiliated for all ‘‘joint venture’’ would be a new ongoing dates of the offers for each of three
purposes. Again, the two (or more) firms business entity that is owned by two solicitations at issue.



The proposed rule also clarifies that this end, the 8(a) Participant to the joint access to Federal procurements
while a joint venture may or may not be venture must submit to SBA an intended for small business. While this
a separate legal entity (e.g., an LLC), it addendum to the joint venture is not a change to how SBA has
must exist through a written document. agreement explaining how the work will interpreted this regulation, SBA believes
Thus, even an ‘‘informal’’ joint venture be performed on the contract, specifying that it should be spelled out in the
must have a written agreement between what resources will be provided by each regulation to avoid any further
the partners. In addition, the rule joint venture partner, and providing any confusion and, thus, clarifying language
clarifies SBA’s current policy that a other information necessary to fulfill the has been added to § 121.103(h)(3)(iii).
joint venture may or may not be requirements set forth in 13 CFR SBA is also considering whether to limit
populated (i.e., have its own separate 124.512(c). If the second (and/or third) the exclusion to affiliation for a joint
employees). Whether a joint venture contract to be awarded to a specific joint venture that is comprised of a protege´ ´
needs to be populated or have separate venture is not an 8(a) contract, the joint firm and its SBA-approved mentor only
employees depends upon the legal venture entity would not be required to to 8(a) contracts. If this proposal were
structure of the joint venture. If a joint submit an addendum to SBA prior to ´ ´
adopted, mentor/protege joint ventures
venture is a separate legal entity, then award, but would, as explained in the for small business set aside contracts (or
it must have its own employees. If a following paragraph, be required to other small business contracts) would
joint venture merely exists through a meet the general 8(a) joint venture not receive an exclusion from affiliation.
written agreement between two or more requirements. As such, if the mentor were a large
individual business entities, then it business, the joint venture would be
Exclusion from Affiliation for Mentor/
need not have its own separate ´ ´ large and, thus, ineligible for a small
Protege Joint Ventures
employees and employees of each of the business set aside contract. Proponents
individual business entities may The third proposed change to the size of this view believe that benefits for 8(a)
perform work for the joint venture. regulations also pertains to exceptions firms should be limited to contracts
There has also been confusion as to to affiliation. Currently, SBA’s obtained through the 8(a) program, and
whether this three in two year rule regulations authorize an exception to not extended to other small business
applies to the 8(a) BD program. Some affiliation where two firms approved by programs. They believe that it is unfair
individuals mistakenly believed that it ´ ´
SBA to be a mentor and protege under for non-8(a) small business concerns to
did not apply to joint ventures between the 8(a) BD program seek to joint have to compete against a joint venture
´ ´
mentors and protege firms in the 8(a) BD venture and perform a contract as a ´ ´
involving a protege firm and a large
program. This is not the case. Because small business concern for any Federal mentor for small business contracts
the rule appears in SBA’s size Government procurement. For a outside the 8(a) program. SBA
regulations, it applies to all of SBA’s procurement to be awarded through the specifically requests comments on
programs. That is, it applies to all 8(a) BD program, SBA’s regulations at whether this policy should be changed
situations in which a joint venture seeks § 124.513 require SBA to approve the in a subsequent final rule.
to qualify as a ‘‘small business joint venture agreement prior to award
concern.’’ Because this confusion is and specify what must be included in Classification of a Procurement for
limited and SBA believes that the size the joint venture agreement. There has Supplies
regulations clearly apply the three in been some confusion as to whether the SBA’s current regulations provide that
two year rule to all joint venture requirements for 8(a) joint venture acquisitions for supplies must be
situations, SBA does not believe that a agreements apply to non-8(a) classified under the appropriate
regulatory change is necessary to procurements. SBA believes that any manufacturing NAICS code, not under a
specifically apply the rule to the 8(a) BD joint venture seeking to use the 8(a) wholesale trade NAICS code. The fourth
program. ´ ´
mentor/protege status as a basis for an proposed change to the size regulations
This proposed rule would also amend exception to affiliation requirements would clarify that a procurement for
§ 124.513(e) to clarify the requirement must follow the 8(a) requirements (i.e., supplies also cannot be classified under
that SBA approve 8(a) joint ventures it must meet the content requirements a retail trade NAICS code.
prior to award for a second or third 8(a) set forth in § 124.513(c) and the
Application of the Nonmanufacturer
contract award to a specific joint performance of work requirements set
Rule
venture. The current regulation states forth in § 124.513(d)). Although SBA
that SBA must approve a joint venture does not approve joint venture The fifth proposed change to the size
for an 8(a) contract prior to contract agreements for procurements outside regulations would provide further
award. There has been some confusion the 8(a) program, if the size of a joint guidance to the current
about how this requirement relates to venture claiming an exception to nonmanufacturer rule (i.e., the rule that
the size provision which would now affiliation is protested, the requirements requires, in pertinent part, a firm that is
allow three contract awards over a two of § 124.513(c) and (d) must be met in not itself the manufacturer of the end
year period to a specific joint venture. order for the exception to affiliation to item being procured to provide the
Prior to the first contract award, SBA apply. The reason SBA’s 8(a) regulations product of a small business
would have to approve the joint permit exceptions to affiliation on small manufacturer). Several procuring
venture. SBA’s review would examine business contracts outside the 8(a) agencies have misconstrued when to
the structure of the joint venture and the program (e.g., small business set asides, apply the nonmanufacturer rule. The

work each joint venture partner would HUBZone set asides, service disabled proposed rule would explicitly state
perform on the proposed 8(a) contract. veteran owned small business set that the nonmanufacturer rule applies
For the second (and third) 8(a) contract, ´ ´
asides) is to further assist protege 8(a) only where the procuring agency has
SBA would not need to examine the BD Participants in their business classified a procurement as a
structure of the joint venture again, but development. If the requirements manufacturing procurement by
would need to determine that the work ensuring control and performance of assigning the procurement a NAICS
to be done by the joint venture partners ´ ´
work by the 8(a) protege firm are not code under Sectors 31–33. It would also
on the proposed second (or third) 8(a) enforced, a large business would be able clarify that the nonmanufacturer rule
contract meets SBA’s requirements. To to have unchecked and inappropriate does not apply to supply contracts that



do not involve manufacturing. For equipment or facilities in a manner SBA would determine whether the firm
example, the nonmanufacturer rule consistent with industry practice. This has met the targets and objectives set
would not apply to situations where a change is primarily in response to forth in its business plan.
procuring agency is acquiring situations where SBA has waived the
Definitional Changes
agricultural commodities that are not nonmanufacturer rule and the prime
processed or changed and the procuring contractor essentially subcontracts all This rule would amend Section 124.3,
agency classifies the contract as crop services, such as warehousing or to add a definition of NAICS code.
production under NAICS Subsector 111. delivery, to a large business. Such an Additionally, the term ‘‘SIC code’’
arrangement, where the prime would be changed to ‘‘NAICS code’’
In addition, the rule applies only to
contractor can legally provide the everywhere it appears in part 124 to
the manufacturing or supply component
product of a large business and then take into account the replacement of the
of a manufacturing procurement. The
subcontract all tangential services to a Standard Industry Classification (SIC)
rule provides two examples to clarify
large business, is contrary to the intent code system with the North American
SBA’s position regarding the rule.
and purpose of the Small Business Act, Industry Classification System. The
Where a procuring agency has classified
i.e., providing small businesses with an NAICS code system is used to classify
a procurement as a manufacturing
opportunity to perform prime contracts. businesses for size purposes.
procurement and is also acquiring
Such an arrangement inflates the cost to Specifically, the term ‘‘NAICS code’’
services, the nonmanufacturer rule
the Government of contract performance would replace the term ‘‘SIC code’’ in
would apply to the supply component §§ 124.110(c), 124.111(d), 124.502(c)(3),
of that procurement only. In other and inflates the statistics for prime
contracting dollars awarded to small 124.503(b), 124.503(b)(1), 124.503(b)(2),
words, a firm seeking to qualify as a 124.503(c)(1)(iii), 124.503(g)(3),
small business nonmanufacturer must business, which is detrimental to other
small businesses that are willing and 124.505(a)(3), 124.507(b)(2)(i),
supply the product of a small business 124.513(b)(1), 124.513(b)(1)(i),
manufacturer (unless a able to perform Government contracts.
124.513(b)(1)(ii)(A), 124.513(b)(2),
nonmanufacturer waiver applies), but Request for Formal Size Determination 124.513(b)(3), 124.514(a)(1), 124.515(d),
need not perform any specific portion of The sixth proposed change to the size 124.517(d)(1), 124.517(d)(2),
the accompanying services. Since the regulations would amend § 121.1001(b) 124.519(a)(1), 124.519(a)(2),
procurement is classified under a to give the SBA’s Office of Inspector 124.1002(b)(1), 124.1002(b)(1)(i),
manufacturing NAICS code, it cannot General (OIG) the authority to ask for a 124.1002(b)(1)(ii), and 124.1002(f)(3).
also be considered a services formal size determination. Because the The rule also proposes to amend the
procurement and, thus, the 50% OIG is not currently listed in the definition of primary industry
performance of work requirement set regulations as an individual who can classification to specifically recognize
forth in § 125.6 for services does not request a formal size determination, the that a Participant may change its
apply to that procurement. In classifying OIG must currently seek a formal size primary industry classification over
the procurement as a manufacturing/ determination through the relevant SBA time. The rule would allow a Participant
supply procurement, the procuring program office. SBA believes that the to change its primary industry
agency must have determined that the Inspector General should be able to seek classification from one NAICS code to
‘‘principal nature’’ of the procurement a formal size determination when another where it can demonstrate that
was supplies. As a result, any work questions about a concern’s size arise in the majority of its revenues during a
done by a subcontractor on the services the context of an investigation or other two-year period have evolved from its
portion of the contract cannot rise to the review of SBA programs by the Office of former primary NAICS code to another
level of being ‘‘primary and vital’’ Inspector General. NAICS code. The proposed rule would
requirements of the procurement, and also add a new § 124.112(e) to permit a
therefore cannot be the basis or Completion of Program Term Participant to request a change in its
affiliation as an ostensible The first proposed change to SBA’s primary industry classification with its
subcontractor. Conversely, if a 8(a) BD regulations is an amendment to servicing SBA district office where it
procuring agency determines that the the current rule to specify that a firm can demonstrate that its revenues have
‘‘principal nature’’ of the procurement is that merely completes its program term in fact evolved from one NAICS code to
services, only the requirements relating is not deemed to ‘‘graduate’’ from the another.
to services contracts apply. The 8(a) program. Pursuant to the Small The rule would also add a definition
nonmanufacturer rule, which applies Business Act, a Participant is of the term ‘‘regularly maintains an
only to manufacturing/supply contracts, considered to graduate only if it office.’’ This definition is important in
would not apply. Thus, although a firm successfully completes the program by determining whether a participant has a
seeking to qualify as a small business substantially achieving the targets, bona fide place of business in a
with respect to such a contract must objectives, and goals contained in the particular geographic location. While
certify that it will perform at least 50% concern’s business plan, thereby the definition proposed is not a change
of the cost of the contract incurred for demonstrating its ability to compete in in current SBA policy, SBA believes
personnel with its own employees, it the marketplace without 8(a) assistance. that the definition should be added to
need not supply the product of a small 15 U.S.C. 636(j)(10)(H). Sections 124.2, the regulations for clarity purposes.
business manufacturer on the supply 124.301 and 124.302 would be amended Under the proposed rule, a Participant

component of the contract. In order to to effect this change. In addition, the would be deemed to regularly maintain
qualify as a nonmanufacturer, a firm proposed rule would add a new an office in a particular location if it
must be primarily engaged in the retail § 124.112(f) to require SBA to determine conducts business activities as an on-
or wholesale trade and normally sell the if a firm should be deemed to graduate going business concern from a fixed
type of item being supplied. We are from the 8(a) BD program at the end of location on a daily basis. The rule
proposing to further define this its nine-year program term. As part of would also provide that the best
statutory requirement to mean that the the final annual review performed by evidence of the regular maintenance of
firm takes ownership or possession of SBA prior to the expiration of a an office is documentation that shows
the item(s) with its personnel, Participant’s nine-year program term, that third parties routinely transact



business with a participant at that majority of its revenues during a two- the inclusion of IRA’s and other
location. Such evidence includes year period have evolved from its retirement accounts in the calculation of
advertisements, bills, correspondence, former primary NAICS code to another an individual’s net worth does not serve
lease agreements, land records, and NAICS code. As such, SBA may early to disqualify wealthy individuals from
evidence that the participant has graduate a firm from the 8(a) BD participation in the program; rather, it
complied with all local requirements program if the firm exceeds the size has worked to make middle and lower
concerning registering, licensing, or standard corresponding to its primary income individuals ineligible to the
filing with the State or County where NAICS code (whether its initial primary extent they have invested prudently in
the place of business is located. This NAICS code or a revised primary NAICS accounts to ensure income at a time in
means that a firm would generally be code) for two successive program years. their lives that they are no longer
required to have a license to do business working. SBA is cognizant of the
Economic Disadvantage
in a particular location in order to potential for abuse of this proposed
‘‘regularly maintain an office’’ there. SBA proposes to amend § 124.104 provision, with individuals attempting
The firm would not, however, be Who is Economically Disadvantaged? to to hide current assets in funds labeled
required to have a construction license incorporate into the regulations certain ‘‘retirement accounts.’’ Obviously, SBA
or other specific type of license in order interpretations and policies that have does not believe such attempts to
to regularly maintain an office and thus been followed informally by SBA. Some remove certain assets from an
have a bona fide place of business in a of these policies and regulatory individual’s economic disadvantage
specific location. SBA’s bona fide place interpretations are currently set forth in determination would be appropriate.
of business requirement is met with a SBA’s Standard Operating Procedures Therefore, it has added the condition
license to do business generally. (SOPs) or in decisions rendered by the that in order for funds not to be counted
Whether a firm is or is not able to get SBA Office of Hearings and Appeals in an economic disadvantage
a specific type of contract because it (OHA). A sentence would be added to determination, the funds cannot be
does not possess an additional license is paragraph (b)(2) to clarify that SBA does currently withdrawn from the account
not a bona fide place of business issue. not take community property laws into without a significant penalty. A
account when determining economic significant penalty would be one equal
Size for Primary NAICS Code disadvantage. This means that property or similar to the penalty assessed by the
This rule proposes to amend that is legally in the name of one spouse Internal Revenue Service for early
§ 124.102(a) to require that a firm would be considered wholly that withdrawal. In order for SBA to
remain small for its primary NAICS spouse’s property, whether or not the
determine whether funds invested in a
code during its term of participation in couple lived in a community property
specific account labeled a ‘‘retirement
the 8(a) BD program, and state. Since community property laws
account’’ may be excluded from an
correspondingly to revise § 124.302 to are usually applied when a couple
individual’s net worth calculation, the
permit SBA to graduate a Participant separates and since spouses in
individual must provide to SBA
prior to the expiration of its program community states generally have the
information about the terms and
term where the firm exceeds the size freedom to keep their property separate
conditions of the account. SBA is
standard corresponding to its primary while they are married, SBA has
interested in hearing from the public
NAICS code for two successive program decided to treat property owned solely
concerning this proposed revision, and
years. SBA has historically permitted a by one spouse as that spouse’s property
firm to remain in the 8(a) program and for economic disadvantage specifically requests comments on how
receive 8(a) contracts in secondary determinations. This policy also results best to exclude legitimate retirement
NAICS codes as long as it remains small in equal treatment for applicants in accounts without affording others a
for such secondary codes. SBA has community and non-community mechanism to circumvent the economic
reexamined this policy and concluded property states. Community property disadvantage criterion.
that if a firm has grown to be other than laws will continue to be applied in SBA is also proposing to amend
small in its primary NAICS code, it can § 124.105(k) for purposes of determining paragraph (c)(2) to exempt income from
reasonably be said that the firm has ownership of an applicant or Participant an S Corporation from the calculation of
achieved its goals and objectives. firm, but they will not be applied for both income and net worth to the extent
Understanding that the size of a firm any other purpose. Paragraph (b)(2) such income is reinvested in the firm or
can vary from year to year based on the would also be amended to provide that used to pay taxes arising from the
receipts/number of employees in any SBA may consider a spouse’s financial normal course of operations of an S
given year, SBA is proposing that a firm situation in determining an individual’s corporation. Therefore, while the
be graduated early only where it access to capital and credit. This income of an S corporation flows
exceeds the size standard for its primary addition reflects current practice. through and is taxed to individual
NAICS code in two successive program Paragraph (c)(2) would be amended to shareholders in accordance with their
years. SBA believes that it would be exempt funds in Individual Retirement interest in the S corporation for Federal
unfair to early graduate a firm from the Accounts (IRAs) and other official tax purposes, SBA will take such
8(a) program where it has one very retirement accounts from the calculation income into account for economic
successful program year that may not of net worth provided that the funds disadvantage purposes only if it is
again be repeated. This does not mean cannot currently be withdrawn from the actually distributed to the particular

that a firm cannot change its primary account prior to retirement age without shareholder. This change would result
NAICS code during its participation in a significant penalty. Retirement in equal treatment of corporate income
the program. As noted in the accounts are not assets to be currently for C and S corporations. In cases where
Supplementary Information enjoyed, rather they are held for that income is reinvested in the firm or
corresponding to the definition of purposes of ensuring future income used to pay taxes arising from the
primary industry classification in when an individual is no longer normal course of operations of the S
§ 124.3, the proposed rule would working. SBA believes it is unfair to corporation and not retained by the
authorize a firm to change its primary count those assets as current assets. individual, SBA believes it should be
NAICS code by demonstrating that the Through experience SBA has found that treated the same as C corporation



income for purposes of determining income may seem unduly high as a income. Again, while the income of an
economic disadvantage. In order to be benchmark, we note that this amount is S corporation flows through and is
excluded, the owner of the S being used only to presume, without taxed to individual shareholders in
corporation would be required to clearly more information, that the individual is accordance with their interest in the S
demonstrate that he or she paid taxes of not economically disadvantaged. We corporation, SBA will take such income
the S corporation or reinvested certain also note that average income for a small into account only if it is actually
funds into the S corporation within 12 business owner is higher than average distributed to the particular
months of the distribution of income. income for the population at large. SBA shareholder.
Conversely, the owner of an S may consider incomes lower than This rule also proposes to amend
corporation could not subtract S $200,000 as indicative of lack of § 124.104(c) to establish an objective
corporation losses from the income paid economic disadvantage. However, it standard by which an individual can
by the S corporation to him/her or from would not presume lack of economic qualify as economically disadvantaged
the individual’s total income from disadvantage in that case. It may also based on his or her total assets. The
whatever source. S corporation losses, consider income in connection with regulations have historically authorized
like C corporation losses, are losses to other factors when determining an SBA to use total assets as a basis for
the company only, not losses to the individual’s access to capital. SBA determining economic disadvantage, but
individual, and based upon the legal specifically requests comments on both did not identify a specific level below
structure of the corporation and the the straight line approach proposed and which an individual would be
protections affording the principals the current comparison of income levels considered disadvantaged. The
through this structure, the individual is to the IRS statistics. The rule also regulations also did not spell out a
not personally liable for the debts proposes to establish a two year average specific level of total assets above which
representing any of those liabilities. income level of $250,000 for continued an individual would not qualify as
Thus, it is inappropriate to consider 8(a) BD program eligibility. SBA economically disadvantaged. Although
these personal losses and individuals believes that a higher income level may SBA has used total assets as a basis for
should not be able to use them to reduce be more appropriate as a firm becomes denying an individual participation in
their personal incomes. more developed, but does not want to the 8(a) BD program based on a lack of
sanction too high a level. SBA requests economic disadvantage, the precise
A new paragraph (c)(3) would be
comments on the $250,000 level, level at which an individual no longer
added to provide that SBA would qualifies as economically disadvantaged
presume that an individual is not including whether the same $200,000
level should be used for both initial and is not certain. SBA’s findings that an
economically disadvantaged if his or her individual was not economically
adjusted gross income averaged over the continued 8(a) BD eligibility and
whether some other level (e.g., disadvantaged with total asset levels of
past two years exceeds $200,000. SBA $4.1 million and $4.6 million have been
considered incorporating into the $225,000) should be used for continued
eligibility. upheld as reasonable. See Matter of
regulation the present policy that an Pride Technologies, SBA No. 557 (1996),
individual is not economically The proposed regulation would and SRS Technologies v. U.S., 843 F.
disadvantaged if his or her adjusted permit applicants to rebut the Supp. 740 (D.D.C. 1994). Alternatively,
gross income exceeds that for the top presumption of lack of economic SBA’s finding that an individual was
two percent of all wage earners disadvantage upon a showing that the not economically disadvantaged with
according to Internal Revenue Service income is not indicative of lack of total assets of $1.26 million was
(IRS) statistics. Under the current economic disadvantage. For example, overturned. See Matter of Tower
approach, SBA compares the income of the presumption could be rebutted by a Communications, SBA No. 587 (1997).
the individual claiming disadvantage to showing that the income was unusual This rule proposes to eliminate any
the most currently available final IRS (inheritance) and is unlikely to occur confusion as to what level of total assets
income tax return data. In some cases, again or that the earnings were offset by qualifies as economic disadvantage for
SBA may be comparing IRS information losses as in the case of winnings and 8(a) BD purposes. Under the proposed
relating to one tax year to an losses from gambling resulting in a net rule, an individual would not be
individual’s income from a succeeding gain far less than the actual income considered economically disadvantaged
tax year because final IRS information is received. SBA may still consider any if the fair market value of all his or her
not available for that succeeding tax unusual earnings or windfalls as part of assets exceeds $3 million at the time of
year. Although that policy has been its review of total assets. Thus, although 8(a) application and $4 million for
upheld by SBA’s OHA and the Federal an inheritance of $5 million, for purposes of continued 8(a) BD program
courts (see SRS Technologies v. United example, may be unusual income and participation. While the proposed rule
States, 894 F. Supp. 8 (D.D.C. 1995); excluded from SBA’s determination of would exclude retirement accounts from
Matter of Pride Technologies, Inc., SBA economic disadvantage based on an individual’s net worth in
No. 557 (1996) SBA No. MSB–557), SBA income, it would not be excluded from determining economic disadvantage, it
believes that a straight line numerical SBA’s determination of economic would not exclude such amounts from
figure is more understandable, easier to disadvantage based on total assets. In the individual’s total assets in
implement, and avoids any appearance such a case, a $5 million inheritance determining economic disadvantage on
of unfair treatment when statistics for would render the individual not that basis.

one tax year are compared to an income economically disadvantaged based on
level for another tax year. SBA is total assets. This paragraph would also Changes to Ownership Requirements
proposing an income level of $200,000 provide that S corporation income will SBA is proposing to amend
because that figure closely approximates not be considered in determining an § 124.105(g) governing ownership to
the income level corresponding to the individual’s average income if the S provide more flexibility in determining
top two percent of all wage earners, corporation owner submits evidence whether to admit to the 8(a) program
which has been upheld as a reasonable that such income was reinvested in the companies owned by individuals where
indicator of a lack of economic firm or used to pay corporate taxes such individuals have immediate family
disadvantage. Although a $200,000 within 12 months of the distribution of members who are owners of current or


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