If you are a Veteran business owner and live in a community property state, then take heed: the VA Center for Veterans Entrepreneurship (CVE) is now enforcing the law that says your spouse owns 50% of your share in any business unless your business ownership has been established as separate property or the business was established before you were married.
I encourage all Veteran business owners located in a common property state to review their situation with their attorneys and take action as appropriate to ensure they can substantiate unconditional ownership.
Here’s my story. I am the 100% shareholder of my S Corporation that I founded in 2001, I am in the office every day intimately involved in every aspect of my business. As a small business developing learning and performance solutions for the government with a special focus on helping the VA better serve Veterans, my SDVOSB status is a critical component of my company’s growth strategy. So I worked hard to ensure my corporate documents were in order, that I was in control of the company, and that I didn’t have any affiliations or agreements that would disqualify me.
Over the past three years I’ve considered myself one of the fortunate companies that had sailed through the VA’s CVE SDVOSB verification and re-verification process with little to no delay. I had been verified by CVE in 2011 and again in 2012. I had even weathered an unannounced office visit by an examiner one morning who asked to see all of the paperwork I had previously submitted and went on to ask me a number of questions to confirm my status and involvement in the company. All three events had gone smoothly. I had been quick to defend CVE to others saying that if one had their paperwork in order that the verification process could go pretty smoothly. That had been my experience—until recently.
Given that I had been verified twice and gone through an onsite, unannounced site visit by a VA examiner, you can imagine my shock when I received a Notice of Proposed Cancellation of my verified status the CVE. The letter informed me that the CVE could not confirm that I had “unconditional ownership” of 51% of my company in accordance with 38 CFR 74 because I was incorporated in Texas, a community property state and “technically” my wife owned 50% of the company. They gave me 30 days to prove otherwise or I would lose my verified status.
The letter caught me by surprise—we were in the middle of competing for a VA-solicited SDVOSB set-aside and the loss of our verified status could have been significant. I immediately shifted my time and attention to researching what all of this meant and what I needed to do to prevent my verified status from being cancelled.
Through my research I found out that the CVE actually had a document on their website about community property challenges, but for some reason had not included this in their letter and I had to find it myself. I would have been less stressed and expended less time had they simply provided a link to the additional information on the subject that they had available on their website.
I also discovered that 38 CFR 74.3(4)(f) had always required CVE to consider a spouses legal claim to ownership of a company in common property states. So why had they approved me twice before without questioning my unconditional ownership?
To prove unconditional ownership and save my verified status I needed to retain an attorney specializing in Texas Community Property laws. My attorney constructed a legal agreement separating the minimum amount of property required to show me as having an unconditional ownership of 51%. My wife and I signed it, voided my stock, reissued the stock, and then she “gifted” her stock to me to make my ownership unconditional. I submitted the agreement and stock certificates to CVE who reviewed and accepted it as proof of unconditional ownership saving my verified status until my next re-verification.
Of course there are always unintended consequences and costs associated with the enforcement of laws. In my case not only did I pay attorney fees, I also lost several weeks of momentum in my business. But the real cost of this event to my estate will come if I were to die before my wife. Under those circumstances my wife would lose the benefit of stepping up the basis value of the business to fair-market value on that portion of the business that is now separated property and will owe the IRS taxes when she assumes ownership where otherwise no taxes would have been due.
The enforcement of 38 CFR 74.3(4)(f) also brings another unintended consequence in the form of potentially increased protests. There are nine community property States, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington, and Wisconsin. If one were to lose a SDVOSB set-aside bid to a company in one of the common property States, it would be reasonable to protest the SDVOSB status of the winner based on them not having 51% “unconditional” ownership. My guess is that most Veterans are unaware of this requirement and haven’t put agreements in place according to their respective State’s laws that separate their and their spouse’s property to establish unconditional ownership and support majority ownership. The complexity of such a transaction would be compounded when there are multiple Veteran owners involved.
This appears to be another case where CVE is enforcing an extreme interpretation of the law rather than considering business realities. Until such time as my death, my wife has absolutely no involvement or interest in my business making this a ridiculous exercise to say the least.
I encourage all Veteran business owners located in a common property state to 1) review their situation with their attorneys and take action as appropriate to ensure unconditional ownership before you receive the dreaded “Notice of Intent to Cancel” letter from CVE or win an award to lose it in protest; and 2) to write their congressperson asking them to put a little common sense back into the verification process.