Kingfisher Systems, Inc. v. United States

In the United States Court of Federal Claims

No. 19-693C

(Filed Under Seal: August 21, 2019)

(Reissued for Publication: September 3, 2019)*

*************************************

KINGFISHER SYSTEMS, INC., *

*

Plaintiff, *

Preaward Bid Protest; Small Business

*

Administration Size Determination;

v. *

Cross-Motions for Judgment on the

*

Administrative Record

THE UNITED STATES, *

*

Defendant. *

*************************************

Kevin P. Mullen, Morrison & Foerster LLP, Washington, DC, for plaintiff.

Amanda L. Tantum, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Chief Judge

In this preaward bid protest, plaintiff Kingfisher Systems, Inc. (“Kingfisher”) challenges

a size determination by the United States Small Business Administration (“SBA”) that prevented

the United States Navy (“Navy”) from awarding Kingfisher a multiyear contract for network

cyber security services. As explained below, the SBA reasonably determined that Kingfisher did

not meet the applicable size standard. Accordingly, the court denies Kingfisher’s motion for

judgment on the administrative record and grants defendant’s cross-motion.

*

The court issued this Opinion and Order under seal on August 21, 2019, and directed

the parties to submit proposed redactions. This reissued Opinion and Order incorporates the

redactions proposed by the parties. All redactions within the text are indicated by a bracketed

ellipsis (“[. . .]”). All redactions within tables are indicated by a black box (“ ”).

I. BACKGROUND

A. Statutory and Regulatory Context

As a bedrock principle of government contracting, the Competition in Contracting Act of

1984 generally requires federal agencies to “provide for full and open competition in soliciting

offers and awarding Government contracts.” FAR 6.101(a) (2017). A procurement provides for

“full and open competition” when “all responsible sources are permitted to submit sealed bids or

competitive proposals.” 41 U.S.C. § 107 (2012); accord FAR 2.101 (“Full and open

competition, when used with respect to a contract action, means that all responsible sources are

permitted to compete.”).

However, there are “certain limited exceptions” to the full-and-open-competition

requirement generally applicable to federal government procurements. FAR 6.101(a). As

relevant here, one such exception allows federal agencies to obtain goods and services “using

competitive procedures, but excluding other than small business concerns.” 41 U.S.C.

§ 3303(b); see also 15 U.S.C. § 644(a) (2012) (discussing small business procurements). The

SBA has the statutory responsibility to promulgate regulations concerning “standards by which a

business concern may be determined to be a small business concern.” 15 U.S.C. § 632(a)(2)(A).

Such size standards “var[y] from industry to industry to the extent necessary to reflect the

differing characteristics of the various industries and consider other factors deemed to be

relevant by the [SBA].” Id. § 632(a)(3); accord 13 C.F.R. § 121.101(a) (2018) (“SBA’s size

standards define whether a business entity is small and, thus, eligible for Government programs

and preferences reserved for ‘small business’ concerns. Size standards have been established for

types of economic activity, or industry, generally under the North American Industry

Classification System (NAICS).”).

To be eligible to receive a contract in a procurement set aside for small businesses, an

offeror “must not exceed the size standard for the NAICS code specified in the solicitation.” 13

C.F.R. § 121.402(a). The size standards are “expressed in either number of employees or annual

receipts,” which represent the “maximum allowed for a concern and its affiliates to be

considered small” under the applicable NAICS code. Id. § 121.201.

Receipts means all revenue in whatever form received or

accrued from whatever source, including from the sales of products

or services, interest, dividends, rents, royalties, fees, or

commissions, reduced by returns and allowances. Generally,

receipts are considered “total income” . . . plus “cost of goods

sold” as these terms are defined and reported on Internal Revenue

Service (IRS) tax return forms . . . . Receipts do not include net

capital gains or losses; taxes collected for and remitted to a taxing

authority if included in gross or total income, such as sales or other

taxes collected from customers and excluding taxes levied on the

concern or its employees; proceeds from transactions between a

concern and its domestic or foreign affiliates; and amounts

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collected for another by a travel agent, real estate agent,

advertising agent, conference management service provides,

freight forwarder or customs broker. For size determination

purposes, the only exclusions from receipts are those specifically

provided for in this paragraph. All other items . . . may not be

excluded from receipts.

Id. § 121.104(a); see also id. § 121.104(e) (“Unless otherwise defined in [13 C.F.R. § 121.104],

all terms shall have the meaning attributed to them by the IRS.”). The SBA determines an

entity’s size status based on the average of the entity’s annual receipts reported on its federal tax

returns, including amendments, for the three most recent fiscal years. Id. § 121.104(a)(1), (c)(1).

An offeror’s size status is determined “as of the date the [offeror] submits a written self-

certification that it is small . . . as part of its initial offer.” Id. § 121.404(a); see also FAR

19.301-1(a) (discussing self-certification). After self-certifying, a qualifying offeror is

“considered to be a small business throughout the life of that contract.”1 13 C.F.R. § 121.404(g).

However, an interested party in a procurement set aside for small businesses may lodge a size

status protest. Id. § 121.1001(a)(1); FAR 19.301-1(b). Such protests are adjudicated by the

appropriate SBA Area Office (“Area Office”), and that decision is subject to review by the SBA

Office of Hearings and Appeals (“Office of Hearings and Appeals”). 13 C.F.R. § 121.1002;

FAR 19.301-1(c); FAR 19.302(f)(1), (h). The Office of Hearings and Appeals decision

constitutes “the final decision of the SBA.” 13 C.F.R. § 134.316(d).

The SBA’s determination regarding size status is “binding on the contracting officer, as

to whether the offeror is a small business.” FAR 19.301-1(c). After receiving an adverse size

determination, an entity is ineligible to receive any federal contract utilizing the same or a lower

size standard, and may not self-certify as “small” under the same or a lower size standard,

without first being recertified by the SBA. 13 C.F.R. § 121.1009(g)(5). In addition, if an entity

that receives an adverse size determination is involved in a pending procurement, the entity must

notify the contracting officer of that determination. Id.

B. Kingfisher’s Income

Kingfisher registered with the Virginia Secretary of State on June 3, 2005.2 AR 538, 649.

As of March 2018, its principal place of business is in Falls Church, Virginia. Id. at 538.

Kingfisher derives its revenues primarily from computer systems design services (NAICS code

541512), computer facilities management services (NAICS code 541513), other computer-

related services (NAICS code 541519), and engineering services (NAICS code 541330). Id. at

654. For the 2015, 2016, and 2017 calendar years, Kingfisher filed its federal income tax returns

1

The life of the contract includes contract options, but does not include contract

renewals or follow-on contracts. 13 C.F.R. § 121.404(g)-(h).

2

The court derives the facts in this section and beyond from the administrative record

(“AR”).

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on a calendar-year basis using Form 1120S, U.S. Income Tax Return for an S Corporation. Id. at

666 (2015), 1356 (2016), 1831 (2017). Kingfisher reported the following income on its 2015,

2016, and 2017 tax returns:

Item Line 2015 2016 2017

Gross receipts or sales Line 1a, Form 1120S

Net gain (loss) from

Line 4, Form 1120S

Form 4797, line 17

Other income (loss) Line 5, Form 1120S

Interest income Line 4, Schedule K

Net short-term capital

Line 7, Schedule K

gain (loss) from Sch. D

Net long-term capital

Line 8a, Schedule K

gain (loss) from Sch. D

Net section 1231 gain

Line 9, Schedule K

(loss) from Form 4797

Id. at 666-68 (2015), 1356-58 (2016), 1831-33 (2017).

On its financial statements, Kingfisher explained that during 2016, it entered into an asset

purchase agreement with another entity to acquire the rights to an existing contract with the

federal government, software used to perform that contract, and a lease for a sensitive

compartmented information facility (“SCIF data center”) for a total of $[. . .].3 Id. at 4053, 4070.

Because the price was determined according to “expected billing to be generated under the

contract,” it was “to be paid in installments associated with certain events identified in the

agreement, and also included a contingent amount of $[. . .] if certain performance indicators

were met.” Id. at 4070. Kingfisher paid $[. . .] in cash during 2016 and recorded the remaining

$[. . .] as a liability on its 2016 financial statements. Id. at 4043-46. But see id. at 4070

(explaining, in a note on Kingfisher’s 2017 financial statements the following year, that

Kingfisher paid $[. . .] to the seller in 2016, recorded $[. . .] within accounts payable as of

December 31, 2016, and included $[. . .] in long-term liabilities as of December 31, 2016). On

its 2016 tax return filed on or about March 9, 2017, Kingfisher claimed a total of $[. . .] in

depreciation and amortization expenses with respect to all assets (not just those acquired as part

of the $[. . .] purchase agreement) and a $[. . .] current liability “due to [. . .].” Id. at 1356,

1363-64, 1370, 1372.

The following year, on its 2017 tax return, Kingfisher reported that it sold some of the

assets it had acquired in 2016, namely, software, data, contract rights, and a SCIF data center.

Id. at 1849. Specifically, the tax return reflects that Kingfisher purchased these assets between

April 1, 2016, and June 1, 2016, for an aggregate $[. . .], and sold these assets on April 1, 2017,

for the same amount. Id. at 1840 (Form 4797), 1849 (Form 4797 Statement 17). Because

3

The court uses “financial statements” in this opinion to refer to the financial statements

attached to Kingfisher’s annual “Independent Accountants’ Review Report.” See, e.g., AR 4041.

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Kingfisher timely appealed the Area Office’s decision to the Office of Hearings and

Appeals on February 28, 2019. Id. at 4312. See generally id. at 4313-26 (appeal petition).

Kingfisher based its appeal on two primary arguments. First, Kingfisher suggested that the

dispute centered on the import of Line 4 of its 2017 tax return, where it had “reported $[. . .] as a

net gain from the sale of business property,” and emphasized that it “properly did not include this

amount in its calculation of receipts for 2017.” Id. at 4318. Kingfisher explained that “the Area

Office failed to recognize that the $[. . .] reported gain was not a ‘receipt,’ but instead arose from

a reduction in the price of business property Kingfisher purchased in 2016.” Id. at 4319.

According to Kingfisher, “the $[. . .] depreciation reversal was merely an accounting correction

to reverse depreciation allowed to Kingfisher on its 2016 and 2017 tax returns” and thus “was

properly excluded from Kingfisher’s calculations because it does not reflect any actual economic

gains or receipt of proceeds from the sale of property.” Id. at 4320-21. Kingfisher averred that

the “depreciation reversal . . . was plainly indicated” as a depreciation reversal, rather than a

receipt, on its 2017 tax return. Id. at 4321. Second, Kingfisher asserted that the decision was

deficient because “the Area Office failed to apprise Kingfisher of the basis for the adverse Size

Determination.” Id. at 4324.

The Office of Hearings and Appeals issued its decision on May 2, 2019, id. at 4392, and

provided a redacted version for public release five days later, id. at 4415, 4423. See generally id.

at 4416-22 (containing a complete copy of the public version of Kingfisher Sys., Inc., SBA No.

SIZ-6003 (May 2, 2019)). In its decision, the Office of Hearings and Appeals observed:

For fiscal years 2015 and 2016, the amounts [Kingfisher]

identified as “Total Revenue” in its protest response correspond

exactly with the amounts [Kingfisher] reported as “Total income”

on line 6 of its Federal income tax return, Form 1120S.

[Kingfisher’s] 2017 tax return, though, showed a “Total income”

of $[. . .]. This amount included $[. . .] of gross receipts and an

additional $[. . .] labeled “Net gain (loss) from Form 4797, line

17.”

Id. at 4394 (citations omitted). After noting that its standard of review is whether the Area

Office’s determination was “based upon a clear error of fact or law,” id. at 4397 (citing 13 C.F.R.

§ 134.314), the Office of Hearings and Appeals explained:

[Kingfisher] made no argument to the Area Office as to the manner

in which [Kingfisher] believed its receipts should be calculated.

[Kingfisher] provided the Area Office a table purporting to show

[Kingfisher’s] “Total Revenue” for each of the three fiscal years

under review, but offered no explanation as to how [Kingfisher]

arrived at those figures. Further, although [Kingfisher]

acknowledges on appeal that receipts normally will be the same as

total income, [Kingfisher] did not contend to the Area Office that

its receipts should be different than the total income shown on its

tax returns. In addition, for two of the three years under review,

-8-

the amounts [Kingfisher] itself identified as “Total Revenue”

corresponded exactly with the amounts [Kingfisher] reported as

total income on line 6 of its Federal income tax returns. On this

record, then, it was reasonable for the Area Office to conclude that

the amount [Kingfisher] cited as its 2017 “Total Revenue” was in

error, perhaps because [Kingfisher] had referenced the wrong line

of its 2017 tax return. Accordingly, [Kingfisher] has not shown

reversible error in the size determination. . . . [I]f [Kingfisher]

wished to argue for adjustments to the amounts shown on its tax

returns, it was incumbent upon [Kingfisher] to raise such

arguments to the Area Office, and to prove the validity of those

adjustments.

. . . [B]y choosing not to provide any explanation on this

issue, [Kingfisher] assumed the risk that the Area Office would not

understand that [Kingfisher] believed the “Net gain” of $[. . .]

should be excluded from [Kingfisher’s] 2017 receipts.

Id. at 4398 (citations omitted). Accordingly, the SBA Office of Hearings and Appeals denied

Kingfisher’s appeal and affirmed the size determination. Id. at 4399.

E. Procedural History

Following receipt of the SBA final decision, Kingfisher filed the instant protest on May

10, 2019. After agreeing to stay award of the contract at issue pending the outcome of this

protest, defendant filed the administrative record on May 20, 2019. The parties then briefed

cross-motions for judgment on the administrative record, and the court heard argument on

August 20, 2019.4 The parties’ cross-motions are now ripe for adjudication.

4

During briefing on the parties’ cross-motions, Kingfisher moved to supplement the

administrative record with an affidavit provided by a partner at its outside accounting firm. The

court denied that motion on June 3, 2019. Nevertheless, Kingfisher relies on portions of that

affidavit even though it is extra-record evidence. Thus, the court disregards Kingfisher’s

arguments made in reliance on that affidavit to the extent that those arguments are not supported

in the administrative record.

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II. STANDARD OF REVIEW

In bid protests, the United States Court of Federal Claims (“Court of Federal Claims”)

reviews the agency action at issue pursuant to the standards set forth in 5 U.S.C. § 706.5 28

U.S.C. § 1491(b)(4). Although Section 706 includes several standards, “the proper standard to

be applied in bid protest cases is provided by 5 U.S.C. § 706(2)(A): a reviewing court shall set

aside the agency action if it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.’” Banknote Corp. of Am. v. United States, 365 F.3d 1345, 1350 (Fed. Cir.

2004); accord Per Aarsleff A/S v. United States, 829 F.3d 1303, 1309 (Fed. Cir. 2016). Under

this standard, the court

may set aside a procurement action if (1) the procurement official’s

decision lacked a rational basis; or (2) the procurement procedure

involved a violation of regulation or procedure. A court reviews a

challenge brought on the first ground to determine whether the

contracting agency provided a coherent and reasonable explanation

of its exercise of discretion, and the disappointed bidder bears a

heavy burden of showing that the award decision had no rational

basis. When a challenge is brought on the second ground, the

disappointed bidder must show a clear and prejudicial violation of

applicable statutes or regulations.

Centech Grp., Inc. v. United States, 554 F.3d 1029, 1037 (Fed. Cir. 2009) (citations and internal

quotation marks omitted); see also Turner Constr. Co. v. United States, 645 F.3d 1377, 1384-85

(Fed. Cir. 2011) (explaining that reviewing courts conduct a “rational basis” review of the

agency action at issue, rather than an “independent de novo assessment”); Advanced Data

5

Defendant does not contest the court’s jurisdiction to entertain the subject matter of this

bid protest. Under the Tucker Act, the Court of Federal Claims

shall have jurisdiction to render judgment on an action by an

interested party objecting to a solicitation by a Federal agency for

bids or proposals for a proposed contract or to a proposed award or

the award of a contract or any alleged violation of statute or

regulation in connection with a procurement or a proposed

procurement . . . without regard to whether suit is instituted before

or after the contract is awarded.

28 U.S.C. § 1491(b)(1) (2012). Accordingly, the court possesses subject-matter jurisdiction to

entertain this protest. Further, Kingfisher plainly has standing to maintain this protest. See

Weeks Marine, Inc. v. United States, 575 F.3d 1352, 1359 (Fed. Cir. 2009) (explaining that

standing in a bid protest is “limited to actual or prospective bidders or offerors whose direct

economic interest would be affected by the award of the contract or by the failure to award the

contract” (quoting Am. Fed’n of Gov’t Emps. v. United States, 258 F.3d 1294, 1302 (Fed. Cir.

2001))).

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Concepts, Inc. v. United States, 216 F.3d 1054, 1058 (Fed. Cir. 2000) (observing that the

“arbitrary and capricious” standard is “highly deferential” and requires courts to sustain agency

actions that demonstrate “rational reasoning and consideration of relevant factors”). Generally,

“the focal point for judicial review should be the administrative record already in existence, not

some new record made initially in the reviewing court.”6 Camp, 411 U.S. at 142; accord Axiom

Res. Mgmt., Inc. v. United States, 564 F.3d 1374, 1381 (Fed. Cir. 2009).

III. ANALYSIS

Kingfisher advances two arguments in support of its request that the court overturn the

SBA’s size determination. First and foremost, Kingfisher contends that it did not exceed the

$27.5 million threshold because the $[. . .] gain reported on Line 4 of its 2017 Form 1120S

should not be counted as part of its gross receipts. According to Kingfisher, the proper treatment

of the $[. . .] gain was apparent from the information contained within its tax return. Second,

Kingfisher posits that the SBA’s process in reaching the size determination was inadequate

because the Area Office failed to consider all pertinent information, misunderstood Kingfisher’s

2017 tax return, and failed to sufficiently explain why it believed Kingfisher’s calculation was

incorrect.

A. The SBA’s Methodology Was Proper

Before addressing Kingfisher’s merits argument, the court turns to Kingfisher’s process

argument wherein Kingfisher stresses that the SBA’s methodology in reaching its conclusion

was defective. Kingfisher is mistaken. The SBA properly limited the Kingfisher size

determination to the four corners of Kingfisher’s tax returns. Further, the SBA sufficiently

explained its reasoning.

As Kingfisher correctly observes, applicable regulations provide that the SBA “must” use

a business concern’s federal tax returns in reaching a size status determination, 13 C.F.R.

§ 121.104(a)(1), and additional information such as accounting records, financial statements, and

affidavits are only to be used “[w]hen a concern has not filed a Federal income tax return with

the IRS for a fiscal year which must be included in the period of measurement,” id.

§ 121.104(a)(2). There is no dispute that 2015, 2016, and 2017 are the proper years of

consideration because Kingfisher files its tax returns on a calendar-year basis and submitted its

response to the solicitation (wherein it self-certified as meeting the applicable size standard) on

October 23, 2018. There is also no dispute that Kingfisher had no outstanding (i.e., unfiled) tax

returns as of that date. Therefore, the SBA properly focused solely on Kingfisher’s 2015, 2016,

and 2017 tax returns in making its size determination. Kingfisher’s insistence that the Area

6

An administrative record typically contains the materials developed and considered by

an agency in making a decision subject to judicial review. See Camp v. Pitts, 411 U.S. 138, 142-

43 (1973) (remarking that an agency’s finding must be “sustainable on the administrative record

made” by the agency at the time of its decision); Cubic Applications, Inc. v. United States, 37

Fed. Cl. 345, 349-50 (1997) (“[T]he primary focus of the court’s review should be the materials

that were before the agency when it made its final decision.”).

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Office should have “made an[] effort to confirm the accuracy of Kingfisher’s receipts

calculation,” Mem. Supp. Pl.’s Mot. J. Administrative R. (“Pl.’s MJAR”) 7, rings hollow.

Because it had access to all of the pertinent tax returns, the Area Office would have violated 13

C.F.R. § 121.104(a)(2) had it considered documents beyond Kingfisher’s tax returns, such as

Kingfisher’s financial statements.

Kingfisher stresses that it “provided the Area Office with all of the information [the Area

Office] requested and needed to determine the accuracy of the receipts calculations.” Id. at 13.

By doing so, Kingfisher appears to suggest that the SBA erred in not considering, in addition to

its tax returns, the financial statements that it submitted to the Area Office containing an

explanation of the $[. . .] asset purchase agreement and subsequent retroactive purchase price

reduction. See AR 4325 (reflecting Kingfisher’s argument to the Office of Hearings and

Appeals that there was no evidence that the Area Office “understood the $[. . .] gain arose from a

purchase price reduction”). Such a suggestion evinces flawed reasoning. As noted above,

although Kingfisher’s financial statements were before the Area Office, it would have been

improper for the Area Office to consider them. To the extent Kingfisher suggests that its tax

returns, standing alone (as they must do), contained “all the information” necessary for the SBA

to make a proper decision and that the SBA misunderstood those returns, Kingfisher maintains

an argument addressing the merits of the SBA’s determination, not its process. See infra Section

III.B (discussing the merits of the SBA’s size determination).

Because the SBA properly limited its analysis to Kingfisher’s tax returns, the

explanations provided by the Area Office and the Office of Hearings and Appeals were

sufficiently detailed. As noted above, the Office of Hearings and Appeals observed that

Kingfisher “made no argument to the Area Office as to the manner in which [Kingfisher]

believed its receipts should be calculated.” AR 4398. With respect to its annual revenues,

Kingfisher merely provided the Area Office with a table listing the respective amounts for 2015,

2016, and 2017. The values in that table coincided with discrete entries on Kingfisher’s tax

returns. Kingfisher provided no further argument to the Area Office pertaining to the character

of the $[. . .] gain, thus choosing to rest on the information contained within its tax returns.

Although Kingfisher also submitted its financial statements containing an explanation of the

$[. . .] gain to the Area Office, the Area Office could not properly consider them. Therefore, the

Office of Hearings and Appeals’ observation regarding Kingfisher’s failure to provide support

for its position regarding gross receipts to the Area Office was accurate. Assuming (for the sake

of argument only) that the SBA’s decisions lacked detail, that shortcoming was harmless error.

Kingfisher’s submissions—both to the SBA and this court—demonstrate Kingfisher’s

understanding that, at bottom, the SBA believed the $[. . .] gain should be included within its

gross receipts for size determination purposes. In other words, Kingfisher knew what it was up

against; it cannot now argue otherwise.

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In addition, Kingfisher takes issue with the final paragraph of the Office of Hearings and

Appeals’ decision:

Lastly, it is worth noting that [Kingfisher] has not

established that it is, in fact, proper to exclude the $[. . .] from the

calculation of [Kingfisher’s] average annual receipts. While it may

be true, as [Kingfisher] contends, that the $[. . .] does not reflect

economic gains from the sale of property, [Kingfisher]

nevertheless acknowledges that it reported the $[. . .] as income

during 2017 in order to partially reverse depreciation deductions

that [Kingfisher] had claimed in prior years. Logically, if the

depreciation had been correctly reported in prior years,

[Kingfisher’s] receipts in those prior years would have been

correspondingly higher. Accordingly, [Kingfisher] has not

persuasively explained why it would be appropriate to exclude the

$[. . .] from [its] receipts for 2017, but not to make any upward

adjustments to [its] receipts for prior years.

Id. (citation omitted). As Kingfisher highlights, these observations are incorrect. First,

Kingfisher avers that it was attempting to reverse depreciation deductions claimed in both 2016

and 2017 on its 2017 tax return, not just depreciation deductions for prior years. Second, the

Office of Hearings and Appeals’ comment regarding upward adjustments reflects a

misunderstanding of depreciation deductions. Depreciation deductions are not tied to gross

receipts or income.7 Accordingly, if Kingfisher had reported a different amount of depreciation

than it did in 2016, its gross receipts for that year would have been unchanged.

However, the correctness of Kingfisher’s argument regarding the final paragraph of the

Office of Hearings and Appeals’ decision is irrelevant to the merits of its protest. The Office of

Hearings and Appeals did not, as Kingfisher remarks, “affirm the Area Office’s decision on this

basis.” Pl.’s MJAR 8. Rather, the Office of Hearings and Appeals was reviewing the Area

Office decision under a “clear error” standard pursuant to 13 C.F.R. § 134.314, rather than a de

novo standard. Its discussion regarding the Area Office’s review served as the basis for its

decision; the final paragraph was merely dicta. Indeed, the Office of Hearings and Appeals

indicated as such at the beginning of that paragraph, stating that it was simply “worth noting” its

observations therein. AR 4398.

7

Unlike depreciation, an election to wholly or partially expense certain property under

section 179 of the Internal Revenue Code is limited by business income. Compare 26 U.S.C.

§ 167 (2012) (allowing a depreciation deduction), and id. § 168 (calculating the allowable

depreciation deduction), with id. § 179(b)(3) (business income limitation on the “section 179”

deduction).

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In sum, the Area Office properly limited its analysis to Kingfisher’s tax returns while

disregarding Kingfisher’s financial statements, the Office of Hearings and Appeals analyzed the

Area Office decision under the appropriate standard, and the basis for both decisions was clear to

Kingfisher.

B. The SBA Reasonably Determined That Kingfisher Exceeded the Applicable Size

Standard

The crux of this protest is Kingfisher’s argument that the SBA improperly reviewed

Kingfisher’s 2017 tax return and committed clear error by including the $[. . .] gain reported on

that return in its calculation of Kingfisher’s gross receipts. The court must therefore consider

whether the Area Office’s interpretation of the $[. . .] gain as reflected on Kingfisher’s 2017 tax

return lacked a rational basis.

As an initial matter, the court observes that Kingfisher does not contend that a gain

resulting from a sale of business property is not properly included in gross receipts for size

determination purposes. Thus, assuming that the SBA reasonably interpreted Kingfisher’s $[. . .]

gain as arising from such a sale, Kingfisher would not challenge the inclusion of that amount in

its gross receipts. Rather, Kingfisher draws a distinction between (1) “the sale or disposition of

business property” and (2) a “depreciation reversal” that arises from a purchase price reduction.

Pl.’s MJAR 6. It emphasizes that neither a purchase price reduction nor a resulting depreciation

reversal “bears any resemblance to any of the types of revenue . . . cited in 13 C.F.R.

§ 121.104(a).” Id.; see also id. (describing the depreciation reversal as “merely an accounting

correction”). However, despite Kingfisher’s averments otherwise, the SBA’s interpretation of

Kingfisher’s 2017 tax return was reasonable for three independent reasons.

1. The Area Office Reasonably Interpreted the $[. . .] Entry as Gain From a Sale

First, the information contained in Kingfisher’s 2017 tax return provided no indication

that the April 1, 2017 transaction reported therein was not what it appeared to be—a sale of four

assets. Although the sale price was equal to the acquisition cost for each asset, the assets

identified as having been sold on April 1, 2017, were identified as having been acquired on April

1, 2016, and June 1, 2016. Thus, as reported, the assets were sold soon after they were acquired.

Accordingly, it was not unreasonable for the SBA to believe that the fair market value of the

assets did not change during that time and that Kingfisher simply used the proceeds of the sale to

extinguish the $[. . .] debt that had existed at the beginning of the year.8 Further, Kingfisher

attached a statement to its 2017 tax return containing details of the transaction, but nowhere in

that statement (or elsewhere on the return) did Kingfisher explain that the transaction reported as

a sale on Form 4797 was not actually a sale.

8

That the gain on the supposed sale of each asset was equal to its prior depreciation is of

no moment; this result occurs mathematically when the sale price is equal to the acquisition cost.

See 26 U.S.C. § 1011(a) (providing that “gain or loss from the sale or other disposition of

property, whenever acquired” is determined using its adjusted basis).

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2. Kingfisher’s Alleged “Depreciation Reversal” Reflects an Unusual Approach

Second, a “depreciation reversal” is not the normal tax treatment when there is a purchase

price reduction after the close of the year in which an asset is acquired (as Kingfisher avers).

Rather, the normal tax treatment is simply to reduce the basis of the asset. See Dep’t of the

Treasury, Publication 946 (2017): How to Depreciate Property (“Pub. 946”) 13 (Feb. 28, 2018)

(“If you deduct more depreciation than you should, you must reduce your basis by any amount

deducted from which you received a tax benefit . . . .”). Therefore, the SBA was not

unreasonable in failing to interpret the transaction reported on Kingfisher’s Form 4797 for 2017

as a mere accounting correction when, as noted above, there was no indication as such.

When purchase-money debt owed to a seller is reduced (as Kingfisher alleges), and not

pursuant to bankruptcy or when the purchaser is insolvent (neither of which Kingfisher alleges),

such a reduction is not treated as cancellation-of-debt income under the Internal Revenue Code

but rather as a purchase price reduction. 26 U.S.C. § 108(e)(5). An after-the-fact “adjustment[]

to the sales price . . . reduce[s] the basis” of that item of property. Dep’t of the Treasury,

Publication 551: Basis of Assets 5 (Dec. 2016). The Internal Revenue Service provides specific

guidance regarding how to depreciate property when the basis of an asset must be adjusted “for

any reason” other than normal allowable depreciation or making improvements. Pub. 946 at 40.

In such a situation, the depreciation for that asset must be computed manually.9 Id.

Publication 946 contains a representative example that applies to various situations where

the basis of property must be reduced. See id. In the example, an event occurred in July 2017

requiring the taxpayer to reduce her adjusted basis. Id. Rather than amending her 2016 return or

reporting a “depreciation reversal” on her 2017 return to reflect the excess depreciation claimed

in 2016 as a result of the subsequent basis reduction, the hypothetical taxpayer “must now figure

her depreciation for 2017 without using the percentage tables.” Id. The hypothetical taxpayer

leaves the 2016 depreciation intact and simply has lower depreciation deductions beginning in

2017 and continuing for the remaining life of the asset. See id. at 43-47 (“Figuring the

Deduction Without Using the Tables”). In other words, the first-year excessive depreciation due

to the subsequent purchase price reduction is offset with lower allowable deprecation in future

years.10

9

This is not to suggest that Kingfisher’s reporting of the alleged depreciation reversal

was necessarily improper. Kingfisher may have simply been attempting to adhere to the tax

benefit rule. See Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370, 377-79 (1983) (discussing the

tax benefit rule, which addresses situations in which “an apparently completed transaction will

reopen unexpectedly in a subsequent taxable year, rendering the initial reporting improper”).

However, the substantive issue in the instant protest is not whether Kingfisher properly reported

the alleged purchase price reduction, but whether the Area Office’s interpretation of Kingfisher’s

reporting was reasonable.

10

There would be depreciation recapture if the amount of the purchase price reduction

was greater than the amount of the remaining adjusted basis, but that is not what happened in

either the hypothetical example in Publication 946 or with Kingfisher in 2016 and 2017.

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Kingfisher’s alternative argument regarding its alleged “depreciation reversal” fares no

better. At a minimum, Kingfisher posits, the portion of its “depreciation reversal” attributable to

2017 depreciation (as opposed to the portion attributable to 2016 depreciation) should not be

treated as a receipt because it “was just an elimination of a deduction being claimed in the same

tax return.” Pl.’s MJAR 9. It would be unusual for a taxpayer to partially offset an excessive

deduction by reporting phantom income in the same tax year rather than simply claiming a lower

deduction.11 (Such an approach is not necessarily improper because either path results in the

same taxable income. The approach could be problematic, though, if a taxpayer artificially

increased income to impermissibly inflate other deductions.) Therefore, the SBA’s failure to

interpret Kingfisher’s 2017 tax return in such a manner was not unreasonable. The SBA simply

took Kingfisher’s 2017 tax return at face value, as it must do.

3. The SBA Properly Included Kingfisher’s Alleged “Depreciation Reversal” Within

Kingfisher’s Receipts

In any event, defendant stresses, even under Kingfisher’s proffered interpretation of the

$[. . .] gain that Kingfisher reported on its 2017 tax return, Kingfisher still cannot prevail in this

protest because its alleged “depreciation reversal” income cannot be excluded from total income.

Defendant is correct.

As noted above,

Receipts means all revenue in whatever form received or

accrued from whatever source, including from the sales of products

or services, interest, dividends, rents, royalties, fees, or

commissions, reduced by returns and allowances. Generally,

receipts are considered “total income” . . . plus “cost of goods

sold” as these items are defined and reported on Internal Revenue

Service (IRS) tax return forms . . . .

13 C.F.R. § 121.104(a). This list of various sources of revenue is, by its own terms, not

exhaustive.12 For entities that file Form 1120S, the SBA must base a size determination on the

sum of line 6 (total income) and line 2 (cost of goods sold), unless some of the income can be

excluded.

Receipts do not include net capital gains or losses; taxes collected

for and remitted to a taxing authority if included in gross or total

income, such as sales or other taxes collected from customers and

excluding taxes levied on the concern or its employees; proceeds

11

For example, taxpayers “cannot depreciate . . . [p]roperty placed in service and

disposed of in the same year.” Pub. 946 at 6.

12

Kingfisher’s reliance on 26 U.S.C. § 108(e)(5) reflects a tacit acknowledgement that

“total income” is a far-reaching concept.

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from transactions between a concern and its domestic or foreign

affiliates; and amounts collected for another by a travel agent, real

estate agent, advertising agent, conference management service

provides, freight forwarder or customs broker. For size

determination purposes, the only exclusions from receipts are those

specifically provided for in this paragraph. All other items . . .

may not be excluded from receipts.

Id. (emphasis added). The only receipts that can be excluded from the computation of “receipts”

for size determination purposes are specifically enumerated. Like gain from the sale of business

property, “depreciation reversal” income is not on that list.

Therefore, even if the $[. . .] gain forming part of the “total income” that Kingfisher

reported on its 2017 tax return was actually a depreciation reversal, the SBA did not err by

including that amount in its computation of Kingfisher’s receipts for size determination

purposes.

C. Kingfisher Is Not Entitled to Injunctive Relief

Having ruled on the merits of Kingfisher’s protest, the court turns to Kingfisher’s request

for permanent injunctive relief.

The Court of Federal Claims has the authority to award injunctive relief pursuant to 28

U.S.C. § 1491(b)(2), and is guided in making such an award by Rule 65 of the Rules of the

United States Court of Federal Claims. In determining whether to award a permanent injunction,

the court must consider whether (1) the plaintiff has succeeded on the merits, (2) the plaintiff

will suffer irreparable harm if the court withholds injunctive relief, (3) the balance of hardships

favors granting injunctive relief, and (4) it is in the public interest to grant injunctive relief.

Centech, 554 F.3d at 1037. The protestor bears the burden of establishing the factors by a

preponderance of the evidence. Lab. Corp. of Am. Holdings v. United States, 116 Fed. Cl. 643,

654 (2014); Textron, Inc. v. United States, 74 Fed. Cl. 277, 287 (2006).

Although an award of injunctive relief is based on the consideration of a four-factor test,

a plaintiff’s failure to achieve success on the merits is dispositive. See PGBA, LLC v. United

States, 389 F.3d 1219, 1228-29 (Fed. Cir. 2004) (explaining that a plaintiff “must [have]

succeeded on the merits of the case” in order to be granted permanent injunctive relief); Career

Training Concepts, Inc. v. United States, 83 Fed. Cl. 215, 219 (2008) (“[A] permanent injunction

requires actual success on the merits.”) (collecting cases). Since Kingfisher has not achieved

success on the merits of its protest, it is not entitled to injunctive relief.13 Thus, the court need

not address the remaining factors or the scope of Kingfisher’s request.

13

Kingfisher can nevertheless petition the SBA for a new size determination, based on

its 2016, 2017, and 2018 tax returns, that would inform its eligibility for future procurements that

are set aside for small businesses.

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IV. CONCLUSION

The court has considered all of the parties’ arguments. To the extent not discussed

herein, they are unpersuasive, meritless, or unnecessary for resolving the issues currently before

the court.

The SBA did not act arbitrarily, capriciously, or erroneously in determining that

Kingfisher does not meet the $27.5 million size standard to be considered a small business for

purposes of the instant procurement. The Area Office properly based its size determination on

Kingfisher’s “total income” as reported on line 6 of its Form 1120S for 2015, 2016, and 2017.

The Area Office properly limited its analysis to the four corners of Kingfisher’s tax returns, and

it was not unreasonable for the Area Office to interpret the $[. . .] gain on Kingfisher’s 2017 tax

return as other than what it purported to be—gain from the sale of business assets. Further, the

Office of Hearings and Appeals applied the correct standard of review by declining to consider

arguments that Kingfisher did not advance before the Area Office, and reasonably found no error

in the Area Office’s conclusions. Because Kingfisher fails on the merits of its protest, it is not

entitled to injunctive relief.

Therefore, the court DENIES Kingfisher’s motion for judgment on the administrative

record and GRANTS defendant’s cross-motion. No costs. The clerk is directed to enter

judgment accordingly.

The court has filed this opinion under seal. The parties shall confer to determine

proposed redactions that are agreeable to all parties. Then, no later than Wednesday,

September 4, 2019, the parties shall file a joint status report under seal indicating their

agreement with the proposed redactions and attaching a complete copy of the court’s opinion

with all redactions clearly indicated.

IT IS SO ORDERED.

s/ Margaret M. Sweeney

MARGARET M. SWEENEY

Chief Judge

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