Tower Communications, No. MSB-587 (August 29, 1997)
Docket No. MSBE-97-2-20-2
                                
                               
                                
                    UNITED STATES OF AMERICA
                  SMALL BUSINESS ADMINISTRATION
                 OFFICE OF HEARINGS AND APPEALS
                        WASHINGTON, D.C.
                                

_______________________________
                               )
IN THE MATTER OF:              )   Docket No. MSBE-97-2-20-2
                               )
Tower Communications           )   Decided:  August 29, 1997
______________________________ )

                           APPEARANCES
                                
Antonio   R.  Franco,  Esq.,  Piliero,  Mazza  &  Pargament   for
Petitioner Tower Communications.

Sandra L. Park, Esq., John T. Spotila, Esq. for Respondent  Small
Business Administration.

                             DIGEST

The  SBA  must  explain  its  rationale  when  finding  that   an
individual's average personal income and total fair market  value
of  assets  are so excessive that they support a conclusion  that
the individual is not economically disadvantaged.

When  calculating an individual's total assets,  the  SBA  cannot
count an asset twice, first as a personal asset and then as  part
of the individual's ownership interest in the applicant concern.

When calculating an individual's average personal income, the SBA
must consider certain losses along with other items of income.

The  individual's  access to credit and the  applicant  concern's
access  to  credit  are two distinct concepts requiring  separate
analyses.

                         FINAL DECISION
                                
ARKOW, Administrative Law Judge:

       Petitioner  Tower  Communications  (Tower)  challenges   a
decision  by  the Respondent Small Business Administration  (SBA)
denying  it  entry into the 8(a) program.1  The SBA  found  Tower
ineligible  for  the 8(a) program because its owners,  Mr.  Keith
Bass  and Mrs. Paulette Bass, are not economically disadvantaged.
The  basis for that conclusion was the SBA's assessment of  their
personal income for the past two years, the fair market value  of
their  assets, and their access to business and personal  credit.
See   13   C.F.R.  Section  124.106.   Tower  claims  the   SBA's
determination is arbitrary, capricious, and contrary to  law.   I
agree.

                          Jurisdiction
                                
      Jurisdiction  to decide this appeal is proper.   15  U.S.C.
Section  637(a)(9); 13 C.F.R. parts 124 and 134.  The  appeal  is
timely.  13 C.F.R. Sections 124.210(b), and 134.202(a).

                              Issue

      Whether  the action of the SBA denying Tower Communications
entry into the 8(a) program is arbitrary, capricious, or contrary
to  law.   15  U.S.C.  Section 637(a)(9)(C),  13  C.F.R.  Section
124.210(h)(1).

                              Facts

      Tower,  a telecommunications/data service company,  applied
for admission into the 8(a) program on August 13, 1996.  The firm
is  owned  equally by Mr. Keith Bass and his wife, Mrs.  Paulette
Bass,   Black   Americans,  who  claim  they  are  socially   and
economically disadvantaged.2

      On  November  12, 1996, the SBA denied Tower's  application
because   it   found  that  the  Basses  were  not   economically
disadvantaged.  The SBA advised Mr. Bass that the basis for  that
finding was:

     [Y]ou  and  your  spouse  have accumulated  substantial
     wealth   and  have  been  able  to  access  significant
     personal  credit  and  capital.   We  note  that   your
     individual  assets total $1,260,971 each  and  you  own
     real  estate  worth $1,840,000 and have  been  able  to
     qualify  for  and  service $1,642,000 in  mortgages  on
     these two properties with monthly mortgage payments  of
     $10,847.   In  addition,  while your  average  adjusted
     income  for  the  past two years is low,  it  has  been
     substantially reduced through Net Operating Loss  (NOL)
     Carryovers  from your passive partnership of  $229,254.
     Without  this  NOL, your average separate  incomes  are
     $73,148  for  the past two years.  We  note  that  your
     individual  equity  in  the  applicant  firm  is   over
     $250,000 and has been in excess of this figure for four
     years.   In addition, your personal tax returns reflect
     significant  interest earnings and capital  gains  over
     the   past  three  years.   The  totality  of  evidence
     suggests that you are not economically disadvantaged.

Administrative Record (AR) at Ex. 7.

     Tower requested that the SBA reconsider its decision denying
entry  into the 8(a) program on November 21, 1996, and  submitted
additional documentation to support its position that the  Basses
were  economically disadvantaged.  AR at Ex. 6.   On  January  6,
1997, the SBA denied the reconsideration request, concluding that
Tower  had not presented sufficient evidence to cause the SBA  to
change its determination.  The SBA concluded:

     [A]lthough your family partnership operates at a  break
     even  rate, the net operating losses generated by  this
     partnership  have  generated  over  $500,000   in   tax
     benefits to you and your spouse over the last three tax
     years.   And, while your access to credit for  business
     operations  is  now limited, it appears that  this  has
     occurred  due  to  the  significant  amount  of  credit
     utilized to fund business real estate and operations in
     the  past  several years.  We also note that your  indi
     vidual  shares of the applicant firm have increased  to
     over   $284,000  as  of  September  30,  1996,  despite
     significant  corrective amortization of  goodwill.   As
     indicated  in your initial decline, you have properties
     valued at $1,840,000, with mortgages of $1,642,00 [sic]
     and  a total monthly payment of $10,847.  Based on this
     information  provided, you have been  able  to  utilize
     $1.6  million in credit to purchase business properties
     and  provide operating funds.  The ability  to  qualify
     and  service this level of credit as well as accumulate
     assets  of  this value is not indicative of individuals
     who are economically disadvantaged.
     
AR at Ex. 1.

      Tower  appealed the reconsideration denial on February  20,
1997.

                     Position of the Parties

      Tower  contends  the SBA improperly assessed  the  personal
financial  condition of the Basses and their access  to  business
and  personal credit.  Among other points, Tower argues that  the
SBA did not compare Tower's access to credit to other concerns as
required  by  the regulation, and should not have considered  the
mortgages  used to secure financing for the business.  Therefore,
the SBA's determination that Tower is not eligible to participate
in  the  8(a)  program  because the Basses are  not  economically
disadvantaged is arbitrary, capricious, and contrary to law.

     The SBA contends it properly assessed the personal financial
condition  of  the  Basses   and their  access  to  business  and
personal credit, and properly concluded that the Basses  are  not
economically  disadvantaged.  With respect to access  to  credit,
the  SBA argues it made the correct comparisons to other concerns
and properly considered the mortgages.  Therefore, the denial  of
admission is not arbitrary, capricious, or contrary to law.

                           Discussion
                                
      Among  the requirements for admission into the 8(a) program
is  that  the  socially  disadvantaged owners  of  the  applicant
concern also must be economically disadvantaged.  See  13  C.F.R.
Sections    124.101,    124.106.    Economically    disadvantaged
individuals are:

     socially  disadvantaged individuals  whose  ability  to
     compete in the free enterprise system has been impaired
     due  to diminished capital and credit opportunities  as
     compared  to  others  in the same or  similar  line  of
     business  who are not socially disadvantaged, and  such
     diminished  opportunities have precluded or are  likely
     to   preclude   such   individuals  from   successfully
     competing in the open market.

13 C.F.R. Section 124.106(a)(1)(i).

     In assessing economic disadvantage, the SBA examines factors
that  fall  into  three  general categories:   (1)  the  personal
financial  condition  of  each individual claiming  disadvantaged
status, including that individual's access to credit and capital;
(2) the financial condition of the applicant concern; and (3) the
applicant  concern's  access  to credit,  capital,  and  markets.
13  C.F.R. Section 124.106(a)(2).  Here, the only issues are  the
personal  financial condition of the Basses and their  access  to
business and personal credit.

       In   evaluating  the  personal  financial   condition   of
individuals  claiming economic disadvantage,  the  SBA  examines:
(1)  their  personal income for at least the past two years;  (2)
the total fair market value of all their personal assets; and (3)
their  personal  net worth.3  13 C.F.R. Section 124.106(a)(2)(i).
A  finding  adverse to the applicant on any of these  factors  is
sufficient  to  conclude that an individual is  not  economically
disadvantaged.  See generally Matter of Pride Technologies, Inc.,
SBA  No.  557 (1996) (holding net worth of $250,000 or less  does
not   necessarily   mean  the  individual  is  not   economically
disadvantaged,  because excessive personal  income  or  excessive
total   assets   alone  can  preclude  a  finding   of   economic
disadvantage) and cases cited therein.  See also SRS Technologies
v.  United States, 843 F. Supp. 740 (D.D.C. 1994) (holding  total
assets alone can preclude a finding of economic disadvantage).
                                
                                I
                                
                         Personal Income
     
     The   analysis   of   this  factor  of   personal   economic
disadvantage  consists of two steps: (1) the calculation  of  the
individual's  personal  income,  and  (2)  the  determination  of
whether  that amount of income is so excessive as to  preclude  a
finding of personal economic disadvantage.  The SBA's analysis of
the Basses' personal income is defective at both steps.

      First,  the SBA uses an individual's Adjusted Gross  Income
(AGI),4   as  reported on his federal income tax return,  as  the
starting point for determining personal income.5  Matter of Pride
Technologies, Inc., SBA No. 557 at 12 (1996); Matter  of  TAO  of
Systems  Integration, Inc., SBA No. 528 at 3  (1995);  Matter  of
Autek Systems Corporation, SBA No. 417 at 11 (1992) (Decision and
Remand  Order);   See also Autek Systems Corp. v. United  States,
835 F. Supp. 13 (D.D.C. 1993), aff'd 43 F.3d 712 (D.C. Cir. 1994)
(aff'g SBA Nos. 417 and 420).  The use of an individual's AGI for
determining  the  amount of his personal income  has  a  rational
basis  and,  thus,  this methodology has  been  held  not  to  be
arbitrary, capricious, or contrary to law.  Pride, SBA No. 557 at
12  (citing  Motor Vehicle Mfrs. Ass'n v. State Farm  Mut.  Auto.
Ins. Co., 463 U.S. 29, 43 (1983)).

      The  use  of AGI makes the source of the income irrelevant.
Pride,  SBA No. 557 at 12; TAO, SBA No. 528 at 5 (both  comparing
  124.106(a)(2)(i), which does not exclude any particular type of
income   when  calculating  personal  income,  with   13   C.F.R.
Section  124.106(a)(2)(i)(B), which specifically excludes certain
assets  when  calculating personal net worth).  Accordingly,  the
SBA  has, for example, properly considered as income the distribu
tions  from  an "S" corporation as they appear on an individual's
tax  return.   Pride,  SBA No. 557.  The SBA  also  has  properly
considered  shareholder  income from the applicant  concern  even
though  that  income subsequently was reinvested  in  that  firm.
Matter of Super Solutions Corporation, SBA No. 461 (1994).6  I am
unaware  of  any  decisions addressing  the  modification  of  an
individual's AGI to calculate personal income.

      Here, the SBA initially calculated the Basses' average  AGI
for  1994  and 1995 as $13,095 each.  AR at Ex. 9 (BOS Analysis).
However,  the  SBA also found that the Basses'  income  for  both
years  had  been "drastically" reduced because of NOL  carryovers
passed  through  to the Basses on their tax return  from  another
business   enterprise.   Id.   In  evaluating   Tower's   initial
application, the SBA recalculated the Basses' average  income  by
adding  back the NOL carryovers, and found each spouse's  average
income to be $73,148.7   AR at Ex. 7.8

      Thus,  in  calculating the amount of the  Basses'  personal
income,  the  SBA  substantially departed from its  long-standing
policy of using an individual's AGI without any modification.

     Second, in determining whether the amount of an individual's
personal  income  is  so excessive as to preclude  a  finding  of
economic  disadvantage,  the  SBA's  policy  is  to  compare  the
individual's  income  to  that of  other  taxpayers.   When  that
individual's  income  is  in one of the top  percentiles  of  all
individual  U.S.  taxpayers,  the  SBA  concludes   he   is   not
economically  disadvantaged.  This methodology and  its  specific
applications  repeatedly  have been upheld  as  reasonable.   See
Pride,  SBA  No.  557 (AGI of $302,798, $275,901,  $649,368,  and
$814,672 over 4 years in top 1% of gross income earners);  Autek,
835  F.  Supp. at 15 (AGI of $475,000 and $381,000,  in  top  1.5
percent of all U.S. taxpayers, as found in Autek, SBA No. 417  at
11  (Decision and Remand Order)); TAO, SBA No. 528 at 3  (AGI  of
$186,022  and  $306,661 in the top two percent of wage  earners);
Super  Solutions,  SBA  No. 461 at 7, 9-10 (average  income  over
three  years,  including  salaries  of  $122,932,  $398,890,  and
$508,760, in the top percentile of all U.S. taxpayers).  Such  an
analysis serves as a rational explanation of why any given amount
of  personal  income  is  excessive and precludes  a  finding  of
economic disadvantage.

      Here,  even if the SBA had correctly calculated the Basses'
personal  income  as $73,148 each, it failed to  explain  why  it
departed  from its comparison policy, and also failed to  explain
why  it  concluded that personal income of $73,148 is excessive.9
Without  such  an  explanation, there is no  rational  connection
between the SBA's finding of fact and its conclusion.

      Accordingly, because the SBA miscalculated the Basses'  AGI
by  excluding  their  NOLs, and because it erroneously  concluded
that  the Basses' personal income precludes a finding of economic
disadvantage, the SBA's evaluation is arbitrary, capricious,  and
contrary to law.

                               II
                                
                          Total Assets

     The   analysis   of   this  factor  of   personal   economic
disadvantage  also consists of two steps: (1) the calculation  of
the  amount  of  the  individual's  total  assets,  and  (2)  the
determination of whether the total assets are so excessive as  to
preclude a finding of personal economic disadvantage.  The  SBA's
analysis of the Basses' total assets is defective at both steps.

      The  calculation  of personal assets  is  distinct  from  a
calculation  of personal net worth.  The Small Business  Act  and
the regulations recognize the differences between "net worth" and
"total assets, and require the SBA to consider both factors  when
evaluating  an  individual's economic  disadvantage.   15  U.S.C.
Section  637(a)(6)(A) ("In determining the degree  of  diminished
credit  and  capital opportunities the [SBA] shall consider,  but
not  be  limited  to, the assets and net worth of  such  socially
disadvantaged   individual.")   (emphasis   added);   13   C.F.R.
Section  124.106(a)(2)(i) ("The specific factors to be considered
include  .  .  .  total fair market value of all assets  and  the
individual's personal net worth.") (emphasis added).

     Property  excluded from "net worth" calculations is included
in  "total  assets" calculations.  Matter of Pride  Technologies,
Inc.,  SBA No. 557 (1996).  In Pride, the ALJ held that  the  SBA
reasonably  found the individual not economically  disadvantaged,
despite  his low personal net worth, because his personal  assets
of $4.1 million were excessive.  Id. at 10.  In  SRS Technologies
v.  United States, 843 F. Supp. 740, 747 (D.D.C. 1994) the  court
held the SBA properly found that an individual's total assets  of
$4.6   million  precluded  economic  disadvantage,  despite   low
personal net worth.

     Here, the SBA incorrectly valued the Basses' total assets at
$1,260,071 each.  It counted Tower's office building,  valued  at
$850,000,  twice.  First, it counted the building as  a  personal
asset of the Basses.  AR at Ex. 9, pp. 44-45; Ex. 17A, pp. 316-17
&  329-30.   Second,  the SBA counted the office  building  as  a
business  asset  of  Tower  and hence  as  part  of  the  Basses'
ownership interest in Tower.10  AR at Ex. 9, pp. 44-45;  see  Ex.
17A,  pp.  316-17  & 329-30; Ex. 5, p.11 (Tower's  balance  sheet
reporting  the  building as an asset and  the  Basses'  ownership
interest  as owners' equity).  Such double-counting is arbitrary,
capricious, and contrary to law.

      It appears that the appropriate method of calculating total
assets  would  be  to treat all of the assets  of  the  applicant
concern   only  as  a  part  of  the  disadvantaged  individual's
ownership  interest  in it, rather than to  treat  the  concern's
assets both as separate personal assets of the owners and as part
of  their  ownership interest.  In this case, the calculation  of
the  Basses'  assets  is  complicated because  Tower  is  a  sole
proprietorship  rather  than  a  separate  entity   such   as   a
partnership  or a corporation.  Thus, the Basses  have  title  to
these assets.  Even so, just as a corporation's assets should  be
treated  separately  from its shareholders' personal  assets,  it
would  appear  inequitable to calculate total assets  differently
for  partnerships and sole proprietorships.  Because it is  clear
that  the SBA incorrectly counted Tower's office building as both
a personal asset and a business asset, I need not decide, at this
time, how the SBA should calculate total personal assets.

      Moreover, even if the SBA had properly calculated the total
assets  to  be $1,260,971, this figure alone cannot lead  to  the
conclusion  that  the Basses are not economically  disadvantaged.
The SBA failed to explain why it reached its conclusion that such
an  amount  precludes  a finding of economic  disadvantage.   For
example,  the SBA did not compare the Basses' total  assets  with
those  of  other  entrepreneurs or other  American  taxpayers  to
determine if they are excessive.  Also, the Basses' total  assets
are far below the amounts that have been held to be excessive  in
earlier cases.  See Pride, SBA No. 557 at 10 ($4.1 million);  SRS
Technologies,  843  F. Supp. at 747 ($4.6 million).   Without  an
explanation of why total assets of $1,260,971 led the SBA to  the
conclusion  that the Basses were not economically  disadvantaged,
there  is  no rational connection between that finding  and  that
conclusion.   Accordingly, the SBA's evaluation  of  the  Basses'
total assets is arbitrary, and capricious.

                               III
                                
                        Access to Credit
                                
      The  regulations  governing the determination  of  economic
disadvantage   require   the  SBA  to   consider   the   socially
disadvantaged "individual's access to credit and capital" as part
of  the  assessment  of personal financial condition.  13  C.F.R.
Section 124.106(a)(2).

     The  regulations also require the SBA to evaluate separately
the  applicant concern's access to credit and capital.   The  SBA
must:
     
     evaluate the ability of the applicant concern to obtain
     the external support necessary to operate a competitive
     business  enterprise.  In making  the  evaluation,  SBA
     shall  consider  the  concern's access  to  credit  and
     capital,  including, but not limited to, the  following
     factors:   Access  to  long-term financing;  access  to
     working  capital  financing;  equipment  trade  credit;
     access  to raw materials and/or supplier trade  credit;
     and bonding capability.
     
13 C.F.R. Section 124.106(a)(2)(iii).11
     
     Moreover,  because  the concern's access  to  credit  is  an
aspect  of its business and financial profile, the SBA must  also
compare  the  applicant concern's access to credit  to  non-disad
vantaged  concerns in the same or similar line of  business.   13
C.F.R.  Section  124.106(a)(1)(i); Matter  of  Gulf  Construction
Group, Inc., SBA No. 426 (1993); Matter of Joanna T. Lau and  Lau
Acquisition Corporation, SBA No. 391 (1992) (Decision and  Remand
Order).12
     
     Thus,  the  regulations and case law clearly  establish  the
individual's access to credit and the applicant concern's  access
to credit as two distinct concepts requiring separate analyses.
     
      With respect to access to credit, the SBA concluded in  its
initial denial letter:

     [Y]ou  and  your spouse . . . have been able to  access
     significant personal credit and capital.  We note  that
     .  .  .  you own real estate worth $1,840,000 and  have
     been  able  to  qualify for and service  $1,642,000  in
     mortgages on these two properties with monthly mortgage
     payments of $10,847.
     
AR at Ex. 7 (emphasis added).

     Subsequently, in its reconsideration denial letter  the  SBA
concluded:
     
     [W]hile  your access to credit for business  operations
     is  now limited, it appears that this has occurred  due
     to  the  significant amount of credit utilized to  fund
     business real estate and operations in the past several
     years.  .  .  .   As indicated in [the  initial  denial
     letter], you have properties valued at $1,840,000, with
     mortgages  of  $1,642,00  [sic]  and  a  total  monthly
     payment   of   $10,847.   Based  on  this   information
     provided, you have been able to utilize $1.6 million in
     credit  to  purchase  business properties  and  provide
     operating funds.
     
AR at Ex. 1 (emphasis added).

     The  SBA's  analysis  and conclusions  regarding  access  to
credit  make  it apparent that the SBA confused, and  treated  as
one,  Tower's access to credit and the Basses' access to  credit.
The  initial  denial letter relies upon the Basses' mortgages  on
their personal residence and Tower's office building to reach its
conclusion  that the Basses "have been able to access significant
personal credit and capital."  AR at Ex. 7 (emphasis added).   On
the  other  hand, the reconsideration denial letter  also  relies
upon  the  mortgages on the Basses' residence and Tower's  office
building to reach the conclusion that Tower's access to credit is
now  limited because it used a significant amount of credit  when
it  mortgaged those same properties.  This failure to  separately
analyze personal and business access to credit is contrary to the
requirements of the regulations.
     
     
     Further, in reaching its conclusion, the SBA failed to  make
and  to  utilize the required separate analysis of Tower's access
to  credit comparing it to other concerns in the same or  similar
line  of  business.13   The  SBA based its  conclusion  upon  the
assumption that a concern currently has access to credit where it
has  had access to credit in the past, but now has limited access
to credit because its credit has been exhausted.
     
     The  regulation  governing  the analysis  of  the  applicant
concern's access to credit requires the SBA to determine, at  the
time  the 8(a) application is considered, whether the concern  is
able  to  obtain  the "external support necessary  to  operate  a
competitive    business   enterprise."    13    C.F.R.    Section
124.106(a)(2)(iii).   This is no different from  the  requirement
     that the applicant concern's business financial condition be
assessed  "at  a specific point in time," rather  than  what  has
occurred  years  earlier.   13 C.F.R. Section  124.106(a)(2)(ii).
Thus,  the  SBA's conclusion is based upon a flawed  analysis  of
Tower's access to credit.14

     Accordingly, the SBA's evaluation of the Basses' and Tower's
access to credit is arbitrary, capricious, and contrary to law.15                            
                                
                               IV
                                
                       Standard of Review
                                
      The  SBA's  denial  of  Tower's  8(a)  application  can  be
sustained  only if a review of the written administrative  record
demonstrates the SBA has not acted arbitrarily, capriciously,  or
contrary   to  law  in  concluding  that  the  Basses  were   not
economically  disadvantaged, as required  by  13  C.F.R.  Section
124.106.    See  15  U.S.C.  Section  637(a)(9)(C);   13   C.F.R.
Section  124.210(h)(1).  Such a review is  narrow  and  does  not
permit me to substitute my own judgment for that of the SBA.  The
review should examine whether the SBA considered all of the facts
presented   and  correctly  applied  the  applicable   laws   and
regulations to those facts in deciding whether or not to  approve
Tower's  8(a) application.  Then, the review must examine whether
there  was  a  clear error of judgment by the SBA in  making  the
determination,  before a finding of arbitrary and capricious  can
be  made.  See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29, 43 (1983).

     A clear error of judgment can be found if the SBA:  Fails to
properly apply the law and regulations to the facts of the  case;
fails  to consider an important aspect of the problem; offers  an
explanation  for  its  determination that runs  contrary  to  the
evidence;  or  provides an implausible explanation that  is  more
than a difference between my views and those of the SBA.  In sum,
the  SBA  must  articulate  a satisfactory  explanation  for  its
action,  including a rational connection between the facts  found
and its determination.  See id.

      The  SBA failed to correctly apply the laws and regulations
applicable to economic disadvantage determinations to  the  facts
in   this  case  before  concluding  that  the  Basses  are   not
economically  disadvantaged.   The  SBA  made  clear  errors   of
judgment  in  failing  to apply the established  methodology  for
assessing  the Basses' personal income; for properly  calculating
their  total  assets;  and  for  evaluating  their  personal  and
business  access  to credit.  Thus, there were  clear  errors  of
judgment  in  reaching the conclusion that  the  Basses  are  not
economically  disadvantaged, and that  Tower  therefore  has  not
established its eligibility for admission into the 8(a)  program.
Accordingly,  the  SBA's decision is arbitrary,  capricious,  and
contrary to law.16                                
                                
                           Conclusion

      Respondent  Small  Business Administration's  determination
denying  8(a)  program entry to Petitioner, Tower Communications,
is  ARBITRARY,  CAPRICIOUS, AND CONTRARY TO LAW.  See  15  U.S.C.
Section 637(a)(9)(C); 13 C.F.R. Section 124.210(h)(1).

       This   is   the  final  decision  of  the  Small  Business
Administration  and is binding upon all parties, including  those
within the employ of the Agency.  15 U.S.C. Section 637(a)(9)(D);
13 C.F.R. Section 124.210(i).

                              
                              ______________________________
                              RICHARD S. ARKOW
                              Administrative Law Judge

_______________________________
     1  Small Business Act of 1958, Section 8(a), as amended,  15
U.S.C.  Section  637(a);  13 C.F.R. part  124.   The  purpose  of
section  8(a)  is to "promote the business development  of  small
business   concerns  owned  and  controlled   by   socially   and
economically disadvantaged individuals so that such concerns  can
compete  on an equal basis in the American economy."   15  U.S.C.
Section 631(f)(2)(A).
     2 Black Americans are presumed to be socially disadvantaged.
See 13 C.F.R. Section 124.105(b).
     3  The  SBA  does not contend that the Basses' personal  net
worth  exceeds  the  regulatory maximum of $250,000.   Thus,  the
Basses meet this requirement.
     4  On the individual tax return, "Adjusted Gross Income"  is
"Total Income" minus certain adjustments, such as retirement plan
deductions.  See IRS Form 1040 (1995 & 1994) at Lines 23a through
31  (calculation of AGI).  "Total Income" is the sum of all items
of  income,  including subtractions for certain  allowed  losses.
See  IRS  Form  1040 (1995 & 1994) at Lines 7-22 (calculation  of
Total Income).
     5  Where the individual is married, the SBA calculates  each
spouse's  share  of AGI.  See Pride, SBA No.  557  at  11,  n.10;
Matter of Anil Verma Associates, Inc., SBA No. 536 at 6 (1996).
     6 Conversely, the SBA properly has not subtracted Schedule A
personal  deductions  for home mortgage  interest  from  AGI  for
purposes  of determining economic disadvantage.  Super Solutions,
SBA No. 461 at 16.
     7  The  SBA  added back the carryovers to the Basses'  Total
Income, not their AGI.
     8  The Basses' 1994 tax return also includes a large capital
gain  passed  through  to  them  from  the  sale  of  partnership
property.  AR at Ex. 13E.  The SBA did not subtract the amount of
this gain from its calculation of the Basses' personal income.
      9  In this connection, I note that $73,148 is far below the
average  personal incomes found to be excessive in Pride,  Autek,
TAO, and Super Solutions.
     10 The SBA did not include Tower's other assets, such as cash
and equipment, in its calculation of the Basses' personal assets.
No  explanation  is given for such disparate treatment.   Perhaps
there  is  confusion over how assets should be  reported  on  the
Personal Financial Statement (SBA Form 413).
     11  The  SBA recently proposed new regulations for the  8(a)
program.   These  new regulations would eliminate  the  applicant
concern's  access  to  credit  as  a  separate  factor   in   the
determination  of  economic disadvantage.  62  Fed.  Reg.  43583,
43587 (Aug. 14, 1997) (preamble to proposed rule).
      12  Analysis  of the disadvantaged individual's  access  to
credit does not require a comparison to other individuals in  the
same  or  similar line of business.  See Matter of Autek  Systems
Corporation,  SBA  No.  420  at  4  (1992)  (discussing  personal
financial condition generally).
     13  The SBA compared Tower's business financial condition to
other  concerns in SIC code 7374, which represents 20% of Tower's
business, because no comparison data was available for  SIC  code
7375,  Tower's  primary industry.  AR at Ex. 4, p.  9.   The  SBA
should  have  compared  Tower's business financial  condition  to
other concerns in Major Group 73, and should have assessed all of
Tower's  business.   See  13  C.F.R.  Sections  124.106(a)(2)(ii)
(requiring  the  comparison); 124.100 (defining same  or  similar
line of business).
     14  The  reconsideration  denial letter  mentions  only  the
mortgages  as  the  factual bases for the SBA's  conclusion  that
Tower  and the Basses have sufficient access to credit to support
denial of eligibility on that ground.  Thus, Tower and the Basses
seem  to  meet  all  other eligibility requirements  relating  to
access  to  credit.   See 13 C.F.R. Section 124.206(c)(1)  (Where
admission  is  denied on reconsideration, the "letter  shall  set
forth findings based on the facts .  . . for every material issue
relating  to  each eligibility factor with specific  reasons  for
each finding").
     15 On appeal, the SBA's counsel argues that certain financial
ratios  calculated from Tower's financial statements support  the
conclusion  that Tower has access to credit and capital.   Answer
at 12 (citing AR at Ex. 4, p. 9).  The SBA's counsel thus appears
to  be  arguing these financial ratios as additional reasons  for
denying  Tower's application on the ground of access  to  credit.
Although these ratios themselves do appear in the AR, the SBA did
not  base  its determination denying Tower's 8(a) eligibility  on
them.   Thus, this argument is without merit.  See Lau,  SBA  No.
391  at  16, n.8 (citing Motor Vehicle Mfrs. Ass'n v. State  Farm
Mut. Auto. Ins. Co., 463 U.S. 29 (1983)).
     16  Because each of the SBA's conclusions regarding  income,
total  assets, and access to credit is arbitrary and  capricious,
they  cannot support the SBA's conclusion, based on the "totality
of evidence," that the Basses are not economically disadvantaged.
See AR at Ex. 7 (initial denial letter).

                                       Posted: September, 1997